** **

**UNITEDSTATES**

## **SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, DC  20549**

 

#### **FORM 10-K**

####  

**(Mark One)**

**ý****          ****ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the fiscal year ended March 4, 2006**

 

**OR**

 

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

**For the transition period from                             to                        **

 

**Commission file number 0-7277**

 

 

**PIERRE FOODS, INC.**

(Exact Name of Registrant asSpecified in Its Charter)

 

| **North Carolina**                 | ** ** | **56-0945643**       |
|------------------------------------|------------|----------------------|
| (State or  Other Jurisdiction      |       | (I.R.S.  Employer    |
| of  Incorporation or Organization) |       | Identification  No.) |

 

| **9990 Princeton Road, Cincinnati, Ohio** | ** ** | **45246**  |
|-------------------------------------------|------------|------------|
| (Address of  Principal Executive Offices) |       | (Zip Code) |

 

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

 

Securities registered pursuant to Section 12(b) ofthe Act: ** None.**

Securities registered pursuant to Section 12(g) ofthe Act:  **None.**

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes o No ý

 

Indicate by check markwhether the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. Yes ý   No o

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding twelve months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý No  o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof the registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ý

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined in ExchangeAct Rule 12b-2). Yes o No ý

 

Theaggregate market value of the voting and non-voting common equity held bynon-affiliates as of the last business day of the registrant’s most recentlycompleted second quarter (September 3, 2005) was $0.00.

 

Asof June 1, 2006, there were 100,000 Class A Common Shares of theregistrant outstanding.

 

DocumentsIncorporated by Reference:

 

None.

 

 

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**TABLE OFCONTENTS**

 
| **Item  Number**  | ** **                                                                                                             |       |       |
|-------------------|------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **        |                                                                                                                   | ** ** | ** ** |
|              | **PART I**                                                                                                        |       |       |
| ** **        |                                                                                                                   |       |       |
| Item 1.           | Description of Business                                                                                                |       |       |
|              | General Development of Business                                                                                        |       |       |
|              | Narrative Description of the Business                                                                                  |       |       |
| Item  1A.         | Risk  Factors                                                                                                          |       |       |
| Item  2.          | Properties                                                                                                             |       |       |
| Item  3.          | Legal  Proceedings                                                                                                     |       |       |
| Item 4.           | Submission of Matters to a Vote of Security Holders                                                                    |       |       |
|              |                                                                                                                   |       |       |
|              | **PART II**                                                                                                       |       |       |
| ** **        |                                                                                                                   |       |       |
| Item 5.           | Market for the Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Securities |       |       |
| Item 6.           | Selected Financial Data                                                                                                |       |       |
| Item 7.           | Management’s Discussion and Analysis of Financial Condition and  Results of Operations                            |       |       |
|              | Results of Operations                                                                                                  |       |       |
|              | Liquidity and Capital Resources                                                                                        |       |       |
|              | Commercial Commitments, Contingencies, and  Contractual Obligations                                                    |       |       |
|              | Inflation                                                                                                              |       |       |
|              | Critical Accounting Policies and Estimates                                                                             |       |       |
| Item 7A.          | Quantitative and Qualitative Disclosures  About Market Risk                                                            |       |       |
| Item 8.           | Financial Statements and Supplementary Data                                                                            |       |       |
| Item 9.           | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure                                  |       |       |
| Item 9A.          | Controls and Procedures                                                                                                |       |       |
| Item 9B.          | Other Information                                                                                                      |       |       |
|              |                                                                                                                   |       |       |
|              | **PART III**                                                                                                      |       |       |
| ** **        |                                                                                                                   |       |       |
| Item 10.          | Directors and Executive Officers of the  Registrant                                                                    |       |       |
| Item 11.          | Executive Compensation                                                                                                 |       |       |
| Item 12.          | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters                        |       |       |
| Item 13.          | Certain Relationships and Related Party  Transactions                                                                  |       |       |
| Item 14.          | Principal Accountant Fees and Services                                                                                 |       |       |
|              |                                                                                                                   |       |       |
|              | **PART IV**                                                                                                       |       |       |
| ** **        |                                                                                                                   |       |       |
| Item 15.          | Exhibits and Financial Statement Schedules                                                                             |       |       |
|              |                                                                                                                   |       |       |
| Signatures        |                                                                                                                   |       |
| Index to Exhibits |                                                                                                                   |       |
|                   |                                                                                                                        |            |            |  |

 

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**Cautionary Statement As To Forward-LookingInformation**

 

This report includes “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended, including statements about the business, operations, financialresults, and future prospects of the Company. Forward-looking statements relateto future events or future financial performance. In some cases, you canidentify forward-looking statements by terminology such as “may,” “should,” “expect,”“plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,”the negative of such terms or other comparable terminology. These statements may involverisks and uncertainties related to, among other things:

 

•                  changesin economic and business conditions in the world;

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

•                  increasedglobal tensions, market disruption resulting from a terrorist or other attackand any armed conflict involving the United States;

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

•                  theCompany’s level of indebtedness;

•                  restrictionsimposed by the Company’s debt instruments;

•                  increasedcompetitive activity;

•                  governmentregulatory actions, including those relating to federal and state environmentallaws;

•                  dependenceon significant customers;

•                  changesin consumer preferences and diets;

•                  consolidationof the Company’s customers;

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

•                  adversechange to, or efficient utilization or successful rationalization of, theCompany’s Cincinnati, Ohio or Claremont, North Carolina facilities;

•                  dependenceon key personnel; and

•                  changesin the availability and relative costs of labor and potential labor disruptionsor union organization activities.

 

The Company is not under any duty to updateany forward-looking statements after the date of this report to conform suchstatements to actual results or to changes in the Company’s expectations. Allforward-looking statements contained in this report and any subsequently filedreports are expressly qualified in their entirety by these cautionarystatements.

 

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**PART I**

 

**Item 1. *Description of Business***

 

***General Development of Business*.**PierreFoods, Inc. (the “Company” or “Pierre”) is a manufacturer and marketer ofhigh-quality, differentiatedprocessed food solutions, focusing on formed, pre-cooked protein products andhand-held convenience sandwiches. The Company’s products include beef, pork,poultry, cheese, and bakery items. Pierre offers comprehensive food solutionsto its customers, including proprietary product development, specialingredients, and recipes, as well as custom packaging and marketing programs. Pierre’spre-cooked proteins include flamebroiled burger patties, homestyle meatloaf,chicken strips, and boneless, barbecued pork rib products. Pierre markets itspre-cooked protein products to a broad array of customers that includesrestaurant chains, schools, and other foodservice providers.

 

***Restructuring.***OnMarch 8, 2004, following a consent solicitation in which consents ofholders of $112.4 million in aggregate principal amount of the Company’s then outstandingnotes (“Old Notes”), representing 97.74% of the outstanding Old Notes,consented to a Fourth Supplemental Indenture between the Company and the Trusteethereunder, the Company entered into the Fourth Supplemental Indenture with theTrustee. Among other things, the Fourth Supplemental Indenture increased theannual interest rate on the Old Notes from 10.75% to 12.25% through March 31,2005 and 13.25% thereafter; required the payment of a cash consent fee of $3.5million (3% of the principal amount of Old Notes held by each consentingnoteholder); granted to the noteholders liens on the assets of the Company andits subsidiaries, such liens being junior to the senior liens securing theCompany’s credit facility, granted to noteholders a repurchase right allowingall of the noteholders to require the Company to repurchase their Old Notes atpar plus accrued interest on March 31, 2005; provided for the payment of aportion of certain cash flow of the Company (referred to as “excess cash”) toreduce the principal amount of Old Notes outstanding at the end of the Company’s fiscal years; added restrictive covenantslimiting the compensation payable to certain senior executives of the Companyand limiting future related party transactions; required the termination of allrelated party transactions, except for certain specifically-permittedtransactions; provided for the assumption by the Company of approximately $15.3million of subordinated debt of PF Management, Inc. (“PFMI”), the soleshareholder of the Company; required the Company to comply with certaincorporate governance standards, including appointing an independent directoracceptable to the Company and the noteholders to its board and hiring anindependent auditor to monitor the Company’s compliance with the Indenture; andwaived any and all defaults of the Indenture existing as of March 8, 2004.The restrictive covenants limiting compensation payable to certain seniorexecutives of the Company permitted for bonus payments to those executivesabove the compensation limitations. The bonus payments were based on theprofitability of the Company and cash payments made on the Old Notes.

 

Concurrently with the execution of the FourthSupplemental Indenture, the Company took title to an aircraft transferred froma related party subject to $5.6 million of existing purchase money debt;assumed $15.3 million of debt from PFMI; cancelled the $1.0 million relatedparty note receivable against the debt assumed from PFMI; cancelled thebalances owed by the Company to certain related parties, as follows: $0.5 millionowed to Columbia Hill Aviation (“CHA”); $3.5 million owed to PF Purchasing, aformer affiliate of the Company; $0.5 million owed to PF Distribution, a formeraffiliate of the Company; and assumed the operating leases of PF Distributionin connection with the Fourth Supplemental Indenture.

 

In this document, unless the contextotherwise requires, the term “Company” refers to Pierre Foods, Inc. andits current and former subsidiaries. The Company’s fiscal year ended March 4,2006 is referred to as “successor fiscal 2006.” As a result of the Acquisition discussed below, on June 30, 2004,the Company’s fiscal year ended March 5, 2005 is comprised of two shortperiods. The periods of March 7, 2004 through June 30, 2004 and July 1,2004 through March 5, 2005 are referred to as “predecessor fiscal 2005”and “successor fiscal 2005,” respectively. These two short periods collectivelyare referred to as “predecessor fiscal 2005 and successor fiscal 2005 combined.” The Company’s fiscal year ended March 6,2004 is referred to as “predecessor fiscal 2004.”

 

***Acquisition.***OnJune 30, 2004, the shareholders of PFMI sold their shares of stock (the “Acquisition”)to Pierre Holding Corp. (“Holding”), an affiliate of Madison Dearborn Partners,LLC (“MDP”). The following occurred in conjunction with the Acquisition:

 

•                  The Company merged with Pierre Merger Corp., anaffiliate of MDP, with the Company being the surviving corporation followingthe merger.

 

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•                  The Company terminated its three-year variable-rate$40 million revolving credit facility and obtained a $190 million creditfacility from a new lender which includes a six-year variable-rate $150 millionterm loan and a five-year variable-rate $40 million revolving credit facilitywith a $10 million letter of credit subfacility. See Note 7 — “FinancingArrangements,” to the Company’s Consolidated Financial Statements.

 

•                  The Company terminated its few remaining relatedparty transactions as described in Note 16 —“Transactions with Related Parties,”to the Consolidated Financial Statements, transferred miscellaneous assets to Messrs. Richardsonand Clark, the Company’s former Chairman and Vice Chairman, respectively,including the Company’s airplane, which was distributed to Mr. Richardson.

 

•                  Pierre Merger Corp. closed a cash tender offer andconsent solicitation for the Company’s Old Notes. Holders of approximately$106.3 million, or approximately 92%, of aggregate principal amount of theCompany’s outstanding Old Notes tendered their Old Notes. The Company, as thesurviving corporation of the merger with Pierre Merger Corp., accepted and paidfor all Old Notes tendered pursuant to the tender offer. A redemption noticefor the Old Notes not tendered (approximately $8.7 million) was issued on June 30,2004 and these Old Notes were redeemed on July 20, 2004.

 

•                  The Company issued $125.0 million of 9-7/8% SeniorSubordinated Notes due 2012 (the “New Notes”). The proceeds of the New Notes,together with the equity contributions from MDP and certain members ofmanagement (as described below) and borrowings under the Company’s new seniorcredit facility, were used to finance the Acquisition and to repay outstandingindebtedness.

 

•                  The Company’s President and Chief Executive Officer,Norbert E. Woodhams, and its Senior Vice President of Sales, Marketing and NewProduct Development, Robert C. Naylor, signed employment agreements committingthem to continue working for the Company after the Acquisition. The stated termof employment for each executive is one year, but each agreement renews year-to-yearunless terminated.

 

•                  The management investors, the Company’s Presidentand Chief Executive Officer, Norbert E. Woodhams, and its Senior Vice Presidentof Sales, Marketing and New Product Development, Robert C. Naylor, investedapproximately $4.9 million in a deferred compensation plan. This deferredcompensation plan is funded through a rabbi trust that owns preferred stock ofHolding with an aggregate liquidation value of approximately $5.7 million as ofMarch 4, 2006.

 

•                  In addition to the base purchase price, the stockpurchase agreement entitled the selling shareholders to earn-out cash payments,which included an additional aggregate amount of $13.0 million in the eventthat, at the end of any fiscal quarter during the fiscal year ended March 5,2005, the Company achieved EBITDA (as defined in the stock purchase agreement)for the prior four fiscal quarters then ended of $56.0 million or more. Noportion of the additional amount was payable, as this EBITDA target was not met.

 

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

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

 

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The Company obtained outside appraisals ofacquired assets and liabilities in successor fiscal 2005. Deferred taxliabilities were finalized based on the final allocation of the purchase priceand the determination of the tax basis of the assets and liabilities acquired.

 

***Narrative Description of the Business***. TheCompany manufactures and markets a wide variety of high-quality, differentiated processedfood solutions, focusing on formed, pre-cooked protein products and hand-heldconvenience sandwiches. Products primarily consist of specialty beef, poultry,pork, and bakery items. Pierre offers comprehensive food solutions to itscustomers, including proprietary product development, special ingredients andrecipes, as well as custom packaging and marketing programs. Pierre’s pre-cookedproteins include flamebroiled burger patties, homestyle meatloaf, chickenstrips, and boneless, barbecued pork rib products. The Company markets itspre-cooked protein products to a broad array of customers that includesrestaurant chains, schools, and other foodservice providers*.*

 

The Company’s product line consists of over 1,100stock keeping units (“SKUs”). Pierre manufactures its pre-cooked proteins,hand-held convenience sandwiches, and bakery items in its two manufacturingfacilities located in Ohio and North Carolina. Pierre forms, portions, seasons,cooks, and freezes beef, poultry, and pork in its facility located inCincinnati, Ohio. These frozen products are either shipped to customers or sentto the Company’s sandwich assembly facility in Claremont, North Carolina. Pierre’sClaremont, North Carolina plant houses high-speed baking and sandwich assemblylines.

 

The following table sets forth the Company’snet revenue and percent of net revenue contributed during the past three fiscalyears by its various product channels and classes. Note that****as a result of the Acquisition, the results for predecessorfiscal 2005 and successor fiscal 2005 are combined in the table below in orderto provide a more meaningful period-to-period comparison.

 
| ** **                     | ** ** | **Net Revenues by Source   (in millions)** | ** ** |
|--------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                     | ** ** | ** **                                                          | ** ** | ** ** | ** ** | **Predecessor Fiscal 2005** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **Successor**                                                       | ** ** | **and Successor Fiscal 2005** | ** ** | **Predecessor** | ** ** |
| ** **                     | ** ** | **Fiscal 2006**                                                | ** ** | **Combined** | ** ** | **Fiscal 2004** | ** ** |
| ** **                     | ** ** | ** **                                                          | ** ** | **%** | ** ** | ** ** | ** ** | **%** | ** ** | ** ** | ** ** | **%** | ** ** |
| Food  processing:              |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Fully-cooked  protein products |       | $                                                                   | 254.8      |   | 59.0 |   | $ | 255.3 |   | 62.2 |   | $ | 214.7 |   | 59.9 |   |
| Microwaveable  sandwiches      |       | 168.4                                                               |       | 39.0 |   | 147.3 |   | 35.9 |   | 136.4 |   | 38.0 |   |
| Bakery and  other products     |       | 8.4                                                                 |       | 2.0 |   | 7.8 |   | 1.9 |   | 7.5 |   | 2.1 |   |
|                           |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Total food  processing:        |       | $                                                                   | 431.6      |   | 100.0 |   | $ | 410.4 |   | 100.0 |   | $ | 358.6 |   | 100.0 |   |

 

***Significant Customer.***Salesto CKE Restaurants, Inc. (“CKE”) accounted for approximately 21%, 25%, and24% of the Company’s net sales in successor fiscal 2006, predecessor fiscal 2005and successor fiscal 2005 combined, and predecessor fiscal 2004, respectively. Noother customer accounted for 10% or more of net sales during successor fiscal2006, predecessor fiscal 2005 and successor fiscal 2005 combined, and predecessorfiscal 2004.

 

***Sales, Marketing and NewProduct Development.***The Company’s team of salesand marketing professionals has significant experience in the Company’s marketsfor fully-cooked protein products, packaged sandwiches, and bakery products. Thesales, marketing, and new product development functions are organizedpredominantly by distribution channel. In addition to its direct sales force,the Company utilizes a nationwide network of over 105 independent food brokers,all of whom are compensated primarily by payment of sales commissions.

 

The Company’s marketing strategy includesdistributor and consumer promotions, trade promotions, advertising, andparticipation in trade shows and exhibitions. The Company participates innumerous conferences and is a member of more than 15 industry organizations. Certainmembers of the Company’s management serve on the boards of a number of industryorganizations, including the American Meat Institute, the American School FoodService Association, the American Commodity Distribution Association, and theNational Association of Convenience Stores.

 

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The Company is actively involved in allaspects of developing food solutions systems to meet customers’ needs. TheCompany’s sales force works directly with customers to define product and menuneeds, assess market opportunities, and create and implement packaging,merchandising, and marketing strategies. The Company’s ability to develop andimplement innovative food solutions is an important aspect of the Company’ssuccess.

 

The Company employs seven food technologists inthe product and process development department. Ongoing food productionresearch and development activities include development of new products,improvement of existing products, and refinement of food production processes. Theseactivities resulted in the launch of approximately 300 new SKUs in successorfiscal 2006. Approximately 25.8% of the Company’s successor fiscal 2006 netrevenues were derived from product SKUs developed during the last two fiscalyears. In successor fiscal 2006, predecessor fiscal 2005 and successor fiscal2005 combined, and predecessor fiscal 2004, the Company spent approximately $1,936,000,$1,650,000, and $1,286,000, respectively, on product development programs.

 

***Raw Materials*.**The primary raw materials used inthe Company’s food processing operations are boneless beef, chicken and pork,flour, yeast, seasonings, cheese, breading, soy proteins, and packagingsupplies. Meat proteins are generally purchased under seven day paymentterms, with the exception of a few that require payment at the time the productis shipped. Historically, the Company has not hedged in the futures markets,and over time, the Company’s raw material costs have fluctuated with movementin the relevant commodity markets. Prices for beef, chicken, and pork, theCompany’s principal protein raw materials, reached historical highs duringpredecessor fiscal 2005 and successor fiscal2005 combined. However, during successor fiscal 2006, the weighted averageprices paid for raw materials (excluding cost-plus contracts) decreased fromthe historical highs experienced in predecessor fiscal 2005 and successcr fiscal2005 combined, with the exception of beef, which increased byapproximately 7.7% compared to the weighted average prices the Company paidduring predecessor fiscal 2005 and successor fiscal 2005 combined. The Companymanages raw material fluctuations through purchase orders, cost-pluscontracts, and by passing on such cost increases to customers.

 

The Company purchases all of its raw materials fromoutside sources. The Company does not depend on a single source for anysignificant item except for, as requested by a customer, the utilization of asingle source raw material supplier for production specific to that customer. Thesingle source supplier allows for consistent supply and competitive pricing forthe Company. The Company believes that its sources of supply for raw materialsare adequate for its present needs and does not anticipate any difficulty inacquiring such materials in the future.

 

***Trademarks andLicensing.***The Company markets its sandwiches under a number ofbrand names, such as PierreTM, Fast Choice®, Rib-B-Q®, Blue Stone GrillTM, Hot ‘n’Ready®, and Big AZ®. The Company regards its trademarks and service marks ashaving significant value in marketing its food products. The Company also hasproprietary rights, including trade secret and other intellectual propertyprotection, in formulations and processes used to make its products. Inaddition, the Company has licenses to sell sandwiches using well-known brands,such as Checkers®, Rally’s®, Krystal®, Tony Roma’s®, NASCAR®, NASCAR CAFE®, andNathan’s Famous®. The term of each such license is subject to renewal andsatisfaction of sales volume requirements.

 

***Seasonality*.**The Company experiences seasonal fluctuations in sales and operatingresults as a result of sales to school districts. Sales to school districtsdecline significantly during summer, late November, and December. Duringsuccessor fiscal 2006, predecessor fiscal 2005 and successor fiscal 2005combined, and predecessor fiscal 2004, sales to schools representedapproximately 20%, 18%, and 19%, respectively, of the Company’s net revenues.

 

***Competition.***Thefood production business is highly competitive and is often affected by changesin tastes and eating habits of the public, economic conditions affecting thepublic’s spending habits, and other demographic factors. The Company competeswith manufacturers and distributors of value-added meat products and packagedsandwich suppliers. In sales of its protein products, the Company facescompetition from a variety of meat processing companies, including Advance FoodCompany, Zartic, Inc., Tyson, Gorges/Quick To Fix, and from smaller localand regional operations. The sandwich industry, however, is extremelyfragmented, with few large direct competitors, but indirect competition in the form ofnumerous other products. Pierre’s competitors in the sandwich industry includeSara Lee/Jimmy Dean Foods, Bridgford Foods Corp., Deli Express, and Landshire. Insales of biscuit and yeast roll products, the Company competes with a number oflarge bakeries in various parts of the country.

 

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***GovernmentRegulation.***The food production industry issubject to extensive federal, state, and local regulations. The Company’s foodprocessing facilities and food products are subject to frequent inspection bythe United States Department of Agriculture (“USDA”), the Food and DrugAdministration (“FDA”), and various state and local health and agriculturalagencies. Applicable statutes and regulations governing food products include rules foridentifying the content of specific types of foods, the nutritional value ofthat food and its serving size, as well as rules that protect againstcontamination of products by food-borne pathogens and sanitation requirements.Many jurisdictions also require that food manufacturers adhere to goodmanufacturing practices (the definition of which may vary by jurisdiction)with respect to production processes. Recently, the food safety practices andprocedures in the meat processing industry have been subject to more intensescrutiny and oversight by the USDA and future outbreaks of diseases amongcattle, poultry or pigs could lead to further governmental regulation. In July 1996,the USDA issued strict new policies against contamination by food-bornepathogens and established the Hazard Analysis and Critical Control Points (“HACCP”)system. The Company believes that it is in substantial compliance with suchapplicable laws and regulations and the Company is not aware of any pending changesin such laws and regulations that are likely to have a material impact on theCompany’s operations.

 

In addition, the Company’s operations are governedby laws and regulations relating to workplace health and safety that, amongother things, establish noise standards and regulate fire codes and the use ofhazardous chemicals in the workplace. The Company is also subject to numerousfederal, state, and local environmental laws. Under applicable environmentallaws, the Company may be responsible for remediation of environmentalconditions and may be subject to associated liabilities relating to itsfacilities and the land on which its facilities are or had been situated,regardless of whether the Company leases or owns the facilities or land inquestion and regardless of whether such environmental conditions werecreated by the Company or by a prior owner or tenant.

 

As described in Note 17 — “Legal Proceedings,” tothe Consolidated Financial Statements, if the Hamilton County Department ofEnvironmental Services (“HCDOES”) determines that the Company isnon-compliant with emissions requirements, the Company likely will be requiredto install additional control equipment. The Company is estimating the cost ofsuch upgrades to existing equipment to be $2.5 million. Should such capitalexpenditures be required, the Company would likely adjust its capital budgetfor its successor fiscal 2007 or delay previously budgeted capital expenditures.The Company does not believe that any other issues related to compliance withenvironmental laws will have a material effect upon the capital expenditures,earnings or competitive position of the Company.

 

The Company’s operations aresubject to licensing and regulation by a number of state and local governmentalauthorities, which include health, safety, sanitation, building, and fireagencies. Operating costs are affected by increases in costs of providinghealth care benefits, the minimum hourly wage, unemployment tax rates, salestaxes, and other similar matters over which the Company may have nocontrol. The Company is subject to laws governing relationships with employees,including minimum wage requirements, overtime, working conditions, andcitizenship requirements.

 

***Employees.***As of March 4, 2006, the Company employedapproximately 1,850 persons. The Company’s employees are non-unionized. TheCompany has experienced no work stoppage attributable to labor disputes,and considers employee relations to be good.

 

**Item 1A. *Risk Factors***

 

***Increases in theprice of raw materials, particularly beef, chicken, pork, and cheese couldreduce our operating margins.***The primary raw materials used in the Company’s food processingoperations are boneless beef, chicken, pork, and cheese, breading, soy proteins,and packaging supplies. Meat proteins are generally purchased underseven day payment terms, with the exception of a few that require payment atthe time the product is shipped. Historically, the Company has not hedged inthe futures markets, and over time, the Company’s raw material costs havefluctuated with movement in the relevant commodity markets. Prices for beef,chicken, and pork, the Company’s principal protein raw materials, reachedhistorical highs during predecessor fiscal 2005 and successor fiscal 2005 combined. However, duringsuccessor fiscal 2006, the weighted average prices paid for raw materials(excluding cost-plus contracts) decreased from the historical highs experiencedin predecessor fiscal 2005 and successor fiscal 2005 combined, with theexception of beef, which increased by approximately 7.7% compared to theweighted average prices the Company paid during predecessor fiscal 2005 andsuccessor fiscal 2005 combined. During

 

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successorfiscal 2006, the weighted average prices the Company paid for beef, chicken,pork, and cheese decreased by approximately 4.4%, 3.6%, 29.1% and 7.7%,respectively, over the weighted average prices the Company paid for these rawmaterials during the fourth quarter of successor fiscal 2005. Whilehistorically the Company has managed such fluctuations through purchase orders,cost-plus contracts, and by passing on such cost increases to customers, the Company may be unable to protectitself from future increases in the prices of raw materials on a timely basis,or at all. In addition, some of the Company’s customers purchase products basedon bid contracts with set prices, which would prevent the Company fromrecovering any raw materials price increases from these customers during the lifeof those contracts. If prices for beef, chicken, pork, and cheese were toincrease significantly without a commensurate increase in the price for processedprotein food products, the Company’s financial condition and operating results couldbe adversely affected.

 

***If the Company’sproducts become contaminated or are mislabeled, the Company may be subjectto product liability claims, product recalls, and increased scrutiny byregulators, any of which could adversely affect the Company’s business.***Beef, chicken, and pork products arevulnerable to contamination by organisms producing food-borne illnesses. Theseorganisms are generally found in the environment, and, as a result, there is arisk that as a result of food processing, they could be found in the Company’sproducts. For example, *E. coli* isone of many food-borne pathogens commonly associated with beef products. Ifcontaminated products are shipped for distribution, illness and death couldresult if the pathogens are not eliminated by processing at the foodservice orconsumer level. The risk can be controlled, but not eliminated, by use of goodmanufacturing practices and finished product testing. Also, products purchasedfrom others for re-packing or distribution may contain contaminants thatthe Company is unable to identify. The Company may also encounter the samerisks if a third party tampers with its products or if its products areinadvertently mislabeled. Shipment of adulterated products, even ifinadvertent, is a violation of law and may lead to product liabilityclaims, product recalls and increased scrutiny by federal and state regulatoryagencies, any of which could have a material adverse effect on the Company’sreputation, business, prospects, results of operations, and financial condition.

 

***The Company’sinsurance and indemnification agreements may be inadequate to cover allthe liabilities the Company may incur.***The Company faces the risk of exposure toproduct liability claims and adverse public relations in the event that itscontrol procedures fail and the consumption of its products causes injury orillness. If a product liability claim is successful, the Company’s insurance may notbe adequate to cover all liabilities it may incur, including harm to itsreputation, and the Company may not be able to continue to maintain suchinsurance, or obtain comparable insurance at a reasonable cost, if at all. TheCompany generally seeks contractual indemnification and insurance coverage fromits suppliers, but this indemnification or insurance coverage is limited by thecreditworthiness of the indemnifying party and their insurance carriers, ifany, as well as the insured limits of any insurance provided by those suppliers.If the Company does not have adequate insurance or contractual indemnificationavailable, product liability claims relating to defective products could have amaterial adverse effect on its financial condition and operating results.

 

***A decline inmeat consumption, or in the consumption of processed food products, would havea material adverse effect on the Company’s business, financial condition, andoperating results.***Adversepublicity relating to health concerns and the nutritional value of meat andmeat products could adversely affect meat consumption and, consequently, demandfor the Company’s beef, chicken, and pork products. In addition, as all of theCompany’s operations consist of the production and distribution of processedfood products, a change in consumer preferences relating to processed foodproducts or in consumer perceptions regarding the nutritional value ofprocessed food products could significantly reduce the Company’s sales volume. Areduction in demand for the Company’s products caused by these factors couldhave a material adverse effect on the Company’s business, financial condition,and operating results.

 

The food industry in general is subject to changingconsumer trends, demands, and preferences. The Company’s processed protein andbakery products compete with other processed convenience foods, as well asother foods. The Company’s failure to anticipate, identify or react to changesin consumer preferences could lead to, among other things, reduced demand andreduced margins for its products, and could have a material adverse effect onits business, financial condition, and operating results.

 

6

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***Outbreaks ofdisease among cattle, chicken or pigs could significantly reduce demand for theCompany’s products and restrict its ability to produce meat and sandwich products,adversely affecting its sales volume.***An outbreak of disease affecting livestock,such as bovine spongiform encephalopathy (commonly referred to as “mad cowdisease” or BSE), foot-and-mouth disease or Asian bird flu could result inreductions in demand and restrictions on sales of products to the Company’scustomers or purchases of meat and poultry products from its suppliers. Healthconcerns about BSE in particular have had an adverse impact on the livestockindustry and on sales of beef products in Europe, South America and Japan inpast years. The North American Governmental Food Agencies have put preventativemeasures in place to lessen these risks.

 

***The categories ofthe food industry in which the Company operates are highly competitive, and theCompany’s inability to compete successfully could adversely affect itsbusiness, results of operations, and financial condition.***Competition in each of the categories of thefood industry in which the Company operates is intense. Increased competitionfor any of the Company’s products could result in price reductions, reducedmargins or loss of market share, any of which would negatively affect theCompany’s business, results of operations, and financial condition. The Company’sformed, pre-cooked protein products compete with the products of several meatprocessors, including Advance Food Company, Zartic, Inc., Tyson,Gorges/Quick To Fix, and smaller local and regional producers. The market forhand-held convenience sandwiches has low barriers to entry and is extremelyfragmented, with several direct competitors, including Sara Lee/Jimmy DeanFoods, Bridgford Foods Corp., Deli Express, and Landshire, and indirectcompetition from a variety of substitute products. Many of the Company’scompetitors in each of these categories have substantially greater financialresources, name recognition, research and development, marketing, and humanresources. In addition, any of the Company’s competitors may develop newor enhanced products that are superior to the Company’s products, or market andsell their products more successfully than the Company does, the Company may beunable to compete successfully with any or all of these companies.

 

***The Company’stop ten customers have historically accounted for a significant portion of itsnet revenues and its largest customer accounted for approximately 21% of netrevenues for successor fiscal 2006.***The Company’s top ten customers accounted forapproximately 55% and 59% of its net revenues in successor fiscal 2006 andpredecessor fiscal 2005 and successor fiscal 2005 combined, respectively. Inparticular, the Company’s largest customer accounted for approximately 21% and25% of net revenues in successor fiscal 2006 and predecessor fiscal 2005 andsuccessor fiscal 2005 combined, respectively. If, for any reason, one of theCompany’s key customers were to purchase significantly less of the Company’s productsin the future or were to terminate purchases from the Company, or if for anyreason the Company was unable to renew an existing contract with a key customeron favorable terms, or at all, and the Company was not able to sell itsproducts to new customers at comparable or greater levels, its business,financial condition, and operating results would suffer.

 

***Theconsolidation of and market strength among the Company’s retail and foodservicecustomers may put pressure on its operating margins.***In recent years, the trend among the Company’sretail and foodservice customers, such as warehouse clubs and foodservicedistributors, has been toward consolidation. In addition, the Company’scustomers include two of the five largest quick-service hamburger restaurantchains in the United States. These factors have resulted in increased negotiatingstrength among many of the Company’s customers, which has and may continueto allow them to exert pressure on the Company with respect to pricing terms,product quality, and the introduction of new products. To the extent theCompany’s customer base continues to consolidate, competition for the businessof fewer customers may intensify. If the Company cannot continue tonegotiate favorable contracts, whether upon renewal or otherwise, with thesecustomers, implement appropriate pricing and introduce new product offeringsacceptable to its customers, or if the Company loses its existing largecustomers, its profitability could decrease.

 

***The Companymanufactures many of its products using proprietary formulations and marketsits products under a variety of brand names. The termination of, or failure torenew a license agreement under which the Company sells branded products, thereduction in value of an underlying license or its inability to protectownership of proprietary formulations, could negatively impact the Company’sability to produce and sell its products.***The market for the Company’s products dependsto a significant extent upon the proprietary formulations used in manufacturingits products and the goodwill associated with the brand names under which itsproducts are sold. The Company relies on patent, trademark and trade secret lawto establish and protect its intellectual property rights, including itsproprietary formulations. The Company may be required from time to time tobring lawsuits against third parties to protect its intellectual property.

 

7

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Similarly,from time to time the Company may be party to proceedings in which thirdparties challenge its rights, including those to the Company’s productformulations. Any lawsuits or other actions the Company brings to enforce itsrights may not be successful, and the Company may in fact be found toinfringe on the intellectual property rights of others, in either of which casethe Company may not be able to prevent others from using such intellectualproperty and/or may be prevented from using such intellectual property,including proprietary formulations.

 

In addition to its own brand names, the Company haslicenses with third parties that own certain trademarks or trade names used inthe marketing of some of the Company’s products. In the event that any suchlicense is terminated, the Company may lose the right to use or havereduced rights to use the intellectual property covered by such agreement. Insuch event, the Company may not be able to secure licenses to usealternative trademarks or trade names in the marketing of its products, and itsproducts may not be as attractive to customers. In addition, certain events,including events beyond the Company’s control, could make certain of its brandnames, or the brand names it licenses, less attractive to its customers, makingits products less desirable as a result. Any loss in the value of a brand nameor loss of a license for a brand name could adversely affect the Company’ssales volume for affected products.

 

***The Company issubject to extensive governmental regulations, which require significantcompliance expenditures.***The Company is subject to extensive federal, state and localregulations. Its food processing facilities and food products are subject tofrequent inspection by the USDA, FDA, and various state and local health andagricultural agencies. Applicable statutes and regulations governing foodproducts include rules for identifying the content of specific types offoods, the nutritional value of that food and its serving size, as well as rules thatprotect against contamination of products by food-borne pathogens. Manyjurisdictions also provide that food manufacturers adhere to good manufacturingpractices (the definition of which may vary by jurisdiction) with respectto production processes. Recently, the food safety practices and procedures inthe meat processing industry have been subject to more intense scrutiny andoversight by the USDA and future outbreaks of diseases among cattle, poultry orpigs could lead to further governmental regulation. In addition, the Company’sproduction and distribution facilities are subject to various federal, stateand local laws and regulations relating to workplace safety and workplacehealth. Failure to comply with all applicable laws and regulations couldsubject the Company to civil remedies, including fines, injunctions, productrecalls or seizures and criminal sanctions, any of which could have a materialadverse effect on the Company’s business, financial condition and results ofoperations. Furthermore, compliance with current or future laws or regulationscould require the Company to make material expenditures or otherwise adverselyaffect the way the Company operates its business, financial condition andoperating results.

 

***Any materialchanges to, cutbacks in or termination of the USDA’s Commodity ReprocessingProgram could have a material adverse effect on the Company’s sales to schools.***A substantialportion of the products that the Company sells to schools use meat provided tothe schools through the USDA’s Commodity Reprocessing Program. If this programwere terminated or significantly curtailed due to budgetary constraints, or ifthe program were changed in a way that neutralizes what the Company believes isits competitive advantage in complying with program guidelines, the Company may beunable to continue to sell these products to schools at current volumes. Theseprograms provide food and nutrition assistance to certain eligible institutions.The programs are designed to assist farmers, commodity producers and processorsto maintain stable commodity prices and to provide nutritious foods to children.The Company produces many of its pre-cooked proteins using meat provided bycustomers through this program, which it re-sells to these customers.

 

***Compliance withenvironmental regulations may result in significant costs and the Company’sfailure to comply with environmental regulations may result in civil aswell as criminal penalties, liability for damages and negative publicity*****.**The Company’s operations are subject toextensive and increasingly stringent regulations pertaining to the discharge ofmaterials into the environment and the handling and disposition of wastes. Failureto comply with these regulations can have serious consequences for the Company,including criminal as well as civil and administrative penalties and negativepublicity. The Company has incurred and will continue to incur significantcapital and operating expenditures to avoid violations of these laws andregulations. Additional environmental requirements imposed in the future couldrequire currently unanticipated investigations, assessments or expenditures,and may require the Company to incur significant additional costs.

 

***Labordisruptions or increased labor costs could adversely affect the Company’sbusiness.***As of March 4,2006, the Company had approximately 1,850 employees. The Company considers itsrelations with its employees to be good.

 

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However,the Company could experience a material labor disruption or significantly increasedlabor costs at one or more of its facilities in the future, which would have amaterial adverse effect on its business, financial condition and operatingresults.

 

***The Company sellsa large percentage of its products to schools, which subjects its sales volumesand, thus, its operating results, to seasonal variations.***The Company’s quarterly operating results areaffected by the seasonal fluctuations of its sales and operating profits. TheCompany derived approximately 20% and 21% of its net revenues in successorfiscal 2006 and predecessor fiscal 2005 and successor fiscal 2005 combined,respectively, from sales to schools. Since schools comprise a significantportion of the Company’s customer base, sales of its products tend to be lowerduring the summer months. These lower sales volumes negatively impact itsoperating profits during the second quarter of each fiscal year. As a result ofthese fluctuations, the Company believes that comparisons of its sales andoperating results among different quarters within a single fiscal year are notnecessarily meaningful and that they cannot be relied upon as indicators of theCompany’s future performance.

 

***The Companyprocesses meat at its Cincinnati, Ohio facility, and the Company produces breadand assembles sandwiches at its Claremont, North Carolina facility. A materialdisruption at either of these plants or an increase in demand causing inabilityto meet customer demands could seriously harm the Company’s financial conditionand operating results.***The Company manufactures protein products, including the meat used inits packaged sandwich operations, at its Cincinnati, Ohio facility. In addition,the Company produces bread and assembles sandwiches at its Claremont, NorthCarolina facility. Since the Company does not have operations elsewhere, amaterial disruption at either location would seriously limit its ability todeliver products to its customers. Such disruption could be caused by a numberof different events, including:

 

• maintenance outages;

• prolonged power failures;

• equipment failure;

• chemical spill or release;

• widespread contamination of our equipment;

• fires, floods, earthquakes or other natural disasters; or

• other operational problems.

 

Any material malfunction or prolonged disruption inthe operations of either of its facilities could prevent the Company fromfulfilling orders to existing customers, and would limit its ability to sellproducts to new customers. Any material malfunction or prolonged disruption inits Cincinnati, Ohio meat processing facility would be particularly harmful tothe Company, as nearly all of its products are manufactured, at least in part, atthat facility. In addition, the Company may not be able to meetmanufacturing requirements in its current facilities if there is a significant increasein customer demands. Any of these events would adversely affect the Company’sbusiness, financial condition and operating results.

 

***The Companydepends upon the continued services of certain members of its senior managementteam, without whom its business operations would be significantly disrupted.***The Company’s success depends, in part, on thecontinued contributions of its executive officers and other key employees. TheCompany’s management team has significant industry experience and would bedifficult to replace. If the Company loses or suffers an extended interruptionin the service of one or more of its senior officers, its financial conditionand operating results may be adversely affected. Moreover, the market forqualified individuals may be highly competitive and the Company may notbe able to attract and retain qualified personnel to replace or succeed membersof its senior management or other key employees, should the need arise.

 

***Significant increases in the cost of distribution would have an adverseeffect on the Company’s financial condition and operating results.***The Company’s distribution costs include fuelfor transportation and electricity for cold storage. Significant increases inthese distribution costs would adversely affect the Company’s financial conditionand operating results. The Company uses a core group of contract carriers thathave established rates based on mileage to regions or destination states. Afuel surcharge addendum is a component of all rates to offset the fluctuatingprice of diesel fuel, primarily to limit the contract carrier’s exposure. Thesefuel surcharges have risen over the past year and remain at a historic

 

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high.If these surcharges continue to rise, or if the Company is unable to passincreased distribution costs on to its customers in the form of higher pricesfor our products, its financial condition and operating results would suffer.

 

The Company uses commercialcold storage vendors to store finished goods. A major component of cold storageoperations expense is electricity cost. Although the Company tries to minimizestorage costs, any significant increase in electricity rates for the vendor arepassed along in the form of higher storage rates. If the Company’s storagerates increase significantly, it may be unable to pass these costs on toits customers, which would have an adverse effect on its financial conditionand operating results.

 

***The Company’s ability to service its debt and meet itscash requirements depends on many factors, some of which are beyond its control.These factors could have a material adverse affect on the Company’s business,financial position and results of operations.***TheCompany’s ability to satisfy its obligations, including its Notes and itscredit facility will depend on the Company’s future operating performance andfinancial results, which will be subject, in part, to factors beyond theCompany’s control, including interest rates and general economic, financial andbusiness conditions. If the Company is unable to general sufficient cash flow, itmay be required to refinance all or a portion of its debt, including the Notesand its credit facility, obtain additional financing in the future foracquisitions, working capital, capital expenditures and general corporate orother purposes, redirect a substantial portion of its cash flow to debtservice, which as a result, might not be available for its operations or otherpurposes, sell some of its assets or operations, reduce or delay capitalexpenditures, or revise or delay its operations or strategic plans. If theCompany is required to take any of these actions, it could have a materialadverse effect on its business, financial condition or results of operations. Inaddition, the Company cannot assure you that it would be able to take any ofthese actions, that these actions would enable it to continue to satisfy itscapital requirements or that these actions would be permitted under the termsof its Notes or credit facility.

 

***Restrictive covenants in the Company’s debtinstruments restrict or prohibit the Company’s ability to engage in or enterinto a variety of transactions, which could adversely affect the Company.***Theindenture governing the Company’s Notes and its credit facility contain variousrestrictive covenants that limit the Company’s discretion in operating itsbusiness. In particular, those agreements limit the Company’s ability to, amongother things:

 

•                  incuradditional indebtedness;

•                  makecertain investments or acquisitions;

•                  createliens on its assets to secure additional debt;

•                  engage incertain transactions with affiliates;

•                  merge,consolidate or transfer substantially all of its assets; and

•                  transferand sell assets.

 

These covenants could have a material adverse effecton the Company’s business by limiting its ability to take advantage offinancing, merger and acquisition or other corporate opportunities to fund itsoperations. Any future debt could also contain financial and other covenantsmore restrictive than those imposed under the indenture governing the Company’sNotes and its credit facility.

 

***If the Company is unable to maintain or upgrade itsinformation systems and software programs or if the Company is unable toconvert to alternate systems in an efficient and timely manner, the Company’soperations may be disrupted or become less efficient.***The Companydepends on a variety of information systems for the efficient functioning ofits business. The Company relies on certain software vendors to maintain andperiodically upgrade many of these systems so that they can continue to supportthe Company’s business. The software programs supporting many of the Company’ssystems were licensed to the Company by independent software developers. Costsand potential interruptions associated with the implementation of new orupgraded systems and technology or with maintenance or adequate support ofexisting systems could disrupt or reduce the efficiency of the Company’sbusiness.

 

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**Item  2.*Properties***

 

***Principal Offices.***TheCompany’s main office is located in a facility it owns in Cincinnati, Ohio. TheCompany also owns and uses a 23,000 square foot building in Claremont, NorthCarolina for additional office space.

 

***Food Processing Plants.***TheCompany produces its fully-cooked meat products, packaged sandwiches, and specialtybread products at facilities it owns in Cincinnati, Ohio and Claremont, NorthCarolina. The Cincinnati facility occupies buildings totaling approximately225,000 square feet. The Claremont facility occupies buildings totalingapproximately 150,000 square feet.

 

The Company is highly committed to thequality of its products and the safety of its operations. The Company’s modernequipment allows for a fully automated contaminant removal procedure. As aresult of this procedure, in addition to the continuous raw materialinspections that the Company performs, the Company has received the totalquality control designation from the USDA since 1987.

 

The Company believes that its facilities aregenerally in good condition and that they are suitable for their current uses. TheCompany nevertheless engages periodically in construction and other capitalimprovement projects that the Company believes are necessary to expand andimprove the efficiency of its facilities.

 

**Item  3.*Legal Proceedings***

 

On August 19, 2003, as a result of complaintsfrom neighboring businesses, the Company received a Notice of Violation (“NOV”)from the Hamilton County Department of Environmental Services (“HCDOES”)relating to operations at its Cincinnati, Ohio plant facility. The NOV allegedthat the Company violated its permits by exceeding the visual emission (“VE”)specification of 20% opacity. The Company received additional NOV’s for opacityviolations on October 22, 2003 and November 26, 2003, all of whichwere the result of complaints from neighboring businesses.

 

Subsequent to the original NOV received in August of2003, the Company began investigating and testing various emission reductiontechnologies. The Company found a solution that enabled operations to continuewith less smoke output and completed the upgrade during early 2004. HCDOESinspected the upgrade in April of 2004 and determined that the Company hadreturned to compliance with the opacity limit. In connection with the upgrade,the Company was required to submit a revised Permit to Install (“PTI”)application.

 

In August, 2005, pursuant to its regulatory authority,HCDOES requested a Method 5 Stack Test be performed to assess the Company’scompliance with its emissions limits. The Company contacted HCDOES, requestingthe scheduled stack emission compliance test be postponed while the Company’sindependent consulting firm conducted an emissions audit program consisting ofa series of engineering stack tests that were performed at both controlledand uncontrolled emission test points in order to evaluate the magnitude of theemissions based on current production data and to estimate new emissionsfactors by product line. HCDOES agreed to this approach and granted permissionto delay the standard Method 5 Stack Test originally requested while theCompany conducted its emissions audit program.

 

The Company contracted with an independentenvironmental consulting firm to perform the audit and evaluation. As part ofthe overall audit, this firm performed preliminary testing in early September 2005,which indicated that violations of emission levels may have occurred, andretested September 28, 2005 through September 30, 2005. The firmconducted additional tests during October 27, 2005 through November 8,2005. The Company received the results of the audit in January, 2006. Theresults allowed the Company to evaluate the facility’s current and historicalpotential and actual emissions. The testing revealed that assumptions made bythe Company’s former outside engineering firm concerning particulate emissionsand throughput were incorrect. This miscalculation caused the Company toreceive permit limits that are lower than actual emissions for certain cooklines. The Company met with the local air permitting authority in February,2006, to discuss the results of the emissions audit program.

 

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Based on the results of the audit program,the Company received a NOV from HCDOES on March 20, 2006 for particulateemissions in excess of the allowable limits of certain of its air permits andfor submitting certain permit applications with incorrect information. TheCompany is in the process of assessing control technology options and vendorsfor the installation of new control technology to substantially reduceparticulate emissions. This process, including the installation of additionalcontrol technology, will likely last through the remainder of calendar year 2006and could take until early 2007 to complete.

 

The Company is cooperating with theauthorities in all aspects of these matters. In addition, the Company consultedwith its outside legal counsel to assist them in resolving these matters andestimate the potential fines and penalties that may be assessed in thefuture.

 

The Company continuously evaluates contingencies basedupon the best available information. The Company believes it has recordedappropriate liabilities to the extent necessary in cases where the outcome ofsuch liabilities is considered probable and reasonably estimable, and that itsassessment of contingencies is reasonable. To the extent that resolution ofcontingencies results in amounts that vary from management’s estimates, futureearnings will be charged or credited accordingly.

 

As part of its ongoing operations in the foodmanufacturing industry, the Company is subject to extensive federal, state, andlocal regulations and its food processing facilities and food products aresubject to frequent inspection, audits, and inquiries by the USDA, the FDA, andvarious local health and agricultural agencies and by federal, state and localagencies responsible for the enforcement of environmental laws and regulations.The Company is also involved in various legal actions arising in the normalcourse of business. These matters are continuously being evaluated and, in somecases, are being contested by the Company and the outcome is not predictable.Consequently, an estimate of the possible loss or range of loss associated withthese actions cannot be made. Although occasional adverse outcomes (orsettlements) may occur and could possibly have an adverse effect on theresults of operations in any one accounting period, the Company believes thatthe final disposition of such matters will not have a material adverse affecton the Company’s consolidated financial position.

 

**Item  4.*Submission of Matters to a Vote of Security Holders***

 

No matters were submitted to a vote of the Company’sshareholder during the quarter ended March 4, 2006.

 

**PART II**

 

**Item  5. *Market forthe Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities***

 

Since the Company’s going-private transaction on July 26,2002, the Company has been a wholly-owned subsidiary of PFMI; accordingly,there is no public trading market for the Company’s common stock. The Companydid not declare a cash dividend during successor fiscal 2006, predecessor fiscal2005 and successor fiscal 2005 combined or predecessor fiscal 2004. The Company’sdebt instruments restrict its ability to pay dividends. See “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources” and Note 7 — “FinancingArrangements,” to the Company’s Consolidated Financial Statements. Regardlessof the scope of such restrictions, the Company’s policy is to reinvestany earnings rather than pay dividends. The Company has no compensation plansor individual arrangements under which equity securities of the Company areauthorized for issuance; however, Holding, the sole stockholder of PFMI,implemented a stock option plan in successor fiscal 2005 pursuant to whichoptions to purchase shares of common stock of Holding may be issued toofficers, employees and consultants of the Company. In addition, on July 12,2005, Holding issued 2,000 shares of restricted common stock that vest overtime to Scott W. Meader, a director of the Company. The shares were purchased by Mr. Meaderfor $10.00 per share. See Note 11 —“Stock-BasedCompensation,” to the Consolidated Financial Statements.

 

No equity securities of the Company were soldby the Company during successor fiscal 2006 and predecessor fiscal 2005 andsuccessor fiscal 2005 combined.

 

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**Item 6. *Selected Financial Data***

 

The following selected historical financialinformation has been derived from audited consolidated financial statements ofthe Company. Such financial information should be read in conjunction with theconsolidated financial statements of the Company, the notes thereto and theother financial information contained elsewhere herein. See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andthe Company’s Consolidated Financial Statements and supplementary data.

 
| ** **                                                | ** ** | **Successor**                                                                   | ** ** | ** **           | **Predecessor** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|----------------------|-----------------|------------|
| ** **                                                | ** ** | **Fiscal 2006**                                                            | ** ** | **Fiscal 2005** | ** **      | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** | **Fiscal 2003** | ** ** | **Fiscal 2002** | ** ** |
| ** **                                                | ** ** | **(dollars in thousands, except per share data)** | ** ** |
|                                                      |       |                                                                            |       |                 |            |       |   |   |   |   |   |   |   |   |
| STATEMENT OF  OPERATIONS DATA:                            |       |                                                                            |       |                 |            |       |   |   |   |   |   |   |   |   |
| Revenues,  net                                            |       | $                                                                               | 431,633    |                 | $               | 294,867    |   |   | $ | 115,549 |   | $ | 358,549 |   | $ | 276,339 |   | $ | 243,278 |   |
| Cost of  goods sold                                       |       | 309,273                                                                         |       | 217,323              |            |       | 87,025 |   | 254,235 |   | 184,092 |   | 160,781 |   |
| Selling,  general, and administrative                     |       | 67,839                                                                          |       | 39,826               |            |       | 26,447 |   | 79,982 |   | 71,352 |   | 62,399 |   |
| Net loss on  disposition of property, plant and equipment |       | 6                                                                               |       | 5                    |            |       | 340 |   | 11 |   | 89 |   | 84 |   |
| Depreciation  and amortization                            |       | 30,638                                                                          |       | 23,170               |            |       | 1,545 |   | 4,605 |   | 4,125 |   | 6,438 |   |
| Operating  income                                         |       | 23,877                                                                          |       | 14,543               |            |       | 192 |   | 19,716 |   | 16,681 |   | 13,576 |   |
| Interest  expense                                         |       | (22,331                                                                         | )          | (19,493              | )               |       | (6,538 | ) | (16,979 | ) | (14,228 | ) | (13,206 | ) |
| Other  income, net                                        |       | 151                                                                             |       | 24                   |            |       | 2 |   | — |   | 447 |   | 364 |   |
| Income tax  benefit (provision)                           |       | 465                                                                             |       | 597                  |            |       | 2,080 |   | (1,303 | ) | (1,122 | ) | (733 | ) |
| Income  (loss) from continuing operations                 |       | 2,162                                                                           |       | (4,329               | )               |       | (4,264 | ) | 1,434 |   | 1,778 |   | 1 |   |
| Cumulative  effect of accounting change (1)               |       | —                                                                          |       | —               |            |       | — |   | — |   | (18,605 | ) | — |   |
| Net income  (loss)                                        |       | $                                                                               | 2,162      |                 | $               | (4,329     | ) |   | $ | (4,264 | ) | $ | 1,434 |   | $ | (16,827 | ) | $ | 1 |   |
|                                                      |       |                                                                            |       |                 |            |       |   |   |   |   |   |   |   |   |
| NET INCOME  (LOSS) PER SHARE - BASIC AND DILUTED:         |       |                                                                            |       |                 |            |       |   |   |   |   |   |   |   |   |
| Income (loss)  from continuing operations                 |       | $                                                                               | 21.62      |                 | $               | (43.29     | ) |   | $ | (42.64 | ) | $ | 14.34 |   | $ | 17.78 |   | $ | 0.01 |   |
| Cumulative  effect of accounting change                   |       | —                                                                          |       | —               |            |       | — |   | — |   | (186.05 | ) | — |   |
| Net income  (loss)                                        |       | $                                                                               | 21.62      |                 | $               | (43.29     | ) |   | $ | (42.64 | ) | $ | 14.34 |   | $ | (168.27 | ) | $ | 0.01 |   |
|                                                      |       |                                                                            |       |                 |            |       |   |   |   |   |   |   |   |   |
| OTHER DATA:                                               |       |                                                                            |       |                 |            |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                     |       | $                                                                               | 7,150      |                 | $               | 3,677      |   |   | $ | 2,084 |   | $ | 10,041 |   | $ | 16,216 |   | $ | 5,994 |   |
|                                                      |       |                                                                            |       |                 |            |       |   |   |   |   |   |   |   |   |
| BALANCE  SHEET DATA:                                      |       |                                                                            |       |                 |            |       |   |   |   |   |   |   |   |   |
| Working  capital                                          |       | $                                                                               | 61,997     |                 | $               | 62,145     |   |   | n/a |   | $ | 46,110 |   | $ | 40,716 |   | $ | 37,061 |   |
| Total assets                                              |       | 472,425                                                                         |       | 496,588              |            |       | n/a |   | 175,771 |   | 168,781 |   | 169,821 |   |
| Total debt                                                |       | 244,994                                                                         |       | 263,580              |            |       | n/a |   | 143,694 |   | 136,348 |   | 121,231 |   |
| Shareholder’s  equity                                |       | 148,058                                                                         |       | 146,023              |            |       | n/a |   | 6,621 |   | 8,998 |   | 27,207 |   |

 

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(1)  Reflects a loss due to cumulative effect of accounting changein the amount of $18,605 in predecessor fiscal 2003. The loss represents thewrite-off of goodwill upon adoption of Statement of Financial AccountingStandards No. 142, “Goodwill and Other Intangible Assets.”

 

13

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**Item 7. *Management’s Discussionand Analysis of Financial Condition and Results of Operations***

 

The following discussion relates to thefinancial condition and results of operations for successor fiscal 2006,successor fiscal 2005, predecessor fiscal 2005, and predecessor fiscal 2004. Successorfiscal 2005 and predecessor fiscal 2005 collectively are referred to as “predecessorfiscal 2005 and successor fiscal 2005 combined.”  This section should be read inconjunction with the Company’s Consolidated Financial Statements and consideredwith “Risk Factors” discussed in Item 1A above, Item 7A —“Quantitativeand Qualitative Disclosures About Market Risk” below, and “CautionaryStatements Regarding Forward Looking Statements,” which precedes Part I,Item 1 above.

 

Pierre operates on a 52-week or 53-weekfiscal year 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 year contains13 weeks except for the infrequent fiscal years with 53 weeks. Theresults for successor fiscal 2006 and the results for predecessor fiscal 2005and successor fiscal 2005 combined both contain 52 weeks. The results for predecessorfiscal 2004 contain 53 weeks.

 

**Results of Operations**

 

Results for successor fiscal 2006, successor fiscal2005, predecessor fiscal 2005, and predecessor fiscal 2004 are shown below:

 
| ** **                                                 | ** ** | **Successor**          | ** ** | ** **           | **Predecessor** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|----------------------|-----------------|------------|
| ** **                                                 | ** ** | **Fiscal 2006**   | ** ** | **Fiscal 2005** | ** **      | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** |
| ** **                                                 | ** ** | **(in millions)** | ** ** |
| Revenues,  net                                             |       | $                      | 431.6      |                 | $               | 294.9      |   |   | $ | 115.5 |   | $ | 358.6 |   |
| Cost of  goods sold                                        |       | 309.3                  |       | 217.3                |            |       | 87.0 |   | 254.2 |   |
| Selling,  general, and administrative                      |       | 67.8                   |       | 39.8                 |            |       | 26.4 |   | 80.0 |   |
| Net loss on  disposition of property, plant, and Equipment |       | —                 |       | —               |            |       | 0.4 |   | 0.1 |   |
| Depreciation  and amortization                             |       | 30.6                   |       | 23.2                 |            |       | 1.5 |   | 4.6 |   |
| Operating  income                                          |       | 23.9                   |       | 14.6                 |            |       | 0.2 |   | 19.7 |   |
| Interest  expense and other income, net                    |       | (22.2                  | )          | (19.5                | )               |       | (6.5 | ) | (17.0 | ) |
| Income  (loss) before income tax                           |       | 1.7                    |       | (4.9                 | )               |       | (6.3 | ) | 2.7 |   |
| Income tax benefit (provision)                             |       | 0.5                    |       | 0.6                  |            |       | 2.0 |   | (1.3 | ) |
| Net income (loss)                                          |       | $                      | 2.2        |                 | $               | (4.3       | ) |   | $ | (4.3 | ) | $ | 1.4 |   |

 

As a result of the Acquisition as describedin Note 1 — “Basis of Presentation and Acquisition,” to the ConsolidatedFinancial Statements and elsewhere in this report, the following resultsof operations comparisons demonstrate a significant difference between comparedperiods. The Acquisition was accounted for under the purchase method ofaccounting, resulting in an increase in the basis of the Company’s assets. Dueto the change in basis, the Company’s results of operations and those of itspredecessor are not considered comparable. The Company’s results of operationsinclude amortization related to the identifiable intangible assets and interestexpense related to the borrowings incurred in connection with the Acquisition. Forthe purpose of comparing comparable time periods, the results forpredecessor fiscal 2005 and successor fiscal 2005 are combined in thediscussion below in order to provide a more meaningful period-to-periodcomparison.

 

***Successor Fiscal 2006 Compared to PredecessorFiscal 2005 and Successor Fiscal 2005 Combined***

 

***Revenue, net.***Net revenues increased by $21.2 million,or 5.2%. This increase was primarily due to sales volume growth in most of theCompany’s end-market segments ($30.1 million), net price increases to customers,and higher margin product sales; offset by decreased sales volume to two largeNational Accounts customers ($18.2 million). Sales to these National Accountscustomers were impacted, in part, by their promotional activity towardsandwiches that do not include Pierre’s products and to a lesser extent, highergasoline prices, which impacted the store traffic of these National Accountscustomers.

 

14

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Net price increases to customers in successor fiscal2006 consisted of  $4.0 millionattributable to cost-plus contracts with two large National Accounts customers,which enable the Company to limit its exposure to raw material pricefluctuations, and $3.3 million related to the impact of price increasesimplemented during the prior year in response to higher raw material prices.

 

***Cost of goodssold.***Cost ofgoods sold increased by $4.9 million in successor fiscal 2006 compared topredecessor fiscal 2005 and successor fiscal 2005 combined, or 1.6%. Thisincrease was primarily due to (1) an increase in costs as a result ofincreased net revenues due to volume growth; (2) an increase in rawmaterial protein costs of $3.8 million attributableto cost-plus contracts with two large National Accounts customers, which enablethe Company to limit its exposure to raw material price fluctuations; (3) anincrease in utility costs of $1.0 million primarily due to natural gas andelectric cost increases offset by increased efficiencies related to waterusage; offset by (4) start-up costs of $3.1 million incurred inpredecessor fiscal 2005 and successor fiscal 2005 combined associated with aNational Accounts customer that were not incurred during successor fiscal 2006;(5) a favorable impact as a result of a $2.0 million purchase accountingadjustment on beginning inventory in the prior year comparable period made inconnection with the Acquisition; and (6) the net impact of decreases inprices paid for raw material proteins and formulation mix excluding rawmaterial protein purchases attributable to cost-plus contracts with two largeNational Accounts customers.

 

As a percentage of revenues, cost of goodssold decreased from 74.2% to 71.7%, a decrease of 2.5%. This decrease wasprimarily due to (1) a decrease in costs as a result of an change in mixto lower cost, higher margin products (approximately 1.3%); (2) start-upcosts incurred in predecessor fiscal 2005 and successor fiscal 2005 combinedassociated with a National Accounts customer that were not incurred duringsuccessor fiscal 2006 (approximately 0.7%); (3) a favorable impact as aresult of a purchase accounting adjustment on beginning inventory in the prioryear comparable period made in connection with the Acquisition (approximately0.5%); and (4) the net impact of decreases in prices paid for raw materialproteins and formulation mix; offset by (5) an increase in costs as aresult of manufacturing efficiencies related to changes in sales mix.

 

The primary materials used in the Company’sfood processing operations include boneless beef, pork, chicken, flour, yeast,seasonings, cheese, breading, soy proteins, and packaging supplies. Meatproteins are generally purchased under 7-day payment terms. Historically, theCompany has not hedged in the futures markets, and over time, the Company’s rawmaterial costs have fluctuated with movement in the relevant commodity markets.Additionally, the Company has contracts with formulaic pricing that require theCompany to immediately pass along commodity price variances. During successorfiscal 2006, net raw material protein prices increased approximately $2.7million including a $4.7 million increase related to these formulaic contractsoffset by raw material protein price decreases of approximately $2.0 millionrelated to other non-contracted sales.

 

Approximately 42.0% of total sales forsuccessor fiscal 2006 were protected from commodity exposure, of which 35.8%were attributable to cost-plus contracts, while the other 6.2% were related tothe USDA Commodity Reprocessing Program, which also insulates the Company fromraw material price fluctuations. For predecessor fiscal 2005 and successorfiscal 2005 combined, approximately 44.9% of total sales were protected fromcommodity exposure, of which 38.7% were attributable to cost-plus contracts,while the other 6.2% were related to the USDA Commodity Reprocessing Program.

 

The following table represents the(increases)/decreases in the weighted average prices the Company paid for beef,pork, chicken, and cheese excluding unfavorable formulation mix and contractswith formulaic pricing during successor fiscal 2006 compared to predecessorfiscal 2005 and successor fiscal 2005 combined:

 

| ** ** | ** ** | **(Increase)/Decrease**                                   | ** ** |
|------------|------------|-----------------------------------------------------------|------------|
| ** ** | ** ** | **Successor Fiscal 2006 Compared to** | ** ** |
| ** ** | ** ** | **Predecessor Fiscal 2005 and**            | ** ** |
| ** ** | ** ** | **Successor Fiscal 2005 Combined**         | ** ** |
| Beef       |       | (7.7                                                      | )%         |
| Pork       |       | 14.2                                                      | %          |
| Chicken    |       | 39.0                                                      | %          |
| Cheese     |       | 6.1                                                       | %          |
| Aggregate  |       | 7.8                                                       | %          |

 

15

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***Selling, general and administrative*.**Selling,general and administrative expenses increased by $1.6 million, or 2.4%. Thisincrease was primarily due to (1) an increase in sales volume and anincrease in sales mix to lower cost, higher margin end-markets with greaterselling burden rates; (2) an increase in storage expense ($1.8 million) asa result of increased inventories built to maintain customer service levels forcustomer requirements and product line expansion, in addition to increasedstorage rates paid by the Company; (3) an increase in freight ($2.1million) due to higher fuel prices and higher fuel surcharges; (4) anincrease in selling expenses ($1.6 million) primarily due to selling expensesincurred to establish the Company’s new Military selling channel, product lineexpansion, and an increase in demonstration expense related to growth in theWaarehouse Club selling channel; and (5) an increase in administrativecosts; offset by (6) the elimination of expenses related to the sellingshareholders and non-recurring transaction fees as a result of the Acquisition ($8.8million). As a percentage of revenues, selling, general, and administrativeexpenses decreased from 16.1% to 15.7%.

 

Expenses associated with the sellingshareholders in predecessor fiscal 2005 and successor fiscal 2005 combined thatare not present in successor fiscal 2006 and are not expected to be incurred inthe future include the following:

 

| ** **                                       | ** ** | **Predecessor  Fiscal 2005 and  Successor Fiscal  2005  Combined** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **(in millions)**                                                            | ** ** |
| Compensation  expense (a)                        |       | $                                                                                 | 1.2        |   |
| Travel and  entertainment (b)                    |       | 1.0                                                                               |       |
| Office  expense (c)                              |       | 0.2                                                                               |       |
| Aircraft  expense (d)                            |       | 0.8                                                                               |       |
| Compass  Outfitters (e)                          |       | 0.1                                                                               |       |
| Professional  fees (f)                           |       | 2.6                                                                               |       |
| Selling  shareholders’ other expenses (g)   |       | 0.7                                                                               |       |
| Selling  shareholders’ transaction fees (h) |       | 1.0                                                                               |       |
| Consulting  services (i)                         |       | 0.8                                                                               |       |
| Endorsement  termination (j)                     |       | 0.3                                                                               |       |
| Other (k)                                        |       | 0.1                                                                               |       |
| Total                                            |       | $                                                                                 | 8.8        |   |

 

Compensation expense (a) relates topersonnel who were terminated in connection with the Acquisition and will notbe replaced. Travel and entertainment (b) relates to expenses incurred bypersonnel who were terminated and will not be replaced as a result of the Acquisition.Office expense (c) relates to rent expense, maintenance and otheroccupancy costs associated with the lease of an office building from a relatedparty that was terminated in connection with the Acquisition. Aircraft expense (d) relatesto the leasing of an aircraft owned by Columbia Hill Aviation, LLC, which wasformerly a subsidiary of PFMI, which was retained by the selling shareholders. CompassOutfitters (e) relates to expenses incurred in connection with an assetthat was retained by the selling shareholders. The professional fees (f) primarilyrelate to the Restructuring and to the Acquisition. The selling shareholders’other expenses (g) relate to outside board of director fees, communityrelations, and contributions made to the former owners alma mater. The sellingshareholders’ transaction fees (h) include legal, accounting, and taxconsulting fees related to the Acquisition. The consulting services (i) consistof the fee paid to the selling shareholders’ adviser for his role in the Acquisition.The endorsement termination (j) relates to the termination of the contractbetween the Company and Crawford Race Cars, LLC. Other (k) includesemployee travel and other expenses incurred as a result of the debt placementfor the Acquisition.

 

***Depreciationand amortization.***Depreciation and amortization expenseincreased by $5.9 million. This is due to an increase in amortization of$5.7 million, primarily related to the allocation of the Acquisition purchaseprice to other intangible assets that was present for the entire successorfiscal 2006 period. For the prior year comparable period, such amortization ofintangible assets only occurred subsequent to the Acquisition during successorfiscal 2005. In addition, depreciation expense increased by $0.2 million,primarily as a result of the allocation of the Acquisition purchase price andre-valuation of property, plant, and equipment as a result of purchaseaccounting due to the Acquisition.

 

16

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***Loss on disposal of assets.***The loss ondisposal of assets decreased by $0.3 million. The decrease is due to therecording of losses in the prior year related to affiliated companies as aconsequence of the Restructuring.

 

***Interest expense and other income, net*.**Interestexpense and other income, net consists primarily of interest on fixed andvariable-rate long-term debt and interest on the revolving loan, both of whichwere entered into in connection with the Acquisition. Interest expense andother income, net decreased by $3.8 million, or 14.7%. This decrease isprimarily due to expenses incurred during predecessor fiscal 2005 and successorfiscal 2005 combined as a result of the Acquisition, including: (1) $4.3million for the write-off of deferred loan origination fees; (2) $0.6million for the repayment of the Old Notes; and (3) $0.5 million for therepayment of the Company’s former revolving credit facility. This decrease wasoffset by increased debt and related interest expense as a result of theAcquisition, in addition to an increase in floating interest rates related tothe Company’s term loan.

 

***Income taxes.***The effective tax rate forsuccessor fiscal 2006 was 27.4% compared to 23.8% for predecessor fiscal 2005and successor fiscal 2005 combined. The change in the effective tax rate isprimarily due to the impact of new Ohio tax laws enacted in H.B. 66 on June 30,2005. H.B. 66 includes the phase-out of Ohio franchise tax and Ohio personalproperty tax and the phase-in of a gross receipts tax referred to as theCommercial Activity Tax (“CAT”). As a result of the enactment, the Companyreduced its deferred tax liability based on the phase-out of franchise tax andrecorded an additional valuation allowance based on Ohio investment tax creditsthat are expected to expire prior to utilization. Excluding the one-time impactof this enactment, the effective tax rate for successor fiscal 2006 would havebeen 38.3%.

 

***Predecessor Fiscal 2005 and Successor Fiscal2005 Combined Compared to Predecessor Fiscal 2004***.

 

***Revenues, net.***Netrevenues increased by $51.9 million, or 14.5%. The increase in netrevenues was the result of increases in sales across most of the Company’send-market segments, including the substantial development of national businesswith existing customers and the advent of business with a new customer, inaddition to net revenue of approximately $6.4 million due to net priceincreases to customers, offset by additional revenues of $7.9 million in theprior year due to predecessor fiscal 2004 being a 53 week year, compared to the52 week period in predecessor fiscal 2005 and successor fiscal 2005 combined. Includedin predecessor fiscal 2005 and successor fiscal 2005 combined and predecessorfiscal 2004 are non-recurring revenues of $8,604 and $104,127, respectively,related to Compass Outfitters, LLC. These revenues are not present in futureperiods due to Compass Outfitters, LLC being retained by the sellingshareholders following the Acquisition.

 

***Cost of goodssold.***Cost ofgoods sold increased by $50.1 million in predecessor fiscal 2005 andsuccessor fiscal 2005 combined compared to predecessor fiscal 2004, or19.7%. As a percentage of revenues, cost of goods sold increased from 70.9% to74.2%. This increase was primarily due to increased raw material prices($13.9 million), the impact of a $2.0 million purchase accountingadjustment on beginning inventory (as a result of the Acquisition) and start-upcosts of $3.1 million related to the development of new lower margin, highvolume national accounts business. In predecessor fiscal 2005 and successorfiscal 2005 combined, beef, pork, chicken and cheese prices increased approximately7.3%, 49.4%, 22.5% and 25.0%, respectively, compared to predecessor fiscal2004. These increases were partially offset by price increases passed on tocustomers, as noted above, and the elimination of commissions as a result ofthe termination of the Company’s purchasing agreement with PF Purchasing.Commissions paid to PF Purchasing totaled $5.3 million during predecessorfiscal 2004. This affiliate relationship was terminated in conjunction with theRestructuring.

 

***Selling, general and administrative*.**Selling,general and administrative expenses decreased by $13.7 million, or 17.1%.As a percentage of revenues, selling, general and administrative expensesdecreased from 22.3% to 16.1%. This decrease was primarily due to theelimination of PF Distribution fees of $11.6 million and a decrease informer affiliate expenses offset, in part, by expenses associated with theAcquisition that are not expected to repeat in future periods. Expensesassociated with the selling shareholders in predecessor fiscal 2005 andsuccessor fiscal 2005 combined and predecessor fiscal 2004 that are notexpected to be incurred in the future include the following:

 

17

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| ** **                                       | ** ** | **Predecessor  Fiscal 2005 and  Successor Fiscal  2005  Combined** | ** ** | **Predecessor Fiscal  2004** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                       | ** ** | **(in millions)**                                                            | ** ** |
| Distribution  expenses (a)                       |       | $                                                                                 | —     |                              | $          | 11.6 |   |
| House lease  (b)                                 |       | —                                                                            |       | 0.1                               |       |
| Compensation  expense (c)                        |       | 1.2                                                                               |       | 2.8                               |       |
| Travel and  entertainment (d)                    |       | 1.0                                                                               |       | 2.0                               |       |
| Office  expense (e)                              |       | 0.2                                                                               |       | 0.6                               |       |
| Aircraft  expense (f)                            |       | 0.8                                                                               |       | 1.5                               |       |
| Compass  Outfitters (g)                          |       | 0.1                                                                               |       | 0.7                               |       |
| Professional  fees (h)                           |       | 2.6                                                                               |       | 2.4                               |       |
| Selling  shareholders’ other expenses (i)   |       | 0.7                                                                               |       | 1.1                               |       |
| Selling  shareholders’ transaction fees (j) |       | 1.0                                                                               |       | —                            |       |
| Consulting  services (k)                         |       | 0.8                                                                               |       | —                            |       |
| Endorsement  termination (l)                     |       | 0.3                                                                               |       | —                            |       |
| Other (m)                                        |       | 0.1                                                                               |       | —                            |       |
| Total                                            |       | $                                                                                 | 8.8        |                              | $          | 22.8 |   |

 

Distribution expenses (a) incurred underrelated party agreements that were terminated in March 2004 as part ofthe Restructuring. The house lease (b) relates to rent expense,maintenance and other occupancy costs paid to related parties pursuant to alease that was terminated in connection with the Restructuring. Compensationexpense (c) relates to personnel who were terminated in connection withthe Acquisition and will not be replaced. Travel and entertainment (d) relatesto expenses incurred by personnel who were terminated and will not be replacedas a result of the Acquisition. Office expense (e) relates to rentexpense, maintenance and other occupancy costs associated with the lease of anoffice building from a related party that was terminated in connection with theAcquisition. Aircraft expense (f) relates to the leasing of an aircraftowned by Columbia Hill Aviation, LLC which was formerly a subsidiary of PFMI,which was retained by the selling shareholders. Compass Outfitters (g) relatesto expenses incurred in connection with an asset that was retained by theselling shareholders. The professional fees (h) primarily are related tothe Restructuring and to the Acquisition. The selling shareholders’ otherexpenses (i) relate to outside board of director fees, communityrelations, and contributions made to the former owners alma mater. The sellingshareholders’ transaction fees (j) include legal, accounting, and taxconsulting fees related to the Acquisition. The consulting services(k) consist of the fee paid to the selling shareholders’ adviser for hisrole in the Acquisition. The endorsement termination (l) relates to thetermination of the contract between the Company and Crawford Race Cars, LLC.Other (m) includes employee travel and other expenses incurred as a resultof the debt placement for the Acquisition.

 

***Depreciationand amortization.***Depreciationand amortization expense increased by $20.1 million. The increase is dueprimarily to amortization of intangible assets and additional depreciationexpense related to a step-up in the value of fixed assets due to purchaseaccounting, both occurring in successor fiscal 2005 as a result of theAcquisition.

 

***Loss on disposalof assets.***Loss on disposal of assets increased by$0.3 million. The increase is due to the recording of losses related toaffiliate companies as a consequence of the Restructuring.

 

***Interest expense and other income, net*.**Interestexpense and other income, net consists primarily of interest on fixed andvariable rate long-term debt and interest on a revolving loan, both of whichexist as a result of the Acquisition. Other expense increased by$9.0 million, or 53.2%. This increase was primarily due to expenses as aresult of the Acquisition, including $4.3 million for the write-off of deferredloan origination fees, $0.6 million for the repayment of the Old Notes and $0.5million for the repayment of the Company’s former revolving credit facilitycombined with the increased debt and borrowings under the Company’s newrevolving credit facility. See “Liquidity and Capital Resources” below.

 

18

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***Income taxes*.**The effective tax rate forpredecessor fiscal 2005 and successor fiscal 2005 combined was 23.8%, comparedto 47.6% for predecessor fiscal 2004. The decrease in the effective tax rate isprimarily due to a change in the tax rate used to provide for deferred taxes.

 

**Liquidity and Capital Resources**

 

***Net cash provided by operatingactivities.***Net cash provided by operatingactivities was $28.5 million, $12.9 million, $0.4 million, and $3.3 million forsuccessor fiscal 2006, successor fiscal 2005, predecessor fiscal 2005, andpredecessor fiscal 2004, respectively. The increase in net cash provided byoperating activities for successor fiscal 2006 compared to net cash provided byoperating activities for predecessor fiscal 2005 and successor fiscal 2005combined was primarily due to the Company’s increased profitability duringsuccessor fiscal 2006, in addition to (1) an increase in accountsreceivable during successor fiscal 2006 that was substantially less than theincrease during the prior year comparable period; (2) a decrease inrefundable income taxes, prepaid expense, and other current assets duringsuccessor fiscal 2006 compared to the increase in the prior year comparableperiod; and (3) an increase in inventories during successor fiscal 2006that was substantially less than the increase in the prior year comparableperiod; offset by (4) an increase in payments on long-term debt duringsuccessor fiscal 2006 compared to the prior year comparable period and (5) anincrease in accounts payable and other accrued liabilities during successorfiscal 2006 that was significantly less than the increase in the prior yearcomparable period.

 

The primary components of the net cashprovided by operating activities for successor fiscal 2006 were (1) depreciationand amortization of intangible assets of $30.6 million, of which $7.2 millionrelates to depreciation of fixed assets and $23.4 million relates toamortization of intangible assets; (2) a decrease in refundable incometaxes, prepaid expenses, and other current assets of $2.2 million, primarilydue to the tax provision recorded as a result of the income in successor fiscal2006, reducing previously recorded tax benefits; (3) an increase in tradeaccounts payable and other accrued liabilities of $0.8 million; and (4) amortizationof deferred loan fees totaling $1.7 million; offset by (5) a decrease inother long-term liabilities of $4.3 million primarily as a result of thepayment to the selling shareholders as required by the tax sharing agreement,partially offset by an increase in liability for deferred compensation; (6) adecrease in deferred income taxes of $2.3 million; and (7) an increase ininventories of $1.9 million due to an inventory build to satisfy existing customerneeds, new customers needs, and new product lines.

 

The primary components of net cash providedby operating activities for successor fiscal 2005 were: (1) depreciationand amortization, including amortization of deferred loan origination fees,totaling $24.2 million; (2) an increase in deferred income taxes of $0.4million; (3) the write-off of deferred loan origination fees of $4.3million; (4) an increase in trade accounts payable and other accruedliabilities of $0.9 million; and (5) a decrease in inventory of $0.5million; offset by (6) an increase in accounts receivable of $9.6 millionand (7) an increase in refundable income taxes, prepaid expenses and othercurrent assets of $3.6 million.

 

The primary components of net cash providedby operating activities for predecessor fiscal 2005 were: (1) a decreasein accounts receivable of $5.7 million; (2) depreciation and amortization,including amortization of deferred loan origination fees, totaling $2.3million; (3) an increase in trade accounts payable and other accruedliabilities of $2.2 million; offset by (4) an increase in inventoryof $4.9 million; (5) an increase in refundable income taxes, prepaidexpenses and other current assets of $0.2 million; and (6) an decreasein deferred income taxes of $2.1 million.

 

The primary components of net cash providedby operating activities for predecessor fiscal 2004 were: (1) depreciationand amortization, including amortization of deferred loan origination fees,totaling $5.4 million; (2) a decrease in deferred income taxes of $1.3million; (3) an increase in trade accounts payable and other accruedliabilities of $2.4 million; and (4) the write-off of deferred loanorigination fees of $1.2 million; offset by (5) an increase in inventoriesof $6.4 million and (6) an increase in receivables of $2.0 million.

 

19

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***Net cash used in investingactivities.***Net cash used in investing activitiesfor successor fiscal 2006, successor fiscal 2005, predecessor fiscal 2005, andpredecessor fiscal 2004 was $7.2 million, $3.7 million, $2.1 million, and $9.8million, respectively. The primary components for successor fiscal 2006,successor fiscal 2005, and predecessor fiscal 2005 were plant improvements androutine capital expenditures. The primary components for predecessor fiscal2004 were plant improvements, routine capital expenditures, and a significantplant expansion totaling $10.0 million.

 

***Net cash provided by (used in)financing activities*.**Net cash used in financingactivities was $18.8 million for successor fiscal 2006. The primary componentswere:  (1) principal pre-payments onlong-term debt of $17.8 million; (2) net repayments under the revolvingcredit agreement of $0.8 million; (3) a return of capital to parent of$0.1 million; and (4) loan origination fees of $0.1 million.

 

Net cash used in financing activities was$11.3 million for successor fiscal 2005. The primary components were:  (1) the payoff of the Old Notes of$115.0 million; (2) a return of capital to parent of $100.1 million; (3) therepayment of debt in conjunction with the Acquisition of $29.0 million; (4) netrepayment of the revolving credit agreement of $17.7 million; (5) principalpayments on long-term debt of $16.2 million; and (6) loan origination feesof $10.0 million; offset by (7) borrowings under the new term loan of$150.0 million; (8) issuance of New Notes of $125.0 million; (9) thetermination of a certificate of deposit for $1.3 million; and (10) acontribution from parent totaling $0.4 million.

 

Net cash provided by financing activities was$3.7 million for predecessor fiscal 2005. The primary components were: (1) netborrowings under the revolving credit agreement with former lender of $7.7million; offset by (2) loan origination fees incurred in the amount of$3.4 million and (3) principal payments on long-term debt in the amount of$0.7 million.

 

Net cash provided by financing activities was$6.4 million for predecessor fiscal 2004. The primary components were: (1) borrowingsunder the equipment term loan subline and the real estate term loan subline of$5.0 million each, offset by (2) the net repayment of revolving creditagreement of $1.8 million; (3) principal payments on long-term debt of$0.8 million; and (4) loan origination fees of $0.7 million.

 

On March 8, 2004, following a consentsolicitation in which consents of holders of $112.4 million in aggregateprincipal amount of the Company’s then outstanding Old Notes, representing97.74% of the outstanding Old Notes, consented to a Fourth SupplementalIndenture between the Company and U.S. Bank National Association, as trustee(the “Trustee”). The Company entered into the Fourth Supplemental Indenturewith the Trustee. Among other things, the Fourth Supplemental Indentureincreased the annual interest rate on the Old Notes from 10.75% to 12.25%through March 31, 2005 and 13.25% thereafter, and required the payment ofa cash consent fee of $3.5 million (3% of the principal amount of OldNotes held by each consenting noteholder); required the termination of allrelated party transactions, except for certain specifically-permittedtransactions as described in Note 16 — “Transactions With Related Parties” tothe Consolidated Financial Statements); provided for the assumption by theCompany of approximately $15.3 million of subordinated debt of PFMI andwaived any and all defaults of the Indenture existing as of March 8, 2004.

 

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

 

On June 30, 2004, the shareholders ofPFMI closed the sale of their shares of stock of PFMI to Holding (see Note 1 — “Basisof Presentation and Acquisition,” to the Consolidated Financial Statements). EffectiveJune 30, 2004, the Company terminated its three-year variable-rate$40 million revolving credit facility. Existing debt issuance costsrelated to the Company’s former $40 million facility in the amount of$0.5 million and a prepayment penalty paid to the former lender in theamount of $0.4 million were charged to interest expense.

 

20

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Also effective June 30, 2004, theCompany obtained a $190 million credit facility from a new lender whichincludes a six-year variable-rate $150 million term loan, a five-yearvariable-rate $40 million revolving credit facility and a $10 millionletter of credit subfacility. Funds available under this new facility areavailable for working capital requirements, permitted investments, and generalcorporate purposes. Borrowings under the new facility bear interest at floatingrates based upon the interest rate option selected from time to time by theCompany and are secured by a first-priority security interest in substantiallyall of the Company’s assets. The interest rates for base rate borrowings underthe new revolving credit facility and the new term loan at March 4, 2006were 9.25% (prime of 7.50% plus 1.75%) and 9.00% (prime of 7.50% plus 1.50%),respectively. Actual interest rates are lowered by the use of LIBOR tranches asappropriate. Repayment of borrowings under the term loan was initially $375,000per quarter, which began on September 4, 2004, with a balloon payment of$141.4 million due on June 5, 2010. However, in addition to payingall scheduled quarterly payments totaling $8.6 million for the term of theloan, the Company made prepayments on the term loan totaling $4.9 millionduring successor fiscal 2005. Prepayments totaling $17.4 million were madeduring successor fiscal 2006. The remaining outstanding balance of $119.1million as of March 4, 2006 is due on June 5, 2010.

 

As of March 4, 2006, the Company hadcash and cash equivalents on hand of $2.5 million, no outstanding borrowingsunder its revolving credit facility and borrowing availability of approximately$34.4 million. Also as of March 4, 2006, the Company had borrowingsunder its term loan of $119.1 million and $125.0 million of the New Notesoutstanding. As of March 5, 2005, the Company had no cash and cashequivalents on hand, outstanding borrowings under its revolving credit facilityof $0.8 million, and borrowing availability of approximately $34.7 million.Also as of March 5, 2005, the Company had borrowings under its term loanof $136.5 million and $125.0 million of the New Notes outstanding. The maturitydate of the $40 million revolving credit facility is June 30, 2009. Inaddition, the Company is required to satisfy certain financial covenantsregarding cash flow and capital expenditures. As of March 4, 2006, theCompany is in compliance with all financial covenants.

 

In conjunction with the Acquisition, theCompany issued the New Notes. The proceeds of the New Notes, together with theequity contributions from MDP and certain members of management and borrowingsunder the Company’s new senior credit facility, were used to finance theAcquisition and to repay outstanding indebtedness, including paying off debt ofPFMI assumed by the Company under the Fourth Supplemental Indenture (exceptcapital leases), paying for the Old Notes tendered in connection with the tenderoffer described in Note 1 — “Basis of Presentation and Acquisition” to the ConsolidatedFinancial Statements and redeeming the Old Notes not tendered.

 

Alsoin conjunction with the Acquisition, the Company and the selling shareholders****entered into a tax sharing and indemnification agreementcontaining certain representations and warranties of the selling shareholderswith respect to taxes. The agreement provides that any net operating losscarryforwards attributable to expenses relating to the sale of the Company (“DealRelated NOLs”) and certain other deal related expenses, will be for the benefitof the selling shareholders. As of the date of the Acquisition, these DealRelated NOLs and other deal related expenses totaled approximately $24.2million and $6.6 million, respectively. Accordingly, the Company is required payto the selling shareholders the amount of any tax benefit attributable to suchDeal Related NOLs and other deal related expenses, except that the first $4.0million of such tax benefits shall be paid into an escrow account that willsecure the selling shareholders indemnification obligations under the taxsharing and indemnification agreement. The Company is required to make paymentsto the selling shareholders or the escrow account for tax benefits derived fromsuch utilization 20 days after the filing of the tax return that utilizes suchDeal Related NOLs or other deal related expenses.

 

Initially,the Company recorded a net long-term liability to the selling shareholderstotaling $10.3 million for the estimated obligations under the tax sharing andindemnification agreement. As of March 4, 2006, based on the federalincome tax return filed November 15, 2005 (for the tax year ended February 26,2005), the Company has utilized $8.6 million of the Deal Related NOLs and $1.7million in other deal related expenses. During the fiscal year ended March 4,2006, the Company submitted payments based on the tax benefits received, net ofother tax assessments due to the Company from the selling shareholders, to anescrow account for a total of $3.6 million and directly to the sellingshareholders for a total of $1.4 million. As of March 4, 2006, the Companyhas a net long-term liability to the selling shareholders totaling $5.3million.

 

Forthe tax year ended February 26, 2005, the Company utilized approximately$3.3 million of non-deal related NOLs in its tax return filed November 15,2005. The non-deal related NOLs enabled the Company to defer cash tax paymentsrequired by the tax sharing and indemnification agreement of approximately $1.2million attributable to this tax period.

 

21

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Forthe tax year ending February 25, 2006, as a result of the current year taxableincome for successor fiscal 2006, the Company was able to defer cash taxpayments of approximately $4.2 million. The Company expects a portion of suchdeferred amounts to be paid out pursuant to the tax sharing and indemnificationagreement subsequent to the filing of its tax return in November 2007.

 

The Company has budgeted approximately $13.4million for capital expenditures for successor fiscal 2007. These expenditures includea provision for capacity expansion, system upgrades, and routine foodprocessing capital improvement projects and other miscellaneous expenditureswithin the Company’s existing facilities. The Company believes that funds fromoperations and funds from its $40 million revolving credit facility, as well asthe Company’s ability to enter into capital or operating leases, will beadequate to finance these capital expenditures. As described in Note 17 — “LegalProceedings,” to the Consolidated Financial Statements, if the HCDOESdetermines that the Company is non-compliant with emissions requirements, theCompany likely will be required to install additional control equipment. TheCompany is estimating the cost of such upgrades to existing equipment to be$2.5 million. Should such capital expenditures be required, the Company wouldlikely adjust its capital budget for its successor fiscal 2007 or delaypreviously budgeted capital expenditures.

 

If the Company continues its historicalrevenue growth trend as expected, then the Company will be required to raiseand invest additional capital for additional plant expansion projects toprovide operating capacity to satisfy increased demand. Management believesthat future cash requirements for these plant expansion projects would need tobe met through other long-term financing sources. The incurrence of additionallong-term debt is governed and restricted by the Company’s existing debt instruments.Furthermore, there can be no assurance that additional long-term financing willbe available on advantageous terms (or any terms) when needed by the Company.

 

Significant assumptions underlie the belief that theCompany anticipates that its fiscal 2007 cash requirements for working capitaland debt service will be met through a combination of funds provided byoperations and borrowings under its $40 million revolving credit facility,including, among other things, that there will be no material adversedevelopments in the business, liquidity or significant unbudgeted capitalrequirements of the Company.

 

**Commercial Commitments,Contingencies, and Contractual Obligations**

 

The Company provided a letter of credit in theamount of $5.5 million, $4.5 million and $3.5 million in successor fiscal 2006,predecessor fiscal 2005 and successor fiscal 2005 combined, and predecessor fiscal2004, respectively, to its insurance carrier for the underwriting of certainperformance bonds. The current letter of credit expires in fiscal 2007. TheCompany also provides secured letters of credit to its insurance carriers foroutstanding and potential workers’ compensation and general liability claims. Lettersof credit for these claims totaled $110,000 in both successor fiscal 2006 andin predecessor fiscal 2005 and successor fiscal 2005 combined, and $75,000 in predecessorfiscal 2004. In addition, the Company provides secured letters of credit to alimited number of suppliers. The Company had no letters of credit for suppliersin successor fiscal 2006 or predecessor fiscal 2005 and successor fiscal 2005combined. Letters of credit for suppliers totaled $250,000 in predecessor fiscal2004.

 

The Company is involved invarious legal proceedings. Management believes, based on the advice of legalcounsel, that the outcome of such proceedings will not have a materiallyadverse effect on the Company’s financial position or future results ofoperations and cash flows. See Item 3 — “Legal Proceedings” and Note 17 – “LegalProceedings,” to the Consolidated Financial Statements for further discussionof proceedings as of March 4, 2006.

 

The following tables summarize our contractualobligations and commitments as of March 4, 2006:

 
| ** **                                 | ** ** | **Commitments by Fiscal Year** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                 | ** ** | **Total**                                     | ** ** | **Less than 1  Year** | ** ** | **1 – 3 Years** | ** ** | **3 - 5 Years** | ** ** | **More than  5 Years** | ** ** |
| Letters of  credit                         |       | $                                             | 5,610,000  |   | $ | 5,610,000 |   | $ | — |   | $ | — |   | $ | — |   |
| Purchase  commitments for capital projects |       | 1,941,735                                     |       | 1,941,735 |   | — |   | — |   | — |   |
| Purchase commitments for raw materials     |       | 852,576                                       |       | 852,576 |   | — |   | — |   | — |   |
| Purchase  commitments for natural gas      |       | 3,130,722                                     |       | 3,130,722 |   | — |   | — |   | — |   |
| Other  miscellaneous services              |       | 90,000                                        |       | 90,000 |   | — |   | — |   | — |   |
| Total                                      |       | $                                             | 11,625,033 |   | $ | 11,625,033 |   | $ | — |   | $ | — |   | $ | — |   |

 

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| ** **                        | ** ** | **Contractual Obligations by Fiscal Year** | ** **  |
|-----------------------------------|------------|----------------------------------------------------------------|-------------|
| ** **                        | ** ** | **Total**                                                      | ** **  | **Less than 1  Year** | ** ** | **1 – 3  Years** | ** ** | **3-5  Years** | ** ** | **More than  5 Years** | ** ** |
|                              |       |                                                           |        |   |   |   |   |   |   |   |   |
| Long-term  debt                   |       | $                                                              | 244,125,000 |   | $ | — |   | $ | — |   | $ | 119,125,000 |   | $ | 125,000,000 |   |
| Capital  lease obligations*       |       | 868,659                                                        |        | 229,172 |   | 357,870 |   | 281,617 |   | — |   |
| Operating  lease obligations      |       | 4,963,704                                                      |        | 3,644,904 |   | 1,104,483 |   | 198,117 |   | 16,200 |   |
| Interest on  fixed-rate debt**    |       | 68,842,870                                                     |        | 12,719,106 |   | 25,246,422 |   | 24,705,467 |   | 6,171,875 |   |
| Interest on  variable-rate debt** |       | 31,322,662                                                     |        | 8,949,332 |   | 17,898,664 |   | 4,474,666 |   | — |   |
| Total                             |       | $                                                              | 350,122,895 |   | $ | 25,542,514 |   | $ | 44,607,439 |   | $ | 148,784,867 |   | $ | 131,188,075 |   |

 

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*Capitallease obligations include interest component related to leases.

**Estimatedpayments for interest are based on actual interest rates for fixed and variable-ratedebt outstanding as of March 4, 2006 assuming that the outstandingbalances remain unchanged until maturity.

 

In conjunction with the Acquisition, the Companyrecorded a net long-term liability to the selling shareholders totaling $10.3million for the estimated obligations under the tax sharing and indemnificationagreement. As of March 4, 2006, based on the federal income tax returnfiled November 15, 2005 (for the tax year ended February 26, 2005),the Company has utilized $8.6 million of the Deal Related NOLs and $1.7 millionin other deal related expenses. During the fiscal year ended March 4,2006, the Company submitted payments based on the tax benefits received, net ofother tax assessments due to the Company from the selling shareholders, to anescrow account for a total of $3.6 million and directly to the sellingshareholders for a total of $1.4 million. As of March 4, 2006, the Companyhas a net long-term liability to the selling shareholders totaling $5.3 million.This amount is excluded from the table above due to the uncertainty of whensuch utilization of the Deal Related NOLs will occur.

 

**SeeNote 14 — “Commitments, Contingencies and, Contractual Obligations,” to theConsolidated Financial Statements for further discussion.**

 

**Inflation**

 

The Company believes that inflation has nothad a material impact on its results of operations for successor fiscal 2006,predecessor fiscal 2005 and successor fiscal 2005 combined or predecessor fiscal2004. In addition, the Company does not expect inflation to have a materialimpact on its results of operations for successor fiscal 2007. However, theCompany experienced significant increases in fuel prices in successor fiscal2006, in addition to raw material price increases in predecessor fiscal 2005and successor fiscal 2005 combined and predecessor fiscal 2004; see Item 7A. – “Quantitativeand Qualitative Disclosures About Market Risk.”

 

**Critical Accounting Policies and Estimates**

 

Thepreparation of financial statements in conformity with accounting principles generally accepted in theUnited States of America (“GAAP”) requires the appropriate application of certain accountingpolicies, many of which require the Company to make estimates and assumptionsabout future events and their impact on amounts reported in the financialstatements and related notes. Since future events and the impact of thoseevents cannot be determined with certainty, the actual results will inevitablydiffer from the Company’s estimates. Such differences could be material to thefinancial statements.

 

The Company believes its application ofaccounting policies, and the estimates inherently required therein, arereasonable. These accounting policies and estimates are constantly reevaluated,and adjustments are made when facts and circumstances dictate a change. Historically,the Company’s application of accounting policies has been appropriate, andactual results have not differed materially from those determined usingnecessary estimates.

 

The following critical accounting policiesaffect the Company’s more significant judgments and estimates used in thepreparation of its financial statements.

 

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***Revenue Recognition.***The Company records**revenuesfrom its sales of food processing products at the time title transfers. Standardshipping terms are FOB destination. Based on these terms, title passes at thetime the product 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 on historicaltrends and expected future payments (see also *Promotions*below).

 

***Goodwill and Other IntangibleAssets*****.**In conjunction with the Acquisition, the Company engaged anindependent party to perform valuations for financial reporting purposesof the Company’s goodwill and other intangible assets. Assets identifiedthrough this valuation process included goodwill, formulas, customerrelationships, licensing agreements, and certain trade names and trademarks.

 

In accordance with Financial AccountingStandard No. 142 (“SFAS 142”) —“Goodwill and Other Intangible Assets,” theCompany tests recorded goodwill and intangibles with indefinite lives forimpairment at least annually. Intangible assets with finite lives are amortizedover their estimated economic or estimated useful lives. In addition, all otherintangible assets are reviewed for impairment in accordance with SFAS144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  As of March 4, 2006, the Companyperformed the annual impairment review of goodwill and indefinite-livedintangible assets and also assessed whether the indefinite-lived intangibleassets continue to have indefinite lives. The Company engaged an independentparty to perform valuations to assist in the impairment review. There wereno impairment charges as a result of this review.

 

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

 

***Promotions*****.**Promotional expenses associated withrebates, marketing promotions, and special pricing arrangements are recorded asa reduction of revenues or as selling expense at the time the sale is recorded.Certain of these expenses are estimated based on historical trends, expectedfuture payments to be made under these programs, and expected future customerdeductions to be taken under these programs. The Company believes the estimatesrecorded in the financial statements are reasonable estimates of the Company’sliability under these programs.

 

***Concentration of Credit Risk and Significant Customers*.**Financial instruments that potentially subject the Company toconcentrations of credit risk consist primarily of trade receivables. TheCompany performs periodic credit evaluations of its customers’ financialcondition and generally does not require collateral. The Company encounters acertain amount of credit risk as a result of a concentration of receivablesamong a few significant customers. Sales to the Company’s largest customer wereapproximately 21%, 25%, and 24% of net revenues for successor fiscal 2006,predecessor fiscal 2005 and successor fiscal 2005 combined, and predecessorfiscal 2004, respectively. Accounts receivable at March 4, 2006 and March 5,2005 included receivables from the Company’s largest customer totaling$2.7 million and $4.4 million, respectively.

 

***Stock-Based Compensation*.**The Company treats the options to purchase shares of common stock ofHolding issued to employees of the Company (“Options”) as stock-basedcompensation for employees of the Company. As permitted under GAAP, the Companyaccounts for the Options under the recognition and measurement principles ofAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees” (“APB 25”), and related Interpretations using the intrinsic valuemethod. Accordingly, no compensation expense has been recognized for the stockoption plan in the Company’s consolidated statements of operations.

 

***New Accounting Pronouncements*****.**In November 2004, the FinancialAccounting Standards Board (the “FASB”) issued SFAS No. 151, “InventoryCosts—an amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFASNo. 151 amends ARB 43, Chapter 4, to clarify that abnormalamounts of idle facility expense, freight, handling costs and wasted materials(spoilage) should be recognized as current-period charges. In addition, SFAS No. 151requires that allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities. TheCompany will adopt the provisions of SFAS No. 151, effective March 5,2006 for its fiscal 2007 consolidated financial statements. Managementcurrently believes that adoption of the provisions of SFAS No. 151 willnot have a material impact on the Company’s consolidated financial statements.

 

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In December of 2004, the FASB issuedStatement of Financial Accounting Standards No. 123 (Revision 2004), “Share-BasedPayment” (“SFAS 123R”), which is effective for the first annual reportingperiod beginning after December 15, 2005 for non-public companies (asdefined in SFAS 123R). The new statement requires compensation expenseassociated with share-based payments to employees to be recognized in thefinancial statements based on their fair values. Upon the adoption of SFAS123R, the Company will be required to apply the provisions of the statementprospectively for any newly issued, modified or settled award after the date ofinitial adoption, as well as to the unvested portion of awards granted prior toadoption of the standard. As the Company currently uses the intrinsic valuemethod to value the Options, the fair value assigned to any newly issued, modifiedor settled awards after the adoption of SFAS 123R is expected to besignificantly greater due to the differences in valuation methods.

 

In May 2005, FASB issued SFAS 154, “Accounting Changes and Error Corrections.”  This statement requires retroactiveapplication of a voluntary change in accounting principle to prior periodfinancial statements unless it is impracticable. SFAS 154 also requires that achange in method of depreciation, amortization, or depletion for long-lived,non-financial assets be accounted for as a change in accounting estimate thatis affected by a change in accounting principle. SFAS 154 replaces APB Opinion20, “Accounting Changes”, andSFAS 3, “Reporting Accounting Changesin Interim Financial Statements”. The Company will adopt the provisionsof SFAS 154, effective March 5, 2006 for its fiscal 2007 ConsolidatedFinancial Statements. Management currently believes that adoption of theprovisions of SFAS 154 will not have a material impact on the Company’sConsolidated Financial Statements.

 

**Item 7A. *Quantitative andQualitative Disclosures About Market Risk***

 

The Company is exposed to market riskstemming from changes in interest rates, foreign exchange rates and commodityprices. Changes in these factors could cause fluctuations in the Company’sfinancial condition, results of operations and cash flows. The Company owned noderivative financial instruments or nonderivative financial instruments heldfor trading purposes at March 4, 2006, March 5, 2005, or March 6,2004. Certain of the Company’s outstanding nonderivative financial instrumentsat March 4, 2006 are subject to interest rate risk, but not subject toforeign currency or commodity price risk. There was no significant change inmarket risk from predecessor fiscal 2005 and successor fiscal 2005 combined comparedto successor fiscal 2006.

 

##### ***Interest RateRisk.***TheCompany’s major market risk exposure is potential loss arising from changinginterest rates and its impact on long-term debt. The Company’s policy is tomanage interest rate risk by maintaining a combination of fixed and variable-ratefinancial instruments in amounts and with maturities that management considersappropriate. The risks associated with long-term debt at March 4, 2006have not changed materially since March 5, 2005. Of the long-term debtoutstanding at March 4, 2006, the $125.0 million of New Notes and the$0.9 million of capital leases accrue interest at fixed interest rates, whilethe $119.1 million outstanding borrowings under the Term B Loan facilityand the revolving credit facility accrue interest at a variable interest rate. AtMarch 4, 2006, the Company had no outstanding borrowings under therevolving credit facility. A rise in prevailing interest rates could haveadverse effects on the Company’s financial condition and results of operations.A 25 basis point increase in the reference rates for the Company’s averagevariable-rate debt outstanding during successor fiscal 2006 would have decreasednet income for that period by approximately $324,000.

 

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The following table summarizes the Company’smarket risks associated with long-term debt outstanding at March 4, 2006. Thetable presents principal cash outflows and related interest rates by maturitydate.

 
| ** ** | ** ** | **March 4, 2006  Expected Maturities in Fiscal Years  Long-Term Debt** | ** **  |
|------------|------------|-----------------------------------------------------------------------------------------------------------|-------------|
| ** ** | ** ** | **Variable-Rate  Long-Term Debt**                                                                    | ** **  | **Fixed-Rate  Long-Term Debt** | ** ** | **Weighted  Average  Interest Rate** | ** ** |
| 2007       |       | $                                                                                                         | —      |   | $ | 229,172 |   | 6.52 | % |
| 2008       |       | —                                                                                                    |        | 190,293 |   | 6.63 | % |
| 2009       |       | —                                                                                                    |        | 167,577 |   | 6.86 | % |
| 2010       |       | —                                                                                                    |        | 175,453 |   | 7.83 | % |
| Thereafter |       | 119,125,000                                                                                               |        | 125,106,164 |   | 8.86 | % |
| Total      |       | $                                                                                                         | 119,125,000 |   | $ | 125,868,659 |   | 8.85 | % |
|       |       |                                                                                                      |        |   |   |   |   |
| Fair Value |       | $                                                                                                         | 119,125,000 |   | $ | 135,737,000 |   | 8.85 | % |

 

***Foreign Exchange Rate Risk.***The Company bills customers in foreign countriesin US dollars, with the exception of sales to Canada. The Company does notbelieve the foreign exchange rate risk on Canadian sales is material. However,a significant decline in the value of currencies used in certain regions of theworld as compared to the US dollar could adversely affect product sales inthose regions because the Company’s products may be more expensive forthose customers to pay for in their local currency. At March 4, 2006 and March 5,2005, all trade receivables were denominated in US dollars.

 

##### ***CommodityPrice Risk.***Certain raw materials used in food processing operations are susceptibleto commodity price changes. Increases in the prices of certain commodityproducts could result in higher overall production costs. The primary rawmaterials used in the Company’s food processing operations are boneless beef,chicken and pork, flour, yeast, seasonings, cheese, breading, soy proteins, andpackaging supplies. Prices for beef, chicken, and pork, the Company’s principalprotein raw materials, reached historical highs during predecessor fiscal 2005and successor fiscal 2005 combined. However, during successor fiscal 2006, theweighted average prices paid for raw materials (excluding cost-plus contracts)decreased from the historical highs experienced during predecessor fiscal 2005and successor fiscal 2005 combined, with the exception of beef,which increased by approximately 7.7% compared to the weighted averageprices the Company paid during predecessor fiscal 2005 and successor fiscal 2005combined. During successor fiscal 2006, the weighted average prices the Companypaid for beef, chicken, pork, and cheese decreased by approximately 4.4%, 3.6%,29.1%, and 7.7%, respectively, over the weighted average prices the Companypaid for these raw materials during the fourth quarter of successor fiscal 2005.The Company manages such fluctuations through purchase orders, cost-pluscontracts and by passing on such cost increases to customers. At March 4,2006, the Company evaluated commodity pricing risks and determined it was notcurrently beneficial to use derivative financial instruments to hedge theCompany’s current positions with respect to such pricing exposures.

##### * *

##### ***Fair Value ofFinancial Instruments.***The Company’s nonderivative financial instruments consistprimarily of cash and cash equivalents, trade receivables, trade payables andlong-term debt. The estimated fairvalues of the financial instruments have been determined by the Company usingavailable market information and appropriate valuation techniques. Considerablejudgment is required, however, to interpret market data to develop theestimates 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 fairvalue amounts. See further discussion in Note 12 —“DisclosuresAbout Fair Values of Financial Instruments,” to the Consolidated FinancialStatements.

 

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**Item  8.*Financial Statements and Supplementary Data***

 

The Company’s Consolidated Financial Statementsrequired by this Item are on pages F-1 through F-31 of this Report.

 

**Item  9.*Changes in and Disagreements with Accountants onAccounting and Financial Disclosure***

 

None.

 

**Item 9A. *Controls and Procedures***

 

***Evaluation ofDisclosure Controls and Procedures*****.**As of the end ofthe period covered by this report, the Company performed an evaluation, underthe supervision and with the participation of its management including thePresident and Chief Executive Officer and Principal Financial Officer of theeffectiveness of the Company’s disclosure controls and procedures (as such termis defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based uponthis evaluation, the Company’s President and Chief Executive Officer andPrincipal Financial Officer have concluded that as of March 4, 2006, theCompany’s disclosure controls and procedures were effective for the purposes ofensuring that informationrequired to be disclosed in reports that the Company files or submits under the1934 Act has been recorded, processed, summarized and reported in accordancewith the rules and forms of the Securities and Exchange Commission (the “SEC”).

 

***Changes inInternal Controls*****.**Therehave been no changes in the Company’s internal controls over financialreporting during the quarter ended March 4, 2006 that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

**Item 9B. *Other Information***

 

None.

 

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**PART III**

 

**Item 10. *Directors and ExecutiveOfficers of the Registrant***

 

**Directors and Executive Officers**

 

ROBIN P. SELATI, DIRECTOR,age 40, became a director in June 2004 upon completion of the Acquisition.Prior to co-founding MDP in 1993, Mr. Selati was with Alex, Brown &Sons Incorporated. Mr. Selati also serves on the Board of Directors ofBeverages & More, Inc., Carrols Holdings Corporation, Cinemark, Inc.,Family Christian Stores, Inc., NWL Holdings, Inc., Peter Piper, Inc.,Ruth’s Chris Steak House, Inc., Tuesday Morning Corporation, and Wm.Bolthouse Farms, Inc.

 

NICHOLAS W. ALEXOS, DIRECTOR, age 42, becamea director in June 2004 upon completion of the Acquisition. Prior toco-founding MDP in 1993, Mr. Alexos was with First Chicago Venture Capitalfor four years. Mr. Alexos also serves on the Board of Directors ofNational Mentor, Inc. and Sirona Holdings Luxco S.C.A.

 

GEORGE A. PEINADO, DIRECTOR, age 36, became adirector in June 2004 upon completion of the Acquisition. Mr. Peinadocurrently serves as a director of MDP and has been employed by the firm since January 2004.Mr. Peinado also serves as a board member of Wm. Bolthouse, Inc. Priorto that, beginning in 1997, Mr. Peinado was with Donaldson, Lufkin &Jenrette and DLJ Merchant Banking Partners.

 

SCOTT W. MEADER, DIRECTOR, age 44, became a directorin October 2004. Mr. Meader was formerly the President and ChiefExecutive Officer of Milnot Holding Corp., having served in that position from1997 until 2006. Prior to Milnot Holding Corp., Mr. Meader held variouspositions with Burns Philps Foods PLC, Pet Incorporated, A.T. Kearney andQuaker Oats Co.

 

NORBERT E. WOODHAMS, PRESIDENT, CHIEF EXECUTIVEOFFICER, DIRECTOR AND CHAIRMAN OF THE BOARD, age 60, became the Company’sPresident and Chief Executive Officer in December 1999 and became adirector in June 2004 upon completion of the Acquisition. He was electedas Chairman of the Board of the Company effective January 11, 2005. Immediatelyprior to his election to those offices, Mr. Woodhams was President ofPierre Foods, LLC, the Company’s former operating subsidiary, having served inthat position since the Company’s acquisition of Pierre Cincinnati in June 1998.From 1994 to 1998, he served as President of Hudson Specialty Foods, a foodprocessing division of Hudson Foods, Inc. Upon the acquisition of Hudsonby Tyson Foods in January 1998, Mr. Woodhams became President ofPierre. Mr. Woodhams served as a director from 1998 to September 2002.

 

ROBERT C. NAYLOR, SENIOR VICE PRESIDENT OF SALES,MARKETING AND NEW PRODUCT DEVELOPMENT, age 54, became the Company’s Senior VicePresident of Sales, Marketing and New Product Development in December 1999.Immediately prior, he was Senior Vice President of Sales of Pierre Foods, LLC,the Company’s former operating subsidiary, having served in that position sincethe Company’s acquisition of Pierre Cincinnati in June 1998. From 1978 to1998, he served in various sales positions for Pierre Cincinnati, includingVice President of Sales.

 

JOSEPH W. MEYERS, VICE PRESIDENT, FINANCE, age 39,has served as the Company’s Vice President, Finance since February 2003and has held various accounting and finance positions with the Company since1996. Prior to this, Mr. Meyers held the position of General AccountingManager at OhSe Foods, Lunch Meat Division of Hudson Foods in Topeka, Kansasfrom 1991 through 1996. In 1996, OhSe Foods divested into Hudson Foods.

 

28

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**Audit Committee Financial Expert**

 

The Board of Directors of the Company hasdetermined that Nicholas W. Alexos is an “audit committee financial expert” asdefined in Item 401(h) of Regulation S-K promulgated by the SEC; however Mr. Alexosis not considered “independent” as that term is defined under the applicableSEC rules. Mr. Alexos is a Managing Partner of Madison Dearborn Partners,LLC, the general partner of Madison Dearborn Partners IV, L.P., which is thegeneral partner of Madison Dearborn Capital Partners IV, L.P., which holdsapproximately 96% of the issued and outstanding capital stock of Holding.

 

**Code of Ethics**

 

The Board of Directors adopted a Code ofEthics effective January 10, 2006, which is applicable to all officers,directors, and employees of the Company. The portion of such Code of Ethicsthat constitutes a “Code of Ethics” as defined in Item 406 of Regulation S-Kunder the Exchange Act is filed as Exhibit 14 to the Company’s QuarterlyReport on Form 10-Q filed with the SEC on January 17, 2006 and isincorporated herein by reference.

 

**Item 11. *Executive Compensation***

 

**Summary Compensation Table**

 

The following information presents compensationinformation for services to the Company, for the fiscal years indicated, forits President and Chief Executive Officer and the Company’s other most highly compensatedexecutive officer (collectively, the “Named Executive Officers”).

 
| **Name and Principal  Position** | ** ** | **Fiscal  Year** | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Long-Term  Compensation  Awards  Number of Shares  Underlying Options** | ** ** | **All Other  Compensation** | ** ** |
|--------------------------------------------|------------|------------------|------------|------------|------------|-----------|------------|------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
|                                       |       |             |       |       |       |      |       |                                                                                     |       |                             |       |
| Norbert E.  Woodhams                       |       | 2006             |       | $          | 381,865    |      | $          | 89,751                                                                                   |       | —                           |       | $ | 157,425 | (5) |
| President  and Chief                       |       | 2005             |       | 367,019    |       | 78,591    |       | 53,228                                                                                   | (1)        | 75,207                           | (2)        |
| Executive  Officer                         |       | 2004             |       | 356,731    |       | 518,213   |       | —                                                                                   |       | 9,200                            | (3)        |
|                                       |       |             |       |       |       |      |       |                                                                                     |       |                             |       |
| Robert C.  Naylor                          |       | 2006             |       | $          | 251,077    |      | $          | 59,834                                                                                   |       | —                           |       | $ | 144,492 | (6) |
| Senior Vice  President of                  |       | 2005             |       | 240,423    |       | 41,971    |       | 32,756                                                                                   | (1)        | 76,347                           | (4)        |
| Sales,  Marketing and New                  |       | 2004             |       | 224,231    |       | 314,592   |       | —                                                                                   |       | 8,000                            | (3)        |
| Product  Development                       |       |             |       |       |       |      |       |                                                                                     |       |                             |       |

 

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(1)  Represents options to purchase shares of Holding awardedunder the 2004 Stock Option Plan. See “Stock-Based Compensation” below.

 

(2)  Represents $3,878 in matching contributions made by theCompany to the Company’s 401(k) plan and $71,329 in life insurance premiums.

 

(3)  Represents matching contributions made by the Company to theCompany’s 401(k) plan.

 

(4)  Represents $5,018 in matching contributions made by theCompany to the Company’s 401(k) plan and $71,329 in life insurance premiums.

 

(5)  Represents $109,091 in life insurance premiums, $14,387 indisability premiums, $7,040 in matching contributions made by the Company tothe Company’s 401(k) plan, and $26,907 primarily relating to the use of aCompany-leased automobile.

 

(6)  Represents $109,091 in life insurance premiums, $10,333 indisability premiums, $7,114 in matching contributions made by the Company tothe Company’s 401(k) plan, and $17,954 primarily relating to the use of aCompany-leased automobile.

 

29

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**Stock-Based Compensation**

 

Following the consummation of the Acquisition,Holding’s board of directors and stockholders adopted the 2004 Stock OptionPlan (the “Option Plan”), pursuant to which a pool of approximately 10% ofHolding’s common stock, or 163,778 shares, were reserved for issuance tomanagement, employees and consultants of the Company in order to provideincentives to such persons. In the event that any participant in the OptionPlan ceases to be employed by Holding or its subsidiaries, Holding may repurchasesuch participant’s option shares at fair market value (whether held by theparticipant or one or more of his transferees). If for any reason, Holding doesnot elect to purchase all of such option shares, MDP and certain of itsaffiliates will be entitled to do so. In addition, subject to certainexceptions, any shares issued pursuant to the Option Plan will be subject tothe stockholders agreement, which grants Holding certain rights of firstrefusal in connection with certain transfers of such shares. Upon a sale ofHolding to an independent third party, Holding’s board of directors, in itssole discretion, may permit the acceleration of the vesting of the optionsof participants in the Option Plan. Should any participant’s employment withHolding or its subsidiaries terminate prior to the vesting of options issued tosuch participant, any unvested options expire and are forfeited by theparticipant. No options were granted to any Named Executive Officer insuccessor fiscal 2006.

 

**Aggregated Option Exercises In Last FiscalYear and Year-End Values**

 

The following table sets forth, for each ofthe Named Executive Officers, aggregated information concerning options topurchase shares of common stock of Holding granted to each and the value ofoutstanding options to purchase shares of common stock of Holding at March 4,2006. No stock appreciation rights were outstanding at March 4, 2006. Nooptions were exercised by Named Executive Officers in successor fiscal 2006.

 
| ** **           | ** ** | **Number of Securities Underlying  Unexercised Options At March 4, 2006** | ** ** | **Value of Unexercised In-the-Money Options At  March 4, 2006 (a)** | ** ** |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|
| **Name**             | ** ** | **Exercisable**                                                                                                   | ** ** | **Unexercisable**                                                                                           | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
|                 |       |                                                                                                              |       |                                                                                                        |       |   |   |   |   |
| Norbert E.  Woodhams |       | 7,132                                                                                                             |       | 46,096                                                                                                      |       | $ | 71,320 |   | $ | 460,960 |   |
|                 |       |                                                                                                              |       |                                                                                                        |       |   |   |   |   |
| Robert C.  Naylor    |       | 4,389                                                                                                             |       | 28,367                                                                                                      |       | $ | 43,890 |   | $ | 283,670 |   |

 

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(a) There is no market forthe shares and the values at March 4, 2006 are based on the last valuationavailable to the Company.

 

**Deferred Compensation Plan**

 

Inconnection with the Acquisition, Mr. Woodhams and Mr. Naylor,invested approximately $4.9 million in a deferred compensation plan. Thisdeferred compensation plan is funded through a rabbi trust that owns preferredstock of Holding with an aggregate liquidation value of approximately $5.7 millionat March 4, 2006. See Item 13 —“Certain Relationships and Related Party Transactions” for furtherdiscussion.

 

**Compensation of Directors**

 

During predecessor fiscal 2005, directors were paid$5,000 per board meeting attended, except that directors who were employees ofthe Company received no payment for services as directors. Following theAcquisition in successor fiscal 2006 and successor fiscal 2005, directors thatare employees or affiliates of MDP did not receive fees for services asdirectors. Scott W. Meader, a director who is neither the Company’s employeenor an affiliate of MDP, receives $35,000 annually plus related travel expenses.In addition, Holding entered into a restricted stock agreement with Mr. Meaderpursuant to which Mr. Meader purchased 2,000 shares of common stock of Holdingfor $10.00 per share. The shares vest over 4 1⁄2 years provided that Mr. Meadercontinues to be a director of the Company and Holding. In the event that heceases to be a director of the Company or Holding, Holding has an option torepurchase the vested shares at the greater of the fair market value or $10.00per share and the unvested shares at $10.00 per share. If Holding does notexercise such option, MDP then has the option to purchase the shares on thesame terms. The shares are also subject to restrictions, including restrictionson transfer, set forth in the Stockholder’s Agreement dated June 30, 2004 amongcertain stockholders of Holding. All of the Company’s directors are reimbursedfor out-of-pocket expenses incurred in connection with attending all board andother committee meetings.

 

30

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###### **EmploymentContracts and Change in Control Agreements**

###### ** **

***Norbert E. Woodhams.***In connection with the Acquisition, NorbertE. Woodhams entered into an Employment Agreement with Holding, which providedfor the employment of Mr. Woodhams as President and Chief ExecutiveOfficer of Pierre and Holding through June 29, 2005. The term of theEmployment Agreement automatically renewed after a one-year term, and willcontinue to renew for successive one-year terms unless either party gives theother party written notice of its intent not to renew at least 60 days prior tothe expiration of the then-current term. Pursuant to the Employment Agreement, Mr. Woodhams’base salary is $375,000 per year subject to annual adjustments for inflation. Inaddition, Mr. Woodhams is entitled to (i) participate in the annualbonus plan for senior executives of Pierre, (ii) participate in employeebenefit programs in which senior executives of Pierre are generally eligible toparticipate, (iii) use a company car, and (iv) obtain reimbursementof all reasonable out-of-pocket expenses. If Mr. Woodhams is terminatedwithout cause, dies or becomes disabled, or he resigns for good reason (each asdefined in the Employment Agreement), he will be entitled to receive his basesalary for one year and to continue to participate in employee welfare benefitplans. The Employment Agreement contains customary nondisclosure ofconfidential information provisions and a covenant not to compete with Pierrefor a period of one year after termination of employment. The EmploymentAgreement supercedes the Incentive Agreement dated August 18, 1999, asamended, between Mr. Woodhams and Pierre.

 

***Robert C. Naylor.***Also in connection with the Acquisition,Robert C. Naylor entered into an Employment Agreement with Holding, whichprovides for the employment of Mr. Naylor as Senior Vice President ofSales and Marketing and New Product Development of Pierre and Holding through June 29,2005. The term of the Employment Agreement automatically renewed after a one-yearterm, and will continue to renew for successive one-year terms unless eitherparty gives the other party written notice of its intent not to renew at least60 days prior to the expiration of the then-current term. Pursuant to theAgreement, Mr. Naylor’s base salary is $250,000 per year subject to annualadjustments for inflation. In addition, Mr. Naylor is entitled to (i) participatein the annual bonus plan for senior executives of Pierre, (ii) participatein employee benefit programs in which senior executives of Pierre are generallyeligible to participate, (iii) use a company car, and (iv) obtainreimbursement of all reasonable out-of-pocket expenses. If Mr. Naylor isterminated without cause, dies or becomes disabled, or he resigned for goodreason (each as defined in the Agreement), he will be entitled to receive hisbase salary for one year and to continue to participate in employee welfarebenefit plans. The Employment Agreement contains customary nondisclosure ofconfidential information provisions and a covenant not to compete with Pierrefor a period of one year after termination of employment. The EmploymentAgreement supercedes the Employment Agreement dated December 31, 2001between Mr. Naylor and Pierre.

 

**Item  12. *SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters***

 

**Securities Authorized for Issuance Under Equity Compensation Plans**

 

The following table sets forth the number of sharesof common stock of Holding subject to options granted pursuant to the OptionPlan, which is the only outstanding equity compensation plan relating to theCompany.

 
| **Plan Category**                                      | ** ** | **Number of Securities to be  Issued Upon Exercise of  Outstanding Options  (a)** | ** ** | **Weighted-Average  Exercise Price of  Outstanding Options  (b)** | ** ** | **Number of Securities Remaining  Available for Future Issuance  under Equity Compensation  Plans (excluding Securities  Reflected in Column (a))  (c)** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                        |       |                                                                                                                      |       |                                                                             |       |                                                                                                                                                                                                                      |       |
| Equity  Compensation Plans Approved by Security-Holders     |       | 126,219                                                                                                                   |       | $                                                                                | 10.00      | (1)                                                                                                                                                                                                                       | 37,559     |   |
|                                                        |       |                                                                                                                      |       |                                                                             |       |                                                                                                                                                                                                                      |       |
| Equity Compensation  Plans Not Approved by Security-Holders |       | —                                                                                                                    |       | N/A                                                                              |       | —                                                                                                                                                                                                                    |       |
|                                                        |       |                                                                                                                      |       |                                                                             |       |                                                                                                                                                                                                                      |       |
| TOTAL                                                       |       | 126,219                                                                                                                   |       | $                                                                                | 10.00      | (1)                                                                                                                                                                                                                       | 37,559     |   |

 

31

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(1) All outstanding options have an exercise price of $10.00 per share.

 

**Security Ownership of Principal Shareholders and Management**

 

All of the Company’s capital stock is owned by PFMI,which is a wholly-owned subsidiary of Holding.

 

The following table sets forth certain informationwith respect to the beneficial ownership of the common stock of Holding as of March 4,2006, by (1) each person known by the Company to own beneficially morethan five percent of the outstanding shares of common stock of Holding; (2) eachof the directors and executive officers of Holding; and (3) all of the directorsand executive officers of Holding as a group. Unless otherwise stated, each ofthe persons in the table has sole voting and investment power with respect tothe securities beneficially owned. Percentage ownership is based on 1,479,500shares of common stock of Holding outstanding as of March 4, 2006.

 
| **Name And  Address of  Beneficial Owner**    | ** ** | **Number of Shares  of Common Stock  Beneficially Owned** | ** ** | **Percent of Outstanding  Common Stock** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
|                                                         |       |                                                                               |       |                                                    |       |
| Madison  Dearborn Capital Partners IV, L.P.                  |       | 1,420,000                                                                          | (1)        | 96.0                                                    | %          |
|                                                         |       |                                                                               |       |                                                    |       |
| Norbert E.  Woodhams                                         |       | 33,835                                                                             | (2)        | 2.3                                                     | %          |
|                                                         |       |                                                                               |       |                                                    |       |
| Robert C.  Naylor                                            |       | 27,821                                                                             | (3)        | 1.9                                                     | %          |
|                                                         |       |                                                                               |       |                                                    |       |
| Nicholas W.  Alexos                                          |       | 1,420,000                                                                          | (4)        | 96.0                                                    | %          |
|                                                         |       |                                                                               |       |                                                    |       |
| Scott W.  Meader                                             |       | 510                                                                                | (5)        | (6                                                      | )*         |
|                                                         |       |                                                                               |       |                                                    |       |
| Robin P.  Selati                                             |       | 1,420,000                                                                          | (4)        | 96.0                                                    | %          |
|                                                         |       |                                                                               |       |                                                    |       |
| George A.  Peinado                                           |       | —                                                                             |       | —                                                  |       |
|                                                         |       |                                                                               |       |                                                    |       |
| All  directors and executive officers as a group (6 persons) |       | 1,482,166                                                                          | (2)(3)(5)  | 99.3                                                    | %          |

 

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(1) The listed shares are directly owned by Madison Dearborn Capital Partners IV,L.P. (“MDCP IV”). Madison Dearborn Partners IV , L.P. (“MDP IV”) is the generalpartner of MDCP IV and Madison Dearborn Partners, LLC (“MDP LLC”) is thegeneral partner of MDP IV. MDP IV and MDP LLC may therefore be deemed tohave shared voting and dispositive power with respect to all of the sharesowned by MDCP IV. The address for MDCP IV, MDP IV, and MDP LLC is Three FirstNational Plaza, Suite 3800, Chicago, Illinois 60602.

 

(2) Includes 7,835 shares subject to options exercisable within 60 days by Mr. Woodhams.

 

(3) Includes 4,821 shares subject to options exercisable within 60 days by Mr. Naylor.

 

(4) Messrs. Selati and Alexos are Managing Directors of MDP LLC, the generalpartner of MDP IV, which in turn is the general partner of MDCP IV. Messrs. Selatiand Alexos disclaim beneficial ownership of those shares, except to the extentof any pecuniary interest therein.

 

(5)          Represents vested shares of Restricted Stock sold to Mr. Meader onJuly 12, 2005.

 

(6)          Less than 1% of the total issued and outstanding shares of commonstock.

 

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**Item 13. *Certain Relationships and Related Party Transactions***

 

**Successor Pierre**

 

In conjunctionwith or subsequent to the Acquisition, the following relationships and relatedtransactions existed:

 

**•**                  Inconjunction with the Acquisition, John Grigg, one of the Company’s formerdirectors, was paid a fee at the closing, pursuant to his letter agreement withthe Company dated as of January 29, 2004, for professional servicesperformed on behalf of the Company and PFMI. The fee of approximately $780,952was paid from the proceeds to the selling shareholders and expensed duringpredecessor fiscal 2005.

 

**•**                  MadisonDearborn Partners IV, L.P. received a fee of $5.0 million at the closing of theAcquisition, plus out-of-pocket expenses incurred in connection with theAcquisition. MDP may be paid additional fees from time to time in thefuture for providing management, consulting or advisory services and will bereimbursed for all future expenses incurred in connection with its investmentin Holding.

 

•                  In connection with the Acquisition, Mr. Woodhamsand Mr. Naylor, invested approximately $4.9 million in a deferredcompensation plan. This deferred compensation plan is funded through a rabbitrust that owns preferred stock of Holding with an aggregate liquidation valueof approximately $5.7 million as of March 4, 2006.

 

**•**                  Inconjunction with the Acquisition, the Company and the selling shareholdersentered into a tax sharing and indemnification agreement which contains certainrepresentations and warranties of the selling shareholders with respect totaxes. The agreement provides that any net operating loss carryforward (“NOL”)with respect to periods before the Acquisition, and attributable to expensesrelating to the Acquisition, will be for the benefit of the sellingshareholders. Accordingly, the Company will pay to the selling shareholders theamount of any tax benefit attributable to such NOL, except that the first $4million of such tax benefits shall be paid into an escrow account that willsecure the selling shareholders indemnification obligations under the tax sharingagreement. The Company has made payments to the selling shareholders totaling $5.0million, of which $3.6 million was paid into this escrow account duringsuccessor fiscal 2006. The Company has recorded a net long-term liability tothe former shareholders totaling $5.3 million and $10.3 million as of March 4,2006 and March 5, 2005, respectively, for the estimated obligations underthe tax sharing agreement.

 

•                  NorbertJ. Woodhams, one of the Company’s Vice Presidents, is the son of Norbert E.Woodhams. Norbert E. Woodhams is the Company’s President, Chief ExecutiveOfficer, Director and Chairman of the Board. In successor fiscal 2006, NorbertJ. Woodhams received a base salary of one hundred and one thousand dollars andearned a bonus of thirty-three thousand and three hundred dollars under theCompany’s bonus plan. In predecessor fiscal 2005 and successor fiscal 2005combined, Norbert J. Woodhams received a base salary of ninety-two thousand andseven hundred dollars and earned a bonus of forty-seven thousand and eighthundred dollars under the Company’s bonus plan. The base salary and bonusearned by Norbert J. Woodhams is consistent with the earnings of other Companyemployees with similar responsibilities.

 

**Predecessor Pierre**

 

As described in Note 1 to the Consolidated FinancialStatements, on March 8, 2004 the Company and the Trustee under the Company’sIndenture executed a Fourth Supplemental Indenture and, pursuant to the termsof the Fourth Supplemental Indenture, the Company terminated substantially allof its related party transactions. The following related party transactionswere specifically permitted under the terms of the Fourth SupplementalIndenture:

 

•                  Columbia Hill Land Company, LLC,owned 50% by each of Messrs. Richardson and Clark, leases office space tothe Company in Hickory, North Carolina, pursuant to a ten-year lease thatcommenced in September 1998. Rents paid under the lease were approximately$58,000 and $116,000 in predecessor fiscal 2005 and predecessor fiscal 2004,respectively.

 

•                  On August 13, 2003, the Companyobtained a three year variable rate $40 million revolving credit facility fromFleet Capital Corporation. Messrs. Richardson and Clark providedguarantees of value and validity of the collateral securing this creditfacility; they did not, however, guarantee payment of the facility, nor didthey receive guarantee fees.

 

33

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•                  The Company had mutual leasing agreementswith certain related individuals and with certain companies in which the sellingshareholders had substantial ownership interests. Total payments under suchleasing agreements were approximately $260,000 in predecessor fiscal 2004.

 

•                  On March 8, 2004 the Companytook title to an aircraft that was transferred from Columbia Hill Aviation, LLC(“CHA”), owned 100% by PFMI, subject to existing purchase money debt. Theaircraft was originally leased by the Company from CHA beginning in the fourthquarter of predecessor fiscal 2002. Effective March 1, 2002, the originallease was cancelled and replaced with a non-exclusive lease agreement. Pursuantto this new lease, the Company was obligated to make 16 quarterly leasepayments of $471,500 each for the right to use the aircraft for up to 115flight hours per quarter, based on availability. Under this lease agreement,CHA was responsible for all expenses incurred in the operation of the use ofthe aircraft, except that the Company provided its own flight crew. Duringpredecessor fiscal 2004, the Company paid CHA approximately $2.6 million inlease payments. CHA was not a subsidiary of the Company; however, the Companyconsidered CHA a non-independent special purpose leasing entity. Accordingly,CHA’s financial condition, results of operations and cash flows have beenincluded in the Company’s Consolidated Financial Statements included herein. Underthe terms of the operating lease with CHA, and the financing agreements betweenCHA and its creditor, the Company did not maintain the legal rights ofownership to the aircraft, nor did CHA’s creditor maintain any legal recourseto the Company. Subsequently, as a result of the Acquisition, the aircraft wasdistributed to a former shareholder.

 

Any related party transactions described below thatwere in effect at March 6, 2004 were subsequently terminated as of March 8,2004 pursuant to the terms of the Fourth Supplemental Indenture. As a result ofthe termination of these related party transactions, subsequent to March 8,2004, the Company performs the purchasing and distribution services internally.Other related party services are outsourced as necessary at comparable cost.

 

•                  ColumbiaHill Management, Inc. (“Columbia Hill”), owned 50% by each of Messrs. Richardsonand Clark, provided accounting, tax and administrative services to Pierre, aswell as professional services for the management of special projects. Fees paidfor these services were approximately $203,000 in predecessor fiscal 2004.

 

•                  Duringpredecessor fiscal 2004, PFMI owed the Company as much as $993,247 pursuant toa promissory note payable on demand and bearing interest at the prime rate. Priorto the Acquisition, PFMI was owned in part by Messrs. Richardson andClark, who have unconditionally guaranteed repayment of the note. As of March 8,2004, this note was forgiven in connection with the Fourth SupplementalIndenture.

 

•                  Effective February 21, 2003, Messrs. Richardsonand Clark sold their net assets in Compass Outfitters, LLC, a company thatprovided team-building opportunities for customers and employees of theCompany, to the Company for a total of $270,983. In exchange for the netassets, the Company issued notes in the amount of $135,491 to each of Messrs. Richardsonand Clark. The notes were five-year notes, bearing interest at 6% per annum,with interest and principal due at maturity. As of March 8, 2004, inconnection with the Fourth Supplemental Indenture, these notes were cancelled.

 

•                  PF Purchasing, LLC (“PFP”), previously owned 100% byPFMI, served as the exclusive purchasing agent for the Company, pursuant to athree-year agreement that commenced September 3, 2001. Under theagreement, PFP made an incentive payment of $100,000 per quarter to the Companyin consideration of the opportunity to act as exclusive purchasing agent, andin exchange was entitled to receive all rebates or discounts receivable byPierre from suppliers and vendors for orders negotiated and placed by PFP. Inpredecessor fiscal 2004, net fees paid to PFP were approximately $2,122,000.

 

•                  Effective March 3, 2002, the Company enteredinto a logistics agreement with PF Distribution, LLC (“PFD”), owned 100% byPFMI. Under the agreement, PFD served as the exclusive logistics agent for theCompany, and provided all warehousing, fulfillment and transportation servicesto the Company. The cost of PFD’s services was based on flat rates per pound,which were calculated based on weight and volume characteristics of products,inventory pounds maintained and inventory pounds shipped. Rates were determinedbased on historical costs and industry standards. In predecessor fiscal 2004,distribution expense recorded in selling, general and administrative expensewas approximately $31,126,000 of which approximately $30,999,000 had been paid toPFD as of March 6, 2004.

 

34

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•                  Atlantic Cold Storage of Mocksville, LLC (“ACS”),owned one-third each by Messrs. Richardson and Clark, planned to constructand finance a public cold storage warehouse which would lease space to theCompany as well as to others. The proposed agreement with the Company was for10 years and a minimum of 4,000 pallet positions to be leased as of the firstdate the facility became operational. During predecessor fiscal 2001, theCompany paid $250,000 to ACS for specialized construction costs. As of March 8,2004, in connection with the Fourth Supplemental Indenture, these costs werewritten-off.

 

•                  The following transactions were entered into on March 8,2004 as permitted by the Fourth Supplemental Indenture:

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

 

The $339,639 charge represents the removal ofmembers’ equity of CHA.

 

All material transactions with affiliates ofthe Company were reviewed by the entire Board of Directors, where they wereapproved by a majority of the independent directors. The directors obtained andrelied upon investment banking “fairness” opinions when considering thesetransactions to the extent required by the indenture governing the Old Notes.

 

On June 30, 2004, inconjunction with the Acquisition, all previously existing related partytransactions were terminated as described in Note 1 — “Basis of Presentationand Acquisition,” to the Consolidated Financial Statements.

 

**Item  14. Principal Accountant Fees and Services**

 

The following table presents fees billed forprofessional audit services rendered by Deloitte & Touche LLP for theaudit of the Company’s annual financial statements for successor fiscal 2006, predecessorfiscal 2005 and successor fiscal 2005 combined, and for other services renderedby Deloitte & Touche LLP during those periods:

 
| ** **              | ** ** | ** **                          | ** ** | **Predecessor Fiscal 2005  and** | ** ** |
|-------------------------|------------|-------------------------------------|------------|--------------------------------------------|------------|
| ** **              | ** ** | ** **                          | ** ** | **Successor Fiscal 2005**        | ** ** |
| ** **              | ** ** | **Successor Fiscal 2006** | ** ** | **Combined**                               | ** ** |
|                    |       |                                |       |                                       |       |
| Audit Fees  (1)         |       | $                                   | 254,000    |                                       | $          | 326,900 |   |
| Audit  Related Fees (2) |       | 24,925                              |       | 564,100                                    |       |
| Tax Fees (3)            |       | —                              |       | 137,600                                    |       |
| All Other  Fees         |       | —                              |       | —                                     |       |
|                    |       |                                |       |                                       |       |
| Total                   |       | $                                   | 278,925    |                                       | $          | 1,028,600 |   |

 

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(1) Audit fees during both successor fiscal2006 and predecessor fiscal 2005 and successor fiscal 2005 combined consisted offees for services performed in the audits of the financial statements, as wellas work generally only the independent auditor can reasonably be expected toprovide, such as statutory audits.

 

35

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(2) Audit related fees during successor fiscal2006 include payment for services in connection with a comment letter issued tothe Company by the SEC dated September 15, 2005 related to the Company’s Form 10-Kfor the fiscal year ended March 5, 2005. Audit related fees duringpredecessor fiscal 2005 and successor fiscal 2005 combined include payment forservices in connection with the Acquisition, including but not limited to thetender offer, the filing of the Company’s registration statement and audits inconnection with the Acquisition.

 

(3)  Tax fees include all tax services relatingto tax compliance, tax planning and reporting.

 

The Board of Directors of the Company considered theimpact on auditor’s independence in connection with non-audit services andconcluded there is no adverse effect on their independence.

 

**Policy on Board of Directors Pre-Approval of Audit and PermissibleNon-audit Services of Independent Accountants**

 

Consistent with SEC policies regarding auditorindependence, the Audit Committee of the Board of Directors of the Company hasresponsibility for appointing, setting compensation and overseeing the work of theindependent auditor. In recognition of this responsibility, the Audit Committeeof the Board of Directors has established a policy to pre-approve all audit andpermissible non-audit services provided by the independent auditor**.**

 

36

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**PART IV**

 

**Item  15.*Exhibits and Financial Statement Schedules***

 
| (a)    | 1.     | Financial Statements                                                                                                                                                                                                          |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                          |
|   |   | The Financial Statements listed in the  accompanying Index on page F-1 are filed as a part of this Report.                                                                                                          |
|   |   |                                                                                                                                                                                                                          |
|   | 2.     | Financial Statement Schedules                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                          |
|   |   | Financial statement schedules have been  omitted because they are not applicable or not required, or because the  required information is provided in the Company’s Consolidated Financial  Statements or notes thereto. |
|   |   |                                                                                                                                                                                                                          |
|   | 3.     | Exhibits                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                          |
|   |   | See Index to Exhibits below.                                                                                                                                                                                                  |

 

37

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, Pierre Foods, Inc.has duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|   | PIERRE FOODS, INC. |
|--------|-------------------------|
|   |                    |   |
|   |                    |   |
|   | By:                     | /s/ JOSEPH  W. MEYERS |   |
|   |                    | Joseph W.  Meyers |   |
|   |                    | Vice  President, Finance |   |

 

Dated: June 2, 2006

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of Pierre Foods, Inc., in the capacities andon the dates indicated.

 
| **Signature**           | ** ** | **Title**                         | ** ** | **Date**          |
|-------------------------|------------|-----------------------------------|------------|-------------------|
|                    |       |                              |       |              |
| /s/ NORBERT E. WOODHAMS |       | Chief Executive Officer and       |       | June 2, 2006 |
| Norbert E. Woodhams     |       | President (Principal  Executive   |       |              |
|                    |       | Officer), Director and  Chairman  |       |              |
|                    |       | of the Board                      |       |              |
|                    |       |                              |       |              |
| /s/ JOSEPH W. MEYERS    |       | Vice President, Finance           |       | June 2, 2006 |
| Joseph W. Meyers        |       | (Principal Financial  Officer and |       |              |
|                    |       | Principal Accounting  Officer)    |       |              |
|                    |       |                              |       |              |
| /s/ NICHOLAS W. ALEXOS  |       | Director                          |       | June 2, 2006 |
| Nicholas W. Alexos      |       |                              |       |              |
|                    |       |                              |       |              |
| /s/ SCOTT W. MEADER     |       | Director                          |       | June 2, 2006 |
| Scott W. Meader         |       |                              |       |              |
|                    |       |                              |       |              |
| /s/ GEORGE A. PEINADO   |       | Director                          |       | June 2, 2006 |
| George A. Peinado       |       |                              |       |              |
|                    |       |                              |       |              |
| /s/ ROBIN P. SELATI     |       | Director                          |       | June 2, 2006 |
| Robin P. Selati         |       |                              |       |              |

 

38

----

 

**INDEX TO EXHIBITS**

 
| **Description** | ** ** | **Located  at  Manually  Numbered Page**                                     |
|-----------------|------------|------------------------------------------------------------------------------|
| (2)             |       | PLAN OF ACQUISITION,  REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION |   |   |
|            |       |                                                                         |   |   |   |
|            |       | 2.1                                                                          | Stock Purchase Agreement,  dated as of May 11, 2004, among PF Management, Inc., the PF  Management, Inc. Shareholders, David R. Clark, as Shareholders Agent,  and Pierre Holding Corp. (filed as Exhibit 10.12 to the Company’s Annual  Report on Form 10-K, filed with the Securities and Exchange Commission  On May 17, 2004) |   | ** |
|            |       |                                                                         |   |   |   |
| (3)(i)          |       | ARTICLES OF INCORPORATION                                                    |   |   |
|            |       |                                                                         |   |   |   |
|            |       | 3(i).1                                                                       | Articles of Restatement of  Pierre Foods, Inc., dated July 30, 2002 incorporating Restated  Articles of Incorporation (filed as Exhibit 3.3 to the Company’s  Quarterly Report on Form 10-Q, filed with the Securities and Exchange  Commission on October 15, 2002) |   | ** |
|            |       |                                                                         |   |   |   |
|            |       | 3(i).2                                                                       | Articles of Merger of  Pierre Foods, Inc. and Pierre Merger Corp., dated June 30, 2004  (filed as Exhibit 3.2 to the Company’s Registration Statement on Form S-4,  filed with the Securities and Exchange Commission on September 27, 2004) |   | ** |
|            |       |                                                                         |   |   |   |
|            |       | 3(i).3                                                                       | Articles of Organization  of Fresh Foods Properties, LLC, dated December 10, 1997 (filed as Exhibit 3.4  to the Company’s Registration Statement on Form S-4, filed with the  Securities and Exchange Commission on September 27, 2004) |   | ** |
|            |       |                                                                         |   |   |   |
| (3)(ii)         |       | BYLAWS                                                                       |   |   |
|            |       |                                                                         |   |   |   |
|            |       | 3(ii).1                                                                      | Amended and Restated  Bylaws of Pierre Foods, Inc., dated September 18, 2002 (filed as Exhibit 3.3  to the Amendment No. 2 to the Company’s Registration Statement on Form S-4,  filed with the Securities and Exchange Commission on February 3, 2005) |   | ** |
|            |       |                                                                         |   |   |   |
|            |       | 3(ii).2                                                                      | Operating Agreement of  Fresh Foods Properties, LLC (filed as Exhibit 3.5 to the Company’s  Registration Statement on Form S-4, filed with the Securities and  Exchange Commission on September 27, 2004) |   | ** |
|            |       |                                                                         |   |   |   |
| (4)             |       | INSTRUMENTS DEFINING THE  RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES   |   |   |
|            |       |                                                                         |   |   |   |
|            |       | 4.1                                                                          | Indenture, dated as of June 30,  2004, between Pierre Merger Corp. and U.S. Bank National Association, Trustee  (filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-4,  filed with the Securities and Exchange Commission on September 27, 2004) |   | ** |
|            |       |                                                                         |   |   |   |
|            |       | 4.2                                                                          | First Supplemental  Indenture, dated as of June 30, 2004, among Pierre Foods, Inc.,  Fresh Foods Properties, LLC and U.S. Bank National Association, Trustee  (filed as Exhibit 4.2 to the Company’s Registration Statement on Form S-4,  filed with the Securities and Exchange Commission on September 27, 2004) |   | ** |
|            |       |                                                                         |   |   |   |
|            |       | 4.3                                                                          | Registration Rights  Agreement, dated June 30, 2004, among Pierre Foods, Inc. and Banc  of America LLC and Wachovia Capital Markets, LLC (filed as Exhibit 4.3  to the Company’s Registration Statement on Form S-4, filed with the  Securities and Exchange Commission on September 27, 2004) |   | ** |

 

39

----

 
| (10)   |   | MATERIAL CONTRACTS                                           |                                                                                                                                                                                                                                                                                                                |   |
|--------|--------|--------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                         |                                                                                                                                                                                                                                                                                                                |   |   |
|   |   | Management Contracts and  Compensatory Plans or Arrangements |                                                                                                                                                                                                                                                                                                                |   |
|   |   |                                                         |                                                                                                                                                                                                                                                                                                                |   |   |
|   |   | 10.1                                                         | Third Amendment to  Incentive Agreement, dated as of May 11, 2004, between the Company and  Norbert E. Woodhams (filed as Exhibit 10.13 to the Company’s Annual  Report on Form 10-K, filed with the Securities and Exchange Commission  on May 17, 2004)                                  |   | ** |
|   |   |                                                         |                                                                                                                                                                                                                                                                                                                |   |   |
|   |   | 10.2                                                         | Amendment to Employment  Agreement, dated as of May 11, 2004, between the Company and Robert C.  Naylor (filed as Exhibit 10.15 to the Company’s Annual Report on Form 10-K,  filed with the Securities and Exchange Commission on May 17, 2004)                                           |   | ** |
|   |   |                                                         |                                                                                                                                                                                                                                                                                                                |   |   |
|   |   | 10.3                                                         | Pierre Foods, Inc.  Fiscal 2007 Executive Incentive Compensation Plan (filed as Exhibit 10.2  to the Company Current Report on Form 8-K, filed with the Securities and  Exchange Commission on April 7, 2006)                                                                                   |   | ** |
|   |   |                                                         |                                                                                                                                                                                                                                                                                                                |   |   |
|   |   | 10.4                                                         | Employment Agreement dated  as of May 11, 2004 between Pierre Holding Corp. and Norbert E. Woodhams  (filed as Exhibit 10.15 to the Company’s Registration Statement on Form S-4,  filed with the Securities and Exchange Commission on September 27, 2004)                                |   | ** |
|   |   |                                                         |                                                                                                                                                                                                                                                                                                                |   |   |
|   |   | 10.5                                                         | Employment Agreement dated  as of May 11, 2004 between Pierre Holding Corp. and Robert C. Naylor  (filed as Exhibit 10.16 to the Company’s Registration Statement on Form S-4,  filed with the Securities and Exchange Commission on September 27, 2004)                                   |   | ** |
|   |   |                                                         |                                                                                                                                                                                                                                                                                                                |   |   |
|   |   | 10.6                                                         | Deferred Compensation Plan  (filed as Exhibit 10.17 to the Company’s Registration Statement on Form S-4,  filed with the Securities and Exchange Commission on September 27, 2004)                                                                                                              |   | ** |
|   |   |                                                         |                                                                                                                                                                                                                                                                                                                |   |   |
|   |   | 10.7                                                         | Pierre Holding Corp. 2004  Stock Option Plan (filed as Exhibit 10.1 to the Company’s Quarterly  Report on Form 10-Q, filed with the Securities and Exchange Commission  on January 18, 2005)                                                                                                    |   | ** |
|   |   |                                                         |                                                                                                                                                                                                                                                                                                                |   |   |
|   |   | 10.8                                                         | Form of Option  Agreement (filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q,  filed with the Securities and Exchange Commission on January 18, 2005)                                                                                                                   |   | ** |
|   |   |                                                         |                                                                                                                                                                                                                                                                                                                |   |   |
|   |   | 10.9                                                         | Restricted Stock Agreement  dated July 12, 2005 between Pierre Holding Corp. and Scott W. Meader  (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K  filed with the Securities and Exchange Commission on July 15, 2005)                                                  |   | ** |
|   |   |                                                         |                                                                                                                                                                                                                                                                                                                |   |   |
|   |   | Other Material Contracts                                     |                                                                                                                                                                                                                                                                                                                |   |
|   |   |                                                         |                                                                                                                                                                                                                                                                                                                |   |   |
|   |   | 10.9                                                         | Assignment and Assumption  and Subordination Agreement dated as of March 8, 2004, between Pierre  Foods, Inc. and PF Management, Inc. (filed as Exhibit 10.20 to  the Company’s Annual Report on Form 10-K, filed with the Securities and  Exchange Commission on March 9, 2004) |   | ** |
|   |   |                                                         |                                                                                                                                                                                                                                                                                                                |   |   |
|   |   | 10.10                                                        | Termination Agreement,  dated as of March 8, 2004, between Columbia Hill Aviation, LLC and  Pierre Foods, Inc. (filed as Exhibit 10.21 to the Company’s Annual  Report on Form 10-K, filed with the Securities and Exchange Commission March 9,  2004)                                |   | ** |
|   |   |                                                         |                                                                                                                                                                                                                                                                                                                |   |   |
|   |   | 10.11                                                        | Termination Agreement,  dated as of March 8, 2004, between PF Purchasing, LLC and Pierre Foods, Inc.  (filed as Exhibit 10.22 to the Company’s Annual Report on Form 10-K,  filed with the Securities and Exchange Commission March 9, 2004)                                          |   | ** |

 

40

----

 
|   |   | 10.12  | Termination Agreement,  dated as of March 8, 2004, between PF Distribution, LLC and Pierre Foods, Inc.  (filed as Exhibit 10.23 to the Company’s Annual Report on Form 10-K,  filed with the Securities and Exchange Commission March 9, 2004)                                                                                                                                                                                                                                                                    |   | **     |
|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |
|   |   | 10.13  | Amended and Restated  Agreement, dated as of May 21, 2004, between the Company and Carl  Karcher Enterprises, Inc. (filed as Exhibit 10.8 to the Company’s  Current Report on Form 8-K, filed with the Securities and Exchange  Commission on January 7, 2005)                                                                                                                                                                                                                                                    |   | **C    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |
|   |   | 10.14  | Amended and Restated  Formula Development Agreement, dated as of May 21, 2004, between the  Company and Carl Karcher Enterprises, Inc. (filed as Exhibit 10.9  to the Company’s Current Report on Form 8-K, filed with the Securities  and Exchange Commission on January 7, 2005)                                                                                                                                                                                                                                |   | **C    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |
|   |   | 10.15  | First Amendment Agreement,  dated as of June 27, 2004, between the Company and Carl Karcher  Enterprises, Inc. (filed as Exhibit 10.10 to the Company’s Current  Report on Form 8-K, filed with the Securities and Exchange Commission on  December 2, 2004)                                                                                                                                                                                                                                                      |   | **C    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |
|   |   | 10.16  | Amended and Restated  Agreement, dated as of May 21, 2004, between the Company and Hardee’s  Food Systems, Inc. (filed as Exhibit 10.11 to the Company’s Current  Report on Form 8-K, filed with the Securities and Exchange Commission on  January 7, 2005)                                                                                                                                                                                                                                                 |   | **C    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |
|   |   | 10.17  | Amended and Restated  Formula Development Agreement, dated as of May 21, 2004, between the  Company and Hardee’s Food Systems, Inc. (filed as Exhibit 10.12 to  the Company’s Current Report on Form 8-K, filed with the Securities and  Exchange Commission on January 7, 2005)                                                                                                                                                                                                                             |   | **C    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |
|   |   | 10.18  | First Amendment Agreement,  dated as of June 27, 2004, between the Company and Hardee’s Food Systems, Inc.  (filed as Exhibit 10.13 to the Company’s Current Report on Form 8-K,  filed with the Securities and Exchange Commission on December 2, 2004)                                                                                                                                                                                                                                                     |   | **C    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |
|   |   | 10.19  | Second Amendment  Agreement, dated as of September 30, 2004, between the Company and Carl  Karcher Enterprises, Inc. (filed as Exhibit 10.14 to the Company’s  Current Report on Form 8-K, filed with the Securities and Exchange  Commission on December 2, 2004)                                                                                                                                                                                                                                                |   | **C    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |
|   |   | 10.20  | Second Amendment  Agreement, dated as of September 30, 2004, between the Company and  Hardee’s Food Systems, Inc. (filed as Exhibit 10.15 to the Company’s  Current Report on Form 8-K, filed with the Securities and Exchange  Commission on December 2, 2004)                                                                                                                                                                                                                                              |   | **C    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |
|   |   | 10.21  | Credit Agreement, dated as  of June 30, 2004, among Pierre Merger Corp., Wachovia Bank, National  Association, as administrative and collateral agent, Wachovia Capital Markets,  LLC and Banc of America Securities LLC, as joint lead arrangers and  book-running managers, and a syndicate of banks, financial institutions and  other institutional lenders party thereto (filed as Exhibit 10.14 to the  Registration Statement on Form S-4, filed with the Securities and  Exchange Commission on September 27, 2004) |   | **     |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |
|   |   | 10.22  | Amendment No. 1 to  Credit Agreement, dated as of April 3, 2006, among Pierre Foods, Inc.,  the Lenders, and Wachovia Bank, National Association, as Administrative Agent  (filed as Exhibit 10.1 to the Company Current Report on Form 8-K,  filed with the Securities and Exchange Commission on April 7, 2006)                                                                                                                                                                                                 |   | **     |

 

41

----

 
|   |   | 10.23                                                                                                                                                                           | Tax Sharing and  Indemnification Agreement, dated as of May 11, 2004, among PF Management, Inc.,  the PF Management, Inc. Shareholders, David R. Clark as Shareholders  Agent and Pierre Holding Corp. (filed as Exhibit 10.18 to the  Registration Statement on Form S-4, filed with the Securities and  Exchange Commission on September 27, 2004) |   | **     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   |                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                               |   |   |
| (12)   |   | CALCULATION OF RATIO OF  EARNINGS TO FIXED CHARGES                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                               |   |
|   |   |                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                               |   |   |
| (14)   |   | CODE OF ETHICS (filed as Exhibit 14  to the Company’s Quarterly Report on Form 10-Q filed with the Securities  and Exchange Commission on January 17, 2006) |                                                                                                                                                                                                                                                                                                                                                                               | **     |
|   |   |                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                               |   |   |
| (21)   |   | SUBSIDIARIES OF THE  REGISTRANT                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                               |   |
|   |   |                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                               |   |   |
|   |   | 21                                                                                                                                                                              | Subsidiaries of Pierre  Foods, Inc.                                                                                                                                                                                                                                                                                                                                           |   |   |
|   |   |                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                               |   |   |
| (31)   |   | RULE 13a -  14(a)/15(d)-14(a) CERTIFICATIONS                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                               |   |
|   |   |                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                               |   |   |
|   |   | 31.1                                                                                                                                                                            | Rule 13a-14(a) Certification  of Chief Executive Officer of the Company in accordance with Section 302  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                           |   |   |
|   |   |                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                               |   |   |
|   |   | 31.2                                                                                                                                                                            | Rule 13a-14(a) Certification  of Principal Financial Officer of the Company in accordance with Section 302  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                       |   |   |
|   |   |                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                               |   |   |
| (32)   |   | SECTION 1350  CERTIFICATION                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                               |   |
|   |   |                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                               |   |   |
|   |   | 32                                                                                                                                                                              | Section 1350  Certification of Chief Executive Officer and Principal Financial Officer of  the Company in accordance with Section 906 of the Sarbanes-Oxley Act of  2002                                                                                                                                                                                                 |   |   |

 

----

**  Indicates that Exhibit is incorporatedby reference in this Report from a previous filing with the Commission.

 

“C”  Confidential treatmentrequested as to certain portions, which have been filed separately with theCommission.

 

42

----

 

**INDEX TOFINANCIAL STATEMENTS**

 
| **PIERRE FOODS, INC.**                             | ** **                                                                                                                                                                                                                                                            |
|---------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                              | ** **                                                                                                                                                                                                                                                            | ** ** |
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |                                                                                                                                                                                                                                                                  |
|                                                    |                                                                                                                                                                                                                                                                  |
| CONSOLIDATED FINANCIAL STATEMENTS:                      |                                                                                                                                                                                                                                                                  |
|                                                    |                                                                                                                                                                                                                                                                  |
|                                                    | Consolidated  Balance Sheets - March 4, 2006 and March 5, 2005                                                                                                                                                                                              |   |
|                                                    |                                                                                                                                                                                                                                                                  |   |
|                                                    | Consolidated  Statements of Operations – for the year ended March 4, 2006, for the  periods from March 7, 2004 through June 30, 2004 and July 1,  2004 through March 5, 2005 and for the year ended March 6, 2004                  |   |
|                                                    |                                                                                                                                                                                                                                                                  |   |
|                                                    | Consolidated  Statements of Shareholder’s Equity – for the year ended March 4, 2006,  for the periods from March 7, 2004 through June 30, 2004 and July 1,  2004 through March 5, 2005, and for the year ended March 6,  2004 |   |
|                                                    |                                                                                                                                                                                                                                                                  |   |
|                                                    | Consolidated  Statements of Cash Flows – for the year ended March 4, 2006, for the  periods from March 7, 2004 through June 30, 2004 and July 1,  2004 through March 5, 2005, and for the year ended March 6, 2004                 |   |
|                                                    |                                                                                                                                                                                                                                                                  |   |
|                                                    | Notes to  Consolidated Financial Statements                                                                                                                                                                                                                           |   |
|                                                         |                                                                                                                                                                                                                                                                       |  |  |

 

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

Tothe Board of Directors and Shareholder of

PierreFoods, Inc.

Cincinnati,Ohio

 

Wehave audited the accompanying consolidated balance sheets of Pierre Foods, Inc.and subsidiaries (the “Company”) as of March 4, 2006 and March 5,2005, and the related consolidated statements of operations, shareholder’sequity, and cash flows for the year ended March 4, 2006, for the periodsfrom July 1, 2004 through March 5, 2005 and March 7, 2004 throughJune 30, 2004 and for the year ended March 6, 2004. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

Inour opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of Pierre Foods, Inc. andsubsidiaries at March 4, 2006 and March 5, 2005, and the results ofits operations and its cash flows for the year ended March 4, 2006, theperiods from July 1, 2004 through March 5, 2005 and March 7,2004 through June 30, 2004 and for the year ended March 6, 2004 inconformity with accounting principles generally accepted in the United Statesof America.

 

 

DELOITTE & TOUCHE LLP

Cincinnati, Ohio

June 2, 2006

 

F-2

----

 

**PIERRE FOODS, INC.**

 

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                     | ** ** | **Successor**     | ** **  |
|--------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|
| ** **                                                                                                                     | ** ** | **March 4,** | ** **  | **March 5,** | ** ** |
| ** **                                                                                                                     | ** ** | **2006**          | ** **  | **2005** | ** ** |
| **ASSETS**                                                                                                                     | ** ** | ** **        | ** **  | ** ** | ** ** |
| CURRENT  ASSETS:                                                                                                               |       |              |        |   |   |
| Cash and  cash equivalents                                                                                                     |       | $                 | 2,540,722   |   | $ | — |   |
| Accounts  receivable, net                                                                                                      |       | 29,590,488        |        | 29,547,340 |   |
| Inventories                                                                                                                    |       | 45,686,342        |        | 43,763,934 |   |
| Refundable  income taxes                                                                                                       |       | 1,650,812         |        | 2,906,502 |   |
| Deferred  income taxes                                                                                                         |       | 3,976,012         |        | 5,764,233 |   |
| Prepaid  expenses and other current assets                                                                                     |       | 3,165,310         |        | 4,122,667 |   |
| Total  current assets                                                                                                          |       | 86,609,686        |        | 86,104,676 |   |
|                                                                                                                           |       |              |        |   |   |
| PROPERTY,  PLANT, AND EQUIPMENT, NET                                                                                           |       | 56,206,497        |        | 56,284,482 |   |
| OTHER  ASSETS:                                                                                                                 |       |              |        |   |   |
| Other  intangibles, net                                                                                                        |       | 134,844,032       |        | 158,223,072 |   |
| Goodwill                                                                                                                       |       | 186,535,050       |        | 186,535,050 |   |
| Deferred  loan origination fees, net                                                                                           |       | 7,331,561         |        | 8,923,688 |   |
| Other                                                                                                                          |       | 897,845           |        | 516,565 |   |
| Total other  assets                                                                                                            |       | 329,608,488       |        | 354,198,375 |   |
| Total Assets                                                                                                                   |       | $                 | 472,424,671 |   | $ | 496,587,533 |   |
|                                                                                                                           |       |              |        |   |   |
| **LIABILITIES AND SHAREHOLDER’S EQUITY**                                                                                  | ** ** | ** **        | ** **  | ** ** | ** ** |
| CURRENT  LIABILITIES:                                                                                                          |       |              |        |   |   |
| Current  installments of long-term debt                                                                                        |       | $                 | 229,172     |   | $ | 421,713 |   |
| Trade  accounts payable                                                                                                        |       | 11,897,576        |        | 11,172,350 |   |
| Accrued  payroll and payroll taxes                                                                                             |       | 5,014,821         |        | 4,663,372 |   |
| Accrued  interest                                                                                                              |       | 1,780,618         |        | 1,832,374 |   |
| Accrued  promotions                                                                                                            |       | 3,258,650         |        | 3,499,230 |   |
| Accrued  taxes (other than income and payroll)                                                                                 |       | 796,531           |        | 949,572 |   |
| Other  accrued liabilities                                                                                                     |       | 1,635,052         |        | 1,420,979 |   |
| Total  current liabilities                                                                                                     |       | 24,612,420        |        | 23,959,590 |   |
| LONG-TERM  DEBT, less current installments                                                                                     |       | 244,764,487       |        | 263,158,658 |   |
| DEFERRED  INCOME TAXES                                                                                                         |       | 48,821,259        |        | 52,929,534 |   |
| OTHER LONG-TERM  LIABILITIES                                                                                                   |       | 6,168,649         |        | 10,517,166 |   |
| COMMITMENTS  AND CONTINGENCIES                                                                                                 |       | —            |        | — |   |
| Total  Liabilities                                                                                                             |       | 324,366,815       |        | 350,564,948 |   |
|                                                                                                                           |       |              |        |   |   |
| SHAREHOLDER’S  EQUITY:                                                                                                    |       |              |        |   |   |
| Common stock  - Class A, 100,000 shares authorized, issued, and outstanding at March 4,  2006 and March 5, 2005 |       | 150,225,541       |        | 150,351,972 |   |
| Accumulated  deficit                                                                                                           |       | (2,167,685        | )           | (4,329,387 | ) |
| Total  shareholder’s equity                                                                                               |       | 148,057,856       |        | 146,022,585 |   |
| Total  Liabilities and Shareholder’s Equity                                                                               |       | $                 | 472,424,671 |   | $ | 496,587,535 |   |

 

Seeaccompanying notes to consolidated financial statements. 

 

F-3

----

 

**PIERRE FOODS, INC.**

 

**CONSOLIDATED STATEMENTS OFOPERATIONS**

 
| ** **                                                                                                               | ** ** | **Successor**          | ** **  | ** **             | **Predecessor** | ** **  |
|--------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|------------------------|-----------------|-------------|
| ** **                                                                                                               | ** ** | ** **             | ** **  | **Fiscal 2005**        | ** **      | ** **  | **Fiscal 2005** | ** ** | ** ** | ** ** |
| ** **                                                                                                               | ** ** | **Fiscal 2006**        | ** **  | **For the Period**     | ** **      | ** **  | **For the Period** | ** ** | **Fiscal 2004** | ** ** |
| ** **                                                                                                               | ** ** | **For the Year**       | ** **  | **July 1, 2004**  | ** **      | ** **  | **March 7, 2004** | ** ** | **For the Year** | ** ** |
| ** **                                                                                                               | ** ** | **Ended**              | ** **  | **Through**            | ** **      | ** **  | **Through** | ** ** | **Ended** | ** ** |
| ** **                                                                                                               | ** ** | **March 4, 2006** | ** **  | **March 5, 2005** | ** **      | ** **  | **June 30, 2004** | ** ** | **March 6, 2004** | ** ** |
|                                                                                                                     |       |                   |        |                   |            |        |   |   |   |   |
| REVENUES,  NET:                                                                                                          |       | $                      | 431,632,864 |                   | $               | 294,867,222 |   |   | $ | 115,548,564 |   | $ | 358,549,316 |   |
|                                                                                                                     |       |                   |        |                   |            |        |   |   |   |   |
| COSTS AND  EXPENSES:                                                                                                     |       |                   |        |                   |            |        |   |   |   |   |
| Cost of  goods sold (includes net related party transactions totaling $5,295,036 in  fiscal 2004)                        |       | 309,272,849            |        | 217,322,673            |            |        | 87,025,521 |   | 254,235,016 |   |
| Selling,  general and administrative expenses (includes related party transactions  totaling $32,487,545 in fiscal 2004) |       | 67,838,965             |        | 39,827,160             |            |        | 26,446,857 |   | 79,982,134 |   |
| Loss on  disposition of property, plant and equipment, net                                                               |       | 6,388                  |        | 5,372                  |            |        | 339,921 |   | 11,042 |   |
| Depreciation  and amortization                                                                                           |       | 30,638,357             |        | 23,169,814             |            |        | 1,544,903 |   | 4,604,954 |   |
| Total costs  and expenses                                                                                                |       | 407,756,559            |        | 280,325,019            |            |        | 115,357,202 |   | 338,833,146 |   |
| OPERATING  INCOME                                                                                                        |       | 23,876,305             |        | 14,542,203             |            |        | 191,362 |   | 19,716,170 |   |
| INTEREST  EXPENSE AND OTHER INCOME:                                                                                      |       |                   |        |                   |            |        |   |   |   |   |
| Interest  expense                                                                                                        |       | (22,331,204            | )           | (19,493,148            | )               |        | (6,537,519 | ) | (16,979,028 | ) |
| Other income                                                                                                             |       | 151,739                |        | 24,334                 |            |        | 1,784 |   | — |   |
| Interest  expense and other income, net                                                                                  |       | (22,179,465            | )           | (19,468,814            | )               |        | (6,535,735 | ) | (16,979,028 | ) |
|                                                                                                                     |       |                   |        |                   |            |        |   |   |   |   |
| INCOME  (LOSS) BEFORE INCOME TAX                                                                                         |       | 1,696,840              |        | (4,926,611             | )               |        | (6,344,373 | ) | 2,737,142 |   |
|                                                                                                                     |       |                   |        |                   |            |        |   |   |   |   |
| INCOME TAX  (PROVISION) BENEFIT                                                                                          |       | 464,862                |        | 597,224                |            |        | 2,080,338 |   | (1,303,347 | ) |
|                                                                                                                     |       |                   |        |                   |            |        |   |   |   |   |
| NET INCOME  (LOSS)                                                                                                       |       | $                      | 2,161,702   |                   | $               | (4,329,387  | ) |   | $ | (4,264,035 | ) | $ | 1,433,795 |   |
|                                                                                                                     |       |                   |        |                   |            |        |   |   |   |   |
| NET INCOME  (LOSS) PER COMMON SHARE - BASIC AND DILUTED                                                                  |       |                   |        |                   |            |        |   |   |   |   |
|                                                                                                                     |       |                   |        |                   |            |        |   |   |   |   |
| Net income  (loss) per common share - basic and diluted                                                                  |       | $                      | 21.62       |                   | $               | (43.29      | ) |   | $ | (42.64 | ) | $ | 14.34 |   |
|                                                                                                                     |       |                   |        |                   |            |        |   |   |   |   |
| WEIGHTED AVERAGE  SHARES OUTSTANDING - BASIC AND DILUTED                                                                 |       | 100,000                |        | 100,000                |            |        | 100,000 |   | 100,000 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

F-4

----

 

**PIERRE FOODS, INC.**

 

**CONSOLIDATED STATEMENTS OF SHAREHOLDER’SEQUITY**

 
| ** **                                        | ** ** | **Common**       | ** **  | **Retained**  | ** ** | **Receivable**  | ** ** | **Total**              | ** ** |
|---------------------------------------------------|------------|------------------|-------------|---------------|------------|-----------------|------------|------------------------|------------|
| ** **                                        | ** ** | **Stock**        | ** **  | **Earnings**  | ** ** | **From**        | ** ** | **Shareholder’s** | ** ** |
| ** **                                        | ** ** | **Class A** | ** **  | **(Deficit)** | ** ** | **Shareholder** | ** ** | **Equity**             | ** ** |
|                                              |       |             |        |          |       |            |       |                   |       |
| PREDECESSOR  PIERRE BALANCE AT MARCH 1, 2003 |       | $                | 29,438,172  |          | $          | (15,440,263     | )          | $                      | (5,000,000 | ) | $ | 8,997,909 |   |
| Net income                                        |       | —           |        | 1,433,795     |       | —          |       | 1,433,795              |       |
| Distribution  to parent - tax benefit             |       | —           |        | (3,578,169    | )          | —          |       | (3,578,169             | )          |
| Distributions  of special purpose entity          |       | —           |        | (233,000      | )          | —          |       | (233,000               | )          |
|                                              |       |             |        |          |       |            |       |                   |       |
| PREDECESSOR  PIERRE BALANCE AT MARCH 6, 2004 |       | 29,438,172       |        | (17,817,637   | )          | (5,000,000      | )          | 6,620,535              |       |
| Net loss                                          |       | —           |        | (4,264,035    | )          | —          |       | (4,264,035             | )          |
| Transaction  with common shareholder              |       | (339,639         | )           | (11,900,276   | )          | —          |       | (12,239,915            | )          |
|                                              |       |             |        |          |       |            |       |                   |       |
| PREDECESSOR  PIERRE BALANCE AT JUNE 30, 2004 |       | 29,098,533       |        | (33,981,948   | )          | (5,000,000      | )          | (9,883,415             | )          |
| Purchase  accounting adjustment                   |       | (29,098,533      | )           | 33,981,948    |       | 5,000,000       |       | 9,883,415              |       |
| Successor  Pierre purchase allocation             |       | 150,023,000      |        | —        |       | —          |       | 150,023,000            |       |
| Net loss                                          |       | —           |        | (4,329,387    | )          | —          |       | (4,329,387             | )          |
| Contribution  from parent                         |       | 350,000          |        | —        |       | —          |       | 350,000                |       |
| Expenses  paid on behalf of parent                |       | (21,028          | )           | —        |       | —          |       | (21,028                | )          |
|                                              |       |             |        |          |       |            |       |                   |       |
| SUCCESSOR  PIERRE BALANCE AT MARCH 5, 2005   |       | 150,351,972      |        | (4,329,387    | )          | —          |       | 146,022,585            |       |
| Net income                                        |       | —           |        | 2,161,702     |       | —          |       | 2,161,702              |       |
| Expenses paid  on behalf of parent                |       | (126,431         | )           | —        |       | —          |       | (126,431               | )          |
|                                              |       |             |        |          |       |            |       |                   |       |
| SUCCESSOR  PIERRE BALANCE AT MARCH 4, 2006   |       | $                | 150,225,541 |          | $          | (2,167,685      | )          | $                      | —     |   | $ | 148,057,856 |   |

 

See accompanying notes to consolidated financial statements. 

 

F-5

----

 

**PIERRE FOODS, INC.**

 

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

 
| ** **                                                                                | ** ** | **Successor**               | ** ** | ** **                   | **Predecessor** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|-----------------|------------|
| ** **                                                                                | ** ** | ** **                  | ** ** | **Fiscal 2005**         | ** **      | ** ** | **Fiscal 2005** | ** ** | ** ** | ** ** |
| ** **                                                                                | ** ** | **Fiscal 2006**        | ** ** | **For the Period** | ** **      | ** ** | **For the Period** | ** ** | **Fiscal 2004** | ** ** |
| ** **                                                                                | ** ** | **For the Year**  | ** ** | **July 1, 2004**   | ** **      | ** ** | **March 7, 2004** | ** ** | **For the Year** | ** ** |
| ** **                                                                                | ** ** | **Ended**                   | ** ** | **Through**                  | ** **      | ** ** | **Through** | ** ** | **Ended** | ** ** |
| ** **                                                                                | ** ** | **March 4, 2006** | ** ** | **March 5, 2005**  | ** **      | ** ** | **June 30, 2004** | ** ** | **March 6, 2004** | ** ** |
| CASH FLOWS  FROM OPERATING ACTIVITIES                                                     |       |                        |       |                         |            |       |   |   |   |   |
| Net income  (loss)                                                                        |       | $                           | 2,161,702  |                         | $               | (4,329,387 | ) |   | $ | (4,264,035 | ) | $ | 1,433,795 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |       |                        |       |                         |            |       |   |   |   |   |
| Depreciation  and amortization                                                            |       | 30,638,357                  |       | 23,169,814                   |            |       | 1,544,903 |   | 4,604,954 |   |
| Amortization  of deferred loan origination fees                                           |       | 1,651,969                   |       | 1,029,109                    |            |       | 716,478 |   | 769,587 |   |
| Change in  deferred income taxes                                                          |       | (2,320,054                  | )          | 370,083                      |            |       | (2,080,338 | ) | 1,296,247 |   |
| Write-off of  deferred loan origination fees                                              |       | —                      |       | 4,283,122                    |            |       | — |   | 1,233,530 |   |
| Loss on  disposition of property, plant, and equipment, net                               |       | 6,388                       |       | 5,372                        |            |       | 339,921 |   | 11,042 |   |
| (Increase)  decrease in other non-current assets                                          |       | (381,278                    | )          | (7,100                       | )               |       | (212,772 | ) | 44,237 |   |
| Increase  (decrease) in other long-term liabilities                                       |       | (4,348,517                  | )          | 199,565                      |            |       | (94,477 | ) | (366,339 | ) |
| Changes in  operating assets and liabilities providing (using) cash:                      |       |                        |       |                         |            |       |   |   |   |   |
| Receivables                                                                               |       | (43,148                     | )          | (9,566,451                   | )               |       | 5,660,719 |   | (1,987,250 | ) |
| Inventories                                                                               |       | (1,922,407                  | )          | 436,083                      |            |       | (3,205,051 | ) | (6,178,344 | ) |
| Refundable  income taxes, prepaid expenses, and other current assets                      |       | 2,213,045                   |       | (3,607,572                   | )               |       | (247,428 | ) | 11,380 |   |
| Trade  accounts payable and other accrued liabilities                                     |       | 807,868                     |       | 867,918                      |            |       | 2,227,855 |   | 2,388,092 |   |
| Total  adjustments                                                                        |       | 26,302,223                  |       | 17,179,943                   |            |       | 4,649,810 |   | 1,827,136 |   |
|                                                                                      |       |                        |       |                         |            |       |   |   |   |   |
| Net cash  provided by operating activities                                                |       | 28,463,925                  |       | 12,850,556                   |            |       | 385,775 |   | 3,260,931 |   |
|                                                                                      |       |                        |       |                         |            |       |   |   |   |   |
| CASH FLOWS  FROM INVESTING ACTIVITIES                                                     |       |                        |       |                         |            |       |   |   |   |   |
| Proceeds  from sales of assets to others                                                  |       | —                      |       | —                       |            |       | — |   | 278,400 |   |
| Capital  expenditures                                                                     |       | (7,150,218                  | )          | (3,677,259                   | )               |       | (2,084,160 | ) | (10,040,768 | ) |
| Net cash used  in investing activities                                                    |       | (7,150,218                  | )          | (3,677,259                   | )               |       | (2,084,160 | ) | (9,762,368 | ) |
|                                                                                      |       |                        |       |                         |            |       |   |   |   |   |
| CASH FLOWS  FROM FINANCING ACTIVITIES                                                     |       |                        |       |                         |            |       |   |   |   |   |
| Borrowings  (repayments) of revolving credit agreement                                    |       | (790,000                    | )          | (17,702,886                  | )               |       | 7,712,901 |   | (1,805,161 | ) |
| Borrowings  under equipment term loan subline                                             |       | —                      |       | —                       |            |       | — |   | 5,000,000 |   |
| Borrowings  under real estate term loan subline                                           |       | —                      |       | —                       |            |       | — |   | 5,000,000 |   |
| Principal  payments on long-term debt                                                     |       | (17,796,711                 | )          | (16,169,945                  | )               |       | (673,526 | ) | (849,257 | ) |
| Loan  origination fees                                                                    |       | (59,843                     | )          | (9,952,798                   | )               |       | (3,371,999 | ) | (680,609 | ) |
| Payoff of  Old Notes                                                                      |       | —                      |       | (115,000,000                 | )               |       | — |   | — |   |
| Issuance of  New Notes                                                                    |       | —                      |       | 125,000,000                  |            |       | — |   | — |   |
| Borrowings  under new term loan                                                           |       | —                      |       | 150,000,000                  |            |       | — |   | — |   |
| Repayment of  debt in conjunction with the Acquisition                                    |       | —                      |       | (29,048,031                  | )               |       | — |   | — |   |
| Termination  of certificate of deposit                                                    |       | —                      |       | 1,262,245                    |            |       | — |   | — |   |
| Return of  capital to parent                                                              |       | (126,431                    | )          | (100,085,738                 | )               |       | — |   | — |   |
| Distribution  of special purpose leasing entity                                           |       | —                      |       | —                       |            |       |   |   | (233,000 | ) |
| Contribution  from parent                                                                 |       | —                      |       | 350,000                      |            |       | — |   | — |   |
|                                                                                      |       |                        |       |                         |            |       |   |   |   |   |
| Net cash  provided by (used in) financing activities                                      |       | (18,772,985                 | )          | (11,347,153                  | )               |       | 3,667,376 |   | 6,431,973 |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                     |       | 2,540,722                   |       | (2,173,856                   | )               |       | 1,968,991 |   | (69,464 | ) |
| CASH AND  CASH EQUIVALENTS, BEGINNING OF YEAR                                             |       | —                      |       | 2,173,856                    |            |       | 204,865 |   | 274,329 |   |
|                                                                                      |       |                        |       |                         |            |       |   |   |   |   |   |   |   |   |
| CASH AND  CASH EQUIVALENTS, END OF YEAR                                                   |       | $                           | 2,540,722  |                         | $               | —     |   |   | $ | 2,173,856 |   | $ | 204,865 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

F-6

----

 

**PIERREFOODS, INC.**

 

###### **NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

###### ** **

**1.****              BASIS OFPRESENTATION AND ACQUISITION**

 

***Description of Business.***PierreFoods, Inc. (the “Company” or “Pierre”) is a manufacturer and marketer ofhigh-quality, differentiated processed food solutions, focusing on formed,pre-cooked protein products and hand-held convenience sandwiches. The Company’sproducts include beef, poultry, pork and bakery items. Pierre offerscomprehensive food solutions to its customers, including proprietary productdevelopment, special ingredients and recipes, as well as custom packaging andmarketing programs. Pierre’s pre-cooked proteins include flamebroiled burgerpatties, homestyle meatloaf, chicken strips and boneless, barbecued pork ribproducts. Pierre markets its pre-cooked protein products to a broad array ofcustomers that includes restaurant chains, schools and other foodserviceproviders under a variety of brand names, including PierreTM, Fast Choice®, Rib-B-Q®, Hot ‘n’ Ready® and Big AZ®.

 

***Restructuring.***OnMarch 8, 2004, following a consent solicitation in which consents ofholders of $112.4 million in aggregate principal amount of the Company’soutstanding Notes (“Old Notes”), representing 97.74% of the outstanding Notes,consented to a Fourth Supplemental Indenture between the Company and theTrustee thereunder, the Company entered into the Fourth Supplemental Indenturewith the Trustee. Among other things, the Fourth Supplemental Indentureincreased the annual interest rate on the Old Notes from 10.75% to 12.25%through March 31, 2005 and 13.25% thereafter; required the payment of acash consent fee of $3.5 million (3% of the principal amount of Old Notes heldby each consenting noteholder); granted to the noteholders liens on the assetsof the Company and its subsidiaries, such liens being junior to the seniorliens securing the Company’s credit facility, granted to noteholders arepurchase right allowing all of the noteholders to require the Company torepurchase their Old Notes at par plus accrued interest on March 31, 2005;provided for the payment of a portion of certain cash flow of the Company(referred to as “excess cash”) to reduce the principal amount of Old Notesoutstanding at the end of the Company’s fiscal years; added restrictivecovenants limiting the compensation payable to certain senior executives of theCompany and limiting future related party transactions; required thetermination of all related party transactions, except for certainspecifically-permitted transactions; provided for the assumption by the Companyof approximately $15.3 million of subordinated debt of PFMI, the soleshareholder of the Company, required the Company to comply with certaincorporate governance standards, including appointing an independent directoracceptable to the Company and the noteholders to its board and hiring anindependent auditor to monitor the Company’s compliance with the Indenture; andwaived any and all defaults of the Indenture existing as of March 8, 2004.The restrictive covenants limiting compensation payable to certain seniorexecutives of the Company permitted for bonus payments to those executivesabove the compensation limitations. The bonus payments were based on theprofitability of the Company and cash payments made on the Old Notes.

 

Concurrently with the execution of the FourthSupplemental Indenture, the Company took title to an aircraft transferred froma related party subject to $5.6 million of existing purchase money debt;assumed $15.3 million of debt from PFMI; cancelled the $1.0 million relatedparty note receivable against the debt assumed from PFMI; cancelled thebalances owed by the Company to certain related parties, as follows: $0.5million owed to Columbia Hill Aviation; $3.5 million owed to PF Purchasing; aformer affiliate of the Company, $0.5 million owed to PF Distribution; a formeraffiliate of the Company, and assumed the operating leases of PF Distributionin connection with the Fourth Supplemental Indenture.

 

In this document, unless the contextotherwise requires, the term “Company” refers to Pierre Foods, Inc. andits current and former subsidiaries. The Company’s fiscal year ended March 4,2006 is referred to as “successor fiscal 2006.” As a result of the Acquisition discussed below, on June 30, 2004,the Company’s fiscal year ended March 5, 2005 is comprised of two shortperiods. The periods of March 7, 2004 through June 30, 2004 and July 1,2004 through March 5, 2005 are referred to as “predecessor fiscal 2005”and “successor fiscal 2005,” respectively. These two short periods collectivelyare referred to as “predecessor fiscal 2005 and successor fiscal 2005 combined.”  The Company’s fiscal year ended March 6,2004 is referred to as “predecessor fiscal 2004.”  Financial statement presentation used forsuccessor fiscal 2005, predecessor fiscal 2005, and fiscal 2004 has beenreclassified, where applicable, to conform to financial statementpresentation used for successor fiscal 2006.

 

F-7

----

 

***Acquisition.***OnJune 30, 2004, the shareholders of PFMI, the sole shareholder of theCompany, sold their shares of stock in PFMI (the “Acquisition”) to PierreHolding Corp. (“Holding”), an affiliate of Madison Dearborn Partners, LLC (“MDP”).The following occurred in conjunction with the Acquisition:

 

•                  The Company merged with Pierre Merger Corp., anaffiliate of MDP, with the Company being the surviving corporation followingthe merger.

 

•                  The Company terminated its three-year variable-rate$40 million revolving credit facility and obtained a $190 million creditfacility from a new lender which includes a six-year variable-rate $150 millionterm loan and a five-year variable rate $40 million revolving credit facilitywith a $10 million letter of credit subfacility. See Note 7, “FinancingArrangements,” to the Company’s Consolidated Financial Statements.

 

•                  The Company terminated its few remaining relatedparty transactions (described in Note 16, “Transactions with Related Parties,”to the Consolidated Financial Statements), transferred miscellaneous assets to Messrs. Richardsonand Clark, the Company’s former Chairman and Vice Chairman, respectively,including the Company’s airplane, which was distributed to Mr. Richardson.

 

•                  Pierre Merger Corp. closed a cash tender offer andconsent solicitation for the Company’s Old Notes. Holders of approximately$106.3 million, or approximately 92%, of aggregate principal amount of theCompany’s outstanding Old Notes tendered their Old Notes. The Company, as thesurviving corporation of the merger with Pierre Merger Corp., accepted and paidfor all Old Notes tendered pursuant to the tender offer. A redemption noticefor the Old Notes not tendered (approximately $8.7 million) was issued on June 30,2004 and these Old Notes were redeemed on July 20, 2004.

 

•                  The Company issued $125.0 million of 9-7/8% SeniorSubordinated Notes due 2012 (the “New Notes”). The proceeds of the New Notes,together with the equity contributions from MDP and certain members ofmanagement (as described below) and borrowings under the Company’s new seniorcredit facility, were used to finance the Acquisition and to repay outstandingindebtedness.

 

•                  The Company’s President and Chief Executive Officer,Norbert E. Woodhams, and its Senior Vice President of Sales, Marketing and NewProduct Development, Robert C. Naylor, signed employment agreements committingthem to continue working for the Company after the Acquisition. The stated termof employment for each executive is one year, but each agreement renewsyear-to-year unless terminated.

 

•                  The management investors, the Company’s Presidentand Chief Executive Officer, Norbert E. Woodhams, and its Senior Vice Presidentof Sales, Marketing and New Product Development, Robert C. Naylor, investedapproximately $4.9 million in a deferred compensation plan. This deferredcompensation plan is funded through a rabbi trust that owns preferred stock ofHolding with an aggregate liquidation value of approximately $5.7 million as ofMarch 4, 2006.

 

•                  In addition to the base purchase price, the stockpurchase agreement entitled the selling shareholders to earn-out cash payments,which included an additional aggregate amount of $13.0 million in the eventthat, at the end of any fiscal quarter during the fiscal year ended March 5,2005, the Company achieved EBITDA (as defined in the stock purchase agreement)for the prior four fiscal quarters then ended of $56.0 million or more. Noportion of the additional amount was payable as of March 5, 2005, as thisEBITDA target was not met.

 

F-8

----

 

The Acquisition was recorded under thepurchase method of accounting. The purchase price was allocated to assetsacquired and liabilities assumed based on the fair market value at the date ofAcquisition. The allocation of the purchase price was as follows: 

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

 

The Company obtained outside appraisals ofacquired assets and liabilities in successor fiscal 2005. Deferred taxliabilities were finalized based on the final allocation of the purchase priceand the determination of the tax basis of the assets and liabilities acquired.

 

**2.****                                      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

***Principles of consolidation.***Theaccompanying consolidated financial statements include Pierre Foods, Inc.and subsidiaries, as well as the accounts of the special purpose leasing entityin Predecessor Pierre (see Note 16). All intercompany transactions have beeneliminated.

 

***Fiscal Year.***The Company operates on a 52-week or 53-week fiscal year ending on the firstSaturday in March or if the last day of February is a Saturday, thelast day of February. Each quarter of the fiscal year contains 13 weeksexcept for the infrequent fiscal years with 53 weeks. The results for successorfiscal 2006 and for predecessor fiscal 2005 and successor fiscal 2005 combinedcontain 52 weeks. The results for predecessor fiscal 2004 contain 53 weeks.

 

***Cash and cash equivalents.***For financial statement presentationpurposes, the Company presents book overdrafts, principally outstanding checksin excess of cash on hand with the same financial institution, as accountspayable. As of March 4, 2006, the Company had cash on hand of $1.4 million,which was offset by outstanding checks of $4.7 million resulting in a netreclassification of $3.3 million to accounts payable. The Company considers allhighly liquid investments purchased with an original maturity of three monthsor less to be cash equivalents. As of March 4, 2006, the Company had cashequivalents of $2.5 million.

 

***Inventories.***Inventoriesare stated at the lower of cost (first-in, first-out) or market.

 

***Property, plant and equipment.***Property,plant and equipment are stated at cost or fair value at date of acquisition. Expendituresfor maintenance and repairs which do not significantly extend the useful livesof assets are charged to operations whereas additions and betterments,including interest costs incurred during construction, which was not materialfor any year presented, are capitalized.

 

Depreciation of property, plant and equipmentis provided over the estimated useful lives of the respective assets on thestraight-line basis. Leasehold improvements are depreciated over the shorter oftheir estimated useful lives or the terms of the respective leases. Propertyunder capital leases is amortized in accordance with the Company’s normaldepreciation policy. Depreciation expense,along with amortization of intangible assets, is recorded as a separate lineitem in the consolidated statements of operations. Cost of goods sold andselling, general and administrative expenses exclude depreciation expense. Depreciationexpense excluded from cost of goods sold totaled approximately $6.3 million,$5.7 million, and $3.1 million during successor fiscal 2006, predecessor fiscal2005 and successor fiscal 2005 combined, and predecessor fiscal 2004,respectively.

 

The Company evaluates thecarrying values of long-lived assets for impairment by assessing recoverabilitybased on forecasted operating cash flows on an undiscounted basis in accordancewith SFAS 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” anddetermined no impairment existed at March 4, 2006, March 5, 2005 or March 6,2004.

 

F-9

----

 

***Goodwill and Other IntangibleAssets*****.**In conjunction with the Acquisition, the Company engaged anindependent party to perform valuations for financial reporting purposesof the Company’s goodwill and other intangibles. Assets identified through thisvaluation process included goodwill, formulas, customer relationships,licensing agreements and certain trade names and trademarks.

 

The Company tests recorded goodwill and intangibleswith indefinite lives for impairment at least annually. All other intangibleassets with finite lives are amortized over their estimated economic orestimated useful lives. In addition, all other intangible assets are reviewedfor impairment in accordance with SFAS 144. Based on the Company’s review andthe review performed by third parties, noimpairment existed at March 4, 2006 or March 5, 2005.

 

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

 

***Deferred Loan Origination Fees.***Deferredloan origination fees associated with the Company’s revolving credit facilityand long-term debt are amortized based on the term of the respective agreements,except for those fees associated with the Company’s Term B loan, which areamortized based on the effective interest rate method. All amortization expenserelated to deferred loan origination fees is included in interest expense. Alsoincluded in interest expense during successor fiscal 2005, as a result of theAcquisition, is the write-off of approximately $4.3 million of deferred loanorigination fees associated with the old debt structure.

 

***Revenue Recognition.***The Company records**revenuesfrom its sales of food processing products at the time title transfers. Standardshipping terms are FOB destination. Based on these terms, title passes at thetime the product 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 on historicaltrends and expected future payments (see also *Promotions*below).

 

***Promotions*****.**Promotional expenses associated withrebates, marketing promotions and special pricing arrangements are recorded asa reduction of revenues or 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 the estimatesrecorded in the financial statements are reasonable estimates of the Company’s obligationsunder the programs.

 

***Concentration of Credit Risk and Significant Customers*.**Financial instruments that potentially subject the Company toconcentrations of credit risk consist primarily of trade receivables. TheCompany performs periodic credit evaluations of its customers’ financialcondition and generally does not require collateral. The Company encounters acertain amount of credit risk as a result of a concentration of receivablesamong a few significant customers. Sales to the Company’s largest customer wereapproximately 21%, 25% and 24% of net revenues for successor fiscal 2006,predecessor fiscal 2005 and successor fiscal 2005 combined and predecessorfiscal 2004, respectively. Accounts receivable at March 4, 2006 and March 5,2005 included receivables from the Company’s largest customer totaling$2.7 million and $4.4 million, respectively.

 

***Stock-Based Compensation*.**On June 30, 2004, Holding adopted a stock option plan, pursuant towhich the Board of Directors of Holding may grant options to purchase anaggregate of 163,778 shares of common stock of Holding. Such options may begranted to directors, employees and consultants of Holding and itssubsidiaries, including the Company. At March 4, 2006 and March 5,2005, options to purchase a total of 126,219 shares and 127,397 shares ofcommon stock of Holding, respectively, had been issued to members of managementof the Company (the “Options”) and 37,559 and 36,381, respectively werereserved for future issuance. All outstanding Options were granted at $10 pershare and expire ten years from the date of grant. A portion of eachoutstanding Option vests daily on a pro-rata basis over a five-year period fromthe date of grant and the remaining portion of each outstanding Option vestsseven years from the date of grant, subject to accelerated vesting based on theachievement of certain performance measures.

 

F-10

----

 

The Company treats the Options as stock-based employee compensation foremployees of the Company. As permitted under accounting principles generally acceptedin the United States of America (“GAAP”), the Company accounts for the Optionsunder the recognition and measurement principles of Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), andrelated Interpretations using the intrinsic value method. Accordingly, nocompensation expense has been recognized for the Options in its consolidatedstatements of operations. Had compensation expense for the Options beendetermined in accordance with the minimum value approach as defined byStatement of Financial Accounting Standards (“SFAS”) No. 123, “Accountingfor Stock-Based Compensation” (“SFAS 123”), the Company’s net income (loss) andearnings (loss) per share would have been the following (in thousands, exceptper share data):

 
| ** **                                              | ** ** | **Successor Fiscal 2006** | ** ** | **Successor Fiscal 2005** | ** ** |
|---------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| Net income (loss) as reported                           |       | $                         | 2,162      |                      | $          | (4,329 | ) |
| Minimum value of stock-based compensation,  net of tax  |       | (41                       | )          | (27                       | )          |
| Net income (loss) pro forma                             |       | $                         | 2,121      |                      | $          | (4,356 | ) |
|                                                    |       |                      |       |                      |       |
| Basic and diluted income (loss) per share,  as reported |       | $                         | 21.62      |                      | $          | (43.29 | ) |
| Basic and diluted income (loss) per share,  pro forma   |       | $                         | 21.21      |                      | $          | (43.56 | ) |

 

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

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

 

In December of 2004, the FASB issuedStatement of Financial Accounting Standards No. 123 (Revision 2004), “Share-BasedPayment” (“SFAS 123R”) which is effective for the first annual reporting periodbeginning after December 15, 2005 for non-public companies (as defined inSFAS 123R). The new statement requires compensation expense associated withshare-based payments to employees to be recognized in the financial statementsbased on their fair values**.**Upon theadoption of SFAS 123R, the Company will be required to apply the provisions ofthe statement prospectively for any newly issued, modified or settled awardafter the date of initial adoption. As the Company currently uses the intrinsicvalue method to value the Options, the fair value assigned to any newly issued,modified or settled awards after the adoption of SFAS 123R is expected to besignificantly greater due to the differences in valuation methods.

 

***Advertising Costs.***TheCompany expenses advertising costs as incurred. Advertising expense for successorfiscal 2006, predecessor fiscal 2005 and successor fiscal 2005 combined and predecessorfiscal 2004 was approximately $428,000, $273,000, and $559,000, respectively.

 

***Research and Development.***The Company expenses research anddevelopment costs as incurred. Research and development expense for successorfiscal 2006, predecessor fiscal 2005 and successor fiscal 2005 combined and predecessorfiscal 2004 was approximately $1,936,000, $1,650,000 and $1,286,000, respectively.

 

***Income Taxes.***Incometaxes are provided for temporary differences between the tax and financialaccounting bases of assets and liabilities using the asset and liability method.The tax effects of such differences are reflected in the balance sheet at theenacted tax rate applicable to the years when such differences are scheduled toreverse. The effect on deferred taxes of a change in tax rates is recognized inthe period that includes the enactment date.

 

F-11

----

 

***Distribution Expense.***TheCompany expenses distribution costs as incurred. These costs includewarehousing, fulfillment and freight costs, and are included in selling,general and administrative expense. Distribution expense included in operationsfor successor fiscal 2006, predecessor fiscal 2005 and successor fiscal 2005combined and predecessor fiscal 2004 was approximately $27,659,000, $22,373,000and $31,126,000, respectively. See Note 16 –“Transactions With Related Parties”to the Consolidated Financial Statements for further discussion.

 

***Use of Estimates.***The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America (“GAAP”) requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. Significantaccounting estimates include sales discounts and promotional allowances,inventory reserves, insurance reserves, and useful lives assigned to intangibleassets. Actual results could differ from those estimates.

 

***New Accounting Pronouncements*****.**In November 2004, the FinancialAccounting Standards Board (the “FASB”) issued SFAS No. 151, “InventoryCosts—an amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”).SFAS No. 151 amends ARB 43, Chapter 4, to clarify that abnormalamounts of idle facility expense, freight, handling costs and wasted materials(spoilage) should be recognized as current-period charges. In addition, SFAS No. 151requires that allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities. Wewill adopt the provisions of SFAS No. 151, effective March 5, 2006for our fiscal 2007 consolidated financial statements. Management currentlybelieves that adoption of the provisions of SFAS No. 151 will not have amaterial impact on our consolidated financial statements.

 

In December of 2004, the FASB issuedStatement of Financial Accounting Standards No. 123 (Revision 2004), “Share-BasedPayment” (“SFAS 123R”), which is effective for the first annual reportingperiod beginning after December 15, 2005 for non-public companies (asdefined in SFAS 123R). The new statement requires compensation expenseassociated with share-based payments to employees to be recognized in thefinancial statements based on their fair values. Upon the adoption of SFAS123R, the Company will be required to apply the provisions of the statementprospectively for any newly issued, modified or settled award after the date ofinitial adoption, as well as to the unvested portion of awards granted prior toadoption of the standard. As the Company currently uses the intrinsic value methodto value the Options, the fair value assigned to any newly issued, modified orsettled awards after the adoption of SFAS 123R is expected to be significantlygreater due to the differences in valuation methods.

 

In May 2005, FASB issued SFAS 154, “Accounting Changes and Error Corrections”.The Statement requires retroactive application of a voluntary change inaccounting principle to prior period financial statements unless it isimpracticable. SFAS 154 also requires that a change in method of depreciation,amortization, or depletion for long-lived, non-financial assets be accountedfor as a change in accounting estimate that is affected by a change inaccounting principle. SFAS 154 replaces APB Opinion 20, “Accounting Changes”, and SFAS 3, “Reporting Accounting Changes in InterimFinancial Statements”. The Company will adopt the provisions of SFAS154, effective March 5, 2006 for its fiscal 2007 Consolidated FinancialStatements. Management currently believes that adoption of the provisions ofSFAS 154 will not have a material impact on the Company’s ConsolidatedFinancial Statements.

 

F-12

----

 

**3.****             ****ACCOUNTS AND NOTESRECEIVABLE**

 

Accountsand notes receivable consist of the following:

 
| ** **                                                                                                                                                | ** ** | **March 4,** | ** ** | **March 5,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                                                                                                | ** ** | **2006**          | ** ** | **2005**          | ** ** |
| Accounts receivable:                                                                                                                                      |       |              |       |              |       |
| Trade  accounts receivable (less allowance for doubtful receivables of $308,051 and  $279,763 at March 4, 2006 and March 5, 2005, respectively) |       | $                 | 28,305,893 |              | $          | 28,176,404 |   |
| Other  receivables                                                                                                                                        |       | 1,284,595         |       | 1,370,936         |       |
| Total  accounts receivable                                                                                                                                |       | $                 | 29,590,488 |              | $          | 29,547,340 |   |

 

The following is a summary of activity in the allowance for doubtfulreceivables for successor fiscal 2006, successor fiscal 2005, predecessorfiscal 2005 and predecessor fiscal 2004.

 
| ** **               | ** ** | ** **         | ** ** | **Additions**       | ** ** | **Deduction** | ** ** | ** **      | ** ** |
|--------------------------|------------|--------------------|------------|---------------------|------------|---------------|------------|-----------------|------------|
| ** **               | ** ** | **Balance**        | ** ** | **Charged to** | ** ** | **Amounts**   | ** ** | **Balance**     | ** ** |
| ** **               | ** ** | **Beginning**      | ** ** | **Costs and**  | ** ** | **Charged**   | ** ** | **End of** | ** ** |
| ** **               | ** ** | **of Period** | ** ** | **Expenses**        | ** ** | **Off-Net**   | ** ** | **Period**      | ** ** |
|                     |       |               |       |                |       |          |       |            |       |
| Successor  fiscal 2006   |       | $                  | 279,763    |                | $          | 107,270       |       | $               | 78,982     |   | $ | 308,051 |   |
|                     |       |               |       |                |       |          |       |            |       |
| Successor  fiscal 2005   |       | $                  | —     |                | $          | 306,247       |       | $               | 26,484     |   | $ | 279,763 |   |
|                     |       |               |       |                |       |          |       |            |       |
| Predecessor  fiscal 2005 |       | $                  | 353,543    |                | $          | 15,630        |       | $               | 86,228     |   | $ | 282,945 |   |
|                     |       |               |       |                |       |          |       |            |       |
| Predecessor  fiscal 2004 |       | $                  | 309,741    |                | $          | 507,077       |       | $               | 463,275    |   | $ | 353,543 |   |

 

**4.****             ****INVENTORIES**

 

Asummary of inventories, by major classification, follows:

 
| ** **       | ** ** | **March 4,** | ** ** | **March 5,** | ** ** |
|------------------|------------|-------------------|------------|-------------------|------------|
| ** **       | ** ** | **2006**          | ** ** | **2005**          | ** ** |
|             |       |              |       |              |       |
| Raw  materials   |       | $                 | 7,589,997  |              | $          | 6,530,663 |   |
| Work in  process |       | 5,636             |       | 6,883             |       |
| Finished  goods  |       | 38,090,709        |       | 37,226,388        |       |
| Total            |       | $                 | 45,686,342 |              | $          | 43,763,934 |   |

 

F-13

----

 

**5.****             ****PROPERTY, PLANT, ANDEQUIPMENT**

 

Themajor components of property, plant, and equipment are as follows:

 
| ** **                                      | ** ** | **Estimated**        | ** ** | **March 4,** | ** ** | **March 5,** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                      | ** ** | **Useful Life** | ** ** | **2006**          | ** ** | **2005**          | ** ** |
|                                            |       |                 |       |              |       |              |       |
| Land                                            |       |                 |       | $                 | 1,620,000  |              | $          | 1,620,000 |   |
| Land  improvements                              |       | 10-20 years          |       | 37,840            |       | 37,840            |       |
| Buildings                                       |       | 20-40 years          |       | 16,584,587        |       | 15,243,465        |       |
| Machinery  and equipment                        |       | 5-20 years           |       | 42,186,277        |       | 38,730,648        |       |
| Machinery  and equipment under capital leases   |       | 5-15 years           |       | 1,520,144         |       | 1,278,141         |       |
| Furniture  and fixtures                         |       | 5-15 years           |       | 4,345,445         |       | 2,598,745         |       |
| Furniture  and fixtures under capital leases    |       | 5-15 years           |       | 49,553            |       | 291,557           |       |
| Automotive  equipment                           |       | 2-5 years            |       | 293,222           |       | 171,567           |       |
| Construction  in progress                       |       |                 |       | 2,179,838         |       | 1,804,459         |       |
| Total                                           |       |                 |       | 68,816,906        |       | 61,776,422        |       |
| Less  accumulated depreciation and amortization |       |                 |       | 12,610,409        |       | 5,491,940         |       |
| Property,  plant, and equipment, net            |       |                 |       | $                 | 56,206,497 |              | $          | 56,284,482 |   |

 

F-14

----

 

**6. GOODWILL AND OTHER INTANGIBLE ASSETS**

 

The gross carrying value of goodwill and thegross carrying value and accumulated amortization of other intangible assets asof March 4, 2006 are as follows:

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

 

The gross carrying value of goodwill and thegross carrying value and accumulated amortization of other intangible assets asof March 5, 2005 are as follows:

 
| ** **                               | ** ** | **As of March 5, 2005** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | ** **                                  | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                               | ** ** | **Useful**                                  | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Carrying** | ** ** |
| ** **                               | ** ** | **Life**                                    | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| **Amortizable  intangible assets:**      |       |                                        |       |   |   |   |   |   |   |
| Formulas                                 |       | 15 years                                    |       | $ | 95,000,000 |   | $ | 10,380,233 |   | $ | 84,619,767 |   |
| Tradename  and trademarks                |       | 12-20 years                                 |       | 20,100,000 |   | 1,409,337 |   | 18,690,663 |   |
| Customer  relationships                  |       | 12 years                                    |       | 28,500,000 |   | 4,851,794 |   | 23,648,206 |   |
| Licensing  agreements                    |       | 10 years                                    |       | 12,100,000 |   | 1,035,564 |   | 11,064,436 |   |
| **Total  amortizable intangible assets** |       |                                        |       | $ | 155,700,000 |   | $ | 17,676,928 |   | $ | 138,023,072 |   |
|                                     |       |                                        |       |   |   |   |   |   |   |
| **Indefinite-lived  intangible assets:** |       |                                        |       |   |   |   |   |   |   |
| Tradename                                |       | Indefinite                                  |       | $ | 20,200,000 |   | $ | — |   | $ | 20,200,000 |   |
|                                     |       |                                        |       |   |   |   |   |   |   |
| **Total  other intangible assets**       |       |                                        |       | $ | 175,700,000 |   | $ | 17,676,928 |   | $ | 158,223,072 |   |
|                                     |       |                                        |       |   |   |   |   |   |   |
| Goodwill                                 |       | N/A                                         |       | $ | 186,535,050 |   | $ | — |   | $ | 186,535,050 |   |
| ** **                               |       |                                        |       |   |   |   |   |   |   |   |   |   |
| **Total  intangible assets**             |       |                                        |       | $ | 362,435,050 |   | $ | 17,676,928 |   | $ | 344,758,122 |   |

 

F-15

----

 

The future amortization of other intangibleassets (dollars in thousands) for the next five fiscal years is estimated to beas follows:

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

 

**7.****              FINANCINGARRANGEMENTS**

 

Long-term debt is comprised of the following:

 
| ** **                                                                                                               | ** ** | **March 4, 2006** | ** **  | **March 5, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|-----------------------------|------------|
| 9.875%  Senior Notes, interest payable on January 15 and July 15 of each  year, maturing on July 15, 2012 |       | $                           | 125,000,000 |                        | $          | 125,000,000 |   |
| $150 million  term loan, with floating interest rates maturing 2010                                                      |       | 119,125,000                 |        | 136,500,000                 |       |
| Revolving  line of credit, maximum borrowings of $40 million with floating interest  rates, maturing 2009                |       | —                      |        | 790,000                     |       |
| 0.0% to  7.55% capitalized lease obligations maturing through fiscal 2012                                                |       | 868,659                     |        | 1,290,371                   |       |
| Total  long-term debt                                                                                                    |       | 244,993,659                 |        | 263,580,371                 |       |
| Less current  installments                                                                                               |       | 229,172                     |        | 421,713                     |       |
| Long-term  debt less current installments                                                                                |       | $                           | 244,764,487 |                        | $          | 263,158,658 |   |

 

On March 8, 2004, following a consentsolicitation in which consents of holders of $112.4 million in aggregateprincipal amount of the Company’s then outstanding Old Notes, representing97.74% of the outstanding Old Notes, consented to a Fourth SupplementalIndenture between the Company and U.S. Bank National Association, as trustee(the “Trustee”). The Company entered into the Fourth Supplemental Indenture withthe Trustee. Among other things, the Fourth Supplemental Indenture increasedthe annual interest rate on the Old Notes from 10.75% to 12.25% through March 31,2005 and 13.25% thereafter, and required the payment of a cash consent fee of$3.5 million (3% of the principal amount of Old Notes held by eachconsenting noteholder); required the termination of all related partytransactions, except for certain specifically-permitted transactions (see Note16 — “Transactions With Related Parties” to the Consolidated FinancialStatements); provided for the assumption by the Company of approximately$15.3 million of subordinated debt of PFMI and waived any and all defaultsof the Indenture existing as of March 8, 2004.

 

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

 

On June 30, 2004, the shareholders ofPFMI closed the sale of their shares of stock of PFMI to Holding (see Note 1 — “Basisof Presentation and Acquisition,” to the Consolidated Financial Statements). EffectiveJune 30, 2004, the Company terminated its three-year variable-rate$40 million revolving credit facility. Existing debt issuance costsrelated to the Company’s former $40 million facility in the amount of$0.5 million and a prepayment penalty paid to the former lender in theamount of $0.4 million were charged to interest expense.

 

F-16

----

 

Also effective June 30, 2004, theCompany obtained a $190 million credit facility from a new lender whichincludes a six-year variable-rate $150 million term loan, a five-yearvariable rate $40 million revolving credit facility and a $10 millionletter of credit subfacility. Funds available under this new facility areavailable for working capital requirements, permitted investments and generalcorporate purposes. Borrowings under the new facility bear interest at floatingrates based upon the interest rate option selected from time to time by theCompany and are secured by a first-priority security interest in substantiallyall of the Company’s assets. The interest rates for base rate borrowings underthe new revolving credit facility and the new term loan at March 4, 2006were 9.25% (prime of 7.50% plus 1.75%) and 9.00% (prime of 7.50% plus 1.50%),respectively. Actual interest rates are lowered by the use of LIBOR tranches asappropriate. Repayment of borrowings under the term loan was initially $375,000per quarter, which began on September 4, 2004, with a balloon payment of$141.4 million due on June 5, 2010. However, in addition to payingall scheduled quarterly payments totaling $8.6 million for the term of theloan, the Company made prepayments on the term loan totaling $4.9 millionduring successor fiscal 2005. Prepayments totaling $17.4 million were madeduring successor fiscal 2006. The remaining outstanding balance of $119.1million as of March 4, 2006 is due on June 5, 2010.

 

As of March 4, 2006, the Company hadcash and cash equivalents on hand of $2.5 million, no outstanding borrowingsunder its revolving credit facility and borrowing availability of approximately$34.4 million. Also as of March 4, 2006, the Company had borrowingsunder its term loan of $119.1 million and $125.0 million of the New Notesoutstanding. As of March 5, 2005, the Company had no cash and cashequivalents on hand, outstanding borrowings under its revolving credit facilityof $0.8 million and borrowing availability of approximately $34.7 million.Also as of March 5, 2005, the Company had borrowings under its term loanof $136.5 million and $125.0 million of the New Notes outstanding. The maturitydate of the $40 million revolving credit facility is June 30, 2009. Inaddition, the Company is required to satisfy certain financial covenantsregarding cash flow and capital expenditures. As of March 4, 2006, theCompany is in compliance with all financial covenants.

 

In conjunction with the Acquisition, theCompany issued the New Notes. The proceeds of the New Notes, together with theequity contributions from MDP and certain members of management and borrowingsunder the Company’s new senior credit facility, were used to finance theAcquisition of the Company and to repay outstanding indebtedness, includingpaying off debt of PFMI assumed by the Company under the Fourth SupplementalIndenture (except capital leases), paying for the Old Notes tendered inconnection with the tender offer described in Note 1 — “Basis of Presentationand Acquisition” to the Consolidated Financial Statements and redeeming the OldNotes not tendered.

 
| **Long-Term Debt Maturities, Including Capital Leases (Note 9)** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|
| **2007**                                                                                            | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|                                                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| $                                                                                                   | 229,172    |   | $ | 190,293 |   | $ | 167,577 |   | $ | 175,453 |   | $ | 119,231,164 |   | $ | 125,000,000 |   | $ | 244,993,659 |   |
|                                                                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-17

----

 

**8.****             ****INCOME TAXES**

 

Theincome tax provision (benefit) is summarized as follows:

 
| ** **                 | ** ** | **Successor**               | ** ** | ** **                   | **Predecessor** | ** ** |
|----------------------------|------------|-----------------------------|------------|------------------------------|-----------------|------------|
| ** **                 | ** ** | ** **                  | ** ** | **Fiscal 2005**         | ** **      | ** ** | **Fiscal 2005** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Fiscal 2006**        | ** ** | **For the Period** | ** **      | ** ** | **For the Period** | ** ** | **Fiscal 2004** | ** ** |
| ** **                 | ** ** | **For the Year**  | ** ** | **July 1, 2004**   | ** **      | ** ** | **March 7, 2004** | ** ** | **For the Year** | ** ** |
| ** **                 | ** ** | **Ended**                   | ** ** | **Through**                  | ** **      | ** ** | **Through** | ** ** | **Ended** | ** ** |
| ** **                 | ** ** | **March 4, 2006** | ** ** | **March 5, 2005**  | ** **      | ** ** | **June 30,2004** | ** ** | **March 6, 2004** | ** ** |
|                       |       |                        |       |                         |            |       |   |   |   |   |
| Current:                   |       |                        |       |                         |            |       |   |   |   |   |
| Federal                    |       | $                           | 1,605,414  |                         | $               | (968,107   | ) |   | $ | — |   | $ | — |   |
| State                      |       | 249,778                     |       | 800                          |            |       | — |   | 7,100 |   |
| Total  current             |       | 1,855,192                   |       | (967,307                     | )               |       | — |   | 7,100 |   |
|                       |       |                        |       |                         |            |       |   |   |   |   |
| Deferred:                  |       |                        |       |                         |            |       |   |   |   |   |
| Federal                    |       | (946,930                    | )          | (508,731                     | )               |       | (1,946,381 | ) | 1,077,657 |   |
| State                      |       | (1,373,124                  | )          | 878,814                      |            |       | (133,957 | ) | 218,590 |   |
| Total  deferred            |       | (2,320,054                  | )          | 370,083                      |            |       | (2,080,338 | ) | 1,296,247 |   |
| Total  provision (benefit) |       | $                           | (464,862   | )                            | $               | (597,224   | ) |   | $ | (2,080,338 | ) | $ | 1,303,347 |   |

 

Actualincome tax provision (benefit) are different from amounts computed by applyinga statutory federal income tax rate to income or loss. The computed amount isreconciled to total income tax provision (benefit).

 
| ** **                                                            | ** ** | **Successor**                                                                | ** ** | ** **                                                                                               | **Predecessor** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|-----------------|------------|
| ** **                                                            | ** ** | **Fiscal 2006  For the Year  Ended  March 4, 2006** | ** ** | **Fiscal 2005  For the Period  July 1, 2004  Through  March 5, 2005** | ** **      | ** ** | **Fiscal 2005  For the Period  March 7, 2004  Through  June 30, 2004** | ** ** | **Fiscal 2004  For the Year  Ended  March 6, 2004** | ** ** |
| ** **                                                            | ** ** | **Amount**                                                                   | ** ** | **Percent of  Pretax Income**                                                                  | ** **      | **Amount** | ** ** | **Percent of  Pretax Income** | ** ** | ** ** | **Amount** | ** ** | **Percent of  Pretax Income** | ** ** | **Amount** | ** ** | **Percent of  Pretax Income** | ** ** |
|                                                                  |       |                                                                         |       |                                                                                                     |            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Computed (benefit) provision at statutory rate                        |       | $                                                                            | 593,894    |                                                                                                     | 35.0            | %          | $ | (1,724,314 | ) | 35.0 | % |   | $ | (2,157,087 | ) | 34.0 | % | $ | 930,628 |   | 34.0 | % |
| Tax effect resulting from:                                            |       |                                                                         |       |                                                                                                     |            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| State and local income taxes, net of federal tax  provision (benefit) |       | (51,645                                                                      | )          | (3.1                                                                                                     | )               | (195,884   | ) | 4.0 |   |   | 119,372 |   | (1.9 | ) | 214,720 |   | 7.8 |   |
| Change in estimated effective tax rate                                |       | (43,628                                                                      | )          | (2.6                                                                                                     | )               | 1,121,312  |   | (22.8 | ) |   | — |   | — |   | — |   | — |   |
| General business credit generated                                     |       | (10,702                                                                      | )          | (0.6                                                                                                     | )               | 76,143     |   | (1.6 | ) |   | — |   | — |   | — |   | — |   |
| Impact of Ohio law change on deferred taxes                           |       | (1,115,496                                                                   | )          | (65.7                                                                                                    | )               | —     |   | — |   |   | — |   | — |   | — |   | — |   |
| Income of Columbia Hill Aviation                                      |       | —                                                                       |       | —                                                                                                   |            | —     |   | — |   |   | — |   | — |   | (260,504 | ) | (9.5 | ) |
| Meals and entertainment                                               |       | —                                                                       |       | —                                                                                                   |            | —     |   | — |   |   | — |   | — |   | 359,165 |   | 13.1 |   |
| Permanent differences                                                 |       | 117,440                                                                      |       | 6.9                                                                                                      |            | —     |   | — |   |   | — |   | — |   | — |   | — |   |
| Other                                                                 |       | 45,275                                                                       |       | 2.7                                                                                                      |            | 125,519    |   | (2.5 | ) |   | (42,623 | ) | 0.7 |   | 59,338 |   | 2.2 |   |
| Income tax provision (benefit)                                        |       | $                                                                            | (464,862   | )                                                                                                        | (27.4           | )          | $ | (597,224 | ) | 12.1 | % |   | $ | (2,080,338 | ) | 32.8 | % | $ | 1,303,347 |   | 47.6 | % |

 

F-18

----

 

**8.****             ****INCOME TAXES, CONTINUED**

 

Theapproximate tax effect of each type of temporary difference and carryforwardthat gave rise to the Company’s deferred income tax assets and liabilities forsuccessor fiscal 2006 and predecessor fiscal 2005 and successor fiscal 2005combined is as follows:

 
| ** **                                  | ** ** | **March 5, 2005** | ** ** | **March 5, 2005** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                  | ** ** | **Assets**                  | ** ** | **Liabilities**             | ** ** | **Total** | ** ** | **Assets** | ** ** | **Liabilities** | ** ** | **Total** | ** ** |
|                                        |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Current:                                    |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Allowance for doubtful receivables          |       | $                           | 113,076    |                        | $          | — |   | $ | 113,076 |   | $ | 627,069 |   | $ | — |   | $ | 627,069 |   |
| Inventory                                   |       | 1,122,147                   |       | —                      |       | 1,122,147 |   | 882,044 |   | — |   | 882,044 |   |
| Accrued bonus                               |       | 1,830,368                   |       | —                      |       | 1,830,368 |   | 1,962,476 |   | — |   | 1,962,476 |   |
| Accrued promotional expense                 |       | 141,702                     |       | —                      |       | 141,702 |   | 1,391,447 |   | — |   | 1,391,447 |   |
| Accrued vacation pay                        |       | 548,152                     |       | —                      |       | 548,152 |   | 559,158 |   | — |   | 559,158 |   |
| Reserve for returns                         |       | 53,655                      |       | —                      |       | 53,655 |   | 44,626 |   | — |   | 44,626 |   |
| Reserves - other                            |       | 152,940                     |       | —                      |       | 152,940 |   | 257,961 |   | — |   | 257,961 |   |
| Prepaid expenses                            |       | —                      |       | (365,783                    | )          | (365,783 | ) | — |   | (332,785 | ) | (332,785 | ) |
| Accrued worker’s compensation          |       | 354,759                     |       | —                      |       | 354,759 |   | 332,932 |   | — |   | 332,932 |   |
| Other                                       |       | 24,996                      |       | —                      |       | 24,996 |   | 39,305 |   | — |   | 39,305 |   |
| Total current                               |       | 4,341,795                   |       | (365,783                    | )          | 3,976,012 |   | 6,097,018 |   | (332,785 | ) | 5,764,233 |   |
|                                        |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Non-current:                                |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Property, plant and equipment               |       | —                      |       | (8,804,363                  | )          | (8,804,363 | ) | — |   | (8,901,386 | ) | (8,901,386 | ) |
| Amortization of intangibles                 |       | —                      |       | (42,922,591                 | )          | (42,922,591 | ) | — |   | (50,989,159 | ) | (50,989,159 | ) |
| Non-qualified deferred compensation plan    |       | 316,308                     |       | —                      |       | 316,308 |   | 124,860 |   | — |   | 124,860 |   |
| General business credit carryforward        |       | 906,615                     |       | —                      |       | 906,615 |   | 1,010,883 |   | — |   | 1,010,883 |   |
| Alternative minimum tax credit carryforward |       | 206,421                     |       | —                      |       | 206,421 |   | 656,298 |   | — |   | 656,298 |   |
| Federal loss carryforward                   |       | 1,439,564                   |       | —                      |       | 1,439,564 |   | 4,409,688 |   | — |   | 4,409,688 |   |
| State loss carryforward                     |       | 103,718                     |       | —                      |       | 103,718 |   | 415,557 |   | — |   | 415,557 |   |
| Ohio investment tax credit                  |       | 1,101,698                   |       | —                      |       | 1,101,698 |   | 881,197 |   | — |   | 881,197 |   |
| Valuation allowance                         |       | (1,168,629                  | )          | —                      |       | (1,168,629 | ) | (537,472 | ) | — |   | (537,472 | ) |
| Total non-current                           |       | 2,905,695                   |       | (51,726,954                 | )          | (48,821,259 | ) | 6,961,011 |   | (59,890,545 | ) | (52,929,534 | ) |
| Total current and non-current               |       | $                           | 7,247,490  |                        | $          | (52,092,737 | ) | $ | (44,845,247 | ) | $ | 13,058,029 |   | $ | (60,223,330 | ) | $ | (47,165,301 | ) |

 

AtMarch 4, 2006, federal and state loss carryovers of approximately $4.1million and $6.1 million, respectively, are available to offset future federaland state taxable income. The carryover periods range from fifteen to twentyyears, which will result in expirations of varying amounts beginning in fiscal2021 and continuing through fiscal 2025. As a result of the Acquisition, aportion of the federal and state loss carryforwards are subject to limitationson utilization under Internal Revenue Code Section 382. As such,management has evaluated the Company’s ability to utilize those losses and hasdetermined that it is more likely than not that all of the loss carryforwardswill be utilized.

 

Alsoat March 4, 2006, the Company had federal and state tax creditcarryforwards of approximately $1.1 million each. The carryover periods rangefrom 7 years to indefinite carryover. As a result of the Acquisition, a portionof the federal and state credit carryforwards is subject to limitations onutilization under Internal Revenue Code Section 383. As such, managementhas evaluated the Company’s ability to utilize those credits and has determinedthat it is more likely than not that a portion of the federal and state creditswill not be utilized by the Company. A valuation allowance has been establishedaccordingly.

 

F-19

----

 

**9.****             ****LEASED PROPERTIES**

 

TheCompany leases certain autos, machinery, and equipment, and furniture andfixtures under leases classified as capital leases. The leases have originalterms ranging from one to six years. The assets covered under these leases havecarrying values of $900,082 and $1,452,471 at March 4, 2006 and March 5,2005, respectively.

 

Certainmachinery and equipment and real estate are under operating leases with termsthat are effective for varying periods until 2012. Certain of these leases haveremaining renewal clauses, exercisable at the option of the lessee.

 

AtMarch 4, 2006, minimum rental payments required under operating andcapital leases are summarized as follows:

 
| ** **                                                                                                      | ** ** | **Minimum Rental Payments** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                      | ** ** | **Operating**                         | ** ** | **Capital** | ** ** | ** ** | ** ** |
| **Fiscal Year**                                                                                            | ** ** | **Leases**                            | ** ** | **Leases** | ** ** | **Total** | ** ** |
| 2007                                                                                                            |       | $                                     | 3,644,904  |   | $ | 270,999 |   | $ | 3,915,903 |   |
| 2008                                                                                                            |       | 798,447                               |       | 220,670 |   | 1,019,117 |   |
| 2009                                                                                                            |       | 306,036                               |       | 189,337 |   | 495,373 |   |
| 2010                                                                                                            |       | 126,206                               |       | 189,209 |   | 315,415 |   |
| 2011                                                                                                            |       | 71,911                                |       | 110,372 |   | 182,283 |   |
| Later years                                                                                                     |       | 16,200                                |       | — |   | 16,200 |   |
| Total  minimum lease payments                                                                                   |       | $                                     | 4,963,704  |   | 980,587 |   | $ | 5,944,291 |   |
| Less amount  representing interest                                                                              |       |                                  |       | (111,928 | ) |   |   |
| Present  value of minimum lease payments under capital leases  (See Note 7, “Financing Arrangements”) |       |                                  |       | $ | 868,659 |   |   |   |

 

Rental expense is as follows:

 
| ** **  | ** ** | **Successor** | ** ** | ** ** | **Predecessor** | ** ** |
|-------------|------------|---------------|------------|------------|-----------------|------------|
| ** **  | ** ** | **Fiscal**    | ** ** | **Fiscal** | ** **      | ** ** | **Fiscal** | ** ** | **Fiscal** | ** ** |
| ** **  | ** ** | **2006**      | ** ** | **2005**   | ** **      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Real estate |       | $             | 137,155    |       | $               | 63,244     |   |   | $ | 222,055 |   | $ | 525,830 |   |
| Equipment   |       | 4,355,226     |       | 2,535,838  |            |       | 1,375,181 |   | 928,190 |   |
| Total       |       | $             | 4,492,381  |       | $               | 2,599,082  |   |   | $ | 1,597,236 |   | $ | 1,454,020 |   |

 

F-20

----

 

**10.  EMPLOYEE BENEFITS**

 

The Company maintains a 401(k) Retirement Plan for its employees, whichprovides that the Company will make a matching contribution of up to 50% of anemployee’s voluntary contribution, limited to the lesser of 5% of that employee’sannual compensation or $14,000 in successor fiscal 2006. TheCompany’s contributions were approximately $545,000, $518,000, and $494,000 in successor fiscal 2006, predecessorfiscal 2005 and successor fiscal 2005 combined, and predecessor fiscal 2004,respectively.

 

The Company provides employee health insurance benefits to employees. Medicalbenefits are provided primarily through self insurance group medical plans. TheCompany’s contributions included in operations were approximately $3,681,000, $3,847,000,and $4,140,000, for successor fiscal 2006, predecessor fiscal2005 and successor fiscal 2005 combined, and predecessor fiscal 2004,respectively.

 

Inconnection with the Acquisition, the management investors investedapproximately $4.9 million in a deferred compensation plan of Holding. Theinitial investment was recorded in the financial statements of Holding. Inaddition, this deferred compensation plan is funded through a rabbi trust thatowns preferred stock of Holding with a stated annual return of 10%, including anyunpaid dividends. The Company reflects the stated return and correspondingincrease in liquidation value as compensation expense in its consolidatedstatements of operations. The Company has recorded compensation expense ofapproximately $535,000 and $327,000 in successor fiscal 2006 and successorfiscal 2005, respectively, associated with the deferred compensation plan. Theaggregate liquidation value of the deferred compensation plan was approximately$5.7 million as of March 4, 2006.

 

F-21

----

 

**11.****      ****STOCK-BASED COMPENSATION**

 

The following table summarizes changes in options granted for successorfiscal 2006, successor fiscal 2005 and predecessor fiscal 2005:

 
| ** **                             | ** ** | **Shares** | ** ** | **Weighted Average Exercise  Price Per Share** | ** ** |
|----------------------------------------|------------|------------|------------|------------------------------------------------|------------|
|                                   |       |       |       |                                           |       |
| Adoption of Plan on June 30, 2004 |       | —     |       |                                           |       |
| Options  granted                       |       | 127,397    |       | $                                              | 10.00      |   |
| Balance at March 5, 2005          |       | 127,397    |       | $                                              | 10.00      |   |
|                                   |       |       |       |                                           |       |
| Options  granted                       |       | 3,960      |       | $                                              | 10.00      |   |
| Options  forfeited                     |       | 5,138      |       | $                                              | 10.00      |   |
| Balance at March 4, 2006          |       | 126,219    |       | $                                              | 10.00      |   |

 

The following table summarizes shares available for grant andexcercisable shares as of March 4, 2006 and March 5, 2005:

 
| ** **                 | ** ** | **March 4, 2006** | ** ** | **March 5, 2005** | ** ** |
|----------------------------|------------|------------------------|------------|------------------------|------------|
|                       |       |                   |       |                   |       |
| Shares available for grant |       | 37,559                 |       | 36,381                 |       |
|                       |       |                   |       |                   |       |
| Shares exercisable         |       | 16,064                 |       | 6,313                  |       |

 

**12. DISCLOSURESABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS**

 

The Company’s nonderivative financialinstruments consist primarily of cash and cash equivalents, trade receivables,trade payables and long-term debt. Theestimated fair values of the financial instruments have been determined by theCompany using available 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 herein arenot necessarily 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 fairvalue amounts.

 

At March 4,2006 excluding long-term debt, the book values of each of the nonderivativefinancial instruments recorded in the Company’s balance sheet are consideredrepresentative of fair value due to variable interest rates, short terms tomaturity and/or short length of time outstanding.

 

The fair value of the Company’s New Notes isestimated based on quoted market prices and interest rates currently availablefor issuance of debt with similar terms and maturities. As of March 4,2006 and March 5, 2005, the fair values of the New Notes were approximately$134,869,000 and $131,875,000, respectively. The carrying value of all otherlong-term debt is considered representative of its fair value as of March 4,2006 and March 5, 2005.

 

F-22

----

 

**13.****          ****BUSINESSSEGMENT**

 

During successor fiscal 2006, predecessor fiscal 2005and successor fiscal 2005 combined, and predecessor fiscal 2004, the Companyoperated solely in the food processing segment. Note that as a result of theAcquisition described above, the results for predecessor fiscal 2005 andsuccessor fiscal 2005 are combined in the table below in order to provide amore meaningful period-to-period comparison. Sales by major product line are asfollows:

 
| ** **                     | ** ** | **Net Revenues by Source** | ** ** |
|--------------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **Successor  Fiscal 2006** | ** ** | **Predecessor Fiscal 2005  And  Successor Fiscal 2005  Combined** | ** ** | **Predecessor  Fiscal 2004** | ** ** |
| ** **                     | ** ** | ** **                 | ** ** | **(in millions)** | ** ** | ** ** | ** ** |
| Food processing                |       |                       |       |   |   |   |   |
| Fully-cooked  protein products |       | $                          | 254.8      |   | $ | 255.3 |   | $ | 214.7 |   |
| Microwaveable sandwiches       |       | 168.4                      |       | 147.3 |   | 136.4 |   |
| Bakery and  other products     |       | 8.4                        |       | 7.8 |   | 7.4 |   |
| Total food processing          |       | $                          | 431.6      |   | $ | 410.4 |   | $ | 358.5 |   |

 

Substantially all revenues and long-lived assets arederived from and reside in the United States.

 

**14.****          ****COMMITMENTS,CONTINGENCIES, AND CONTRACTUAL OBLIGATIONS**

 

The Company provided a letter of credit in theamount of $5.5 million, $4.5 million and $3.5 million in successor fiscal 2006,predecessor fiscal 2005 and successor fiscal 2005 combined, and predecessorfiscal 2004, respectively, to its insurance carrier for the underwriting ofcertain performance bonds. The current letter of credit expires in fiscal 2007.The Company also provides secured letters of credit to its insurance carriersfor outstanding and potential workers’ compensation and general liabilityclaims. Letters of credit for these claims totaled $110,000 in both successorfiscal 2006 and in predecessor fiscal 2005 and successor fiscal 2005 combined,and $75,000 in predecessor fiscal 2004. In addition, the Company providessecured letters of credit to a limited number of suppliers. The Company had noletters of credit for suppliers in successor fiscal 2006 and predecessor fiscal2005 and successor fiscal 2005 combined. Letters of credit for supplierstotaled $250,000 in predecessor fiscal 2004.

 

TheCompany is involved in various legal proceedings. Management believes, based onthe advice of legal counsel, that the outcome of such proceedings will not havea materially adverse effect on the Company’s financial position or futureresults of operations and cash flows. See Item 3 — “Legal Proceedings,” forfurther discussion of proceedings as of March 4, 2006.

 

The following tables summarize our contractualobligations and commitments as of March 4, 2006.

 
| ** **                                | ** ** | **Commitments by Fiscal Year** | ** ** |
|-------------------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **Total**                      | ** ** | **Less than 1  Year** | ** ** | **1 – 3 Years** | ** ** | **3-5  Years** | ** ** | **More than  5 Years** | ** ** |
|                                      |       |                           |       |   |   |   |   |   |   |   |   |
| Letters of credit                         |       | $                              | 5,610,000  |   | $ | 5,610,000 |   | $ | — |   | $ | — |   | $ | — |   |
| Purchase commitments for capital projects |       | 1,941,735                      |       | 1,941,735 |   | — |   | — |   | — |   |
| Purchase  commitments for raw materials   |       | 852,576                        |       | 852,576 |   | — |   | — |   | — |   |
| Purchase commitments for natural gas      |       | 3,130,722                      |       | 3,130,722 |   | — |   | — |   | — |   |
| Other miscellaneous services              |       | 90,000                         |       | 90,000 |   | — |   | — |   | — |   |
| Total                                     |       | $                              | 11,625,033 |   | $ | 11,625,033 |   | $ | — |   | $ | — |   | $ | — |   |

 

F-23

----

 
| ** **                       | ** ** | **Contractual Obligations by  Fiscal Year** | ** **  |
|----------------------------------|------------|---------------------------------------------|-------------|
| ** **                       | ** ** | **Total**                                   | ** **  | **Less than 1 Year** | ** ** | **1 – 3  Years** | ** ** | **3-5  Years** | ** ** | **More than  5 Years** | ** ** |
|                             |       |                                        |        |   |   |   |   |   |   |   |   |
| Long-term debt                   |       | $                                           | 244,125,000 |   | $ | — |   | $ | — |   | $ | 119,125,000 |   | $ | 125,000,000 |   |
| Capital lease obligations*       |       | 868,659                                     |        | 229,172 |   | 357,870 |   | 281,617 |   | — |   |
| Operating lease obligations      |       | 4,963,704                                   |        | 3,644,904 |   | 1,104,483 |   | 198,117 |   | 16,200 |   |
| Interest on fixed-rate debt**    |       | 68,842,870                                  |        | 12,719,106 |   | 25,246,422 |   | 24,705,467 |   | 6,171,875 |   |
| Interest on variable-rate debt** |       | 31,322,662                                  |        | 8,949,332 |   | 17,898,664 |   | 4,474,666 |   | — |   |
| Total                            |       | $                                           | 350,122,895 |   | $ | 25,542,514 |   | $ | 44,607,439 |   | $ | 148,784,867 |   | $ | 131,188,075 |   |

 

----

*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 March 4, 2006 assuming that theoutstanding balances remain unchanged until maturity.

 

In conjunction with the Acquisition, the Companyrecorded a net long-term liability to the selling shareholders totaling $10.3million for the estimated obligations under the tax sharing and indemnificationagreement. As of March 4, 2006, based on the federal income tax returnfiled November 15, 2005 (for the tax year ended February 26, 2005),the Company has utilized $8.6 million of the Deal Related NOLs and $1.7 millionin other deal related expenses. During the fiscal year ended March 4, 2006,the Company submitted payments based on the tax benefits received, net of othertax assessments due to the Company from the selling shareholders, to an escrowaccount for a total of $3.6 million and directly to the selling shareholdersfor a total of $1.4 million. As of March 4, 2006, the Company has a netlong-term liability to the selling shareholders totaling $5.3 million. Thisamount is excluded from the table above due to the uncertainty of when suchutilization of the Deal Related NOLs will occur.

 

F-24

----

 

**15.  SUPPLEMENTALCASH FLOW INFORMATION—Cash Paid and Non-Cash Transactions**

 

Cashpaid for interest, income taxes refunded, and non-cash transactions consistingof notes issued for assets acquired, capital lease additions, and certain taxbenefits utilized by the Parent accounted for as a distribution to the Parentare as follows:

 
| ** **                                                       | ** ** | **Successor**        | ** ** | ** **           | **Predecessor** | ** **  |
|------------------------------------------------------------------|------------|----------------------|------------|----------------------|-----------------|-------------|
| ** **                                                       | ** ** | **Fiscal 2006** | ** ** | **Fiscal 2005** | ** **      | ** **  | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** |
|                                                             |       |                 |       |                 |            |        |   |   |   |   |
| Cash paid  during the period for:                                |       |                 |       |                 |            |        |   |   |   |   |
| Interest                                                         |       | $                    | 20,558,245 |                 | $               | 13,440,430  |   |   | $ | 7,915,332 |   | $ | 14,857,594 |   |
| Income taxes  paid (refunds received)                            |       | $                    | 599,501    |                 | $               | 1,939,806   |   |   | $ | — |   | $ | (197,977 | ) |
|                                                             |       |                 |       |                 |            |        |   |   |   |   |
| Non-cash  transactions:                                          |       |                 |       |                 |            |        |   |   |   |   |
| Restructuring  transactions                                      |       |                 |       |                 |            |        |   |   |   |   |
| Assumption  of PF Management debt                                |       | $                    | —     |                 | $               | —      |   |   | $ | 14,274,050 |   | $ | — |   |
| Assumption  of deferred tax liability for aircraft               |       | $                    | —     |                 | $               | —      |   |   | $ | 1,576,000 |   | $ | — |   |
| Cancellation  of note receivable                                 |       | $                    | —     |                 | $               | —      |   |   | $ | 993,247 |   | $ | — |   |
| Cancellation  of accrual to PF Purchasing                        |       | $                    | —     |                 | $               | —      |   |   | $ | 3,479,007 |   | $ | — |   |
| Cancellation  of accrual to PF Distribution                      |       | $                    | —     |                 | $               | —      |   |   | $ | 535,251 |   | $ | — |   |
| Other                                                            |       | $                    | —     |                 | $               | —      |   |   | $ | 174,874 |   | $ | — |   |
|                                                             |       |                 |       |                 |            |        |   |   |   |   |
| Acquisition  transactions:                                       |       |                 |       |                 |            |        |   |   |   |   |
| Elimination  of Predecessor Pierre capital and retained earnings |       | $                    | —     |                 | $               | 4,883,415   |   |   | $ | — |   | $ | — |   |
| Cancellation  of receivable from selling shareholder             |       | $                    | —     |                 | $               | 5,000,000   |   |   | $ | — |   | $ | — |   |
| Distribution  of property, plant, and equipment                  |       | $                    | —     |                 | $               | 8,476,080   |   |   | $ | — |   | $ | — |   |
| Distribution  of other current assets                            |       | $                    | —     |                 | $               | 9,255       |   |   | $ | — |   | $ | — |   |
| Equity from  parent                                              |       | $                    | —     |                 | $               | 250,087,097 |   |   | $ | — |   | $ | — |   |
| Tax sharing  liability to selling shareholders                   |       | $                    | —     |                 | $               | 10,317,601  |   |   | $ | — |   | $ | — |   |
| Valuation of  goodwill and other intangibles                     |       | $                    | —     |                 | $               | 323,626,414 |   |   | $ | — |   | $ | — |   |
| Deferred tax  liability                                          |       | $                    | —     |                 | $               | 54,464,900  |   |   | $ | — |   | $ | — |   |
| Adjustment  of inventory to fair value                           |       | $                    | —     |                 | $               | 2,020,948   |   |   | $ | — |   | $ | — |   |
| Adjustment  of property, plant, and equipment to fair value      |       | $                    | —     |                 | $               | 4,438,984   |   |   | $ | — |   | $ | — |   |
|                                                             |       |                 |       |                 |            |        |   |   |   |   |
| Other  transactions:                                             |       |                 |       |                 |            |        |   |   |   |   |
| Distribution  to parent—tax benefit                         |       | $                    | —     |                 | $               | —      |   |   | $ | — |   | $ | 3,578,167 |   |
| Capital  lease additions                                         |       | $                    | —     |                 | $               | 247,536     |   |   | $ | 1,013,300 |   | $ | 273,208 |   |

 

F-25

----

 

**16. TRANSACTIONSWITH RELATED PARTIES**

 

**Successor Pierre**

 

In conjunctionwith or subsequent to the Acquisition, the following relationships and relatedtransactions existed:

 

**•**                  Inconjunction with the Acquisition, John Grigg, one of the Company’s formerdirectors, was paid a fee at the closing, pursuant to his letter agreement withthe Company dated as of January 29, 2004, for professional servicesperformed on behalf of the Company and PFMI. The fee of approximately $780,952was paid from the proceeds to the selling shareholders and expensed duringpredecessor fiscal 2005.

 

**•**                  MadisonDearborn Partners IV, L.P. received a fee of $5.0 million at the closing of theAcquisition, plus out-of-pocket expenses incurred in connection with theAcquisition. MDP may be paid additional fees from time to time in thefuture for providing management, consulting or advisory services and will bereimbursed for all future expenses incurred in connection with its investmentin Holding.

 

•                  In connection with the Acquisition, Mr. Woodhamsand Mr. Naylor, invested approximately $4.9 million in a deferredcompensation plan. This deferred compensation plan is funded through a rabbitrust that owns preferred stock of Holding with an aggregate liquidation valueof approximately $5.7 million as of March 4, 2006.

 

**•**                  Inconjunction with the Acquisition, the Company and the selling shareholdersentered into a tax sharing and indemnification agreement which contains certainrepresentations and warranties of the selling shareholders with respect totaxes. The agreement provides that any net operating loss carryforward (“NOL”)with respect to periods before the Acquisition, and attributable to expensesrelating to the Acquisition, will be for the benefit of the sellingshareholders. Accordingly, the Company will pay to the selling shareholders theamount of any tax benefit attributable to such NOL, except that the first $4million of such tax benefits shall be paid into an escrow account that willsecure the selling shareholders indemnification obligations under the taxsharing agreement. The Company has made payments to the selling shareholderstotaling $5.0 million, of which $3.6 million was paid into this escrow accountduring successor fiscal 2006. The Company has recorded a net long-termliability to the former shareholders totaling $5.3 million and $10.3 million asof March 4, 2006 and March 5, 2005, respectively for the estimatedobligations under the tax sharing agreement.

 

•                  NorbertJ. Woodhams, one of the Company’s Vice Presidents, is the son of Norbert E. Woodhams.Norbert E. Woodhams is the Company’s President, Chief Executive Officer,Director and Chairman of the Board. In successor fiscal 2006, Norbert J.Woodhams received a base salary of one hundred and one thousand dollars andearned a bonus of thirty-three thousand and three hundred dollars under theCompany’s bonus plan. In predecessor fiscal 2005 and successor fiscal 2005combined, Norbert J. Woodhams received a base salary of ninety-two thousand andseven hundred dollars and earned a bonus of forty-seven thousand and eighthundred dollars under the Company’s bonus plan. The base salary and bonusearned by Norbert J. Woodhams is consistent with the earnings of other Companyemployees with similar responsibilities.

 

**Predecessor Pierre**

 

As described in Note 1 to the Consolidated FinancialStatements, on March 8, 2004 the Company and the Trustee under the Company’sIndenture executed a Fourth Supplemental Indenture and, pursuant to the termsof the Fourth Supplemental Indenture, the Company terminated substantially allof its related party transactions. The following related party transactionswere specifically permitted under the terms of the Fourth SupplementalIndenture:

 

•                  Columbia Hill Land Company, LLC,owned 50% by each of Messrs. Richardson and Clark, leases office space tothe Company in Hickory, North Carolina, pursuant to a ten-year lease thatcommenced in September 1998. Rents paid under the lease were approximately$58,000 and $116,000 in predecessor fiscal 2005 and predecessor fiscal 2004,respectively.

 

•                  On August 13, 2003, the Companyobtained a three year variable rate $40 million revolving credit facility fromFleet Capital Corporation. Messrs. Richardson and Clark providedguarantees of value and validity of the collateral securing this creditfacility; they did not, however, guarantee payment of the facility, nor didthey receive guarantee fees.

 

F-26

----

 

•                  The Company had mutual leasingagreements with certain related individuals and with certain companies in whichthe selling shareholders had substantial ownership interests. Total paymentsunder such leasing agreements were approximately $260,000 in predecessor fiscal2004.

 

•                  On March 8, 2004 the Companytook title to an aircraft that was transferred from Columbia Hill Aviation, LLC(“CHA”), owned 100% by PFMI, subject to existing purchase money debt. Theaircraft was originally leased by the Company from CHA beginning in the fourthquarter of predecessor fiscal 2002. Effective March 1, 2002, the originallease was cancelled and replaced with a non-exclusive lease agreement. Pursuantto this new lease, the Company was obligated to make 16 quarterly leasepayments of $471,500 each for the right to use the aircraft for up to 115flight hours per quarter, based on availability. Under this lease agreement,CHA was responsible for all expenses incurred in the operation of the use ofthe aircraft, except that the Company provided its own flight crew. Duringpredecessor fiscal 2004, the Company paid CHA approximately $2.6 million inlease payments. CHA was not a subsidiary of the Company; however, the Companyconsidered CHA a non-independent special purpose leasing entity. Accordingly,CHA’s financial condition, results of operations and cash flows have beenincluded in the Company’s Consolidated Financial Statements included herein. Underthe terms of the operating lease with CHA, and the financing agreements betweenCHA and its creditor, the Company did not maintain the legal rights ofownership to the aircraft, nor did CHA’s creditor maintain any legal recourseto the Company. Subsequently, as a result of the Acquisition, the aircraft wasdistributed to a former shareholder.

 

Any related party transactions described below thatwere in effect at March 6, 2004 were subsequently terminated as of March 8,2004 pursuant to the terms of the Fourth Supplemental Indenture. As a result ofthe termination of these related party transactions, subsequent to March 8,2004, the Company performs the purchasing and distribution services internally.Other related party services are outsourced as necessary at comparable cost.

 

•                  ColumbiaHill Management, Inc. (“Columbia Hill”), owned 50% by each of Messrs. Richardsonand Clark, provided accounting, tax and administrative services to Pierre, aswell as professional services for the management of special projects. Fees paidfor these services were approximately $203,000 in predecessor fiscal 2004.

 

•                  Duringpredecessor fiscal 2004, PFMI owed the Company as much as $993,247 pursuant toa promissory note payable on demand and bearing interest at the prime rate. Priorto the Acquisition, PFMI was owned in part by Messrs. Richardson andClark, who have unconditionally guaranteed repayment of the note. As of March 8,2004, this note was forgiven in connection with the Fourth SupplementalIndenture.

 

•                  Effective February 21, 2003, Messrs. Richardsonand Clark sold their net assets in Compass Outfitters, LLC, a company thatprovided team-building opportunities for customers and employees of theCompany, to the Company for a total of $270,983. In exchange for the netassets, the Company issued notes in the amount of $135,491 to each of Messrs. Richardsonand Clark. The notes were five-year notes, bearing interest at 6% per annum,with interest and principal due at maturity. As of March 8, 2004, inconnection with the Fourth Supplemental Indenture, these notes were cancelled.

 

•                  PF Purchasing, LLC (“PFP”), previously owned 100% byPFMI, served as the exclusive purchasing agent for the Company, pursuant to athree-year agreement that commenced September 3, 2001. Under theagreement, PFP made an incentive payment of $100,000 per quarter to the Companyin consideration of the opportunity to act as exclusive purchasing agent, andin exchange was entitled to receive all rebates or discounts receivable byPierre from suppliers and vendors for orders negotiated and placed by PFP. Inpredecessor fiscal 2004, net fees paid to PFP were approximately $2,122,000.

 

•                  Effective March 3, 2002, the Company enteredinto a logistics agreement with PF Distribution, LLC (“PFD”), owned 100% byPFMI. Under the agreement, PFD served as the exclusive logistics agent for theCompany, and provided all warehousing, fulfillment and transportation servicesto the Company. The cost of PFD’s services was based on flat rates per pound,which were calculated based on weight and volume characteristics of products,inventory pounds maintained and inventory pounds shipped. Rates were determinedbased on historical costs and industry standards. In predecessor fiscal 2004,distribution expense recorded in selling, general and administrative expensewas approximately $31,126,000 of which approximately $30,999,000 had been paidto PFD as of March 6, 2004.

 

F-27

----

 

•                  Atlantic Cold Storage of Mocksville, LLC (“ACS”),owned one-third each by Messrs. Richardson and Clark, planned to constructand finance a public cold storage warehouse which would lease space to theCompany as well as to others. The proposed agreement with the Company was for10 years and a minimum of 4,000 pallet positions to be leased as of the firstdate the facility became operational. During predecessor fiscal 2001, theCompany paid $250,000 to ACS for specialized construction costs. As of March 8,2004, in connection with the Fourth Supplemental Indenture, these costs werewritten-off.

 

•                  The following transactions were entered into on March 8,2004 as permitted by the Fourth Supplemental Indenture:

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

 

The $339,639 charge represents the removal ofmembers’ equity of CHA.

 

All material transactions with affiliates ofthe Company were reviewed by the entire Board of Directors, where they wereapproved by a majority of the independent directors. The directors obtained andrelied upon investment banking “fairness” opinions when considering thesetransactions to the extent required by the indenture governing the Old Notes.

 

On June 30, 2004, inconjunction with the Acquisition, all previously existing related partytransactions were terminated as described in Note 1, “Basis of Presentation andAcquisition,” to the Consolidated Financial Statements.

 

**17. LEGALPROCEEDINGS**

 

On August 19, 2003, as a result of complaintsfrom neighboring businesses, the Company received a Notice of Violation (“NOV”)from the Hamilton County Department of Environmental Services (“HCDOES”)relating to operations at its Cincinnati, Ohio plant facility. The NOV allegedthat the Company violated its permits by exceeding the visual emission (“VE”)specification of 20% opacity. The Company received additional NOV’s for opacityviolations on October 22, 2003 and November 26, 2003, all of whichwere the result of complaints from neighboring businesses.

 

Subsequent to the original NOV received in August of2003, the Company began investigating and testing various emission reductiontechnologies. The Company found a solution that enabled operations to continuewith less smoke output and completed the upgrade during early 2004. HCDOESinspected the upgrade in April of 2004 and determined that the Company hadreturned to compliance with the opacity limit. In connection with the upgrade,the Company was required to submit a revised Permit to Install (“PTI”)application.

 

In August, 2005, pursuant to its regulatory authority,HCDOES requested a Method 5 Stack Test be performed to assess the Company’scompliance with its emissions limits. The Company contacted HCDOES, requestingthe scheduled stack emission compliance test be postponed while the Company’sindependent consulting firm conducted an emissions audit program consisting ofa series of engineering stack tests that were performed at both controlledand uncontrolled emission test points in order to evaluate the magnitude of theemissions based on current production data and to estimate new emissionsfactors by product line. HCDOES agreed to this approach and granted permissionto delay the standard Method 5 Stack Test originally requested while theCompany conducted its emissions audit program.

 

F-28

----

 

The Company contracted with an independentenvironmental consulting firm to perform the audit and evaluation. As part ofthe overall audit, this firm performed preliminary testing in early September 2005,which indicated that violations of emission levels may have occurred, andretested September 28, 2005 through September 30, 2005. The firmconducted additional tests during October 27, 2005 through November 8,2005. The Company received the results of the audit in January, 2006. Theresults allowed the Company to evaluate the facility’s current and historicalpotential and actual emissions. The testing revealed that assumptions made bythe Company’s former outside engineering firm concerning particulate emissionsand throughput were incorrect. This miscalculation caused the Company to receivepermit limits that are lower than actual emissions for certain cook lines. TheCompany met with the local air permitting authority in February, 2006, todiscuss the results of the emissions audit program.

 

Based on the results of the audit program, theCompany received a NOV from HCDOES for particulate emissions in excess of theallowable limits of certain of its air permits and for submitting certainpermit applications with incorrect information. The Company is in the processof assessing control technology options and vendors for the installation of newcontrol technology to substantially reduce particulate emissions. This process,including the installation of additional control technology, will likely lastthrough the remainder of calendar year 2006 and could take until early 2007 tocomplete.

 

The Company is cooperating with theauthorities in all aspects of these matters. In addition, the Company consultedwith its outside legal counsel to assist them in resolving these matters andestimate the potential fines and penalties that may be assessed in thefuture.

 

The Company continuously evaluates contingencies basedupon the best available information. The Company believes it has recordedappropriate liabilities to the extent necessary in cases where the outcome ofsuch liabilities is considered probable and reasonably estimable, and that itsassessment of contingencies is reasonable. To the extent that resolution ofcontingencies results in amounts that vary from management’s estimates, futureearnings will be charged or credited accordingly.

 

As part of its ongoing operations in the foodmanufacturing industry, the Company is subject to extensive federal, state, andlocal regulations and its food processing facilities and food products aresubject to frequent inspection, audits and inquiries by the United StatesDepartment of Agriculture, the Food and Drug Administration and various localhealth and agricultural agencies and by federal, state and local agenciesresponsible for the enforcement of environmental laws and regulations. TheCompany is also involved in various legal actions arising in the normal courseof business. These matters are continuously being evaluated and, in some cases,are being contested by the Company and the outcome is not predictable.Consequently, an estimate of the possible loss or range of loss associated withthese actions cannot be made. Although occasional adverse outcomes (orsettlements) may occur and could possibly have an adverse effect on theresults of operations in any one accounting period, the Company believes thatthe final disposition of such matters will not have a material adverse affecton the Company’s consolidated financial position.

 

F-29

----

 

**SELECTEDQUARTERLY FINANCIAL DATA (UNAUDITED)**

 
| ** **                                              | ** ** | **Successor  Quarters Ended**                        | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                              | ** ** | **June 6, 2005**                                | ** ** | **September 3, 2005** | ** ** | **December 3, 2005** | ** ** | **March 4, 2006** | ** ** |
| ** **                                              | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| ** **                                              | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues, net                                           |       | $                                                    | 107,735    |   | $ | 99,180 |   | $ | 115,453 |   | $ | 109,265 |   |
| Costs and  expenses                                     |       | $                                                    | 103,280    |   | $ | 97,542 |   | $ | 105,665 |   | $ | 101,270 |   |
| Operating income                                        |       | $                                                    | 4,455      |   | $ | 1,638 |   | $ | 9,788 |   | $ | 7,995 |   |
| Net income (loss)                                       |       | $                                                    | (612       | ) | $ | (1,555 | ) | $ | 2,550 |   | $ | 1,779 |   |
| Net income/(loss) per common share - basic and  diluted |       | $                                                    | (6.12      | ) | $ | (15.55 | ) | $ | 25.50 |   | $ | 17.79 |   |

 
| ** **                                              | ** ** | **Predecessor**                                                                    | ** ** | ** **                   | **Successor** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|------------------------------|---------------|------------|
| ** **                                              | ** ** | ** **                                                                         | ** ** | **For the Period** | ** **    | ** ** | **For the Period** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | **Quarter**                                                                        | ** ** | **June 6, 2004**   | ** **    | ** ** | **July 1, 2004** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| ** **                                              | ** ** | **Ended**                                                                          | ** ** | **Through**                  | ** **    | ** ** | **Through** | ** ** | **Ended** | ** ** | **Ended** | ** ** |
| ** **                                              | ** ** | **June 5, 2004**                                                         | ** ** | **June 30, 2004**  | ** **    | ** ** | **September 4, 2004** | ** ** | **December 4, 2004** | ** ** | **March 5, 2005** | ** ** |
| ** **                                              | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| ** **                                              | ** ** | ** **                                                                         | ** ** | ** **                   | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues, net                                           |       | $                                                                                  | 92,013     |                         | $             | 23,536     |   |   | $ | 75,439 |   | $ | 111,969 |   | $ | 107,459 |   |
| Costs and expenses                                      |       | $                                                                                  | 87,410     |                         | $             | 27,948     |   |   | $ | 74,961 |   | $ | 104,134 |   | $ | 101,230 |   |
| Operating income                                        |       | $                                                                                  | 4,604      |                         | $             | (4,412     | ) |   | $ | 478 |   | $ | 7,835 |   | $ | 6,229 |   |
| Net income (loss)                                       |       | $                                                                                  | (121       | )                            | $             | (4,143     | ) |   | $ | (5,720 | ) | $ | 1,777 |   | $ | (386 | ) |
| Net income/(loss) per common share - basic and  diluted |       | $                                                                                  | (1.21      | )                            | $             | (41.43     | ) |   | $ | (57.20 | ) | $ | 17.77 |   | $ | (3.86 | ) |

 

F-30

----

 

REPORTOF MANAGEMENT

 

The management of Pierre Foods, Inc. isresponsible for the preparation and integrity of the consolidated financialstatements of the Company. The financial statements and notes have beenprepared by the Company in accordance with accounting principles generallyaccepted in the United States of America and, in the judgment of management,present fairly and consistently the Company’s financial position and results ofoperations and cash flows. The financial information contained elsewhere inthis annual report is consistent with that in the financial statements. Thefinancial statements and other financial information in this annual reportinclude amounts that are based on management’s best estimates and judgments.

 

The Company maintains a system of internalaccounting controls to provide reasonable assurance that assets are safeguardedand that transactions are executed in accordance with management’sauthorization and recorded properly to permit the preparation of financialstatements in accordance with accounting principles generally accepted in theUnited States of America.

 

The Company’s financial statements have beenaudited by Deloitte & Touche LLP. Management has made available to themall of the Company’s financial records and related data, and believes that allrepresentations made to Deloitte & Touche LLP during this audit werevalid and appropriate.

 

 
| /s/ Norbert E. Woodhams               |   | /s/ Joseph W. Meyers    |   |
|---------------------------------------|--------|-------------------------|--------|
| Norbert E. Woodhams                   |   | Joseph W. Meyers        |   |
| President and Chief Executive Officer |   | Vice President, Finance |   |

 

F-31

----