##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-K ANNUAL REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended March 6, 2004
 Commission File Number0-7277
 PIERRE FOODS, INC. (Exact name of registrant as specified in its charter)
 North Carolina(State or other jurisdiction of
incorporation or organization)
    
    56-0945643(I.R.S. Employer Identification No.)
 9990 Princeton Road, Cincinnati, Ohio 45246
Telephone: (513) 874-8741
(Address of principal executive offices) Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934: None Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such report(s)), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No o Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein and will not be contained, to
the best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes o No x The aggregate market value of the voting and non-voting common equity held
by non-affiliates as of the last business day of the registrants most recently
completed second quarter (August 30, 2003) was $0.00. The number of shares of Pierre Foods, Inc. Common Stock outstanding as of
April 30, 2004 was 100,000. The aggregate market value of Pierre Foods, Inc.
Common Stock held by non-affiliates of Pierre Foods, Inc. as of April 30, 2004
was $0.00.




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TABLE OF CONTENTS  
 Item Number
    
    
    
    PagePART IItem  1.
    
    Description of Business
    
    
    1General Development of Business
    
    
    1Narrative Description of Business
    
    
    1Item  2.
    
    Properties
    
    
    3Item  3.
    
    Legal Proceedings
    
    
    4Item  4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    4PART IIItem  5.
    
    Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    5Item  6.
    
    Selected Financial Data
    
    
    6Item  7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    7Results of Operations
    
    
    7Critical Accounting Policies and Estimates
    
    
    9Liquidity and Capital Resources
    
    
    11Commercial Commitments, Contingencies and Contractual Obligations
    
    
    14Inflation
    
    
    15Item  7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item  8.
    
    Financial Statements and Supplementary Data
    
    
    18Item  9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    18Item 9A.
    
    Controls and Procedures
    
    
    18PART IIIItem  10.
    
    Directors and Executive Officers of the Registrant
    
    
    19Item  11.
    
    Executive Compensation
    
    
    20Item  12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    22Item  13.
    
    Certain Relationships and Related Transactions
    
    
    23Item  14.
    
    Principal Accountant Fees and Services
    
    
    24PART IVItem  15.
    
    Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    25OTHER INFORMATIONSignatures
    
    
    26Index to Exhibits
    
    
    27
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PART I 
 Item 1.Description of Business 
 General Development of Business Pierre Foods, Inc. (the Company or Pierre Foods) is a producer and
marketer of fully-cooked branded and private label protein and bakery products
and microwaveable sandwiches for the foodservice market. The Companys
predecessor was founded as a North Carolina corporation in 1966 to own and
operate restaurants. The Companys food processing business was originally
developed to support its restaurants, but grew independently to become its
principal business. In recognition of this fact, in May 1998, the Company, then
known as WSMP, Inc., changed its name to Fresh Foods, Inc. In June 1998,
the Company consummated the purchase of substantially all of the business in
Cincinnati, Ohio, and a portion of the business in Caryville, Tennessee
(collectively, Pierre Cincinnati), conducted by the Pierre Foods Division of
Hudson Foods, Inc. (Hudson), a subsidiary of Tyson Foods, Inc. (Tyson).
Pierre Cincinnati was a value-added food processor selling principally to the
foodservice and packaged foods markets. In September 1998, the Company
implemented a tax-exempt reorganization of its corporate structure. The
reorganization established Fresh Foods, Inc. as a holding company, consolidated
32 subsidiaries into 12 subsidiaries and separated the Companys food
processing and restaurant businesses. In July 1999, the Company sold its ham
curing business, and in October 1999, the Company disposed of its restaurant
segment. The Company now operates solely in the food processing business, its
sole segment. In December 1999, the Company implemented another tax-exempt
reorganization of its corporate structure to further streamline its operations
into one subsidiary. In July 2000, the Company, then known as Fresh Foods,
Inc., changed its name to Pierre Foods, Inc. In this document, unless the context otherwise requires, the term
Company refers to Pierre Foods, Inc. and its current and former subsidiaries.
The Companys fiscal year ended March 2, 2002 is referred to as fiscal 2002,
its fiscal year ended March 1, 2003 is referred to as fiscal 2003, and its
fiscal year ended March 6, 2004 is referred to as fiscal 2004. 
 Narrative Description of the Business The Company produces a wide variety of fully-cooked beef, chicken and pork
products, hand-held convenience sandwiches and value-added bakery products.
The Companys product line consists of over 800 stock keeping units (SKUs).
At its Cincinnati facility, the Company produces specialty beef, chicken and
pork products that are typically custom-developed to meet specific customer
requirements. The Company also offers proprietary product development, special
ingredients and recipes as well as custom packaging and marketing programs to
its customers. The Companys bakery and sandwich assembly plant is located at
the Companys Claremont, North Carolina facility. The Companys primary
markets and distribution channels include national restaurant chains, primary
and secondary schools, vending, convenience stores, warehouse clubs and other
niche foodservice and packaged foods markets. The following table sets forth the Companys net revenue and percent of
revenue contributed during the past three fiscal years by its various product
channels and classes: Revenues by SourceFiscal 2004
    
    Fiscal 2003
    
    Fiscal 2002Net Revenues
    
    %
    
    Net Revenues
    
    %
    
    Net Revenues
    
    %(in millions)
    
    
    
    
    
    (in millions)
    
    
    
    
    
    (in millions)Food Processing:Fully-Cooked Protein Products
    
    $
    214.7
    
    
    
    59.9
    
    
    $
    149.3
    
    
    
    54.0
    
    
    $
    139.7
    
    
    
    57.4Microwaveable Sandwiches
    
    
    136.4
    
    
    
    38.0
    
    
    
    119.1
    
    
    
    43.1
    
    
    
    95.8
    
    
    
    39.4Bakery and Other Products
    
    
    7.4
    
    
    
    2.1
    
    
    
    7.9
    
    
    
    2.9
    
    
    
    7.8
    
    
    
    3.2Total Food Processing
    
    $
    358.5
    
    
    
    100.0
    
    
    $
    276.3
    
    
    
    100.0
    
    
    $
    243.3
    
    
    
    100.0
 1




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Significant Customer Sales to
Carl Karcher Enterprises Inc (CKE) accounted for approximately
24% and 11%, of our net sales in fiscal 2004 and 2003, respectively.
No other customer accounted for 10% or more of net sales during
fiscal years 2004, 2003 and 2002. Sales and Marketing The Companys team of sales and marketing professionals has significant
experience in the Companys markets for fully-cooked protein and bakery
products and microwaveable sandwiches. The sales, marketing and new product
development functions are organized predominantly by distribution channel. In
addition to its direct sales force, the Company utilizes a nationwide network
of over 80 independent food brokers, all of whom are compensated primarily by
payment of sales commissions. The Companys marketing strategy includes distributor and consumer
promotions, trade promotions, advertising and participation in trade shows and
exhibitions. The Company participates in numerous conferences and is a member
of 18 national industry organizations. Company representatives serve on the
boards of a number of industry organizations, including the American Meat
Institute, the American School Food Service Association, the American Commodity
Distribution Association, the National Food Service Management Institute
Governing Board and the National Association of Convenience Stores. Raw Materials The primary materials used in the Companys food processing operations
include boneless chicken, beef and pork, flour, yeast, seasonings, breading,
soy proteins, and packaging supplies. Meat proteins are generally purchased
under seven day payment terms, except for the Companys largest beef supplier,
who requires payment at the time the product is shipped. Historically, raw
material costs have remained stable and any price increases have generally been
passed on to the customer. During fiscal 2004, the Company experienced a
significant increase in the price of beef. The Company managed the increase in
beef prices by passing on cost increases to customers and by improving the
formulation of beef products. The Company does not hedge in the futures
markets. The Company purchases all of its raw materials from outside sources. The
Company does not depend on a single source for any significant item except for,
as requested by a customer, the utilization of a single source raw material
supplier for production specific to that customer. The single source supplier
allows for consistent supply and competitive pricing for the Company.
Furthermore, the Company believes that its sources of supply for raw materials
are adequate for its present needs and does not anticipate any difficulty in
acquiring such materials in the future. Trademarks and Licensing The Company markets food products under a variety of brand names,
including Pierre and DesignTM, Pierre Pizza
ParlorTM, Pierre Main Street
DinerTM, Pierre SelectTM, Fast Bites®, Fast Choice®, Rib-B-Q®, Hot n Ready®,
Big AZ®, Chop House®, Deli Breaks and Mom n Pops® brand. The Company
regards its trademarks and service marks as having significant value in
marketing its food products. Pursuant to licenses acquired, the Company began
producing and marketing microwaveable sandwiches under the Checkers, Krystal,
Rallys, Tony Romas and Nathans Famous brand names through its existing
distribution channels. The term of each such license is subject to renewal and
satisfaction of sales volume requirements. The Company has national rights to
distribute products under the Rallys, Krystal and Checkers name to vending
machines, as well as distribution rights for Tony Romas and Nathans Famous
products. Seasonality Except for sales to school districts, which represent approximately 19% of
the Companys total sales and which decline significantly during summer, late
November and December, there is no seasonal variation in the Companys sales. Competition The food production business is highly competitive and is often affected
by changes in tastes and eating habits of the public, economic conditions
affecting spending habits and other demographic factors. In sales of meat
products, the Company faces strong price competition from a variety of large
meat processing concerns, including Tyson, ConAgra, Zartic, Inc. and Advance
Food Company, and from smaller local and regional operations. In sales of
biscuit and yeast roll products, the Company competes with a number of large
bakeries in various parts of the country. The sandwich industry is extremely
fragmented, with few large direct competitors but low barriers to entry and
indirect competition in the form of numerous other products. The Companys
competitors in the sandwich industry include Market Fare Foods, Bridgford Foods
Corp., Jimmy Dean Foods and E.A. Sween. 2




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Research and Development The Company employs nine food technologists in the product and process
development department. Ongoing food production research and development
activities include development of new products, improvement of existing
products and refinement of food production processes. These activities resulted
in the launch of approximately 150 new SKUs in fiscal 2004. Over 36.1% of
fiscal 2004 food processing sales were related to products developed in the
last two years, based on the Companys definition of a new product. In fiscal
2004, 2003 and 2002, the Company spent approximately $886,000, $649,000 and
$373,000, respectively, on product development programs. Government Regulation The food production industry is subject to extensive federal, state and
local government regulation. The Companys food processing facilities and food
products are subject to frequent inspection by the United States Department of
Agriculture (USDA), Food and Drug Administration (FDA) and other government
authorities. In July 1996, the USDA issued strict new policies against
contamination by food-borne pathogens and established the Hazard Analysis and
Critical Control Points (HACCP) system. The Company is in compliance with all
FDA or USDA regulations, including HACCP standards. The Companys operations are governed by laws and regulations relating to
workplace safety and worker health that, among other things, establish noise
standards and regulate the use of hazardous chemicals in the workplace. The
Company also is subject to numerous federal, state and local environmental
laws. Under applicable environmental laws, the Company may be responsible for
remediation of environmental conditions and may be subject to associated
liabilities relating to its facilities and the land on which its facilities are
or had been situated, regardless of whether the Company leases or owns the
facilities or land in question and regardless of whether such environmental
conditions were created by the Company or by a prior owner or tenant. The
Company does not believe that compliance with environmental laws will have a
substantial material effect upon the capital expenditures, earnings or
competitive position of the Company and its subsidiaries. The Companys operations are subject to licensing and regulation by a
number of state and local governmental authorities, which include health,
safety, sanitation, building and fire agencies. Operating costs are affected by
increases in costs of providing health care benefits, the minimum hourly wage,
unemployment tax rates, sales taxes and other similar matters over which the
Company may have no control. The Company is subject to laws governing
relationships with employees, including minimum wage requirements, overtime,
working conditions and citizenship requirements. Employees As of March 6, 2004, the Company employed approximately 1,700 persons.
The Company has experienced no work stoppage attributed to labor disputes and
considers its employee relations to be good. 
 Item 2.Properties Principal Offices.The Companys main office is located in a facility it
owns in Cincinnati, Ohio. The Company also leases 6,000 square feet of
executive office space in Hickory, North Carolina from an affiliated party for
$116,000 per year at terms no less favorable than those which could be obtained
from an unaffiliated third party. The Company also owns and uses a 23,000
square foot building in Claremont, North Carolina for additional office space. Food Processing Plants.The Company produces its fully-cooked meat
products, packaged sandwiches and specialty bread products at facilities it
owns in Cincinnati, Ohio and Claremont, North Carolina. The Cincinnati facility
occupies buildings totaling approximately 225,000 square feet, following a
25,000 square foot building expansion during fiscal 2003. The Claremont
facility occupies buildings totaling approximately 150,000 square feet. The Company believes that its facilities are generally in good condition
and that they are suitable for their current uses. The Company nevertheless
engages periodically in construction and other capital improvement projects as
the Company believes are necessary to expand and improve the efficiency of its
facilities. 3




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Item 3.Legal Proceedings Pierre Foods and its subsidiaries are parties in various lawsuits arising
in the ordinary course of business. In the opinion of management, any ultimate
liability with respect to these matters will not have a material adverse effect
on the Companys financial condition, results of operations or cash flows. 
 Item 4.Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders during the fourth
quarter of fiscal 2004. 4




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PART II 
 Item 5.Market for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity
Securities On July 26, 2002, PF Management, Inc. (PF Management) closed its
management buyout of the Company. This going-private transaction resulted in
the Company becoming a wholly-owned subsidiary of PF Management; accordingly,
there is no public trading market for the Companys common stock. The Company
had 5,781,480 shares of common stock issued and outstanding and 2,500,000
shares of preferred stock authorized, none of which were outstanding,
immediately before the closing. After the closing, the Company amended and
restated its Articles of Incorporation to authorize the issuance of up to
100,000 shares of Class A common stock as the only authorized class of capital
stock of the Company. All 100,000 shares of authorized common stock were
issued to PF Management in connection with the management buyout. All per
share amounts have been retroactively restated in the accompanying Consolidated
Financial Statements and Notes to Consolidated Financial Statements for all
periods presented to reflect the transaction. See Item 12, Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder Matters. The Company did not declare a cash dividend during fiscal 2004 or fiscal
2003. The Companys debt instruments restrict its ability to pay dividends.
See Managements Discussion and Analysis of Financial Condition and Results of
OperationsLiquidity and Capital Resources and the Companys consolidated
financial statements and supplementary data. Regardless of the scope of such
restrictions, the Companys policy is to reinvest any earnings rather than pay
dividends. No securities of the Company were sold by the Company during fiscal 2004. 5




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Item 6.Selected Financial Data The following selected historical financial information has been derived from audited consolidated financial statements of the Company. Such financial
information should be read in conjunction with the consolidated financial statements of the Company, the notes thereto and the other financial
information contained elsewhere herein. See Managements Discussion and Analysis of Financial Condition and Results of Operations and the Companys
consolidated financial statements and supplementary data. Fiscal Years EndedMarch 6,
    
    March 1,
    
    March 2,
    
    March 3,
    
    March 4,2004
    
    2003
    
    2002
    
    2001
    
    2000(dollars in thousands, except per share data)STATEMENT OF OPERATIONS DATA:Revenues, net
    
    $
    358,549
    
    
    $
    276,339
    
    
    $
    243,278
    
    
    $
    203,475
    
    
    $
    179,415Cost of goods sold
    
    
    254,235
    
    
    
    184,092
    
    
    
    160,781
    
    
    
    133,385
    
    
    
    115,968Selling, general and administrative
    
    
    79,982
    
    
    
    71,352
    
    
    
    62,399
    
    
    
    55,752
    
    
    
    59,193Loss on sale of Mom n Pops Country
Ham, LLC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,857Net (gain) loss on disposition of property, plant
and equipment
    
    
    11
    
    
    
    89
    
    
    
    84
    
    
    
    27
    
    
    
    (22
    )Depreciation and amortization
    
    
    4,605
    
    
    
    4,125
    
    
    
    6,438
    
    
    
    6,238
    
    
    
    5,662Operating income (loss)
    
    
    19,716
    
    
    
    16,681
    
    
    
    13,576
    
    
    
    8,073
    
    
    
    (4,243
    )Interest expense
    
    
    16,979
    
    
    
    14,228
    
    
    
    13,206
    
    
    
    13,334
    
    
    
    14,986Other income, net
    
    
    
    
    
    
    447
    
    
    
    364
    
    
    
    281
    
    
    
    169Income tax benefit (provision)
    
    
    (1,303
    )
    
    
    (1,122
    )
    
    
    (733
    )
    
    
    767
    
    
    
    4,825Income (loss) from continuing operations
    
    
    1,434
    
    
    
    1,778
    
    
    
    1
    
    
    
    (4,213
    )
    
    
    (14,235
    )Income from discontinued operations (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,828Gain on disposal of discontinued operations (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,802Extraordinary item (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (455
    )
    
    
    (52
    )Cumulative effect of accounting change (3)
    
    
    
    
    
    
    (18,605
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    1,434
    
    
    $
    (16,827
    )
    
    $
    1
    
    
    $
    (4,668
    )
    
    $
    (4,657
    )NET INCOME (LOSS) PER SHARE  BASIC AND DILUTED:Income (loss) from continuing operations
    
    $
    14.34
    
    
    $
    17.78
    
    
    $
    0.01
    
    
    $
    (42.13
    )
    
    $
    (142.35
    )Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28.28Gain on disposal of discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68.02Extraordinary item
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4.55
    )
    
    
    (0.52
    )Cumulative effect of accounting change
    
    
    
    
    
    
    (186.05
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    14.34
    
    
    $
    (168.27
    )
    
    $
    0.01
    
    
    $
    (46.68
    )
    
    $
    (46.57
    )OTHER DATA:Capital expenditures
    
    $
    10,041
    
    
    $
    16,216
    
    
    $
    5,994
    
    
    $
    2,764
    
    
    $
    5,488BALANCE SHEET DATA:Working capital
    
    $
    46,110
    
    
    $
    40,716
    
    
    $
    37,061
    
    
    $
    35,890
    
    
    $
    36,403Total assets
    
    
    175,771
    
    
    
    168,781
    
    
    
    169,821
    
    
    
    160,308
    
    
    
    164,727Total debt
    
    
    143,694
    
    
    
    136,348
    
    
    
    121,231
    
    
    
    115,165
    
    
    
    115,479Shareholders equity
    
    
    6,621
    
    
    
    8,998
    
    
    
    27,207
    
    
    
    26,867
    
    
    
    31,533
 6




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(1)
    
    Reflects income from discontinued operations in the amount of $2,828
in fiscal 2000. In addition, reflects gain from disposal of
discontinued operations of $6,802 in fiscal 2000.(2)
    
    Reflects an extraordinary loss from early
extinguishment of debt in the amount of $455 in fiscal 2001 and $52 in
fiscal 2000.(3)
    
    Reflects a loss due to a cumulative effect of accounting change in
the amount of $18,605 in fiscal 2003. See Note 2 Summary of
Significant Accounting Policies to the consolidated financial
statements. 
 Item 7.Managements Discussion and Analysis of Financial Condition and
Results of Operations Certain statements made in this document are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve risks and uncertainties that may cause
actual results to differ materially from expected results. These risks and
uncertainties include: substantial leverage and insufficient cash flow from
operations; restrictions imposed by the Companys debt instruments; management
control; restriction of payment of dividends; competitive considerations;
government regulation; general risks of the food industry; adverse changes in
food costs and availability of supplies; dependence on key personnel; potential
labor disruptions and other factors, risks and uncertainties identified in
Exhibit 99.1 to our Annual Report on Form 10-K filed with the SEC on March 9,
2004. This list of risks and uncertainties is not exhaustive. Also, new risk
factors emerge over time. Investors should not place undue reliance on the
predictive value of forward-looking statements. 
 Results of Operations Each quarter of the fiscal year contains 13 weeks except for the
infrequent fiscal years with 53 weeks. The results for fiscal 2004 contain 53
weeks. The results for fiscal 2003 and 2002 contain 52 weeks. Results for fiscal 2004, 2003 and 2002 are shown below: Fiscal Years EndedMarch 6,
    
    March 1,
    
    March 2,2004
    
    2003
    
    2002(in millions)Revenues, net
    
    $
    358.6
    
    
    $
    276.3
    
    
    $
    243.3Cost of goods sold
    
    
    254.2
    
    
    
    184.1
    
    
    
    160.8Selling, general and administrative
    
    
    80.0
    
    
    
    71.3
    
    
    
    62.4Net loss on disposition of property, plant and equipment
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1Depreciation and amortization
    
    
    4.6
    
    
    
    4.1
    
    
    
    6.4Operating income
    
    
    19.7
    
    
    
    16.7
    
    
    
    13.6Interest and other expense, net
    
    
    (17.0
    )
    
    
    (13.8
    )
    
    
    (12.9
    )Income before income tax, and
cumulative effect of accounting change
    
    
    2.7
    
    
    
    2.9
    
    
    
    0.7Income tax provision
    
    
    (1.3
    )
    
    
    (1.1
    )
    
    
    (0.7
    )Income before cumulative effect
of accounting change
    
    
    1.4
    
    
    
    1.8
    
    
    
    Cumulative effect of accounting change
    
    
    
    
    
    
    (18.6
    )
    
    
    Net income (loss)
    
    $
    1.4
    
    
    $
    (16.8
    )
    
    $
    
 7




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Fiscal 2004 Compared to Fiscal 2003 Revenues, net.Net revenues increased by $82.2 million, or 29.7%. The
increase in net revenues was primarily due to the substantial development of
national business with an existing customer, increased retail business with an
existing customer, short term co-packing operations and an increase in sales of
existing product lines. Of all core customer channels, which include
restaurants, schools, vending and convenience stores, the restaurant channel
had the greatest increase in demand. Cost of goods sold.Cost of goods sold increased by $70.1 million, or
38.1%. As a percentage of revenues, cost of goods sold increased from 66.6% to
70.9%. This increase primarily was due to a change in product mix to lower
margin products and increased raw material prices (particularly beef prices),
offset by allocating fixed costs over increased production as a result of the
Cincinnati plant expansion.. In fiscal 2004, beef, pork and chicken prices
increased approximately 13%, 32% and 2%, respectively, compared to fiscal 2003. Selling, general and administrative. Selling, general and administrative
expenses increased by $8.7 million, or 12.1%, primarily due to an increase in
distribution expense on higher product volumes and increased marketing costs.
As a percentage of revenues, selling, general and administrative expenses
decreased from 25.8% to 22.3%. Depreciation and amortization.Depreciation and amortization increased by
$0.5 million, or 11.6%, primarily due to the Cincinnati plant expansion. As a
percentage of net operating revenues, depreciation and amortization decreased
from 1.5% to 1.3%. Interest
expense and other income, net.The primary component of interest
expense and other income, net for fiscal 2004 and fiscal 2003 was interest
expense. Interest expense consists primarily of interest on fixed and variable
rate long-term debt, in addition to expense incurred due to the early
extinguishment of the Companys $50 million revolving credit loan in fiscal
2004. Net other expense increased by $3.2 million or 23.2% in fiscal 2004 due
to increased borrowings under the revolving credit facility and due to the
write-off of loan commitment fees and a prepayment penalty associated with the
change in credit facilities and early extinguishment of that credit facility,
both of which were charged to interest expense (see - Liquidity and Capital
Resources below). Income tax provision. The effective tax rate for fiscal 2004 was 47.6%
compared to 38.7% for fiscal 2003. The increase in the effective tax rate is
primarily due to an increase in state tax expense of 3.4% and a decrease in the
benefit realized from Columbia Hill Aviation. Fiscal 2003 Compared to Fiscal 2002 Revenues, net.Net revenues increased by $33.1 million, or 13.6%. The
increase in net revenues was primarily due to the substantial development of
new customers, to the introduction of a new sandwich line within the
foodservice distribution channel and to increased revenues in existing product
lines. Of all core customer channels, which include restaurants, schools,
vending and convenience stores, the restaurant channel had the greatest
increase in demand. Cost of goods sold.Cost of goods sold increased by $23.3 million, or
14.5%. As a percentage of revenues, cost of goods sold increased from 66.1% to
66.6%. This increase primarily was due to a change in product mix to lower
margin products and unfavorable insurance and utilities expense, offset by a
decrease in the prices of beef, pork and chicken, the Companys primary raw
materials. In fiscal 2003, beef, pork and chicken prices decreased
approximately 9%, 34% and 6%, respectively, compared to fiscal 2002. The cost
of labor for fiscal 2003 was consistent with fiscal 2002. Selling, general and administrative. Selling, general and administrative
expenses increased by $9.0 million, or 14.3%, primarily due to an increase in
overhead costs to support the increased sales volume. As a percentage of
revenues, selling, general and administrative expenses increased from 25.6% to
25.8%. Depreciation and amortization.Depreciation and amortization decreased by
$2.3 million, or 35.9%, primarily due to the adoption of Statement of Financial
Accounting Standards (SFAS) No. 142 (SFAS 142) in fiscal 2003, which
discontinued amortization of goodwill and intangibles with indefinite lives,
offset by depreciation related to an increase in capital expenditures due to a
significant plant expansion. As a percentage of net operating revenues,
depreciation and amortization decreased from 2.6% to 1.5%. 8




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##### 



Interest
expense and other income, net.The primary component of interest
expense and other income, net for fiscal 2003 and fiscal 2002 was interest
expense, which consists primarily of interest on fixed and variable rate
long-term debt. Net other expense increased by $0.9 million, or 7.3%. This
increase primarily was due to a change in the credit facility and increased
borrowings under that facility (see - Liquidity and Capital Resources
below). Income tax provision. The effective tax rate for fiscal 2003 was 38.7%
compared to 99.9% for fiscal 2002. The decrease in the effective tax rate is
primarily due to the limitation on the deductibility of executive compensation
in fiscal 2002, combined with the effects of permanent differences in fiscal
2002. 
 Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the
appropriate application of certain accounting policies, many of which require
the Company to make estimates and assumptions about future events and their
impact on amounts reported in the financial statements and related notes.
Since future events and the impact of those events cannot be determined with
certainty, the actual results will inevitably differ from the Companys
estimates. Such differences could be material to the financial statements. The Company believes its application of accounting policies, and the
estimates inherently required therein, are reasonable. 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, and actual results
have not differed materially from those determined using necessary estimates. The following critical accounting policies affect the Companys more
significant judgments and estimates used in the preparation of its financial
statements. Revenue Recognition.Revenue from sales of food processing products is
recorded at the time title transfers. Standard shipping terms are FOB
destination, therefore title passes at the time the product is delivered to the
customer. Revenue is recognized as the net amount to be received after
deductions for estimated discounts, product returns and other allowances.
These estimates are based on historical trends and expected future payments
(see also Promotionsbelow). Goodwill and Other Intangible Assets. During fiscal 2002 and prior years,
Goodwill and other intangible assets were being amortized using the straight
line method over a 30 year period. The carrying value of goodwill and other
intangible assets was evaluated periodically as events and circumstances
indicate a possible inability to recover its carrying amount. Amortization
expense recognized for the fiscal year ended March 2, 2002 was $2.7 million. In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS 142, Goodwill and Other Intangible Assets, which was effective for the
fiscal year beginning March 3, 2002. SFAS 142 requires, among other things,
the discontinuance of goodwill amortization. In addition, the standard includes
provisions for the reclassification of certain existing recognized intangibles
as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. Upon the Companys adoption of SFAS
142 on March 3, 2002, the Company ceased amortizing goodwill and
indefinite-lived intangibles. Also effective March 3, 2002, the Company
reclassified assembled workforce to goodwill. As prescribed under SFAS 142, the Company tested goodwill for impairment
during fiscal 2003 using a two-step process. The first step of the goodwill
impairment test is used to identify potential impairment by comparing the fair
value of the entity with its net asset value (or carrying amount), including
goodwill. If the fair value of the entity exceeds its net asset value,
goodwill of the entity is considered not impaired and the second step of the
goodwill impairment test is not needed. If the net asset value of the entity
exceeds the fair market value, the second step of the goodwill impairment test
is performed to measure the amount of impairment loss, if any. The second step
of the goodwill impairment test compares the implied fair value of the entitys
goodwill with the carrying amount of that goodwill. If the carrying amount of
the entitys goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess. Subsequent to
recognizing an impairment loss, the adjusted carrying amount of the intangible
asset shall be its new accounting basis. Reversal of a previously recognized
impairment loss is prohibited. 9




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##### 



During fiscal 2003, upon adoption of SFAS 142, the Company utilized a
valuation technique based on market values of publicly-traded equity, as
adjusted, plus publicly-owned subordinated notes, which were determined in
conjunction with the management buyout in fiscal 2003 (See Note 1  Basis of
Presentation, Acquisition and Discontinued Operations for discussion on
Management Buyout). The Companys analysis showed that the carrying value of
the goodwill exceeded its fair value, requiring the Company to determine the
implied fair value of its goodwill. Upon completion of that analysis,
management determined that the entire net carrying value of its goodwill was
impaired. The carrying amount, $29.0 million, net of the related effect on
income taxes, $10.4 million, was written-off by the Company and reported as the
Cumulative Effect of an Accounting Change, net of income taxes in the statement
of operations. See Note 2 Summary of Significant Accounting Policies for
further discussion. Economic Useful
Life of Intangible Assets. The Company reviews the economic useful life of
its intangible assets annually. The determination of the economic useful life of
an intangible asset requires a significant amount of judgment and entails significant
subjectivity and uncertainty. Promotions. Promotional expenses associated with rebates, marketing
promotions and special pricing arrangements are recorded as a reduction of
revenues or selling expense at the time the sale is recorded. Certain of these
expenses are estimated based on historical trends and expected future payments
to be made under these programs. The Company believes the estimates recorded
in the financial statements are reasonable estimates of the Companys liability
under the programs. Going Concern Assumption.Significant assumptions underlie the belief
that the Company anticipates that its fiscal 2005 cash requirements for working
capital and debt service will be met through a combination of funds provided by
operations and borrowings under its $40 million credit facility, including,
among other things, that there will be no material adverse developments in the
business, liquidity or significant capital requirements of the Company. New Accounting Pronouncements. In June 2001, the FASB issued Statement of
Financial Accounting Standards No. 143 (SFAS 143), Accounting for Asset
Retirement Obligations, was adopted by the Company beginning March 2, 2003.
SFAS 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement cost. The adoption of SFAS 143 did not have a material impact
on the Companys financial position and results of operations. In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 (SFAS 148)   Accounting for Stock-Based Compensation 
Transition and Disclosure. This statement amends Statement of Financial
Accounting Standards 123, Accounting for Stock-Based Compensation to provide
alternative methods of transition for an entity that changes to the fair value
based method of accounting for stock-based employee compensation and changes
the disclosure requirements. This statement was effective for financial
statements for fiscal years ending after December 15, 2002. The Company adopted
SFAS No. 148 effective March 1, 2003. During fiscal 2003, effective with the
management buyout discussed in Note 1, all stock option plans were terminated
and all outstanding options were cancelled, however, the necessary disclosure
requirements of SFAS 148 are presented in Note 2 of the Notes to Consolidated
Financial Statements. In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 (SFAS 149),  Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. The statement amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and hedging activities under Statement of Financial Accounting
Standards No. 133. SFAS 149 is effective for all contracts entered into or
modified after June 30, 2003. This Statement did not have an impact on the
Companys financial statements. In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 (SFAS 150), Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This statement requires
certain freestanding financial instruments to be reported as liabilities by
their issuers. The provisions of SFAS 150, which also include a number of new
disclosure requirements, are effective for instruments entered into or modified
after May 31, 2003 and pre-existing instruments as of the beginning of the
first interim period that commences after June 15, 2003. This statement did
not have an impact on the Companys financial statements. In November 2002, the FASB issued FASB Interpretation No. (FIN) 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (FIN 45), which expands the
disclosures a guarantor is required to provide in its annual and interim
financial statements regarding its obligations for certain guarantees.
Disclosures are required to be included in financial statements issued after
December 15, 2002 (see Note 7). FIN 45 also requires the guarantor to
recognize a liability for the fair value of an obligation assumed for
guarantees issued or modified after December 31, 2002. The adoption of FIN 45
did not have a material impact on the Companys financial position and results
of operations. 10




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In December 2003,
the FASB issued FIN 46R, Consolidation of Variable
Interest Entities (FIN 46R), which replaces the same titled FIN 46 that
was issued in January 2003. FIN 46R addresses how to identify variable
interest entities and the criteria that require a company to consolidate such
entities in its financial statements. FIN 46R is
effective for the first reporting
period that ends after March 15, 2004. The Company does not believe that the
adoption of FIN 46R will have a material impact on its financial position and
results of operations. 
 Liquidity and Capital Resources Net cash provided by operating activities was $3.3 million for fiscal
2004, compared to net cash provided by operating activities of $0.04 million
and $9.9 million for fiscal 2003 and fiscal 2002, respectively. The increase
in net cash provided by operating activities from fiscal 2003 to fiscal 2004
was primarily due to the increase in net income of $18.3 million. The primary
components of net cash provided by operating activities for fiscal 2004 were:
(1) a decrease in deferred income taxes of $1.3 million; (2) an increase in
trade accounts payable and other accrued liabilities of $2.4 million; and (3)
the write-off of deferred loan origination fees of $1.2 million; offset by (4)
an increase in inventories of $6.4 million and (5) an increase in receivables
of $2.0 million. The decrease in net cash provided by operating activities
from fiscal 2002 to fiscal 2003 was primarily due to the decrease in net income
of $16.8 million resulting from the loss associated with the cumulative effect
of accounting change in fiscal 2003. The primary components of net cash
provided by operating activities for fiscal 2003 were: (1) an increase in
inventories of $8.7 million; (2) an increase in accounts receivable of $2.2
million and (3) an increase in refundable income taxes, prepaid expenses and
other assets of $1.7 million; offset by (4) an increase in trade accounts
payable and other accrued liabilities of $4.9 million. Net cash used in investing activities was $9.8 million for fiscal 2004.
The primary components were routine capital expenditures and a significant
plant expansion totaling $10.0 million. Net cash used in investing activities
was $16.1 million for fiscal 2003. The primary component was routine
capital expenditures and a significant plant expansion totaling $16.2 million.
Net cash used in investing was $7.3 million for fiscal 2002. The primary
components were for routine capital expenditures totaling $6.0 million. Net cash provided by financing activities was $6.4 million for fiscal
2004. The primary components were (1) borrowings under the new revolving
credit facility of $13.3 million and (2) borrowings under the equipment term
loan subline and the real estate term loan subline of $5.0 million each, offset
by (3) repayment of revolving credit agreement with former lender of $15.1
million; (4) principal payments on long-term debt of $0.8 million and
(5) loan origination
fees of $0.7 million. Net cash provided by financing activities was $11.8
million for fiscal 2003. The primary components were (1) borrowing under the
revolving credit facility of $15.1 million; offset by (2) loan origination fees
of $1.6 million incurred in fiscal 2003 that did not occur in fiscal 2002; (3)
special purpose entity distributions of $1.4 incurred in fiscal 2003 that did
not occur in fiscal 2002 and (4) principal payments on long-term debt of $0.3
million. Net cash provided by financing activities was $0.2 million for fiscal
2002, due to the capital contribution to the special purpose leasing entity
(see Aircraft Operating Lease Agreementbelow), offset by principal payments on
the Companys capital leases and principal payments related to the obligation
of the special purpose leasing entity. Effective August 13, 2003, the Company terminated its five-year
variable-rate $50 million revolving credit facility. Existing debt issuance
costs related to the Companys former $50 million facility in the amount of
$1.2 million were written off and charged to interest expense in conjunction
with the termination of this facility. A prepayment penalty in the amount of
$1.0 million was paid to the former lender and charged to interest expense,
also in conjunction with the termination of this facility. Also effective
August 13, 2003, the Company obtained a three-year variable-rate $40 million
revolving credit facility from a new lender, which includes a $5 million real
estate term loan subline, a $5 million equipment term loan subline and a $7.5
million letter of credit subfacility. Funds available under this new facility
are available for working capital requirements, permitted investments and
general corporate purposes. Borrowings under the new facility bear interest at
floating rates based upon the interest rate option selected from time to time
by the Company and are secured by a first-priority security interest in
substantially all of the Companys assets. The interest rate for borrowings
under the new revolving credit facility at March 6, 2004 was 5% (prime plus
1%). Borrowings under the new facility are due the earlier of ninety days
prior to the redemption of the Companys Senior Notes due 2006 (the Notes) or
August 13, 2006. Repayment is also required in the amount of the proceeds from the sale of any collateral.
The interest rate for the new real estate term loan subline and the equipment
term loan subline is 5.25% (prime plus 1.25%). In addition, the Company is
required to satisfy certain financial covenants regarding cash flow and capital
expenditures. 11




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As of March 6, 2004, the Company had $0.2 million in cash and cash
equivalents on hand, had outstanding borrowings under its revolving credit
facility of $13.3 million and borrowing availability of approximately $12.9
million. Also, as of March 6, 2004, the Company had borrowings under the real
estate subline and the equipment subline of $4.7 million and $4.6 million,
respectively. As of March 1, 2003, the Company had $0.3 million in cash and
cash equivalents on hand, had outstanding borrowings under the former credit
facility of $15.1 million and had approximately $4.6 million of additional
borrowing availability. Fiscal 2004 net cash provided by operating activities was sufficient to
provide necessary working capital and to service existing debt. These cash
requirements were satisfied through a combination of funds provided by cash on
hand at the end of fiscal 2003, net cash provided by operating activities
during fiscal 2004, and borrowings under both the former credit facility and
the new credit facility. The Company anticipates that its fiscal 2005 cash
requirements for working capital and debt service will be met through a
combination of funds provided by operations and borrowings under the new credit
facility. The Company has budgeted approximately $9.9 million for capital
expenditures in fiscal 2005. These expenditures are primarily designated for
routine food processing capital improvement projects and other miscellaneous
expenditures. The Company believes that funds from operations and funds from
its credit facility, as well as the Companys ability to enter into capital or
operating leases, will be adequate to finance these capital expenditures. If the Company continues its historical revenue growth trend as expected,
then the Company will be required to raise and invest additional capital for
additional plant expansion projects to provide operating capacity to satisfy
increased demand. The Company believes that future cash requirements for these
plant expansion projects would need to be met through other long-term financing
sources, such as an increase in borrowing availability under the Companys
credit facility, the issuance of industrial revenue bonds or equity investment.
The incurrence of additional long-term debt is governed and restricted by the
Companys existing debt instruments. Furthermore, there can be no assurance
that additional long-term financing will be available on advantageous terms (or
any terms) when needed by the Company. The Company anticipates continued sales growth in key market areas. As
noted above, however, this growth will require future capital expansion
projects to increase existing plant capacity in order to satisfy increased
demand. Sales growth, improved operating performance and expanded plant
capacity  none of which is assured  will be necessary for the Company to
continue to service existing debt. Aircraft Operating Lease Agreement.The Company leases an aircraft from
Columbia Hill Aviation, LLC (Columbia Hill Aviation), owned 100% by PF
Management. Columbia Hill Aviation is not a subsidiary of the Company;
however, the Company considers Columbia Hill Aviation a non-independent special
purpose entity. Accordingly, Columbia Hill Aviations financial condition,
results of operations and cash flows have been included in the Companys
consolidated financial statements. Under the terms of the operating lease with
Columbia Hill Aviation, and the financing agreements between Columbia Hill
Aviation and its creditor, the Company does not maintain the legal rights of
ownership to the aircraft, nor does Columbia Hill Aviations creditor maintain
any legal recourse to the Company. On March 8, 2004 the Company took title to
the aircraft. See also Restructuring of


Senior Notes below concerning the Companys assumption, subsequent to March 6,
2004, of the airplane lease previously held by Columbia Hill Aviation. Logistics Agreement.Effective March 3, 2002, the Company entered into a
one-year logistics agreement with PF Distribution, LLC (PF Distribution),
owned 100% by PF Management. The agreement was amended on March 2, 2003 to
provide for a continuous term. Under the agreement, PF Distribution served as
the exclusive logistics agent for the Company, and provided all warehousing,
fulfillment and transportation services to the Company. The cost of PF
Distribution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 determined based on
historical costs and industry standards. In fiscal 2004, distribution expense
recorded in selling, general and administrative expense was approximately $31.1
million, of which approximately $30.1 million had been paid to PF Distribution
as of March 6, 2004. In fiscal 2003, distribution expense recorded in selling,
general and administrative expense was approximately $21.5 million, of which
approximately $21.3 million had been paid to PF Distribution as of March 1,
2003. See also Restructuring of Senior Notes below concerning the
termination, subsequent to March 6, 2004, of the logistics agreement with PF
Distribution. 12




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##### 



Restructuring of Senior Notes.On March 8, 2004, following a consent
solicitation in which consents of holders of $112.4 million in aggregate
principal amount of the Companys outstanding Notes, representing 97.74% of the
outstanding Notes, consented to a Fourth Supplemental Indenture between the
Company and U.S. Bank National Association, as trustee (the Trustee), the
Company entered into the Fourth Supplemental Indenture with the Trustee. Among
other things, the Fourth Supplemental Indenture increased the annual interest
rate on the Notes from 10.75% to 12.25% through March 31, 2005 and 13.25%
thereafter; required the payment of a cash consent fee equal to 3% of the
principal amount of Notes held by each consenting noteholder; granted to the
noteholders liens on the assets of the Company and its subsidiaries, such liens
being junior to the senior liens securing the Companys current credit
facility, granted to noteholders a repurchase right allowing all of the
noteholders to require the Company to repurchase their 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 Notes outstanding at the end of the Companys fiscal years;
added restrictive covenants limiting the compensation payable to certain senior
executives of the Company and limiting future related party transactions;
required the termination of all related party transactions, except for certain
specifically-permitted transactions (see Item 13, Certain Relationships and
Related Transaction); provided for the assumption by the Company of
approximately $15.4 million of subordinated debt of PF Management; required the
Company to comply with certain corporate governance standards, including
appointing an independent director acceptable to the Company and the
noteholders to its board and hiring an independent auditor to monitor the
Companys compliance with the Indenture; and waived any and all defaults of the
Indenture existing as of March 8, 2004. The restrictive covenants limiting compensation payable to certain senior
executives of the Company contain provisions for bonuses based on the
profitability of the Company and cash payments made on the Notes which could
significantly increase the limitation. Concurrently with the execution of the Fourth Supplemental Indenture the
Company took title to an aircraft transferred from a related party subject to
existing purchase money debt; forgave the $993,247 related party note
receivable from its principal shareholders; cancelled the balances owed by the
Company to certain related parties; and assumed the operating leases of PF
Distribution in connection with the Fourth Supplemental Indenture. Minimum
lease payments on the former PF Distribution operating leases will be $3.0
million during fiscal year 2005, $2.9 million during fiscal year 2006 and $0.5
million during fiscal year 2007. As noted above, the Company assumed $15.4 million of subordinated debt of
PF Management in connection with the Fourth Supplemental Indenture. Principal
payments on the former PF Management debt will be $4.8 million during fiscal
year 2005, $3.6 million during fiscal year 2006 and $7.0 million during fiscal
year 2007. The interest rates on the former PF Management debt range from 4.4%
to 25%. Other Events.On May 11, 2004, the shareholders of PF Management, the
sole shareholder of the Company, agreed to sell their shares of stock in PF
Management to an affiliate of Madison Dearborn Capital Partners (MDCP). The sale is
scheduled to close on or around June 30, 2004, subject to the satisfaction or waiver of
conditions typical of leveraged buyout transactions, including (among others) these:      The buyers receipt of, and reasonable satisfaction with, consents of certain
of the Companys customers and suppliers and the acquiescence of federal
antitrust authorities;      The absence at the closing of a material adverse change in the assets,
liabilities, business, operations, results or condition of the Company and PF
Management since November 29, 2003;      The buyers receipt of, and reasonable satisfaction with, audited financial
statements of the Company for the fiscal year ended March 6, 2004 and of PF
Management for the same fiscal year and the two immediately preceding fiscal
years;      The buyers receipt of tenders of not less than a majority of the aggregate
principal amount of the Companys 10-3/4% senior notes due 2006; and      The buyers receipt of financing necessary to consummate the transaction. 13




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##### 



The Companys President and Chief Executive Officer, Norbert E. Woodhams,
and its Senior Vice President of Sales and Marketing, Robert C. Naylor, have
signed amended employment agreements committing them to continue working for
the Company after the sale. The stated term of employment for each executive is
one year, but each agreement will renew automatically and continuously
year-to-year unless terminated. Messrs. Woodhams and Naylor are both expected
to make significant equity investments in the Company under its new owner. MDCP has received and
has accepted commitment letters from Wachovia Bank, N.A. and Bank of America, N.A.,
and certain of their affiliates, committing to provide debt financing for this transaction. The
debt financing commitments are subject to conditions typical of LBO financing, such as:      The receipt of all consents and
approvals necessary or, in the reasonable opinion of the banks, desirable in
connection with the transaction;      The
absence at the closing of a material adverse effect on the business
of the Company since March 1, 2003; and      Completion of
MDCPs purchase of the Company, and the remainder of the transaction, consistent with the terms and conditions of the definitive
documentation. There is no assurance that any or all of the conditions to the banks
obligations to finance this transaction will be satisfied or waived or that any
or all of the other conditions to the buyers and shareholders obligations to close
the transaction will be satisfied or waived or that the transaction will close
in accordance with the agreed-upon terms (or at all). 
 Commercial Commitments, Contingencies and Contractual Obligations The Company provided a secured letter of credit in the amount of $3.5
million in both fiscal 2004 and fiscal 2003 and $1.5 million in fiscal 2002 to
its insurance carrier for the underwriting of certain performance bonds. This
letter of credit expires in fiscal 2005. The Company also provides secured
letters of credit to its insurance carriers for outstanding and potential
workers compensation and general liability claims. Letters of credit for
these claims totaled $75,000 in both fiscal 2004 and fiscal 2003 and $225,000
in fiscal 2002. In addition, the Company provides secured letters of credit to
a limited number of suppliers. Letters of credit for suppliers totaled
$250,000 in both fiscal 2004 and fiscal 2003 and $500,000 in fiscal 2002. 14




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##### 



The Company is involved in various legal proceedings. Management
believes, based on the advice of legal counsel, that the outcome of such
proceedings will not have a materially adverse effect on the Companys
financial position or future results of operations and cash flows. Commitments by Fiscal YearLess than 1
    
    
    
    
    
    
    
    
    
    More than 5Total
    
    Year
    
    1  3 Years
    
    3  5 Years
    
    YearsLetters of Credit
    
    $
    3,825,000
    
    
    $
    3,825,000
    
    
    $
    
    
    
    $
    
    
    
    $
    Purchase Commitments for Capital
Projects
    
    
    204,517
    
    
    
    204,517
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    4,029,517
    
    
    $
    4,029,517
    
    
    $
    
    
    
    $
    
    
    
    $
    
 Contractual Obligations by Fiscal YearLess than 1
    
    
    
    
    
    
    
    
    
    More than 5Total
    
    Year
    
    1  3 Years
    
    3  5 Years
    
    YearsLong-Term Debt
    
    $
    137,842,637
    
    
    $
    1,214,280
    
    
    $
    136,357,374
    
    
    $
    270,983
    
    
    $
    Capital Lease Obligations
    
    
    244,713
    
    
    
    100,656
    
    
    
    135,016
    
    
    
    9,041
    
    
    
    Operating Lease Obligations
    
    
    2,514,334
    
    
    
    878,482
    
    
    
    999,357
    
    
    
    446,095
    
    
    
    190,400Consulting and Noncompete
Agreements
    
    
    327,411
    
    
    
    327,411
    
    
    
    
    
    
    
    
    
    
    
    Obligation of Special Purpose
Entity
    
    
    5,606,686
    
    
    
    313,344
    
    
    
    680,741
    
    
    
    660,158
    
    
    
    3,952,443Total
    
    $
    146,535,781
    
    
    $
    2,834,173
    
    
    $
    138,172,488
    
    
    $
    1,386,277
    
    
    $
    4,142,843
 See Notes 14 and 17 to the Consolidated Financial Statements for a further
discussion of commitments, contingencies and contractual obligations. 
 Inflation The Company believes that inflation has not had a material impact on its
results of operations for fiscal 2004, fiscal 2003 or fiscal 2002. The Company
does not expect inflation to have a material impact on its results of
operations for fiscal 2005. 15




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##### 



Item 7A.Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risk stemming from changes in interest
rates, foreign exchange rates and commodity prices. Changes in these factors
could cause fluctuations in the Companys financial condition, results of
operations and cash flows. The Company owned no derivative financial
instruments or nonderivative financial instruments held for trading purposes at
March 6, 2004, March 1, 2003 or March 2, 2002. Certain of the Companys
outstanding nonderivative financial instruments at March 6, 2004 are subject to
interest rate risk, but not subject to foreign currency or commodity price
risk. There was no significant change in market risk from fiscal 2003 to
fiscal 2004. Interest Rate Risk The Company manages potential loss on long-term debt from changing
interest rates by maintaining a combination of fixed and variable rate
financial instruments in amounts and with maturities that management considers
appropriate. The risks associated with long-term debt at March 6, 2004 have
not changed materially since March 1, 2003. Of the long-term debt outstanding
at March 6, 2004, the $115.0 million of Notes and the borrowings under the real
estate term loan subline and the equipment term loan subline of $4.7 million
and $4.6 million, respectively, accrued interest at a fixed rate, while the
$13.3 million of outstanding borrowings under the revolving credit facility and
the $5.6 million obligation of Columbia Hill Aviation accrued interest at
variable rates. A rise in prevailing interest rates could have adverse effects
on the Companys financial condition and results of operations. A 25 basis
point increase in the reference rates for the Companys average variable rate
debt outstanding during fiscal 2004 would have decreased the Companys income
for that period by approximately $66,000. The following table summarizes the Companys market risks associated with
long-term debt outstanding at March 6, 2004. The table presents principal cash
outflows and related interest rates by maturity date. March 6, 2004Expected Maturities in Fiscal YearsLong-Term DebtWeighted AverageVariable Rate
    
    Fixed Rate
    
    Interest Rate2005
    
    $
    1,527,624
    
    
    $
    100,656
    
    
    
    10.81
    %2006
    
    
    1,545,309
    
    
    
    115,089,199
    
    
    
    11.62
    %2007
    
    
    20,492,806
    
    
    
    45,817
    
    
    
    4.96
    %2008
    
    
    369,450
    
    
    
    280,024
    
    
    
    5.53
    %Thereafter
    
    
    4,243,151
    
    
    
    
    
    
    
    5.49
    %Total
    
    $
    28,178,340
    
    
    $
    115,515,696
    
    
    
    9.61
    %Fair Value
    
    $
    28,178,340
    
    
    $
    115,515,696
    
    
    
    9.61
    %
 Foreign Exchange Rate Risk The Company bills customers in foreign countries in US dollars, with the
exception of sales to Canada. The Company does not believe the foreign
exchange rate risk on Canadian sales is material. However, a significant
decline in the value of currencies used in certain regions of the world as
compared to the US dollar could adversely affect product sales in those regions
because the Companys products may be more expensive for those customers to pay
for in their local currency. At March 6, 2004 and March 1, 2003, all trade
receivables were denominated in US dollars. Commodity Price Risk Certain raw materials used in food processing products are exposed to
commodity price changes. Increases in the prices of certain commodity products
could result in higher overall production costs. The Company manages this risk
through purchase orders, non-cancelable contracts and by passing on such cost
increases to customers. The Companys primary commodity price exposures relate
to beef, pork, poultry, flour, soy and packaging materials used in food
processing products. During fiscal 2004, the Company experienced a significant
increase in the price of beef. The Company managed the increase in beef prices
by passing on cost increases to customers and by
improving the formulation of beef products. At March 6, 2004, the Company
evaluated commodity pricing risks and determined it was not currently
beneficial to use derivative financial instruments to hedge the Companys
current positions with respect to such pricing exposures. 16




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##### 



Fair Value of Financial Instruments The Companys nonderivative financial instruments consist primarily of
cash and cash equivalents, trade and note receivables, trade payables and
long-term debt. The estimated fair values of the financial instruments have
been determined by the Company using available market information and
appropriate valuation techniques. Considerable judgment is required, however,
to interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented are not necessarily indicative of the amounts that the
Company could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts. See further discussion at Note 12 to the
Consolidated Financial Statements. 17




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##### 



Item 8.Financial Statements and Supplementary Data The information required by this Item is set forth on pages F-1 through
F-30. 
 Item 9.Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure None. 
 Item 9A.Controls and Procedures Evaluation of Disclosure Controls and Procedures The Companys President and Chief Executive Officer and Chief Financial
Officer have evaluated the effectiveness of the Companys disclosure controls
and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) as of the end of the period covered by this report. Based upon that
evaluation, the Companys President and Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of the period covered by
this report, the Companys disclosure controls and procedures are designed to
ensure that information relating to the Company (including its consolidated
subsidiaries) that is required to be included in the Companys reports filed or
submitted under the Exchange Act is accumulated and communicated to the
Companys management as appropriate to allow timely decisions regarding
required disclosure. Changes in Internal Controls There have
been no significant changes in the Companys internal controls
or in other factors that could significantly affect internal controls
during the Companys most recent fiscal quarter (the Companys
fourth fiscal quarter in the case of this annual report). 18




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PART III 
 Item 10.Directors and Executive Officers of the Registrant DIRECTORS AND EXECUTIVE OFFICERS JAMES C. RICHARDSON, JR., CHAIRMAN, age 54, has been a director since
1987, and became Chairman of the Board of Directors on December 16, 1999. From
1993 until becoming Chairman he had served as Chief Executive Officer of the
Company. From 1996 until becoming Chairman, he had served as Vice Chairman.
Mr. Richardson has served the Company as an executive officer since 1987,
including Executive Vice President from 1989 to 1993 and President from 1993 to
1996. DAVID R. CLARK, VICE CHAIRMAN, age 47, has been a director since 1996 and
Vice Chairman since 1999. He joined the Company as its President and Chief
Operating Officer in 1996 and held those positions until he became Vice
Chairman. From 1994 to 1996, he served as Executive Vice President and Chief
Operating Officer of Bank of Granite, located in Granite Falls, North Carolina. BOBBY G. HOLMAN, DIRECTOR, age 68, has been a director since 1994. He
served as the Companys Chief Financial Officer and Treasurer from 1994 until
his retirement in 1997. During fiscal 2003, Mr. Holman was a member of the
Audit and Special Committees of the Board of Directors, until those committees
were disbanded in September 2002. WILLIAM R. McDONALD III, DIRECTOR, age 69, has been a director since 1991.
From 1989 until his retirement in 1999, he was Branch Manager of American
Pharmaceutical Services, a subsidiary of Mariner Post-Acute Network, or its
predecessors. Mr. McDonald served as Mayor of the City of Hickory, North
Carolina, an elective office he held from 1981 to December 2001. During fiscal
2003, he served on the Audit and Sensitive Transactions Committees of the
Companys Board of Directors, until those committees were disbanded in
September 2002. BRUCE E. MEISNER, DIRECTOR, age 54, was elected to the Board of Directors
by the Board itself on February 3, 2000 to fill the unexpired term of L. Dent
Miller, who had resigned from the Board concurrent with his retirement from the
Company. Mr. Meisner is the proprietor of Bruce E. Meisner Appraisal Company
in Hickory, North Carolina, a company providing real estate appraisal services.
During fiscal 2003, Mr. Meisner served on the Audit, Executive Compensation
and Special Committees, until those committees were disbanded in September
2002. JOHN H. GRIGG, DIRECTOR, age 42, was elected to the Board of Directors on
December 11, 2003 to fill the position of a new director following the
expansion of the Board of Directors to six members. Mr. Grigg is the founder
and President of LTA, LLC, a publishing and event business established in 2001.
From 1989 to 2000, he served as Partner and Managing Director of Bowles
Hollowell Conner & Co. and First Union Capital Markets, investment banking
firms. NORBERT E. WOODHAMS, PRESIDENT AND CHIEF EXECUTIVE OFFICER, age 58, became
the Companys President and Chief Executive Officer on December 16, 1999.
Immediately prior to his election to those offices, Mr. Woodhams was President
of Pierre Foods, LLC, the Companys operating subsidiary, having served in that
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 food
processing division of Hudson. Upon the acquisition of Hudson by Tyson in
January 1998, Mr. Woodhams became President of Pierre. Mr. Woodhams served as
a director from 1998 to September 2002. PAMELA M. WITTERS, CHIEF FINANCIAL OFFICER, TREASURER AND SECRETARY, age
47, became the Companys Chief Financial Officer on December 16, 1999, and
Senior Vice President on October 26, 2000. She served the Company as Vice
President of Finance from 1998 to 1999. From 1994 to 1998, she worked with
Deloitte & Touche LLP in Hickory, North Carolina. ROBERT C. NAYLOR, SENIOR VICE PRESIDENT OF SALES, age 52, became the
Companys Senior Vice President of Sales on December 16, 1999. Immediately
prior, he was Senior Vice President of Sales of Pierre Foods, LLC, the
Companys operating subsidiary, having served in that position since the
Companys acquisition of Pierre Cincinnati in June 1998. From 1978 to 1998, he
served in various sales positions for Pierre Cincinnati, including Vice
President of Sales. 19




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##### 



Item 11.Executive Compensation SUMMARY COMPENSATION TABLE The following information relates to compensation paid by the Company to
its Chief Executive Officer and each of the highly compensated Executive
Officers (collectively, the Named Executive Officers). Annual Compensation
    
    Long TermCompensationOption Awards(# of Shares
    
    All OtherName and
    
    Fiscal
    
    Salary
    
    Bonus
    
    Other
    
    Underlying
    
    CompensationPrincipal Position
    
    Year
    
    ($)
    
    ($)
    
    ($) (1)
    
    Options)
    
    ($)(2)James C. Richardson, Jr.
    
    
    2004
    
    
    $
    1,020,046
    
    
    $
    0
    
    
    $
    188,652
    
    
    $
    0
    
    
    $
    0Chairman
    
    
    2003
    
    
    
    1,000,800
    
    
    
    1,615,000
    
    
    
    276,947
    
    
    
    0
    
    
    
    02002
    
    
    
    481,148
    (3)
    
    
    750,000
    (4)
    
    
    207,314
    
    
    
    0
    
    
    
    0David R. Clark
    
    
    2004
    
    
    $
    1,020,046
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    5,500Vice Chairman
    
    
    2003
    
    
    
    1,000,800
    
    
    
    1,750,000
    
    
    
    0
    
    
    
    0
    
    
    
    3,2002002
    
    
    
    665,604
    (5)
    
    
    1,368,800
    
    
    
    18,876
    
    
    
    0
    
    
    
    3,200Norbert E. Woodhams
    
    
    2004
    
    
    $
    356,731
    
    
    $
    518,213
    
    
    $
    0
    
    
    $
    0
    
    
    $
    9,200President and
    
    
    2003
    
    
    
    350,000
    
    
    
    678,563
    
    
    
    0
    
    
    
    0
    
    
    
    3,200Chief Executive Officer
    
    
    2002
    
    
    
    307,693
    
    
    
    324,771
    
    
    
    0
    
    
    
    0
    
    
    
    3,200Pamela M. Witters
    
    
    2004
    
    
    $
    214,038
    
    
    $
    278,929
    
    
    $
    0
    
    
    $
    0
    
    
    $
    7,400Chief Financial Officer,
    
    
    2003
    
    
    
    210,000
    
    
    
    407,137
    
    
    
    0
    
    
    
    0
    (6)
    
    
    3,200Treasurer and Secretary
    
    
    2002
    
    
    
    184,669
    
    
    
    201,000
    
    
    
    0
    
    
    
    0
    
    
    
    3,200Robert C. Naylor
    
    
    2004
    
    
    $
    224,231
    
    
    $
    314,592
    
    
    $
    0
    
    
    $
    0
    
    
    $
    8,000Senior Vice
    
    
    2003
    
    
    
    220,000
    
    
    
    427,140
    
    
    
    0
    
    
    
    0
    (7)
    
    
    1,040President of
    
    
    2002
    
    
    
    193,860
    
    
    
    202,416
    
    
    
    0
    
    
    
    0
    
    
    
    1,040Sales
 (1) Represents the value of life insurance premiums. For all periods shown,
company cars and certain other benefits are excluded, as such items did not
exceed 10% of the individuals annual salary and bonus. (2) Represents matching contributions made by the Company to the Companys
401(k) plan. (3) For fiscal 2002, includes compensation by HERTH Management Inc. (HERTH)
and subsequently PF Management through September 3, 2001, plus salary beginning
September 3, 2001. The Company paid PF Management $967,500 in fiscal 2002,
consisting of $325,000 under the management services agreement, $350,000 as a
cancellation fee, and $150,000 as bonuses paid to Mr. Richardson. See Note 16
to the consolidated financial statements Transactions with Related Parties. (4) For fiscal 2002, includes management performance bonuses of $600,000 paid
directly to HERTH and management performance bonuses of $150,000 paid directly
to PF Management. (5) For fiscal 2002, excludes $100,000 paid by the Company and offset from
amounts owing to HERTH. See Note 16 to the consolidated financial statements
Transactions with Related Parties. (6) Effective July 26, 2002, Ms. Witters received $12,500 in exchange for the
cancellation of all outstanding options to purchase common stock that had been
issued and were outstanding, including options not yet exercisable as of the
date of cancellation. 20




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##### 



(7) Effective July 26, 2002, Mr. Naylor cancelled all outstanding options to
purchase common stock that had been issued and were outstanding, including
options not yet exercisable as well as options exercisable as of the date of
cancellation. No value was received in connection with the cancellation of the
options due to the excess of the exercise price of the options over the market
value of the common stock. COMPENSATION OF DIRECTORS During fiscal 2004, directors were paid $5,000 per board meeting attended
except that directors who were employees of the Company received no payment for
services as directors. EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL AGREEMENTS On September 3, 2001, each of James C. Richardson, Jr., the Companys
Chairman, and David R. Clark, the Companys Vice Chairman, executed an
Employment Agreement with the Company for three years at an annual base salary
of $1,000,800, which may be increased from time to time by the Board of
Directors. The Company can also award bonuses to Mr. Richardson and Mr. Clark
based upon other considerations. See Executive Compensation. Each of these
employment agreements will be automatically extended for additional, successive
one-year terms, unless the Company or the respective employee gives prior
notice of termination. Should Mr. Richardsons or Mr. Clarks employment be
terminated by the Company without cause, or by reason of death or disability,
or should Mr. Richardson or Mr. Clark resign from employment for good reason,
then the Company would be obligated to make a severance payment to him equal to
the sum of his base salary as would be due in the aggregate for the remainder
of the initial three-year term or the one-year renewal term then in effect, as
the case may be, but which shall not be less than three months of his base
salary then in effect. As described under the heading Restructuring of Senior Notes in Item 7,
the Company entered into a Fourth Supplemental Indenture on March 8, 2004.
Among other things, the Fourth Supplemental Indenture limits the annual
compensation payable to Messrs. Richardson and Clark, as well as the value of
the benefits and perquisites provided to them. The Fourth Supplemental
Indenture provides that annual bonuses may be paid to Messrs. Richardson and
Clark in accordance with formulas set forth in the Fourth Supplemental
Indenture. In the case of Mr. Clark, the Employment Agreement dated as of September
3, 2001 replaced the Employment Agreement between the Company and Mr. Clark
dated June 30, 1996, as amended February 23, 1998 (the superseded agreement).
As amended, the superseded agreement provided for an annual base salary of
$350,000 and an annual bonus based on the Companys financial performance.
Under the superseded agreement, $200,000 of Mr. Clarks base salary was paid by
HERTH and $150,000 of his base salary was paid by the Company. See Certain
Relationships and Related Party Transactions. On August 18, 1999, Norbert E. Woodhams, the Companys President, Chief
Executive Officer and Director, and the Company executed an Incentive
Agreement, which provided for an annual salary of $250,000 and a periodic bonus
under the Companys executive bonus plan (the Woodhams Incentive Agreement).
The Company also agreed to pay to Mr. Woodhams a pay to stay bonus in the
amount of $800,000 (inclusive of a tax gross up amount) in the event that the
Company enters into an agreement for the sale of the Companys food processing
operation or if Mr. Woodhams employment is terminated. Mr. Woodhams was also
entitled to receive a transaction success bonus in the amount of $750,000
(inclusive of a tax gross up amount) and a severance payment of $532,099
(inclusive of a tax gross up amount) in the event that such sale is
consummated or Mr. Woodhams employment is terminated. The Woodhams Incentive
Agreement was amended on January 1, 2000 and December 31, 2001 to increase Mr.
Woodhams annual salary to $300,000 and $350,000, respectively. The Woodhams
Incentive Agreement was further amended (the Third Amendment) on May 11, 2004
to provide that, in the event of a change of control of the Company within six
months following May 11, 2004, Mr. Woodhams will receive a bonus equal to 4% of
the net proceeds received by the Companys shareholder and other executives,
after certain adjustments, reductions and deposits. Concurrently with the
execution of the Third Amendment, Mr. Woodhams executed a Waiver of Payment
under which he waived all rights to all other payments provided for in the
Woodhams Incentive Agreement upon a change of control of the Company.
Accordingly, the only payment Mr. Woodhams will receive upon a change of
control is that set forth in the Third Amendment. The term of the Woodhams
Incentive Agreement expires on June 8, 2004 and will be automatically extended
from year to year unless the Company notifies Mr. Woodhams that it does not
intend to extend the term. 21




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##### 



On December 31, 2001, each of Pamela M. Witters, the Companys Chief
Financial Officer, and Robert C. Naylor, the Companys Senior Vice President of
Sales, executed an Employment Agreement with the Company for three years. Ms.
Witters agreement provides for an annual base salary of $210,000, and Mr.
Naylors agreement provides for an annual base salary of $220,000, each of
which may be increased from time to time by the Board of Directors. The
Company can also award bonuses to Ms. Witters and Mr. Naylor based upon other
considerations. See Executive Compensation. Each of these employment
agreements will be automatically extended for additional successive one-year
terms, unless the Company or the respective employee gives prior notice of
termination. Should Ms. Witters or Mr. Naylors employment be terminated by
the Company without cause, or by reason of death or disability, or should Ms.
Witters or Mr. Naylor resign from employment for good reason, then the Company
would be obligated to make a severance payment to that employee equal to the
sum of his or her base salary as would be due in the aggregate for the
remainder of the initial three-year term or the one-year renewal term then in
effect, as the case may be, but which shall not be less than three months of
his or her base
salary then in effect. In the event of a change in control of the Company, the
employment agreements provided that Ms. Witters and Mr. Naylor would be
entitled to receive (a) three times the amount of base salary paid or payable
by the Company to that employee for services rendered during the most recently
completed fiscal year, plus (b) three times the amount of aggregate cash bonus
paid or payable by the Company to that employee for services rendered during
the most recently completed fiscal year. On May 11, 2004, however, each of Ms.
Witters and Mr. Naylor entered into amendments to their employment agreements
(the Amendments). The Amendments provide that, in the event of a change of
control of the Company within six months following May 11, 2004, each of Ms.
Witters and Mr. Naylor will receive a bonus equal to 3% of the net proceeds
received by the Companys shareholder and other executives, after certain
adjustments, reductions and deposits. Concurrently with the execution of the
Third Amendment, each of Ms. Witters and Mr. Naylor executed a Waiver of
Payment under which they waived all rights to all other payments provided for
in their employment agreements upon a change of control of the Company.
Accordingly, the only payments that Ms. Witters and Mr. Naylor will receive
upon a change of control is that set forth in the Amendments. 
 Item 12.Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters PRINCIPAL SHAREHOLDERS The following table shows, as of April 30, 2004, except as otherwise
indicated, the holdings of Pierre Foods common stock by (1) the sole entity or
persons known to us to be the beneficial owner of more than five percent of the
outstanding shares, and (2) by all directors and executive officers as a group. NAME AND
    
    NUMBER OF SHARES
    
    PERCENT OFADDRESS OF
    
    OF COMMON STOCK
    
    OUTSTANDINGBENEFICIAL OWNER
    
    BENEFICIALLY OWNED (1)
    
    COMMON STOCKPF Management, Inc. (2)
361 Second Street, NW
    
    
    100,000
    
    
    
    100
    %Hickory, NC 28601James C. Richardson, Jr. (3)
P.O. Box 3967
    
    
    100,000
    
    
    
    100
    %Hickory, NC 28603David R. Clark (3)
P.O. Box 3967
    
    
    100,000
    
    
    
    100
    %Hickory, NC 28603James M. Templeton (3)
P.O. Box 1295
    
    
    100,000
    
    
    
    100
    %Claremont, NC 28610All directors and executive
officers as a group (8 persons)
    
    
    100,000
    
    
    
    100
    %
 (1) The actual number of shares outstanding at April 30, 2004 was 100,000. (2) All of the shares owned by PF Management are also deemed to be
beneficially owned by Messrs. Richardson, Clark, and Templeton, who are
shareholders of PF Management. (3) Consists of 100,000 shares deemed to be owned beneficially through
PF Management 22




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##### 



Item 13.Certain Relationships and Related Transactions CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS As described in Liquidity and Capital Resources  Restructuring of Senior
Notes above, on March 8, 2004 the Company and the Trustee under the Companys
Indenture executed a Fourth Supplemental Indenture and, pursuant to the terms
of the Fourth Supplemental Indenture, the Company terminated substantially all
of its related party transactions. The following related party transactions
are specifically permitted under the terms of the Fourth Supplemental
Indenture:  Columbia Hill Land Company, LLC, owned 50% by each of Messrs.
Richardson and Clark, leases office space to the Company in Hickory, North
Carolina, pursuant to a ten-year lease that commenced in September 1998.
Rents paid under the lease were approximately $116,000 in fiscal 2004.  As described above, on August 13, 2003, the Company obtained a
three year variable rate $40 million revolving credit facility from Fleet
Capital Corporation. Messrs. Richardson and Clark have provided
guarantees of value and validity of the collateral securing this credit
facility; they did not, however, guarantee payment of the facility, nor
are they receiving guarantee fees (see further discussion in Liquidity
and Capital Resources).  On March 8, 2004 the Company took title to an aircraft that was
transferred from Columbia Hill Aviation, LLC (CHA), owned 100% by PF
Management, subject to existing purchase money debt. The aircraft was
originally leased by the Company from CHA beginning in the fourth quarter
of fiscal 2002. Effective March 1, 2002, the original lease was cancelled
and replaced with a non-exclusive lease agreement. Pursuant to this new
lease, the Company was obligated to make 16 quarterly lease payments of
$471,500 each for the right to use the aircraft for up to 115 flight hours
per quarter, based on availability. Under this lease agreement, CHA was
responsible for all expenses incurred in the operation of the use of the
aircraft, except that the Company provided its own flight crew. During
fiscal 2004, the Company paid CHA approximately $2.6 million in lease
payments. CHA was not a subsidiary of the Company; however, the Company
considered CHA a non-independent special purpose leasing entity.
Accordingly, CHAs financial condition, results of operations and cash
flows have been included in the Companys consolidated financial
statements included herein. Under the terms of the operating lease with
CHA, and the financing agreements between CHA and its creditor, the
Company did not maintain the legal rights of ownership to the aircraft,
nor did CHAs creditor maintain any legal recourse to the Company. Any related party transactions described below that were 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 of the termination of
these related party transactions, subsequent to March 8, 2004, the Company will
perform the purchasing and distribution services internally. Other related
party services will be outsourced as necessary at comparable cost. Columbia Hill Management, Inc. (Columbia Hill), owned 50% by each of
Messrs. Richardson and Clark, provided accounting, tax and administrative
services to Pierre Foods, as well as professional services for the management
of special projects. Fees paid for these services were approximately $203,000
in fiscal 2004. During fiscal 2004, PF Management owed the Company as much as $993,247
pursuant to a promissory note payable on demand and bearing interest at the
prime rate. PF Management is owned in part by Messrs. Richardson and Clark,
who have unconditionally guaranteed repayment of the note. As of March 8,
2004, this note was forgiven and included in the debt assumed per the Fourth
Supplemental Indenture. Effective February 21, 2003, Messrs. Richardson and Clark sold their net
assets in Compass Outfitters, LLC, a company that provides team-building
opportunities for customers and employees of the Company, to the Company for a
total of $270,983. In exchange for the net assets, the Company issued notes in
the amount of $135,491 to each of Messrs. Richardson and Clark. The notes are
five-year notes, bearing interest at 6% per annum, with interest and principal
due at maturity. 23




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PF Purchasing, LLC (PFP), owned 100% by PF Management, served as the
exclusive purchasing agent for the Company, pursuant to a three-year agreement
that commenced September 3, 2001. Under the agreement, PFP made an incentive
payment of $100,000 per quarter to the Company in consideration of the
opportunity to act as exclusive purchasing agent, and in exchange is entitled
to receive all rebates or discounts receivable by Pierre Foods from suppliers
and vendors for orders negotiated and placed by PFP. In fiscal 2004, net fees
paid to PFP were approximately $2,122,000. Effective March 3, 2002, the Company entered into a logistics agreement
with PF Distribution, LLC (PF Distribution), owned 100% by PF Management.
Under the agreement, PF Distribution served as the exclusive logistics agent
for the Company, and provided all warehousing, fulfillment and transportation
services to the Company. The cost of PF Distribution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 determined based on historical costs and industry
standards. In fiscal 2004, distribution expense recorded in selling, general
and administrative expense was approximately $31,126,000 of which approximately
$30,999,000 million had been paid to PF Distribution as of March 6, 2004. Atlantic Cold Storage of Mocksville, LLC (ACS), owned one-third each by
Messrs. Richardson and Clark, plans to construct and finance a public cold
storage warehouse which would lease space to the Company as well as to others.
The proposed agreement with the Company is for 10 years and a minimum of 4,000
pallet positions to be leased as of the first date the facility is operational.
The Company also agreed to pay $250,000 for specialized construction costs.
During fiscal 2001, the Company paid $250,000 to ACS for the specialized
construction costs. All material transactions with affiliates of the Company were reviewed by
the entire Board of Directors, where they were approved by a majority of the
independent directors. The directors obtained and relied upon investment
banking fairness opinions when considering these transactions to the extent
required by the indenture governing the senior notes. 
 Item 14.Principal Accountant Fees and Services The following table presents fees billed for professional audit services
rendered by Deloitte & Touche LLP for the audit of our annual financial
statements for the years ended March 6, 2004, and March 1, 2003, and for other
services rendered by Deloitte & Touche LLP during those periods: Fiscal Years EndedMarch 6,
    
    March 1,2004
    
    2003Audit Fees (1)
    
    $
    281,000
    
    
    $
    295,650Audit Related Fees (2)
    
    
    
    
    
    
    2,520Tax Fees (3)
    
    
    80,700
    
    
    
    47,829All Other Fees (4)
    
    
    
    
    
    
    $
    361,700
    
    
    $
    345,999
 (1) Audit fees consisted of audit work performed in the preparation of
financial statements, as well as work generally only the independent
auditor can reasonably be expected to provide, such as statutory audits. (2) Audit related fees consisted
principally of services provided for consultation on accounting standards. (3) Tax fees include all tax services relating to tax compliance, tax
planning and reporting. (4) No other fees for professional services rendered to the Company during fiscal 2004 or fiscal 2003. (5) The Board considered the impact on auditors independence in
connection with non-audit services and concluded that there is no adverse
effect on their independence. Policy on Board of Directors Pre-Approval of Audit and Permissible Non-audit
Services of Independent Auditors Consistent with SEC policies regarding auditor independence, the Board of
Directors has responsibility for appointing, setting compensation and
overseeing the work of the independent auditor. In recognition of this
responsibility, the Board of Directors has established a policy to pre-approve
all audit and permissible non-audit services provided by the independent
auditor. 24




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##### 



PART IV 
 Item 15.Exhibits, Financial Statement Schedules, and Reports on Form 8-K  (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 consolidated financial
statements or notes thereto.  3.
    
    Exhibits See Index to Exhibits below.  (b)
    
    Reports On Form 8-K. A current report on Form 8-K was filed on December 30, 2003 to
provide information about the Companys results of operations to holders
of the Notes while the Company negotiated the terms of a restructuring of
its Notes. Included in this filing were the unaudited balance sheets,
statements of operations and statements of cash flows for the fiscal year
ended March 1, 2003, as well as the first two quarters of the Companys
fiscal year 2004, which quarters ended May 31, 2003 and August 30, 2003. A current report on Form 8-K was filed on January 28, 2004 to provide
information about the Companys results of operations to holders of the
Notes while the Company negotiated the terms of a restructuring of its
Notes. Included in this filing were the unaudited balance sheet,
statement of operations and statement of cash flows for the third fiscal
quarter of 2004 ended November 29, 2003. A current report on Form 8-K was filed on January 30, 2004,
announcing the Company had completed negotiations of a restructuring of
its Notes and had distributed consent solicitation materials to holders of
the Notes. 25




---



##### 



SIGNATURES Pursuant to the requirements of Section 13 or 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/ DAVID R. CLARKDavid R. ClarkVice Chairman of the BoardDated: May 17, 2004
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Pierre
Foods, Inc., in the capacities and on the dates indicated. Signature
    
    Title
    
    Date/s/  James C. Richardson, Jr.
James C. Richardson, Jr.
    
    Chairman of the Board
    
    May 17, 2004/s/ David R. Clark
David R. Clark
    
    Vice Chairman of the Board
    
    May 17, 2004/s/  Norbert E. Woodhams
Norbert E. Woodhams
    
    Chief Executive Officer and
  President (Principal Executive
  Officer)
    
    May 17, 2004/s/  Pamela M. Witters
Pamela M. Witters
    
    Chief Financial Officer, Treasurer
  and Secretary (Principal
  Financial Officer and Principal
  Accounting Officer)
    
    May 17, 2004/s/  Bobby G. Holman
Bobby G. Holman
    
    Director
    
    May 17, 2004/s/  Bruce E. Meisner
Bruce E. Meisner
    
    Director
    
    May 17, 2004/s/  William R. McDonald III
William R. McDonald III
    
    Director
    
    May 17, 2004/s/  JOHN H. GRIGG
John H. Grigg
    
    Director
    
    May 17, 2004
 26




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##### 



INDEX TO EXHIBITS Exhibit No.
    
    Description3.1
    
    Articles of Restatement of Pierre Foods, Inc., dated July 30, 2002
incorporating Restated Articles of Incorporation (incorporated by
reference to Exhibit 3.3 to the Companys Quarterly Report on Form 10-Q
for its fiscal quarter ended August 31, 2002)3.2
    
    Amended and Restated Bylaws of Pierre Foods, Inc., dated September 18,
2002 (incorporated by reference to Exhibit 10.6 to the Companys Quarterly
Report on Form 10-Q for its fiscal quarter ended August 31, 2002)3.3
    
    Agreement and Restated Agreement and Plan of Share Exchange between
Pierre Foods, Inc. and PF Management, Inc., dated as of December 20, 2001
(incorporated by reference to Appendix A to the Companys Preliminary
Proxy Statement on Schedule 14A file on January 24, 2002)4.1
    
    Note Purchase Agreement, dated June 4, 1998, among the Company, the
Guarantors and the Initial Purchasers (incorporated by reference to
Exhibit 4.1 to the Companys Current Report on Form 8-K filed with the SEC
on June 24, 1998)4.2
    
    Indenture, dated as of June 9, 1998, among the Company, certain
Guarantors and State Street Bank and Trust Company, Trustee (incorporated
by reference to Exhibit 4.2 to the Companys Current Report on Form 8-K
filed with the SEC on June 24, 1998)4.3
    
    Form of Global Note4.4
    
    First Supplemental Indenture, dated as of September 5, 1998, among the
Company, State Street Bank and Trust Company, Trustee, and Pierre Leasing,
LLC (incorporated by reference to Exhibit 4.8 to Pre-Effective amendment
No. 1 to the Companys Registration Statement on Form S-4 (No. 333-58711))4.5
    
    Second Supplemental Indenture dated as of February 26, 1999 among the
Company, State Street Bank and Trust Company, Trustee, and Fresh Foods
Restaurant Group, LLC (incorporated by reference to Exhibit 4.9 to the
Companys Quarterly Report on Form 10-Q for its fiscal quarter ended
December 4, 1999)4.6
    
    Third Supplemental Indenture dated as of October 8, 1999 between the
Company and State Street Bank and Trust Company, Trustee (incorporated by
reference to Exhibit 4.10 to the Companys Quarterly Report on Form 10-Q
for its fiscal quarter ended December 4, 1999)4.7
    
    Fourth Supplemental Indenture dated as of March 8, 2004 between the
Company and U.S. Bank National Association, Trustee (incorporated by
reference to Exhibit 4.8 to the Companys Annual Report on Form 10-K for
its fiscal year ended March 1, 2003)10.1
    
    Incentive Agreement dated as of August 18, 1999 among the Company, Pierre
Foods, LLC and Norbert E. Woodhams, together with First Amendment to
Incentive Agreement dated as of January 1, 2000 (incorporated by reference
to Exhibit 10.41 to the Companys Quarterly Report on Form 10-Q for the
fiscal quarter ended December 4, 1999)10.2
    
    Employment Agreement dated as of September 3, 2001, by and between Pierre
Foods, Inc. and James C. Richardson, Jr. (incorporated by reference to
Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for its fiscal
quarter ended December 1, 2001)
 27




---



##### 



Exhibit No.
    
    Description10.3
    
    Employment Agreement dated as of September 3, 2001, by and between Pierre
Foods, Inc. and David R. Clark (incorporated by reference to Exhibit 10.3
to the Companys Quarterly Report on Form 10-Q for its fiscal quarter
ended December 1, 2001)10.4
    
    Employment Agreement dated as of December 31, 2001, between the Company
and Pamela M. Witters (incorporated by reference to Exhibit 10.42 to the
Companys Annual Report on Form 10-K for its fiscal year ended March 2,
2002)10.5
    
    Employment Agreement dated as of December 31, 2001, between the Company
and Robert C. Naylor (incorporated by reference to Exhibit 10.43 to the
Companys Annual Report on Form 10-K for its fiscal year ended March 2,
2002)10.6
    
    Assignment and Assumption and Subordination Agreement dated as of March
8, 2004, between Pierre Foods, Inc. and PF Management, Inc. (incorporated
by reference to Exhibit 10.20 to the Companys Annual Report on Form 10-K
for its fiscal year ended March 1, 2003)10.7
    
    Termination Agreement dated as of March 8, 2004, between Columbia Hill
Aviation, LLC and Pierre Foods, Inc. (incorporated by reference to Exhibit
10.21 to the Companys Annual Report on Form 10-K for its fiscal year
ended March 1, 2003)10.8
    
    Termination Agreement dated as of March 8, 2004, between PF Purchasing,
LLC and Pierre Foods, Inc. (incorporated by reference to Exhibit 10.22 to
the Companys Annual Report on Form 10-K for its fiscal year ended March
1, 2003)10.9
    
    Termination Agreement dated as of March 8, 2004, between PF Distribution,
LLC and Pierre Foods, Inc. (incorporated by reference to Exhibit 10.23 to
the Companys Annual Report on Form 10-K for its fiscal year ended March
1, 2003)10.10
    
    Loan and Security Agreement, dated as of August 13, 2003, between the
Company, PF Management, Inc. and Fleet Capital Corporation, as Lender10.11
    
    Amendment No. 1 to, and Consent Under Loan and Security Agreement,
dated as of March 8, 2004, between Pierre Foods, Inc., PF Management, Inc. and Fleet Capital Corporation10.12
    
    Stock Purchase Agreement, dated as of May 11, 2004,
between PF Management, Inc., the PF Management, Inc. Shareholders, David R. Clark and
Pierre Holding Corp10.13
    
    Third Amendment to Incentive Agreement, dated as of May 11, 2004,
between the Company and Norbert E. Woodhams10.14
    
    Amendment to Employment Agreement, dated as of May 11, 2004, between the Company and Pamela M. Witters10.15
    
    Amendment to Employment Agreement, dated as of May 11, 2004, between the Company and Robert C. Naylor12
    
    Calculation of Ratio of Earnings to Fixed Charges21
    
    Subsidiaries of Pierre Foods, Inc.31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer32
    
    Section 1350 Certifications of the Chief Executive Officer and the Chief Financial Officer99.1
    
    Risk Factors (incorporated by reference to Exhibit 99.1 to the Companys
Annual Report on Form 10-K for its fiscal year ended March 1, 2003)
 The Company hereby agrees to provide to the Commission, upon request,
copies of long-term debt instruments omitted from this report pursuant to Item
601(b)(4)(iii)(A) of Regulation S-K under the Securities Act. 28




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##### 



INDEX TO FINANCIAL STATEMENTS PagePIERRE FOODS, INC.INDEPENDENT AUDITORS REPORT
    
    
    F-2CONSOLIDATED FINANCIAL STATEMENTS:Consolidated Balance Sheets as of March 6, 2004 and March 1, 2003
    
    
    F-3Consolidated Statements of Operations for the Years Ended March 6, 2004,
March 1, 2003 and March 2, 2002
    
    
    F-4Consolidated Statements of Shareholders Equity for the Years Ended March 6,
2004, March 1, 2003 and March 2, 2002
    
    
    F-5Consolidated Statements of Cash Flows for the Years Ended March 6, 2004,
March 1, 2003 and March 2, 2002
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7
 F-1




---



##### 



INDEPENDENT AUDITORS REPORT To the Board of Directors and Shareholders of
Pierre Foods, Inc.
Cincinnati, Ohio We have audited the accompanying consolidated balance sheets of Pierre Foods,
Inc. and subsidiaries (the Company) as of March 6, 2004 and March 1, 2003,
and the related consolidated statements of operations, shareholders equity,
and cash flows for each of the three fiscal years in the period ended March 6,
2004. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at March 6, 2004 and
March 1, 2003, and the results of its operations and its cash flows for each of
the three fiscal years in the period ended March 6, 2004 in conformity with
accounting principles generally accepted in the United States of America. As discussed in Note 2 to the financial statements, effective March 3, 2002 the
Company changed its method of accounting for goodwill. DELOITTE & TOUCHE LLP
Cincinnati, Ohio
May 17, 2004 F-2




---



##### 



PIERRE FOODS, INC. 
 CONSOLIDATED BALANCE SHEETS March 6,
    
    March 1,2004
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    204,865
    
    
    $
    274,329Certificate of deposit of special purpose entity
    
    
    1,240,000
    
    
    
    1,240,000Accounts receivable, net
    
    
    25,641,608
    
    
    
    23,654,358Inventories
    
    
    38,974,018
    
    
    
    32,584,777Refundable income taxes
    
    
    
    
    
    
    165,829Deferred income taxes
    
    
    3,569,766
    
    
    
    2,642,526Prepaid expenses and other current assets (includes related party amounts of
$24,000 and $375,000 in fiscal 2004 and fiscal 2003, respectively)
    
    
    3,236,867
    
    
    
    3,264,746Total current assets
    
    
    72,867,124
    
    
    
    63,826,565PROPERTY, PLANT AND EQUIPMENT, NET
    
    
    60,695,455
    
    
    
    55,549,083OTHER ASSETS:Tradename, net
    
    
    38,808,636
    
    
    
    38,808,636Note receivable-related party
    
    
    993,247
    
    
    
    993,247Deferred income taxes
    
    
    482,215
    
    
    
    6,283,871Deferred loan origination fees, net
    
    
    1,627,601
    
    
    
    2,950,109Other
    
    
    296,694
    
    
    
    369,500Total other assets
    
    
    42,208,393
    
    
    
    49,405,363Total Assets
    
    $
    175,770,972
    
    
    $
    168,781,011LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Current installments of long-term debt
    
    $
    1,628,276
    
    
    $
    369,467Trade accounts payable
    
    
    7,170,004
    
    
    
    9,422,256Accrued payroll and payroll taxes
    
    
    5,745,950
    
    
    
    5,929,464Accrued interest
    
    
    3,242,623
    
    
    
    3,056,662Accrued promotions
    
    
    3,064,769
    
    
    
    2,280,788Income taxes payable
    
    
    39,248
    
    
    
    Accrued taxes (other than income and payroll)
    
    
    901,693
    
    
    
    561,642Other accrued liabilities (includes related party amounts of
$4,503,219 and $425,330 in fiscal 2004 and fiscal 2003, respectively)
    
    
    4,964,703
    
    
    
    1,490,086Total current liabilities
    
    
    26,757,266
    
    
    
    23,110,365LONG-TERM DEBT, less current installments
    
    
    136,772,418
    
    
    
    130,387,174OBLIGATION OF SPECIAL PURPOSE ENTITY
    
    
    5,293,342
    
    
    
    5,591,813OTHER LONG-TERM LIABILITIES
    
    
    327,411
    
    
    
    693,750DEFERRED INCOME TAXES
    
    
    
    
    
    
    COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    SHAREHOLDERS EQUITY:Common stock  Class A, 100,000 shares authorized, issued and
outstanding at March 6, 2004 and March 1, 2003
    
    
    29,438,172
    
    
    
    29,438,172Accumulated deficit
    
    
    (17,817,637
    )
    
    
    (15,440,263
    )Note receivable-related party
    
    
    (5,000,000
    )
    
    
    (5,000,000
    )Total shareholders equity
    
    
    6,620,535
    
    
    
    8,997,909Total Liabilities and Shareholders Equity
    
    $
    175,770,972
    
    
    $
    168,781,011
 See accompanying notes to consolidated financial statements. F-3




---



##### 



PIERRE FOODS, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Years EndedMarch 6,
    
    March 1,
    
    March 2,2004
    
    2003
    
    2002REVENUES, NET:
    
    $
    358,549,316
    
    
    $
    276,338,823
    
    
    $
    243,277,822COSTS AND EXPENSES:Cost of goods sold
(includes net related party transactions totaling
$5,295,036, $4,283,025 and $620,191 in fiscal 2004, 2003 and 2002, respectively)
    
    
    254,235,016
    
    
    
    184,091,572
    
    
    
    160,781,388Selling, general and administrative expenses (includes related party
transactions totaling $32,487,545, $23,155,405 and $3,943,452
in fiscal 2004, 2003 and 2002, respectively)
    
    
    79,982,134
    
    
    
    71,351,817
    
    
    
    62,398,791Net loss on disposition of property, plant and equipment
    
    
    11,042
    
    
    
    88,937
    
    
    
    83,833Depreciation and amortization
    
    
    4,604,954
    
    
    
    4,124,641
    
    
    
    6,437,873Total costs and expenses
    
    
    338,833,146
    
    
    
    259,656,967
    
    
    
    229,701,885OPERATING INCOME
    
    
    19,716,170
    
    
    
    16,681,856
    
    
    
    13,575,937OTHER INCOME (EXPENSE):Interest expense
    
    
    (16,979,028
    )
    
    
    (14,228,220
    )
    
    
    (13,206,634
    )Other income, net (includes related party income totaling
$371,610 and $58,203 in fiscal 2003 and 2002, respectively)
    
    
    
    
    
    
    446,825
    
    
    
    364,237Other expense, net
    
    
    (16,979,028
    )
    
    
    (13,781,395
    )
    
    
    (12,842,397
    )INCOME BEFORE INCOME TAX AND CUMMULATIVE EFFECT
OF ACCOUNTING CHANGE
    
    
    2,737,142
    
    
    
    2,900,461
    
    
    
    733,540INCOME TAX PROVISION
    
    
    (1,303,347
    )
    
    
    (1,122,478
    )
    
    
    (732,960
    )INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
    
    
    1,433,795
    
    
    
    1,777,983
    
    
    
    580CUMULATIVE EFFECT OF ACCOUNTING CHANGE (net of income tax
benefit of $10,415,037)
    
    
    
    
    
    
    (18,604,534
    )
    
    
    NET INCOME (LOSS)
    
    $
    1,433,795
    
    
    $
    (16,826,551
    )
    
    $
    580NET INCOME (LOSS) PER COMMON SHARE -  BASIC AND DILUTEDIncome before cumulative effect of accounting change
    
    $
    14.34
    
    
    $
    17.78
    
    
    $
    0.01Cumulative effect of accounting change
    
    
    
    
    
    
    (186.05
    )Net income (loss) per common share -  basic and diluted
    
    $
    14.34
    
    
    $
    (168.27
    )
    
    $
    0.01WEIGHTED AVERAGE SHARES OUTSTANDING -  BASIC AND DILUTED
    
    
    100,000
    
    
    
    100,000
    
    
    
    100,000
 See accompanying notes to consolidated financial statements. F-4




---



##### 



PIERRE FOODS, INC. 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY Common
    
    Additional
    
    Retained
    
    Receivable
    
    TotalCommon
    
    Stock
    
    Paid in
    
    Earnings
    
    From
    
    ShareholdersStock
    
    Class A
    
    Capital
    
    (Deficit)
    
    Shareholder
    
    EquityBALANCE AT MARCH 3, 2001
    
    $
    5,781,480
    
    
    
    
    
    
    $
    23,317,053
    
    
    $
    2,768,265
    
    
    $
    (5,000,000
    )
    
    $
    26,866,798Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    580
    
    
    
    
    
    
    
    580Capital Contributions to special
purpose entity
    
    
    
    
    
    
    
    
    
    
    339,639
    
    
    
    
    
    
    
    
    
    
    
    339,639BALANCE AT MARCH 2, 2002
    
    
    5,781,480
    
    
    
    
    
    
    
    23,656,692
    
    
    
    2,768,845
    
    
    
    (5,000,000
    )
    
    
    27,207,017Recapitalization
    
    
    (5,781,480
    )
    
    
    29,438,172
    
    
    
    (23,656,692
    )
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,826,551
    )
    
    
    
    
    
    
    (16,826,551
    )Distributions of special purpose entity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,382,557
    )
    
    
    
    
    
    
    (1,382,557
    )BALANCE AT MARCH 1, 2003
    
    
    
    
    
    
    29,438,172
    
    
    
    
    
    
    
    (15,440,263
    )
    
    
    (5,000,000
    )
    
    
    8,997,909Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,433,795
    
    
    
    
    
    
    
    1,433,795Distribution to parent  tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,578,169
    )
    
    
    
    
    
    
    (3,578,169
    )Distributions of special purpose entity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (233,000
    )
    
    
    
    
    
    
    (233,000
    )BALANCE AT MARCH 6, 2004
    
    $
    
    
    
    $
    29,438,172
    
    
    $
    
    
    
    $
    (17,817,637
    )
    
    $
    (5,000,000
    )
    
    $
    6,620,535
 See accompanying notes to consolidated financial statements. F-5




---



##### 



PIERRE FOODS, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Fiscal Years EndedMarch 6,
    
    March 1,
    
    March 2,2004
    
    2003
    
    2002CASH FLOWS FROM OPERATING ACTIVITIESNet income (loss)
    
    $
    1,433,795
    
    
    $
    (16,826,551
    )
    
    $
    580Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Cumulative effect of accounting change
    
    
    
    
    
    
    18,604,534
    
    
    
    Depreciation and amortization
    
    
    4,604,954
    
    
    
    4,124,641
    
    
    
    6,437,873Amortization of deferred loan origination fees
    
    
    769,587
    
    
    
    746,262
    
    
    
    528,202Deferred income taxes
    
    
    1,296,247
    
    
    
    1,286,191
    
    
    
    806,004Write-off of deferred loan origination fees
    
    
    1,233,530
    
    
    
    
    
    
    
    Net loss on disposition of assets (net of writedowns)
    
    
    11,042
    
    
    
    88,937
    
    
    
    83,833(Increase) decrease in other assets
    
    
    72,806
    
    
    
    79,831
    
    
    
    (440,931
    )Decrease in other long-term liabilities
    
    
    (366,339
    )
    
    
    (338,946
    )
    
    
    (314,535
    )Changes in operating assets and liabilities providing (using) cash:Receivables
    
    
    (1,987,250
    )
    
    
    (2,170,878
    )
    
    
    (3,271,133
    )Inventories
    
    
    (6,389,241
    )
    
    
    (8,731,922
    )
    
    
    2,951,208Refundable income taxes, prepaid expenses and other assets
    
    
    193,708
    
    
    
    (1,726,478
    )
    
    
    630,899Trade accounts payable and other accrued liabilities
    
    
    2,388,092
    
    
    
    4,906,862
    
    
    
    2,440,434Total adjustments
    
    
    1,827,136
    
    
    
    16,869,034
    
    
    
    9,851,854Net cash provided by operating activities
    
    
    3,260,931
    
    
    
    42,483
    
    
    
    9,852,434CASH FLOWS FROM INVESTING ACTIVITIESProceeds from sales of assets to others
    
    
    278,400
    
    
    
    83,000
    
    
    
    1,000Increase in related party notes receivables
    
    
    
    
    
    
    
    
    
    
    (58,203
    )Capital expenditures
    
    
    (10,040,768
    )
    
    
    (16,216,292
    )
    
    
    (5,994,017
    )Certificate of deposit of special purpose entity
    
    
    
    
    
    
    
    
    
    
    (1,240,000
    )Net cash used in investing activities
    
    
    (9,762,368
    )
    
    
    (16,133,292
    )
    
    
    (7,291,220
    )CASH FLOWS FROM FINANCING ACTIVITIESBorrowings (repayment) of revolving credit agreement with former lender
    
    
    (15,085,147
    )
    
    
    15,085,147
    
    
    
    Net borrowings under new revolving credit agreement
    
    
    13,279,986
    
    
    
    
    
    
    
    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
    
    
    (849,257
    )
    
    
    (311,967
    )
    
    
    (134,107
    )Loan origination fees
    
    
    (680,609
    )
    
    
    (1,603,467
    )
    
    
    (1,949
    )Capital contributions to (distributions of) special purpose
entity
    
    
    (233,000
    )
    
    
    (1,382,557
    )
    
    
    339,639Net cash provided by financing activities
    
    
    6,431,973
    
    
    
    11,787,156
    
    
    
    203,583NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (69,464
    )
    
    
    (4,303,653
    )
    
    
    2,764,797CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    274,329
    
    
    
    4,577,982
    
    
    
    1,813,185CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    204,865
    
    
    $
    274,329
    
    
    $
    4,577,982
 See accompanying notes to consolidated financial statements. F-6




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##### 



PIERRE FOODS, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND ACQUISITION Description of Business.Pierre Foods, Inc. (the Company or Pierre
Foods, formerly known as Fresh Foods, Inc. or Fresh Foods) is a vertically
integrated producer and marketer of fully-cooked branded and private label
protein and bakery products and microwaveable sandwiches for the domestic
foodservice market. The Company sells its products through various
distribution channels under Pierre and DesignTM, Pierre Pizza ParlorTM, Pierre
Main Street DinerTM, Pierre SelectTM, Fast Bites®, Fast Choice®, Rib-B-Q®, Hot
n Ready®, Big AZ®, Chop House®, Deli Breaks and Mom n Pops® brand names. Acquisition of Pierre Foods Division of Hudson Foods, Inc.On June 9,
1998, the Company purchased certain of the net operating assets of the Pierre
Foods Division (Pierre Cincinnati) of Hudson Foods, Inc. (Hudson), a wholly
owned subsidiary of Tyson Foods. The acquisition was accounted for using the
purchase method of accounting. The purchase price, which totaled $119.3
million including capitalized transaction costs, was allocated to the net
underlying assets based on their respective fair values. Excess purchase price
over fair value of the underlying assets was allocated to goodwill, trade name
and assembled work force and was being amortized on a straight-line basis over
lives ranging from fifteen to thirty years until fiscal 2003, at which time,
the Company adopted Statement of Financial Accounting Standards (SFAS) No.
142 (SFAS 142), which requires, among other things, the discontinuance of
goodwill amortization (Note 2). Management Buyout.On April 26, 2001, the Company signed a definitive
exchange agreement documenting a management buyout proposal by PF Management.
In July 2001, the Special Committee of the Board of Directors of the Company
received a competing proposal from William E. Simon & Sons (Simon) and Triton
Partners (Triton) in which Simon and Triton proposed to commence a tender
offer to purchase the Companys common stock for $2.50 per share, subject to
certain conditions. The Special Committee was considering the Simon and Triton
proposal in light of the exchange agreement and other factors when the Company
was contacted in August 2001 by counsel to an Ad Hoc Committee of holders of
the Companys 10.75% Senior Notes due 2006 who stated that the members of the
Ad Hoc Committee, collectively owning at least $90 million in aggregate
principal amount of the Senior Notes, were interested in negotiating with the
Company to restructure the Companys debt and equity capital. The Special
Committee and the Board of Directors decided that the Company should pursue
these negotiations; however, when the Company and the Ad Hoc Committee were
unable to agree on a mutually acceptable proposal, the Company terminated
formal negotiations with the Ad Hoc Committee. On December 13, 2001, Simon entered into an agreement with PF Management,
guaranteed by the Company, whereby Simon agreed to assist PF Management in
completing the management buyout and possible subsequent restructurings of PF
Management and the Company. Commensurate with the signing of this agreement,
Simon withdrew its offer made in July 2001 with Triton. Following the signing
of this agreement, PF Management and the Company entered into an amendment of
the definitive exchange agreement. The amendment, dated December 20, 2001,
provided for an increase in the exchange price to be paid in the management
buyout from $1.21 to $2.50 per share. On June 25, 2002, a definitive proxy statement was filed with the
Securities and Exchange Commission in connection with a special meeting of
shareholders, at which the shareholders were asked to approve the Amended and
Restated Agreement and Plan of Share Exchange dated as of December 20, 2001,
and amended as of June 20, 2002. On July 26, 2002, the Companys shareholders approved the Amended and
Restated Agreement and Plan of Share Exchange dated as of December 20, 2001,
and amended as of June 20, 2002 and the management buyout of the Company was
completed on July 26, 2002. This going-private transaction resulted in the
Company becoming a wholly-owned subsidiary of PF Management; accordingly, there
is no public market for the Companys common stock. The Company had 5,781,480
shares issued and outstanding immediately before the closing and 2,500,000
shares of preferred stock authorized, none of which were outstanding. After
the closing, the Company amended and restated its Articles of Incorporation to
authorize the issuance of up to 100,000 shares of Class A common stock as the
only authorized class of capital stock of the Company. All 100,000 shares of
authorized common stock have been issued to PF Management. All per share
amounts have been retroactively restated in the accompanying Consolidated
Financial Statements and Notes to Consolidated Financial Statements for all
periods presented to reflect the transaction. F-7




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##### 



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation.The accompanying consolidated financial
statements include Pierre Foods, Inc. and subsidiaries, as well as the accounts
of the special purpose leasing entity (see Note 16). All intercompany
transactions have been eliminated. Fiscal Year.The Company reports the results of operations using a 52-53
week basis. Each quarter of the fiscal year contains 13 weeks except for the
infrequent fiscal years with 53 weeks. Fiscal 2004 represents a 53 week
period. Fiscal 2003 and fiscal 2002 represent 52 week periods. The Companys fiscal year ended March 6, 2004 is referred to herein as
fiscal 2004, its fiscal year ended March 1, 2003 is referred to herein as
fiscal 2003, and its fiscal year ended March 2, 2002 is referred to herein as
fiscal 2002. Cash and cash equivalents.The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents. Inventories.Inventories are stated at the lower of cost (first-in,
first-out) or market. Property, Plant and Equipment.Property, plant and equipment are stated
at cost. Expenditures for maintenance and repairs which do not significantly
extend the useful lives of assets are charged to operations whereas additions
and betterments, including interest costs incurred during construction, which
was not material for any year presented, are capitalized. Depreciation of property, plant and equipment is provided over the
estimated useful lives of the respective assets on the straight-line basis.
Leasehold improvements are depreciated over the shorter of their estimated
useful lives or the terms of the respective leases. Property under capital
leases is amortized in accordance with the Companys normal depreciation
policy. Depreciation expense, along with amortization of intangible assets, is
recorded as a separate line item in the consolidated statements of operations.
Cost of goods sold and selling, general and administrative expenses exclude
depreciation expense. The Company evaluates the carrying values of long-lived assets for
impairment by assessing recoverability based on forecasted operating cash flows
on an undiscounted basis, and determined no impairment existed at March 6, 2004
or March 1, 2003. Goodwill and Other Intangible Assets. During fiscal 2002 and prior years,
Goodwill and other intangible assets were being amortized using the straight
line method over a 30 year period. The carrying value of goodwill and other
intangible assets was evaluated periodically as events and circumstances
indicated a possible inability to recover its carrying amount. Amortization
expense recognized for the fiscal year ended March 2, 2002 was $2,693,499. In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS 142, Goodwill and Other Intangible Assets, which was effective for the
fiscal year beginning March 3, 2002. SFAS 142 requires, among other things,
the discontinuance of goodwill amortization. In addition, the standard includes
provisions for the reclassification of certain existing recognized intangibles
as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. Upon the Companys adoption of SFAS
142 on March 3, 2002, the Company ceased amortizing goodwill and
indefinite-lived intangibles. Also effective March 3, 2002, the Company
reclassified the value assigned to its assembled workforce to goodwill. In adopting SFAS 142, the Company considered valuations based discounted
cash flow models and on market values of publicly-traded equity, as adjusted,
plus publicly-owned subordinated notes, which were determined in conjunction
with the Management Buyout in fiscal 2003 (See Note 1  Basis of Presentation,
Acquisition and Discontinued Operations for discussion on Management Buyout).
The Companys analysis determined that the entire carrying amount of the
goodwill balance at March 3, 2002 was impaired. The carrying amount,
$29,019,571 was written-off as the Cumulative Effect of an Accounting Change,
net of income taxes of $10,415,037, in the statement of operations. F-8




---



##### 



Prior to adopting SFAS 142, the Company had the following acquired
intangible assets recorded as of March 2, 2002: Gross Carrying
    
    Accumulated
    
    Net CarryingAmount
    
    Amortization
    
    AmountGoodwill
    
    $
    33,571,687
    
    
    $
    (4,552,116
    )
    
    $
    29,019,571Intangible
assets with
indefinite
lives:Trade name
    
    $
    44,340,000
    
    
    $
    (5,531,364
    )
    
    $
    38,808,636Total
    
    $
    77,911,687
    
    
    $
    (10,083,480
    )
    
    $
    67,828,207
 As required by SFAS 142, the results for fiscal 2002 have not been
restated. The table below presents the effect on net income (loss) and income
(loss) per share as if SFAS 142 had been in effect for fiscal 2002: Fiscal
    
    Fiscal
    
    FiscalYear Ended
    
    Year Ended
    
    Year EndedMarch 6, 2004
    
    March 1, 2003
    
    March 2, 2002Reported net income (loss)
    
    $
    1,433,795
    
    
    $
    (16,826,551
    )
    
    $
    580Add back goodwill and
tradename amortization
(net of tax)
    
    
    
    
    
    
    
    
    
    
    1,688,823Adjusted net income (loss)
    
    $
    1,433,795
    
    
    $
    (16,826,551
    )
    
    $
    1,689,403Basic and diluted netIncome (loss) per shareReported net income
(loss)
    
    $
    14.34
    
    
    $
    (168.27
    )
    
    $
    0.01Add back goodwill and
tradename amortization
(net of tax)
    
    
    
    
    
    
    
    
    
    
    16.88Adjusted net income
(loss)
    
    $
    14.34
    
    
    $
    (168.27
    )
    
    $
    16.89
 Economic Useful
Life of Intangible Assets. The Company reviews the economic useful life of
its intangible assets annually. The determination of the economic useful life of
an intangible asset requires a significant amount of judgment and entails significant
subjectivity and uncertainty. Deferred Loan Origination Fees.Deferred loan origination fees associated
with the Companys revolving credit facility and long-term debt are amortized
based on the term of the respective agreements. This amortization expense is
included in interest expense. Revenue Recognition.Revenue from sales of food processing products is
recorded at the time title transfers. Standard shipping terms are FOB
destination, therefore title passes at the time the product is delivered to the
customer. Revenue is recognized as the net amount to be received after
deductions for estimated discounts, product returns and other allowances. F-9




---



##### 



Significant Customer.Sales to
Carl Karcher Enterprises Inc (CKE) accounted for approximately
24% and 11%, of our net sales in fiscal 2004 and 2003, respectively.
No other customer accounted for 10% or more of net sales during
fiscal years 2004, 2003 and 2002. Promotions.Promotional expenses associated with rebates, marketing
promotions and special pricing arrangements are recorded as a reduction of
revenues at the time the sale is recorded, in accordance with Emerging Issues
Task Force Issue No. 01-9 Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of a Vendors Products). Certain of these
expenses are estimated based on expected future payments to be made under these
programs. The Company believes the estimates recorded in the financial
statements are reasonable estimates of the Companys liability. Advertising Costs.The Company expenses advertising costs as incurred.
Advertising expense for fiscal 2004, fiscal 2003 and fiscal 2002 was $558,689,
$652,927 and $810,367, respectively. Research and Development.The Company expenses research and development
costs as incurred. Research and development expense for fiscal 2004, fiscal
2003 and fiscal 2002 was $885,575, 648,774 and $372,797, respectively. Distribution Expense.The Company expenses distribution costs as
incurred. These costs include warehousing, fulfillment and freight costs, and
are included in selling, general and administrative expense. Distribution
expense included in operations for fiscal 2004, fiscal 2003 and fiscal 2002 was
$31,126,379, $21,544,140 and $17,828,859, respectively (See Note 16). Income Taxes.Income taxes are provided for temporary differences between
the tax and financial accounting bases of assets and liabilities using the
asset and liability method. The tax effects of such differences are reflected
in the balance sheet at the enacted tax rate applicable to the years when such
differences are scheduled to reverse. The effect on deferred taxes of a change
in tax rates is recognized in the period that includes the enactment date. Reclassifications.Financial statements for fiscal 2003 and fiscal 2002
have been reclassified, where applicable, to conform to the financial statement
presentation used in fiscal 2004. Use of Estimates.The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant accounting
estimates include sales discounts and promotional allowances, inventory
reserves, insurance reserves, and useful lives assigned to intangible assets.
Actual results could differ from those estimates. Going Concern Assumption.Significant
assumptions underlie the belief that the Company anticipates that its fiscal 2005 cash requirements
for working capital and debt service will be met through a combination of funds provided by
operations and borrowings under its $40 million credit facility, including among other things,
that there will be no material adverse developments in the business, liquidity or significant capital requirements of the Company. New Accounting Pronouncements. In June 2001, the FASB issued Statement of
Financial Accounting Standards No. 143 (SFAS 143), Accounting for Asset
Retirement Obligations, was adopted by the Company beginning March 2, 2003.
SFAS 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement cost. The adoption of SFAS 143 did not have a material impact
on the Companys financial position and results of operations. In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 (SFAS 148)   Accounting for Stock-Based Compensation 
Transition and Disclosure. This statement amends Statement of Financial
Accounting Standards 123, Accounting for Stock-Based Compensation to provide
alternative methods of transition for an entity that changes to the fair value
based method of accounting for stock-based employee compensation and changes
the disclosure requirements. This statement was effective for financial
statements for fiscal years ending after December 15, 2002. The Company adopted
SFAS No. 148 effective March 1, 2003. During fiscal 2003, effective with the
management buyout discussed in Note 1, all stock option plans were terminated
and all outstanding options were cancelled, however, the necessary disclosure
requirements of SFAS 148 are presented in Note 2 of the Notes to Consolidated
Financial Statements. In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 (SFAS 149),  Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. The statement amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and hedging activities under Statement of Financial Accounting
Standards No. 133. SFAS 149 is effective for all contracts entered into or
modified after June 30, 2003. This Statement did not have an impact on the
Companys financial statements. F-10




---



##### 



In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 (SFAS 150), Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This statement requires
certain freestanding financial instruments to be reported as liabilities by
their issuers. The provisions of SFAS 150, which also include a number of new
disclosure requirements, are effective for instruments entered into or modified
after May 31, 2003 and pre-existing instruments as of the beginning of the
first interim period that commences after June 15, 2003. This statement did
not have an impact on the Companys financial statements. In November 2002, the FASB issued FASB Interpretation No. (FIN) 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (FIN 45), which expands the
disclosures a guarantor is required to provide in its annual and interim
financial statements regarding its obligations for certain guarantees.
Disclosures are required to be included in financial statements issued after
December 15, 2002 (see Note 7). FIN 45 also requires the guarantor to
recognize a liability for the fair value of an obligation assumed for
guarantees issued or modified after December 31, 2002. The adoption of FIN 45
did not have a material impact on the Companys financial position and results
of operations. In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities (FIN 46), which addresses how to identify variable
interest entities and the criteria that require a company to consolidate such
entities in its financial statements. As originally issued, FIN 46 was
effective on February 1, 2003 for new transactions and on July 1, 2003 for
existing transactions. In December 2003, the FASB deferred the effective date
for transactions entered into prior to February 1, 2003, to the first reporting
period that ends after March 15, 2004. The Company does not believe that the
adoption of FIN 46 will have a material impact on its financial position and
results of operations. F-11




---



##### 



Stock Compensation.The Company accounts for its stock option plans using the intrinsic value based method. Had compensation for
stock options granted been determined using the fair value based method, the Companys net income (loss) and net income (loss) per
common share amounts for fiscal 2004, 2003, and 2002 would approximate the following pro forma amounts: Fiscal Years EndedMarch 6, 2004
    
    March 1, 2003
    
    March 2, 2002Net income (loss), as reported
    
    $
    1,433,795
    
    
    $
    (16,826,551
    )
    
    $
    580Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of tax effects
    
    
    
    
    
    
    (171,335
    )
    
    
    (253,434
    )Net income (loss), proforma
    
    $
    1,433,795
    
    
    $
    (16,997,886
    )
    
    $
    (252,854
    )Net income (loss) per common share 
basic and diluted, as reported:
    
    $
    14.34
    
    
    $
    (168.27
    )
    
    $
    0.01Net income (loss) per common share 
basic and diluted, proforma:
    
    $
    14.34
    
    
    $
    (169.98
    )
    
    $
    (2.53
    )
 F-12




---



##### 



3. ACCOUNTS AND NOTES RECEIVABLE Accounts and notes receivable consist of the following: March 6,
    
    March 1,2004
    
    2003Accounts receivable:Trade accounts receivable (less allowance for doubtful receivables of
$353,543 and $309,741 at March 6, 2004 and March 1, 2003)
    
    $
    24,300,201
    
    
    $
    23,072,351Other receivables
    
    
    1,341,407
    
    
    
    582,007Total accounts receivable
    
    $
    25,641,608
    
    
    $
    23,654,358Related party note receivable (includes accrued interest) (Note 16):
    
    $
    993,247
    
    
    $
    993,247Total noncurrent note receivable
    
    $
    993,247
    
    
    $
    993,247
 See Note 16 regarding a $5,000,000 note receivable from a significant shareholder presented as a reduction of shareholders equity. The following is a summary of activity in the allowance for doubtful receivables for the three years in the period ended March 6, 2004 : Additions
    
    DeductionBalance
    
    Charged to
    
    Amounts
    
    BalanceBeginning
    
    Costs and
    
    Charged
    
    End ofYear Ended
    
    of Period
    
    Expenses
    
    Off-Net
    
    PeriodMarch 6, 2004
    
    $
    309,741
    
    
    
    507,077
    
    
    
    463,275
    
    
    $
    353,543March 1, 2003
    
    
    219,118
    
    
    
    108,646
    
    
    
    18,023
    
    
    
    309,741March 2, 2002
    
    
    244,881
    
    
    
    199,840
    
    
    
    225,603
    
    
    
    219,118
 4. INVENTORIES A summary of inventories, by major classification, follows: March 6,
    
    March 1,2004
    
    2003Manufacturing supplies
    
    $
    1,572,212
    
    
    $
    1,361,313Raw materials
    
    
    5,427,936
    
    
    
    6,688,473Work in process
    
    
    1,157
    
    
    
    3,955Finished goods
    
    
    31,972,713
    
    
    
    24,531,036Total
    
    $
    38,974,018
    
    
    $
    32,584,777
 F-13




---



##### 



5. PROPERTY, PLANT AND EQUIPMENT The major components of property, plant and equipment are as follows: Estimated
    
    March 6,
    
    March 1,Useful Life
    
    2004
    
    2003Land
    
    
    
    
    
    $
    1,270,025
    
    
    $
    1,304,018Land improvements
    
    10-20 years
    
    
    585,729
    
    
    
    382,204Buildings
    
    20-40 years
    
    
    26,492,579
    
    
    
    23,454,089Leasehold improvements
    
    5-20 years
    
    
    1,145,737
    
    
    
    1,521,889Machinery and equipment
    
    5-20 years
    
    
    45,793,907
    
    
    
    38,915,741Machinery and equipment under capital leases
    
    5-15 years
    
    
    325,871
    
    
    
    389,873Furniture and fixtures
    
    5-15 years
    
    
    5,798,747
    
    
    
    5,653,632Furniture and fixtures under capital leases
    
    5-15 years
    
    
    58,102
    
    
    
    58,102Aircraft (Note 16 and Note 17)
    
    16 years
    
    
    6,200,000
    
    
    
    6,200,000Automotive equipment
    
    2-5 years
    
    
    644,926
    
    
    
    816,353Construction in progress
    
    
    
    
    
    
    338,357
    
    
    
    1,962,435Total
    
    
    
    
    
    
    88,653,980
    
    
    
    80,658,336Less accumulated depreciation and amortization
    
    
    
    
    
    
    27,958,525
    
    
    
    25,109,253Property, plant and
equipment, net
    
    
    
    
    
    $
    60,695,455
    
    
    $
    55,549,083
 6. INTANGIBLE ASSETS Intangible assets consist of the following: March 6,
    
    March 1,2004
    
    2003Tradename
    
    $
    38,808,636
    
    
    $
    38,808,636
 The Company adopted SFAS 142, Goodwill and Other Intangible Assets,on March 3, 2002. Upon adoption, the Company ceased amortizing goodwill
and indefinite-lived intangibles. The Company recorded no amortization expense in fiscal 2004 and fiscal 2003. F-14




---



##### 



7. FINANCING ARRANGEMENTS Long-term debt is comprised of the following: March 6,
    
    March 1,2004
    
    200310.75% Senior Notes, interest payable on June 1 and December 1 of
each year, maturing on June 1, 2006
    
    $
    115,000,000
    
    
    $
    115,000,000Revolving line of credit, maximum borrowings of $40 million,
with floating interest rates maturing 2007
    
    
    13,279,985
    
    
    
    15,085,1475.25% Term loan sublineequipment
    
    
    4,583,339
    
    
    
    5.25% Term loan sublinereal estate
    
    
    4,708,331
    
    
    
    6% Notes Payable maturing 2008 (Note 16)
    
    
    270,983
    
    
    
    270,9834.89% to 11.9% capitalized lease obligations maturing 2008 (Note 9)
    
    
    244,713
    
    
    
    110,655Total long-term debt
    
    
    138,087,351
    
    
    
    130,466,785Less current installments
    
    
    1,314,933
    
    
    
    79,611Long-term debt, excluding current installments
    
    $
    136,772,418
    
    
    $
    130,387,174
 The Senior Notes are unsecured obligations of the Company, subject to certain financial and non-financial covenants. At March
6, 2004, the Company believes it was in compliance with all covenants under the Senior Notes; but continued compliance will
depend on future cash flows and net income, which are not assured (See also Note 17). Effective August 13, 2003, the Company terminated its five-year variable-rate $50 million revolving credit facility. Also
effective August 13, 2003, the Company obtained a three-year variable rate $40 million revolving credit facility from a new
lender, which includes a $5 million real estate term loan subline, a $5 million equipment term loan subline and a $7.5 million
letter of credit subfacility. Funds available under this new facility are available for working capital requirements, permitted
investments and general corporate purposes. Borrowings under the new facility bear interest at floating rates based upon the
interest rate option selected from time to time by the Company and are secured by a first-priority security interest in
substantially all of the Companys assets. The interest rate for borrowings under the new facility at March 6, 2004 was 5%
(prime plus 1%). Borrowings under the new facility are due the earlier of ninety days prior to the redemption of the Senior
Notes or August 13, 2006. Repayment is also required in the amount of the proceeds from the sale of any collateral. In
addition, the Company is required to satisfy certain financial covenants regarding cash flow and capital expenditures. The average rate on the $40 million revolving credit line was 5.66% for the fiscal year ended March 6, 2004. The average rate
on the $50 million revolving credit line was 8.23% for the fiscal year ended March 1, 2003. At March 6, 2004, the Company had
outstanding borrowings under this new revolving credit facility of $13.3 million and borrowing availability of approximately
$12.9 million. Also, at March 6, 2004, the Company had borrowings under the real estate subline and the equipment subline of
$4.7 million and $4.6 million, respectively. At March 1, 2003, the Company had outstanding borrowings under the revolving
credit facility of $15.1 million, and had approximately $4.6 million of additional borrowing availability. F-15




---



##### 



7. FINANCING ARRANGEMENTS (CONTINUED) Long-Term Debt Maturities, Including Capital Leases (Note 9)2005
    
    2006
    
    2007
    
    2008
    
    Total$
    1,314,933
    
    
    $
    116,303,479
    
    
    $
    20,188,912
    
    
    $
    280,027
    
    
    $
    138,087,351
 Obligation of special purpose entity is comprised of a seven year variable rate note payable, due in monthly installments with a balloon payment due in December 2008 (see Note 16): March 6,
    
    March 1,2004
    
    2003Obligation of special purpose entity
    
    $
    5,606,686
    
    
    $
    5,881,669Less current installments
    
    
    313,344
    
    
    
    289,856Obligation of special purpose entity, excluding current installments
    
    $
    5,293,342
    
    
    $
    5,591,813
 Obligation of Special Purpose Entity2009 and2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total$
    313,344
    
    
    $
    331,029
    
    
    $
    349,712
    
    
    $
    369,450
    
    
    $
    4,243,151
    
    
    $
    5,606,686
 F-16




---



##### 



8. INCOME TAXES The income tax provision (benefit) is summarized as follows: Fiscal Years EndedMarch 6,
    
    March 1,
    
    March 2,2004
    
    2003
    
    2002Current:Federal
    
    $
    
    
    
    $
    (232,761
    )
    
    $
    (59,063
    )State
    
    
    7,100
    
    
    
    69,048
    
    
    
    (13,981
    )Total current
    
    
    7,100
    
    
    
    (163,713
    )
    
    
    (73,044
    )Deferred:Federal
    
    
    1,077,657
    
    
    
    1,161,298
    
    
    
    694,949State
    
    
    218,590
    
    
    
    124,893
    
    
    
    111,055Total deferred
    
    
    1,296,247
    
    
    
    1,286,191
    
    
    
    806,004Total provision (benefit)
    
    $
    1,303,347
    
    
    $
    1,122,478
    
    
    $
    732,960
 Actual income tax provision are different from amounts computed by applying a statutory federal income tax rate to income or loss. The computed amount is reconciled to total income tax provision. Fiscal Years EndedMarch 6, 2004
    
    March 1, 2003
    
    March 2, 2002Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent ofAmount
    
    Pretax Income
    
    Amount
    
    Pretax Income
    
    Amount
    
    Pretax LossComputed provision at statutory rate
    
    $
    930,628
    
    
    
    34.0
    %
    
    $
    986,156
    
    
    
    34.0
    %
    
    $
    249,404
    
    
    
    34.0
    %Tax effect resulting from:State income taxes, net of
federal tax provision
    
    
    214,720
    
    
    
    7.8
    
    
    
    128,001
    
    
    
    4.4
    
    
    
    55,857
    
    
    
    7.6Compensation limitation
    
    
    
    
    
    
    0.0
    
    
    
    18,360
    
    
    
    0.6
    
    
    
    315,941
    
    
    
    43.0Income of Columbia Hill Aviation
    

    
    (260,504
    )
    
    
    (9.5
    )
    
    
    (403,663
    )
    
    
    (13.9
    )
    
    
    Meals and entertainment
    
    
    359,165
    
    
    
    13.1
    
    
    
    386,830
    
    
    
    13.3
    
    
    
    80,429
    
    
    
    11.0Other permanent differences
    
    
    59,338
    
    
    
    2.2
    
    
    
    6,794
    
    
    
    0.3
    
    
    
    31,329
    
    
    
    4.3Income tax provision
    
    $
    1,303,347
    
    
    
    47.6
    %
    
    $
    1,122,478
    
    
    
    38.7
    %
    
    $
    732,960
    
    
    
    99.9
    %
 F-17




---



##### 



8. INCOME TAXES, CONTINUED The
approximate tax effect of each type of temporary difference and
carryforward that gave rise to the Companys deferred income tax assets and liabilities for fiscal 2004 and fiscal 2003 is as follows: March 6, 2004
    
    March 1, 2003Assets
    
    Liabilities
    
    Total
    
    Assets
    
    Liabilities
    
    TotalCurrent:Allowance for doubtful receivables
    
    $
    641,274
    
    
    
    
    
    
    $
    641,274
    
    
    $
    355,239
    
    
    $
    
    
    
    $
    355,239Inventory
    
    
    1,033,554
    
    
    
    
    
    
    
    1,033,554
    
    
    
    1,102,107
    
    
    
    
    
    
    
    1,102,107Accrued promotional expense
    
    
    1,213,601
    
    
    
    
    
    
    
    1,213,601
    
    
    
    840,698
    
    
    
    
    
    
    
    840,698Accrued vacation pay
    
    
    479,528
    
    
    
    
    
    
    
    479,528
    
    
    
    419,132
    
    
    
    
    
    
    
    419,132Reserve for returns
    
    
    70,155
    
    
    
    
    
    
    
    70,155
    
    
    
    45,925
    
    
    
    
    
    
    
    45,925Reserves - other
    
    
    3,634
    
    
    
    
    
    
    
    3,634
    
    
    
    18,865
    
    
    
    
    
    
    
    18,865Prepaid expenses
    
    
    
    
    
    
    (254,633
    )
    
    
    (254,633
    )
    
    
    
    
    
    
    (257,087
    )
    
    
    (257,087
    )Accrued workers compensation
    
    
    218,037
    
    
    
    
    
    
    
    218,037
    
    
    
    142,396
    
    
    
    
    
    
    
    142,396Consulting Agreements
    
    
    116,362
    
    
    
    
    
    
    
    116,362Other
    
    
    48,254
    
    
    
    
    
    
    
    48,254
    
    
    
    
    
    
    
    (24,749
    )
    
    
    (24,749
    )Total current
    
    
    3,824,399
    
    
    
    (254,633
    )
    
    
    3,569,766
    
    
    
    2,924,362
    
    
    
    (281,836
    )
    
    
    2,642,526Noncurrent:Property, plant and equipment
    
    
    
    
    
    
    (6,948,257
    )
    
    
    (6,948,257
    )
    
    
    
    
    
    
    (5,237,655
    )
    
    
    (5,237,655
    )Consulting agreements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    270,562
    
    
    
    
    
    
    
    270,562Goodwill amortization
    
    
    3,368,976
    
    
    
    
    
    
    
    3,368,976
    
    
    
    5,331,733
    
    
    
    
    
    
    
    5,331,733General business credit
carryforward
    
    
    1,070,799
    
    
    
    
    
    
    
    1,070,799
    
    
    
    1,070,799
    
    
    
    
    
    
    
    1,070,799Alternative minimum tax credit
carryforward
    
    
    206,421
    
    
    
    
    
    
    
    206,421
    
    
    
    206,421
    
    
    
    
    
    
    
    206,421Federal loss carryforward
    
    
    1,807,420
    
    
    
    
    
    
    
    1,807,420
    
    
    
    3,510,287
    
    
    
    
    
    
    
    3,510,287State loss carryforward
    
    
    181,922
    
    
    
    
    
    
    
    181,922
    
    
    
    430,000
    
    
    
    
    
    
    
    430,000Charitable contribution carryforward
    
    
    177,155
    
    
    
    
    
    
    
    177,155
    
    
    
    231,758
    
    
    
    
    
    
    
    231,758Other
    
    
    617,779
    
    
    
    
    
    
    
    617,779
    
    
    
    469,966
    
    
    
    
    
    
    
    469,966Total noncurrent
    
    
    7,430,472
    
    
    
    (6,948,257
    )
    
    
    482,215
    
    
    
    11,521,526
    
    
    
    (5,237,655
    )
    
    
    6,283,871Total current and
noncurrent
    
    $
    11,254,871
    
    
    $
    (7,202,890
    )
    
    $
    4,051,981
    
    
    $
    14,445,888
    
    
    $
    (5,519,491
    )
    
    $
    8,926,397
 The Company will file a consolidated federal income tax return, with its parent corporation, PF Management, for fiscal 2004. Under consolidated tax return rules, PF Management will be able to utilize the net
operating loss and certain other deductions of the Company that could not otherwise be currently utilized by the Company on a separate return basis. The tax sharing agreement between PF Management and the Company
does not require PF Management to reimburse the Company for the net operating loss and other deductions that could not be currently utilized on a separate return basis. Accordingly, the Company recorded a
noncash distribution to PF Management in the amount of $3,578,169 for the utilization of the Companys deferred tax assets in PF Managements consolidated federal income tax return. At March 6, 2004, federal and state loss carryovers of approximately $5,316,000 and $9,858,000, respectively, are available to offset future federal and state taxable income. The carryover periods range from
fifteen to twenty years, which will result in expirations of varying amounts beginning in fiscal 2015 and continuing through fiscal 2022. Realization of certain deferred tax assets is dependent upon generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods. Although realization is not
assured, management believes it is more likely than not the deferred tax assets will be realized. F-18




---



##### 



9. LEASED PROPERTIES The Company operates certain machinery and equipment and furniture and fixtures under leases classified as capital leases. The leases have original terms ranging
from one to eight years. The assets covered under these leases have carrying values of $310,904 and $162,358 at March 6, 2004 and March 1, 2003, respectively. Certain machinery and equipment and real estate are under operating leases with terms that are effective for varying periods until 2012. Certain of these leases
have remaining renewal clauses, exercisable at the option of the lessee. Amounts below include leases with related parties (see Note 16). At March 6, 2004, minimum rental payments required under operating and capital leases are summarized as follows: Minimum Rental PaymentsOperating
    
    CapitalFiscal Year
    
    Leases
    
    Leases
    
    Total2005
    
    $
    878,482
    
    
    $
    114,764
    
    
    $
    993,2462006
    
    
    614,704
    
    
    
    95,841
    
    
    
    710,5452007
    
    
    384,653
    
    
    
    47,694
    
    
    
    432,3472008
    
    
    288,645
    
    
    
    9,139
    
    
    
    297,7842009
    
    
    157,450
    
    
    
    
    
    
    
    157,450Later years
    
    
    190,400
    
    
    
    
    
    
    
    190,400Total minimum lease payments
    
    $
    2,514,334
    
    
    
    267,438
    
    
    $
    2,781,772Less amount representing interest
    
    
    
    
    
    
    (22,725
    )Present value of minimum lease
payments under capital leases
(Note 7)
    
    
    
    
    
    $
    244,713
 Rental expense charged to continuing operations is as follows: Fiscal Year EndedMarch 6,
    
    March 1,
    
    March 2,2004
    
    2003
    
    2002Real estate
    
    $
    525,830
    
    
    $
    192,396
    
    
    $
    164,003Equipment
    
    
    928,190
    
    
    
    981,533
    
    
    
    1,185,738Total
    
    $
    1,454,020
    
    
    $
    1,173,929
    
    
    $
    1,349,741
 F-19




---



##### 



10. EMPLOYEE BENEFITS The Company maintains a 401(k) Retirement Plan for its employees which
provides that the Company will make a matching contribution of up to 50% of an
employees voluntary contribution, limited to the lesser of 5% of that
employees annual compensation or $13,000 for fiscal 2004. The Companys
contributions were $494,203, $484,639, and $450,085 in fiscal 2004, 2003 and
2002, respectively. The Company provides employee health insurance benefits to employees.
During fiscal 2002, benefits were provided through both fully insured and self
insurance group medical plans, which are partially funded by the Company.
During fiscal 2004 and fiscal 2003, medical benefits were provided primarily
through self insurance group medical plans. During fiscal 2004, 2003 and 2002,
contributions included in operations were $4,139 We had to subtract stop loss
reimbursements.,845, $2,833,789 and $1,579,999, respectively. Effective August 1, 2000, the Company adopted the Pierre Foods, Inc.
Compensation Exchange Plan. The Plan is a non-qualified deferred compensation
plan in which eligible participants consist of highly compensated employees and
the Companys Board of Directors. Cash contributions to the Plan were $43,839
and $55,270 during fiscal 2003 and fiscal 2002, respectively. Effective
December 31, 2002, the Company terminated the plan. F-20




---



##### 



11. STOCK OPTIONS The Companys 1997 Incentive Stock Option Plan, as amended, provided for the issuance of up to 1,000,000 shares of the Companys common stock to key employees, including officers of the Company. The Company may grant Incentive Stock Options
(ISOs) or nonqualified stock options to eligible employees. Stock options granted under this plan have terms of ten years, vest evenly over five years, and are assigned an exercise price of not less than the fair value on the date of
grant. The Companys 1997 Special Stock Option Plan, as amended, provided for the issuance of up to 1,500,000 shares of the Companys common stock to key management employees, including officers and directors of the Company and certain other
individuals. All options granted under this Plan are nonqualified stock options. Stock options granted under this plan have terms of ten years, vest immediately, and are assigned an exercise price of not less than the fair value on the date
of the grant. During fiscal 2003, effective with the management buyout discussed in Note 1  Basis of Presentation, Acquisition and Discontinued Operations, all stock option plans were terminated and all outstanding options were cancelled. A summary of the changes in shares under option and the weighted-average exercise prices for these Plans follows: 1997 Incentive
    
    1997 SpecialStock Option Plan
    
    Stock Option PlanWeighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageShares
    
    Exercise Price
    
    Shares
    
    Exercise PriceBalance at March 3, 2001
    
    
    260,800
    
    
    
    8.52
    
    
    
    237,500
    
    
    
    7.04Forfeited or cancelled
    
    
    (80,800
    )
    
    
    8.95
    
    
    
    (112,500
    )
    
    
    3.20Balance at March 2, 2002
    
    
    180,000
    
    
    
    8.33
    
    
    
    125,000
    
    
    
    10.50Forfeited or cancelled
    
    
    (180,000
    )
    
    
    8.33
    
    
    
    (125,000
    )
    
    
    10.50Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at March 1, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 F-21




---



##### 



12. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS The Companys nonderivative financial instruments consist primarily of
cash and cash equivalents, trade and note receivables, trade payables and
long-term debt. The estimated fair values of the financial instruments have
been determined by the Company using available market information and
appropriate valuation techniques. Considerable judgment is required, however,
to interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts. At March 6, 2004 excluding long-term debt, the book values of each of the
nonderivative financial instruments recorded in the Companys balance sheet are
considered representative of fair value due to variable interest rates, short
terms to maturity and/or short length of time outstanding. The fair value of the Companys Senior Notes is estimated based on quoted
market prices and interest rates currently available for issuance of debt with
similar terms and maturities. As of March 6, 2004 and March 1, 2003, the fair
value of the Senior Notes was $115,000,000 and $85,100,000, respectively. 13. MAJOR BUSINESS SEGMENT During fiscal 2004, fiscal 2003 and fiscal 2002, the Company operated
solely in the food manufacturing segment. Sales by major product line are as
follows: Net Revenues by SourceFiscal Years EndedMarch 6, 2004
    
    March 1, 2003
    
    March 2, 2002Food Processing:Fully-Cooked Protein Products
    
    $
    214,738,933
    
    
    $
    149,302,819
    
    
    $
    139,634,468Microwaveable Sandwiches
    
    
    136,423,374
    
    
    
    119,087,550
    
    
    
    95,779,980Bakery and Other Products
    
    
    7,387,009
    
    
    
    7,948,454
    
    
    
    7,863,374Total Food Processing
    
    $
    358,549,316
    
    
    $
    276,338,823
    
    
    $
    243,277,822
 Significantly all revenues and long-lived assets are derived from and reside in the United States. F-22




---



##### 



14. COMMITMENTS AND CONTINGENCIES The Companys new three year variable rate $40 million revolving credit facility includes letter of credit subfacilities in the amount of $7.5 million. The Company provides a secured letter of credit in the
amount of $3,500,000 to its insurance carrier for the underwriting of certain performance bonds, which expires in fiscal 2005. The Company also provides secured letters of credit to its insurance carriers
for outstanding and potential workers compensation and general liability claims. Letters of credit for these claims totaled $75,000 in fiscal 2004. In addition, the Company provides secured letters of
credit to a limited number of suppliers. Letters of credit for suppliers totaled $250,000 in fiscal 2004. The Company is involved in various legal proceedings. Management believes, based on the advice of legal counsel, that the outcome of such proceedings will not have a materially adverse effect on the
Companys financial position or future results of operations and cash flows. Commitments by Fiscal Year2009 and2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    TotalLetters of Credit
    
    $
    3,825,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,825,000Purchase
Commitments for Capital Projects
    
    
    204,517
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    204,517Total
    
    $
    4,029,517
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    4,029,517
 Contractual Obligations by Fiscal Year2009 and2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    TotalLong-Term Debt
    
    $
    1,214,280
    
    
    $
    116,214,280
    
    
    $
    20,143,095
    
    
    $
    270,983
    
    
    $
    
    
    
    $
    137,842,638Capital Lease Obligations
    
    
    100,653
    
    
    
    89,199
    
    
    
    45,817
    
    
    
    9,041
    
    
    
    
    
    
    
    244,710Operating Lease Obligations
    
    
    878,482
    
    
    
    614,704
    
    
    
    384,653
    
    
    
    288,645
    
    
    
    347,850
    
    
    
    2,514,334Consulting and Noncompete
Agreements
    
    
    327,411
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    327,411Obligation of Special Purpose
Entity
    
    
    313,344
    
    
    
    331,029
    
    
    
    349,712
    
    
    
    369,450
    
    
    
    4,243,151
    
    
    
    5,606,686Total
    
    $
    2,834,170
    
    
    $
    117,249,212
    
    
    $
    20,923,277
    
    
    $
    938,119
    
    
    $
    4,591,001
    
    
    $
    146,535,779
 See Note 17 to the Consolidated Financial Statements for a further discussion of commitments, contingencies and contractual obligations. F-23




---



##### 



15. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest, income taxes refunded and non-cash transactions
consisting of notes issued for assets acquired, capital lease additions and
certain tax benefits utilized by the Parent accounted for as a distribution to
the Parent are as follows: Fiscal Years EndedMarch 6, 2004
    
    March 1, 2003
    
    March 2, 2002Interest
    
    $
    14,857,594
    
    
    $
    13,515,920
    
    
    $
    12,612,803Income taxes refunded
    
    $
    197,977
    
    
    $
    68,506
    
    
    $
    1,164,569Notes issued for assets acquired
    
    $
    
    
    
    $
    270,983
    
    
    
    Capital lease additions
    
    $
    273,208
    
    
    $
    73,475
    
    
    
    Distribution to parent  tax benefit
    
    $
    3,578,167
    
    
    $
    
    
    
    
    
 During the fourth quarter of fiscal 2002, the special purpose leasing
entity exchanged a note payable in the amount of $6,200,000 for the purchase of
an aircraft for $6,200,000, in a non-cash transaction (see Note 16). 16. TRANSACTIONS WITH RELATED PARTIES Related party transactions during fiscal 2004, 2003 and 2002 arose in
connection with the following relationships: As discussed in Note 17  Restructuring of Senior Notes, on March 8,
2004 the Company executed a Fourth Supplemental Indenture and, pursuant to the
terms of the Fourth Supplemental Indenture, the Company terminated
substantially all of its related party transactions. The following related
party transactions are specifically permitted under the terms of the Fourth
Supplemental Indenture:      Columbia Hill Land Company, LLC,
owned 50% by each of Messrs. Richardson and Clark, Chairman and Vice-Chairman, respectively,
leases office space to the Company in Hickory, North
Carolina, pursuant to a ten-year lease that commenced in September 1998.
Rents paid under the lease were approximately $116,000 in fiscal 2004.      As described above, on August 13, 2003, the Company obtained a
three year variable rate $40 million revolving credit facility from Fleet
Capital Corporation. Messrs. Richardson and Clark have provided
guarantees of value and validity of the collateral securing this credit
facility; they did not, however, guarantee payment of the facility, nor
are they receiving guarantee fees (see further discussion in Liquidity
and Capital Resources).      On March 8, 2004 the Company took title to an aircraft that was
transferred from Columbia Hill Aviation, LLC (CHA), owned 100% by PF
Management, subject to existing purchase money debt. The aircraft was
originally leased by the Company from CHA beginning in the fourth quarter
of fiscal 2002. Effective March 1, 2002, the original lease was cancelled
and replaced with a non-exclusive lease agreement. Pursuant to this new
lease, the Company was obligated to make 16 quarterly lease payments of
$471,500 each for the right to use the aircraft for up to 115 flight hours
per quarter, based on availability. Under this lease agreement, CHA was
responsible for all expenses incurred in the operation of the use of the
aircraft, except that the Company provided its own flight crew. During
fiscal 2004, the Company paid CHA approximately $2.6 million in lease
payments. CHA was not a subsidiary of the Company; however, the Company
considered CHA a non-independent special purpose leasing entity.
Accordingly, CHAs financial condition, results of operations and cash
flows have been included in the Companys consolidated financial
statements included herein. Under the terms of the operating lease with
CHA, and the financing agreements between CHA and its creditor, the
Company did not maintain the legal rights of ownership to the aircraft,
nor did CHAs creditor maintain any legal recourse to the Company. Any related party transactions described below that were 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 of the termination of
these F-24




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related party transactions, subsequent to March 8, 2004, the Company will
perform the purchasing and distribution services internally. Other related
party services will be outsourced as necessary at comparable cost. Under an agreement with a management services entity owned by certain
officers and directors, as amended on December 17, 1999, the Company received
corporate management services, which included, among other things, strategic
planning, investor relations, management of the Companys banking, accounting
and legal relationships and general oversight. Management fees paid under this
agreement were in lieu of salary compensation for certain of the Companys
senior executives. Amounts paid under the agreement were $925,000 in fiscal
2002. Effective April 25, 2001, the agreement was assigned to another
management services entity, owned by certain officers and directors. Fees paid
in fiscal 2002 under the assigned agreement were $325,000, with an additional
$350,000 paid as a termination fee, and $292,500 paid in bonuses to its senior
executives. This agreement was cancelled as of September 3, 2001. In
addition, $426,435 was paid to this entity for reimbursement of expenses
incurred in connection with the exchange as required by the amended exchange
agreement (see Note 1). The Company uses the services of an entity in which the Companys
principal shareholders have substantial ownership interests. Services provided
by this entity include accounting, tax and administrative services, as well as
consulting services related to the development of new sales, warehousing and
distribution programs. Total payments for such services were approximately
$203,000, $650,000 and $1,130,000 in fiscal 2004, 2003 and 2002, respectively. The Company uses the services of an entity owned 100% by PF Management.
This entity serves as the exclusive purchasing agent pursuant to a three-year
agreement that commenced September 3, 2001. Under the agreement, the entity
pays $100,000 per quarter for the right to serve as exclusive purchasing agent.
Net payments to the purchasing entity were approximately $2,122,000,
$3,960,000 and $620,000 in fiscal 2004, fiscal 2003 and fiscal 2002,
respectively, and are recorded in cost of goods sold. During the fourth quarter of fiscal 2002, the Company leased an aircraft
from an entity owned 100% by PF Management. Under this lease, the Company
maintained its own flight department and was responsible for all operating
costs. Total payments under that lease were approximately $168,000 in fiscal
2002. Effective March 1, 2002, that lease was cancelled and replaced with a
four-year non-exclusive operating lease agreement. Pursuant to the new lease,
the Company is obligated to make minimum quarterly lease payments of $471,500
each for the right to use the aircraft for a specified number of hours. Under
this lease arrangement, the entity is responsible for all expenses incurred in
the operation and use of the aircraft, except that the Company must provide its
own crew. On March 1, 2002, the Company paid $943,000 as a refundable deposit
under the agreement and $471,500 for its first quarterly lease payment. During
fiscal 2004 and fiscal 2003, the Company paid approximately $2,597,000 and
$3,188,000, respectively for the aircraft lease. The aircraft leasing entity is owned 100% by PF Management and the Company
considers the entity a non-independent special purpose leasing entity.
Accordingly, the entitys assets and liabilities, results of operations and
cash flows have been included in the Companys consolidated financial
statements. Under the terms of the operating lease with the entity, and the
financing agreements between the entity and its creditor, the Company did not
maintain the legal rights of ownership to the aircraft, nor does the entitys
creditor maintain any legal recourse to the Company. Effective March 3, 2002, the Company entered into a one-year logistics
agreement with PF Distribution, LLC (PF Distribution), owned 100% by PF
Management. Under the agreement, PF Distribution will serve as the exclusive
logistics agent for the Company, and will provide all warehousing, fulfillment
and transportation services to the Company. The cost of PF Distributions
services is based on flat rates per pound, which are calculated based on weight
and volume characteristics of products, inventory pounds maintained and
inventory pounds shipped. Rates were determined based on historical costs and
industry standards. In fiscal 2004, distribution expense recorded in selling,
general and administrative expense was approximately $31,126,000 million, of
which approximately $30,999,000 million had been paid to PF Distribution as of
March 6, 2004. In fiscal 2003, distribution expense recorded in selling,
general and administrative expense was approximately $21,544,000 million, of
which approximately $21,254,000 million had been paid to PF Distribution as of
March 1, 2003. Effective May 29, 2002, the Company terminated its $25 million credit
facility with Fleet Capital. Also, effective May 29, 2002, the Company
obtained a five-year variable-rate $50 million revolving credit facility from
Foothill Capital Corporation, which includes a $16 million term loan subline, a
$10 million capital expenditures subline and a $7 million F-25




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letter of credit subfacility. Funds available under this facility were
available for working capital requirements, permitted investments and general
corporate purposes. Borrowings under the facility were bearing interest at
floating rates based upon the interest rate option selected from time to time
by the Company and were secured by a first-priority security interest in
substantially all of the Companys assets. In addition, the Company was
required to satisfy certain financial covenants regarding cash flow and capital
expenditures. The collateral for the facility included substantially all of
the Companys assets. Messrs. Richardson and Clark guaranteed payment of the
facility in exchange for guarantee fees. The Company paid such fees to each of
Messrs. Richardson and Clark, annually in advance, equal to 1.5% of the amount
committed for lending under the facility. In fiscal 2003, the Company paid
each of Messrs. Richardson and Clark $750,000. The Company has agreed to lease warehouse space from an entity in which
the Companys principal shareholders have substantial ownership interests. The
lease is a ten-year term to begin the first day the facility is operational.
During fiscal 2001, the Company paid $250,000 for specialized construction
costs. The Company uses the services of an entity in which one of the Companys
principal shareholders has a substantial ownership interest. This entity
provides general construction and maintenance services. Total payments for
such services were approximately $142,000 in fiscal 2002. The Company uses the services of an entity in which the Companys
principal shareholders have substantial ownership interests. This entity
provides team-building opportunities for customers and employees. Total
payments for such services were approximately $530,000 and $90,000 in fiscal
2003 and fiscal 2002, respectively. During fiscal 2003, Messrs. Richardson and
Clark each became 50% owners of the entity. Effective February 21, 2003,
Messrs. Richardson and Clark sold their net assets in the entity to the Company
for a total of $270,983. In exchange for the net assets, the Company issued
notes in the amount of $135,491 to each of Messrs. Richardson and Clark. The
notes are five-year notes, bearing interest at 6% per annum, with interest and
principal due at maturity. During fiscal 2004, 2003 and 2002, the Company maintained a $993,247 note
receivable from its principal shareholders. Note is payable on demand and
bears interest at the prime rate through the end of fiscal 2002, none
thereafter. The Company has mutual leasing agreements with certain related individuals
and with certain companies in which the Companys principal shareholders have
substantial ownership interests. Total payments under such leasing agreements
were approximately $260,000 in fiscal 2004, $176,000 in fiscal 2003 and
$103,000 in fiscal 2002. On January 14, 2000, the Company entered into a Consulting and Noncompete
Agreement with Mr. Charles F. Connor, Jr., who at the time was a significant
shareholder and co-founder of the Company. The agreement, which has a
five-year term, provides payments of $200,000 per year and family medical
insurance coverage. The net present value of payments under the agreement,
including the net present value of the medical insurance coverage over the
term, is estimated to be $831,000. This amount was expensed in selling,
general and administrative expense during the fourth quarter of fiscal 2000,
and the balance is reflected in other long-term liabilities. On January 6, 2000, the Company entered into a Consulting and Noncompete
Agreement with Mr. L. Dent Miller, who at the time was a significant
shareholder, former President of Claremont Restaurant Group and former member
of the Companys Board of Directors. The agreement, which has a five-year term,
provides payments of $200,000 per year. The net present value of payments
under the agreement is estimated to be $807,000. This amount was expensed in
selling, general and administrative expense during the fourth quarter of fiscal
2000, and the balance is reflected in other long-term liabilities. Mr. Miller
resigned from his position as a member of the Board of Directors of the
Company, pursuant to his Consulting and Noncompete Agreement. Subsequent to
fiscal 2000, Mr. Miller is no longer a shareholder or related party. On December 16, 1999, the Board of Directors approved a loan to Mr. James
C. Richardson, the Companys current Chairman, of an amount up to $8.5 million
for the purpose of enabling Mr. Richardson to purchase shares of the Companys
common stock owned by certain shareholders. The terms of the loan provide that
outstanding amounts will bear a simple interest rate of 8.5%, with principal
and interest due on demand. At March 4, 2000, disbursements under the loan
approval totaled $5 million. Due to the nature of the loan, the outstanding
balance is presented as a reduction of shareholders equity. F-26




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On July 6, 1999, the Company replaced certain existing Change in Control
Agreements with the Companys current Chairman (Mr. Richardson) and current
Vice Chairman (Mr. Clark) with revised Change in Control Agreements. The
revised agreements provided that, if a change in control of the Company
occurred, the following benefits would be provided by the Company: three times
the amount of the annual base salary of the officer; three times the amount of
the cash bonus paid or payable to such person for the most recent fiscal year;
and a gross-up payment for all excise and income tax liabilities resulting
from payments under the Change in Control Agreements. The Richardson Change in
Control Agreement was cancelled on October 21, 2002, and the Clark Change in
Control Agreement was cancelled October 17, 2002. On September 3, 2001, the Company entered into Employment Agreements with
the Companys current Chairman (Mr. Richardson) and current Vice-Chairman (Mr.
Clark). The agreements specify terms relating to salary, bonus and benefits to
be paid to the executive during the three-year term of the agreements. The Company purchases pork products from an entity in which one of the
Companys Principal Shareholders has a substantial ownership interest. During
fiscal 2003 and 2002, the Company purchased pork products totaling $194,170 and
$150,720, respectively. On August 18, 1999, the Company entered into an Incentive Agreement with
the Companys current President (Mr. Woodhams), which replaced a Change in
Control Agreement and Employment Contract. The agreement, as amended on
January 1, 2000 and December 31, 2001, specifies terms relating to salary and
bonus amounts to be paid to the executive during the four-year term of the
agreement, as well as severance and disposition bonus amounts to be received
upon any sale of the Company. On December 31, 2001, the Company entered into Employment Agreements with
the Companys current Chief Financial Officer (Ms. Witters) and current Senior
Vice President of Sales (Mr. Naylor). The agreements specify terms relating to
salary, bonus and benefit amounts to be paid to the executive during the
three-year term of the agreements, as well as severance and disposition bonus
amounts to be received upon any sale of the Company. 17. SUBSEQUENT EVENTS Restructuring of Senior Notes. In November 2002, the Company received a notice alleging that the Company
was in violation of certain non-financial covenants under the Indenture
covering the Senior Notes. The Company disagreed that it had violated any
Indenture covenants. On March 8, 2004, following a consent solicitation in which consents of
holders of $112.4 million in aggregate principal amount of the Companys
outstanding Notes, representing 97.74% of the outstanding Notes, consented to a
Fourth Supplemental Indenture between the Company and U.S. Bank National
Association, as trustee (the Trustee), the Company entered into the Fourth
Supplemental Indenture with the Trustee. Among other things, the Fourth
Supplemental Indenture increased the annual interest rate on the Notes from
10.75% to 12.25% through March 31, 2005 and 13.25% thereafter; required the
payment of a cash consent fee equal to 3% of the principal amount of Notes held
by each consenting noteholder; granted to the noteholders liens on the assets
of the Company and its subsidiaries, such liens being junior to the senior
liens securing the Companys current credit facility, granted to noteholders a
repurchase right allowing all of the noteholders to require the Company to
repurchase their 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 Notes outstanding at the
end of the Companys fiscal years; added restrictive covenants limiting the
compensation payable to certain senior executives of the Company and limiting
future related party transactions; required the termination of all related
party transactions, except for certain specifically-permitted transactions (see
Note 16, Transactions with Related Parties); provided for the assumption by
the Company of approximately $15.4 million of subordinated debt of PF
Management; required the Company to comply with certain corporate governance
standards, including appointing an independent director acceptable to the
Company and the noteholders to its board and hiring an independent auditor to
monitor the Companys compliance with the Indenture; and waived any and all
defaults of the Indenture existing as of March 8, 2004. F-27




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The restrictive covenants limiting compensation payable to certain senior
executives of the Company contain provisions for bonuses based on the
profitability of the Company and cash payments made on the Notes which could
significantly increase the limitation. Concurrently with the execution of the Fourth Supplemental Indenture the
Company took title to an aircraft transferred from a related party subject to
existing purchase money debt; forgave the $993,247 related party note
receivable from its principal shareholders; cancelled the balances owed by the
Company to certain related parties; and assumed the operating leases of PF
Distribution in connection with the Fourth Supplemental Indenture. Minimum
lease payments on the former PF Distribution operating leases will be $3.0
million during fiscal year 2005, $2.9 million during fiscal year 2006 and $0.5
million during fiscal year 2007. As noted above, the Company assumed $15.4 million of subordinated debt of
PF Management in connection with the Fourth Supplemental Indenture. Principal
payments on the former PF Management debt will be $4.8 million during fiscal
year 2005, $3.6 million during fiscal year 2006 and $7.0 million during fiscal
year 2007. The interest rates on the former PF Management debt range from 4.4%
to 25%. Other Events On May 11, 2004, the shareholders of PF Management, the sole shareholder
of the Company, agreed to sell their shares of stock in PF Management to an
affiliate of Madison Dearborn Capital Partners (MDCP). The sale is scheduled to close
on or around June 30, 2004, subject to the satisfaction or waiver of conditions typical
of leveraged buyout transactions, including (among others) these:       The buyers receipt of, and reasonable satisfaction with, consents of certain
of the Companys customers and suppliers and the acquiescence of federal
antitrust authorities;       The absence at the closing of a material adverse change in the assets,
liabilities, business, operations, results or condition of the Company and PF
Management since November 29, 2003;       The buyers receipt of, and reasonable satisfaction with, audited financial
statements of the Company for the fiscal year ended March 6, 2004 and of PF
Management for the same fiscal year and the two immediately preceding fiscal
years;       The buyers receipt of tenders of not less than a majority of the aggregate
principal amount of the Companys 10-3/4% senior notes due 2006; and       The buyers receipt of financing necessary to consummate the transaction. The Companys President and Chief Executive Officer, Norbert E. Woodhams,
and its Senior Vice President of Sales and Marketing, Robert C. Naylor, have
signed amended employment agreements committing them to continue working for
the Company after the sale. The stated term of employment for each executive is
one year, but each agreement will renew automatically and continuously
year-to-year unless terminated. Messrs. Woodhams and Naylor are both expected
to make significant equity investments in the Company under its new owner. There is no assurance that any
or all of the conditions to the buyers and shareholders obligations to close
the transaction will be satisfied or waived or that the transaction will close
in accordance with the agreed-upon terms (or at all). F-28




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SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Quarters Ended5/31/2003
    
    8/30/2003
    
    11/29/2003
    
    3/6/2004Operating revenues, net
    
    $
    81,479,869
    
    
    $
    81,248,052
    
    
    $
    93,824,930
    
    
    $
    101,996,465Gross profit
    
    $
    25,259,954
    
    
    $
    23,038,885
    
    
    $
    27,322,811
    
    
    $
    28,692,650Net income (loss)
    
    $
    376,235
    
    
    $
    (1,934,115
    )
    
    $
    1,768,328
    
    
    $
    1,223,347Net
income/(loss) per common share  basic and diluted
    
    $
    3.76
    
    
    $
    (19.34
    )
    
    $
    17.68
    
    
    $
    12.24
 6/1/2002
    
    8/31/2002
    
    11/30/2002
    
    3/1/2003Operating revenues, net
    
    $
    61,878,429
    
    
    $
    61,843,102
    
    
    $
    79,032,831
    
    
    $
    73,584,461Gross profit
    
    $
    21,625,594
    
    
    $
    20,864,004
    
    
    $
    26,377,329
    
    
    $
    23,380,324Income before cumulative effect of accounting change
    
    $
    (113,602
    )
    
    $
    (671,138
    )
    
    $
    2,160,880
    
    
    $
    401,843Net income (loss)
    
    $
    (18,718,136
    )
    
    $
    (671,138
    )
    
    $
    2,160,880
    
    
    $
    401,843Net income/(loss) per common share  basic and diluted
before cumulative effect of accounting change
    
    $
    (1.14
    )
    
    $
    (6.71
    )
    
    $
    21.61
    
    
    $
    4.02Net income/(loss) per common share  basic and diluted
    
    $
    (187.18
    )
    
    $
    (6.71
    )
    
    $
    21.61
    
    
    $
    4.02
 F-29




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REPORT OF MANAGEMENT

The management of Pierre Foods, Inc. is responsible for the preparation
and integrity of the consolidated financial statements of the Company. The
financial statements and notes have been prepared by the Company in accordance
with accounting principles generally accepted in the United States of America
and, in the judgment of management, present fairly and consistently the
Companys financial position and results of operations and cash flows. The
financial information contained elsewhere in this annual report is consistent
with that in the financial statements. The financial statements and other
financial information in this annual report include amounts that are based on
managements best estimates and judgments.

The Company maintains a system of internal accounting controls to provide
reasonable assurance that assets are safeguarded and that transactions are
executed in accordance with managements authorization and recorded properly to
permit the preparation of financial statements in accordance with generally
accepted accounting principles.

The Companys financial statements have been audited by Deloitte & Touche
LLP. Management has made available to them all of the Companys financial
records and related data, and believes that all representations made to
Deloitte & Touche LLP during this audit were valid and appropriate.

/S/ NORBERT E. WOODHAMS
    
    /S/ PAMELA M. WITTERSNorbert E. Woodhams
    
    Pamela M. WittersPresident and Chief Executive Officer
    
    Chief Financial Officer and Treasurer


F-30