**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,DC  20549**

 

**FORM 10-K**

 
| **(Mark One)**                                                                                                                                                                                                                                                                                                                                                            |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **x**                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                                                                      |   |   |
| **For the fiscal year ended March 1, 2008**                                                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                                                                      |   |   |
|                                                                                                                                                                                                                                                                                                                                                                      |   | **OR** |
|                                                                                                                                                                                                                                                                                                                                                                      |   |   |
| **o**                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                                                                                                                                | ** ** | ** ** |
| **For the transition period  from                           to                           ** |

 

**Commission file number 0-7277**

 

 

**PIERREFOODS, INC.**

(ExactName of Registrant as Specified in Its Charter)

 

| **North Carolina**                        | ** ** | **56-0945643**       |
|-------------------------------------------|------------|----------------------|
| (State  or Other Jurisdiction             |       | (I.R.S.  Employer    |
| of  Incorporation or Organization)        |       | Identification  No.) |
|                                      |       |                 |
| **9990 Princeton Road, Cincinnati, Ohio** | ** ** | **45246**            |
| (Address  of Principal Executive Offices) |       | (Zip  Code)          |

 

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

 

Securitiesregistered pursuant to Section 12(b) of the Act:  **None.**

 

Securitiesregistered pursuant to Section 12(g) of the Act:  **None.**

 

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.  Yes  **o**  No  **x**

 

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

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the precedingtwelve months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.  Yes **x**  No **o**

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of the registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,”“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of theExchange Act). (Check one):

 
| Large  accelerated filer **o**                                          |   | Accelerated  filer **o**         |
|------------------------------------------------------------------------------|--------|---------------------------------------|
|                                                                         |   |                                  |
| Non-accelerated  filer **x**

(Do not check if  a smaller reporting company) |   | Smaller  Reporting Company **o** |

 

Indicate by check markwhether the registrant is a shell company (as defined in Exchange Act Rule 12b-2of the Exchange Act).Yes  **o**  No **x**

 

The aggregate market value ofthe voting and non-voting common equity held by non-affiliates as of the lastbusiness day of the registrant’s most recently completed second fiscal quarter(September 1, 2007) was $0.00.

 

As of June 16, 2008,there were 100,000 Class A Common Shares of the registrant outstanding.

 

Documents Incorporated byReference:  **None.**

 

 

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**PIERRE FOODS, INC. AND SUBSIDIARIES**

 
| **ITEM**    |       |                                                                                                                    |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------|
| **NUMBER**  |       |                                                                                                                    |
| ** **  | ** ** | ** **                                                                                                              |
| ** **  | ** ** | **Part I**                                                                                                         |
|        |       |                                                                                                                    |
| Item 1.     |       | Description of Business                                                                                                 |
| Item 1A.    |       | Risk Factors                                                                                                            |
| Item 1B.    |       | Unresolved  Staff Comments                                                                                              |
| Item 2.     |       | Properties                                                                                                              |
| Item 3.     |       | Legal Proceedings                                                                                                       |
| Item 4.     |       | Submission  of Matters to a Vote of Security Holders                                                                    |
|        |       |                                                                                                                    |
| ** **  | ** ** | **Part II**                                                                                                        |
|        |       |                                                                                                                    |
| Item 5.     |       | Market for  the Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |
| Item 6.     |       | Selected  Financial Data                                                                                                |
| Item 7.     |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             |
|        |       | Results  of Operations                                                                                                  |
|        |       | Liquidity and Capital Resources                                                                                         |
|        |       | Commercial Commitments, Contingencies, and Contractual  Obligations                                                     |
|        |       | Inflation                                                                                                               |
|        |       | Critical Accounting Policies and Estimates                                                                              |
| Item 7A.    |       | Quantitative  and Qualitative Disclosures About Market Risk                                                             |
| Item 8.     |       | Financial  Statements and Supplementary Data                                                                            |
| Item 9.     |       | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                                   |
| Item 9A.    |       | Controls and  Procedures                                                                                                |
| Item 9A(T). |       | Controls and  Procedures                                                                                                |
| Item 9B.    |       | Other Information                                                                                                       |
|        |       |                                                                                                                    |
| ** **  | ** ** | **Part III**                                                                                                       |
|        |       |                                                                                                                    |
| Item 10.    |       | Directors,  Executive Officers, and Corporate Governance                                                                |
| Item 11.    |       | Executive  Compensation                                                                                                 |
| Item 12.    |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                         |
| Item 13.    |       | Certain  Relationships, Related Transactions, and Director Independence                                                 |
| Item 14.    |       | Principal  Accountant Fees and Services                                                                                 |
|        |       |                                                                                                                    |
| ** **  | ** ** | **Part IV**                                                                                                        |
|        |       |                                                                                                                    |
| Item 15.    |       | Exhibits  and Financial Statement Schedules                                                                             |
| ** **  | ** ** | ** **                                                                                                              |
|        |       | Signatures                                                                                                              |
|        |       | Index  to Exhibits                                                                                                      |
|        |       |                                                                                                                    |

 

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** **

**Cautionary Statement As To Forward-Looking Information**

 

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

 
| · |   | adverse changes in food costs and availability of supplies or costs of  distribution, and the ability to pass on such costs through increased prices  to customers;                                                                                           |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | the Company’s ability to continue as a going concern;                                                                                                                                                                                                    |
| · |   | the Company’s level of indebtedness;                                                                                                                                                                                                                     |
| · |   | the Company’s ability to generate sufficient cash flows in order to  satisfy cash requirements for working capital and debt service;                                                                                                                     |
| · |   | restrictions imposed by the Company’s debt instruments;                                                                                                                                                                                                  |
| · |   | acquisitions, if any, including identification of appropriate targets  and successful integration of any acquired businesses, including the  integration of the Clovervale and Zartic businesses;                                                             |
| · |   | dependence on co-packers, some of whom may be competitors or  sole-source suppliers;                                                                                                                                                                          |
| · |   | increased competitive activity;                                                                                                                                                                                                                               |
| · |   | government regulatory actions, including those relating to federal and  state environmental and labor laws;                                                                                                                                                   |
| · |   | dependence on significant customers;                                                                                                                                                                                                                          |
| · |   | changes in consumer preferences and diets, and the Company’s ability  to develop and introduce new products;                                                                                                                                             |
| · |   | consolidation of the Company’s customers;                                                                                                                                                                                                                |
| · |   | general risks of the food industry, including risk of contamination,  mislabeling of food products, a decline in meat consumption, and outbreak of  disease among cattle, chicken or pigs, or any change in consumer perception  of certain protein products; |
| · |   | adverse change to, or efficient utilization or successful  rationalization of, the Company’s facilities;                                                                                                                                                 |
| · |   | dependence on key personnel;                                                                                                                                                                                                                                  |
| · |   | changes in the availability and relative costs of labor and potential  labor disruptions or union organization activities;                                                                                                                                    |
| · |   | changes in federal government procurement laws or the USDA Commodity  Program, or failure to retain contracts in re-bidding processes;                                                                                                                        |
| · |   | changes in economic and business conditions in the world such as  inflation, recession, or interest rate fluctuations;                                                                                                                                        |
| · |   | potential impact of hurricanes and other natural disasters on sales,  raw material costs, fuel costs, insurance costs, and bad debt expense  resulting from uncollectible accounts receivable; and                                                            |
| · |   | increased global tensions, market disruption resulting from a  terrorist or other attack and any armed conflict involving the United States.                                                                                                                  |

 

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

 

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** **

**PART I**

 

**Item 1.    *Descriptionof Business***

 

Pierre Foods, Inc. and its subsidiaries (the “Company”or “Pierre”) manufacture, market, and distribute high-quality, differentiatedprocessed food solutions, focusing on formed, pre-cooked and ready-to-cookprotein products, compartmentalized meals, and hand-held conveniencesandwiches.  The Company’s products include, but are not limited to, beef,pork, poultry, bakery items, vegetables, fruits, cobblers, and peanut butterand jelly bars, sandwiches and cups.  Pierre offers comprehensive foodsolutions to its customers, including proprietary product development, specialingredients and recipes, as well as custom packaging and marketing programs.  Pierre’s pre-cooked and ready-to-cookproteins include flamebroiled burger patties, homestyle meatloaf, chickenstrips, and boneless, barbecued pork rib products.  Pierre markets its pre-cooked andready-to-cook protein products to a broad array of customers that includerestaurant chains, schools, military, and other foodservice providers.

 

In this document, unless the context otherwiserequires, the term “Company” or “Pierre” refers to Pierre Foods, Inc. andits current and former subsidiaries.  The Company’s fiscal years ended March 1,2008, March 3, 2007, and March 4, 2006 are referred to as “fiscal2008”,  “fiscal 2007”, and “fiscal 2006”,respectively.

 

**GeneralDevelopment of Business**

 

***Acquisition ofPierre.**** *OnJune 30, 2004, the shareholders of PF Management, Inc. (“PFMI”), thesole shareholder of Pierre, sold their shares of stock in PFMI (the “Acquisitionof Pierre”) to Pierre Holding Corp. (“Holding”), an affiliate of MadisonDearborn Partners, LLC (“MDP”).  As part of the same transaction, the Companymerged with Pierre Merger Corp., an affiliate of MDP, with the Company beingthe surviving corporation following the merger. The fair value adjustments related to the Acquisition of Pierre, werepushed down to the Company from Holding, which primarily included adjustmentsin property, plant, and equipment, inventories, goodwill, other intangibleassets and related deferred taxes.  The Company issued $125.0 million of9-7/8% Senior Subordinated Notes due July 15, 2012 (the “Notes”) andentered into a $190.0 million credit facility ($150.0 million term loan and$40.0 million revolving credit facility) (“Credit Agreement”).  Theproceeds of the Notes, together with the equity contributions from MDP andcertain members of management and borrowings under the Company’s senior creditfacility, were used to finance the Acquisition of Pierre and to repayoutstanding indebtedness.

 

***Acquisition ofClovervale.***  On August 21,2006, the Company acquired all of the outstanding shares of stock of ClovervaleFarms, Inc., two of its subsidiaries, and certain of the real propertyused in its business (“Clovervale”).  Theacquisition of Clovervale is referred to herein as the “Acquisition ofClovervale”.  The preliminary aggregate purchase price was $22.8 million,which was paid in cash at the closing.  After repayment of indebtednessand other post-closing adjustments, the preliminary net purchase price was$21.8 million and was subject to a post-closing working capitaladjustment.  Subsequent to finalizing such adjustment, the net purchaseprice was $21.1 million.  Pierre fundedthe Acquisition of Clovervale through an amendment to its Credit Agreement (“AmendmentNo. 2”).  See Note 8, “Financing Arrangements,” to the Company’sConsolidated Financial Statements for further discussion.  Pierre’s investment in Clovervale was basedon the expectation that such an investment would increase the Company’spresence with targeted customer channels and add capacity and productioncapabilities in order to increase product offerings.

 

Prior to the Acquisition of Clovervale, Clovervalewas a privately held company with operations in Amherst, Ohio and Easley, SouthCarolina. Clovervale manufactured and sold a variety of food items includingindividually proportioned entrees, vegetables, fruit, cobblers, peanut butterand jelly bars, sandwiches and cups, sherbets, apple sauce and other similarproducts through various customer channels including schools, military,hospitals, and senior citizen meal programs.  Subsequent to the Acquisitionof Clovervale, the Company has been working to integrate the operations ofClovervale with those of Pierre.  Clovervale currently employsapproximately 122 people and continues to have manufacturingfacilities in Amherst, Ohio and Easley, South Carolina.  Clovervaleprimarily manufactures products for sale and distribution by Pierre.

 

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

 

The Acquisition of Clovervale was recorded under thepurchase method of accounting.  The net purchase price has been allocatedto assets acquired and liabilities assumed based on the estimated fair marketvalue at the date of the Acquisition of Clovervale.  The initialallocation of the preliminary net purchase price to specific assets andliabilities was based, in part, upon preliminary appraisals, and was thereforesubject to change.  During the quarter ended September 1, 2007, theCompany finalized its allocation of the purchase price.  The allocation of the net purchase price isas follows:

 

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| ** **                         | ** ** | **(in thousands)** | ** ** |
|------------------------------------|------------|-------------------------|------------|
| Current assets                     |       | $                       | 5,131      |   |
| Property, plant, and equipment     |       | 12,877                  |       |
| Non-current assets                 |       | 17                      |       |
| Goodwill                           |       | 6,032                   |       |
| Other intangibles                  |       | 2,730                   |       |
| Debt and other liabilities assumed |       | (4,409                  | )          |
| Deferred tax liabilities           |       | (1,244                  | )          |
| Net assets acquired                |       | $                       | 21,134     |   |

 

Of the $2.7 million of acquired other intangibleassets, $2.4 million was assigned to customer relationships with aweighted-average estimated useful life of 10 years.  The remainingacquired other intangible assets included tradenames and trademarks of $280,000with a weighted-average useful life of 3 years and a non-compete agreement of$50,000 with a useful life of 2 years.  The goodwill related to theAcquisition of Clovervale is not deductible for tax purposes.

 

***Acquisition ofZartic. ***On December 11,2006, the Company acquired substantially all of the assets of Zartic, Inc.and its affiliated distribution company, Zar Tran, Inc., and certain realproperty and other assets used in the businesses (“Zartic”).  Theacquisition of Zartic is referred to herein as the “Acquisition of Zartic”. The preliminary aggregate purchase price was $94.0 million, plus the assumptionof certain liabilities, which was paid in cash at the closing and is subject tocertain post-closing adjustments.  After repayment of indebtedness andother post-closing adjustments, the preliminary net purchase price was $91.8million and was subject to additional post-closing adjustments.  The Company finalized such adjustments duringits fourth quarter fiscal 2008, the net purchase price was $91.7 million. Pierre funded the Acquisition of Zartic through an amendment to its CreditAgreement (“Amendment No. 3”).  SeeNote 8, “Financing Arrangements,” to the Company’s Consolidated FinancialStatements for additional information. Pierre’s investment in Zartic was based on the expectation that such aninvestment would increase the Company’s presence with targeted customerchannels and add capacity and production capabilities in order to increaseproduct offerings.

 

Prior to the Acquisition of Zartic, Zartic was aprivately held company that manufactured, sold, delivered, and distributed avariety of food items including packaged beef, poultry, pork, and veal productsthrough its operations in Rome, Georgia, Cedartown, Georgia, and Hamilton, Alabama. Subsequent to the Acquisition of Zartic, the Company has been working tointegrate the operations of Zartic with those of Pierre.  As of March 1,2008, Zartic employed approximately 788 people and has its mainmanufacturing facility in Rome, Georgia.  The Cedartown, Georgiamanufacturing facility was closed February 8, 2008, however, the otherfacilities in Cedartown are currently used by Zar Tran, in addition to beingused for storage of equipment.  TheHamilton, Alabama facility was destroyed in a fire on July 14, 2007. Zartic primarily manufactures products for sale and distribution by Pierre.

 

In conjunction with the Acquisition of Zartic, theCompany’s management performed valuations on the Zartic other intangible assetsfor financial reporting purposes.  Assets identified through thisvaluation process included customer relationships, non-compete agreements, andcertain tradenames and trademarks.  Other fair value adjustments were madein conjunction with the Acquisition of Zartic, which primarily includeadjustments to property, plant, and equipment, and inventory.

 

The Acquisition of Zartic was recorded under thepurchase method of accounting.  The preliminary net purchase price wasallocated to assets acquired and liabilities assumed based on the estimatedfair market value at the date of the Acquisition of Zartic.  The initialallocation of the preliminary net purchase price to specific assets andliabilities was based, in part, upon preliminary appraisals, and was thereforesubject to change.  During the quarter ended March 1, 2008, theCompany finalized its allocation of the net purchase price as follows:

 
| ** **                         | ** ** | **(in thousands)** | ** ** |
|------------------------------------|------------|-------------------------|------------|
| Current assets                     |       | $                       | 27,256     |   |
| Property, plant, and equipment     |       | 29,809                  |       |
| Non-current assets                 |       | 320                     |       |
| Goodwill                           |       | 22,139                  |       |
| Other intangibles                  |       | 27,700                  |       |
| Debt and other liabilities assumed |       | (15,558                 | )          |
| Net assets acquired                |       | $                       | 91,666     |   |

 

2

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Of the $27.7 million of acquired other intangibleassets, $15.1 million was assigned to customer relationships with aweighted-average estimated useful life of 14 years.  The remainingacquired other intangible assets included formula and recipes of $9.9 millionwith a weighted-average useful life of 15 years, tradenames and trademarks of$2.4 million with a weighted-average useful life of 2 years, and a non-competeagreement of $0.3 million with a useful life of 3 years.  The goodwillrelated to the Acquisition of Zartic is deductible for tax purposes.

 

***Unaudited ProForma Results***.****** The following tables present unaudited pro formainformation for fiscal 2007, as if the Acquisition of Clovervale and theAcquisition of Zartic had been completed at the beginning of fiscal 2007.

 
| ** **        | ** ** | **Fiscal 2007**    | ** ** | **Fiscal 2007** | ** ** |
|-------------------|------------|-------------------------|------------|----------------------|------------|
| ** **        | ** ** | **Actual**              | ** ** | **Pro Forma**   | ** ** |
| ** **        | ** ** | **(in thousands)** | ** ** |
| Revenues          |       | $                       | 487,843    |                 | $          | 623,621 |   |
|              |       |                    |       |                 |       |
| Net income (loss) |       | $                       | 1,800      |                 | $          | (13,207 | ) |

 

These unaudited pro forma results, based onassumptions deemed appropriate by the Company’s management, have been preparedfor informational purposes only, and are not necessarily indicative of theamounts that would have resulted if the Company had acquired Clovervale andZartic at the beginning of such period.  Purchase-related adjustments tothe results of operations include the effects on depreciation and amortization,interest expense, cost of goods sold, and income taxes.

 

**Narrative Description of Business****. **The Company’s product lineconsists of over 2,330 stock keeping units (“SKUs”).  Pierre manufacturesits products in its five manufacturing facilities located throughout themid-western and southeastern United States.  Pierre forms, portions,seasons, cooks, and freezes beef, poultry, and pork in its facilities locatedin Cincinnati, Ohio, and Rome, Georgia.  These frozen products are eithershipped to customers or sent to one of the Company’s sandwich assembly andentree assembly facilities.  Pierre’s Claremont, North Carolina planthouses high-speed baking and sandwich assembly lines.  Pierre’s Amherst,Ohio and Easley, South Carolina plants also portion, assemble, and package avariety of sandwiches and meal components. As a result of the Acquisition of Zartic, the Company operatedmanufacturing facilities in Hamilton, Alabama and Cedartown, Georgia.  However, during fiscal 2008, the Hamilton,Alabama facility was destroyed by a fire. In addition, during fiscal 2008, the Company closed its manufacturingfacility in Cedartown, Georgia.  See Item7 “Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources” in this report for furtherdiscussion of the Hamilton, Alabama plant fire and the Cedartown, Georgia plantclosing.

 

The Company’s Independent registered publicaccounting firm has included an explanatory paragraph in its opinion thataccompanies the Company’s audited consolidated financial statements as of andfor the year ended March 1, 2008, indicating that the Company’s currentliquidity position raises substantial doubt about the Company’s ability tocontinue as a going concern. As of March 1, 2008, the Company is in defaultunder its senior credit facility as a result of its failure, among otherthings, to satisfy the financial convenants of its Credit Agreement as of suchdate. These defaults entitle the lenders under the senior credit facility,among other things, to declare all amounts outstanding thereunder, togetherwith accrued and unpaid interest, to be immediately due and payable. An accelerationunder the senior credit facility would constitute an event of default under theindenture governing the Notes, entitling the indenture trustee or the holdersof at least 25% of the Notes outstanding to declare all amounts owing under theNotes to also be immediately due and payable. In addition, the defaults underthe Company’s senior credit facility creates a default under the Company’sinterest rate swap agreement. On June 16, 2008, the Company voluntarilyterminated its swap agreement.  As aresult of the termination, approximately $4.0 million in net settlementpayments will be due and payable on demand. The Company does not currently havecash available to satisfy these obligations if they were to be accelerated orterminated. The Company is currently exploring various strategic andrestructuring alternatives, including a restructuring of its outstanding indebtedness.If the Company is unable to successfully restructure its indebtedness, it maybe unable to continue as a going concern, which will be dependent, among otherthings, upon the Company’s ability to return to profitable operations in thefuture and to obtain the necessary financing to meet its obligations and payits liabilities when they come due.

 

The following table setsforth the Company’s net revenue and percent of revenue contributed during thepast three fiscal years by its various product channels and classes.

 

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| ** **                     | ** ** | **Net Revenues by Source   (in millions)** | ** ** |
|--------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                     | ** ** | **Fiscal 2008**                                                | ** ** | **Fiscal 2007** | ** ** | **Fiscal 2006** | ** ** |
| ** **                     | ** ** | ** **                                                          | ** ** | **%** | ** ** | ** ** | ** ** | **%** | ** ** | ** ** | ** ** | **%** | ** ** |
| **Food processing:**      |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Fully-cooked protein products  |       | $                                                                   | 359.5      |   | 55.9 |   | $ | 263.2 |   | 54.0 |   | $ | 254.8 |   | 59.0 |   |
| Ready-to-cook protein products |       | 32.6                                                                |       | 5.1 |   | 6.7 |   | 1.4 |   | — |   | — |   |
| Sandwiches                     |       | 204.9                                                               |       | 31.8 |   | 195.5 |   | 40.1 |   | 168.4 |   | 39.0 |   |
| Bakery products and other      |       | 46.3                                                                |       | 7.2 |   | 22.4 |   | 4.5 |   | 8.4 |   | 2.0 |   |
|                           |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| **Total food processing:**     |       | $                                                                   | 643.3      |   | 100.0 |   | $ | 487.8 |   | 100.0 |   | $ | 431.6 |   | 100.0 |   |

 

***SignificantCustomer.  ***Sales to CKE Restaurants, Inc.(“CKE”) accounted for approximately 11%, 14%, and 21% of the Company’s netsales in fiscal 2008, fiscal 2007, and fiscal 2006, respectively.  Noother customer accounted for 10% or more of net sales during fiscal 2008,fiscal 2007, or fiscal 2006.

 

***Sales, Marketingand New Product Development.  ***The Company’s team of salesand marketing professionals has significant experience in the Company’s marketsfor formed, pre-cooked and ready-to-cook protein products, hand-heldconvenience sandwiches, compartmentalized meals, fruit and vegetable cups, andbakery products.  The sales department is organized predominantly by saleschannel.  In addition to its direct sales force, the Company utilizes anationwide network of over 130 independent food brokers, all of whom arecompensated primarily by payment of sales commissions.  The Company’s newproduct development department is organized by functional expertise areas withlinkages to the sales channels.

 

The Company’s marketing strategy focuses on keygrowth in each of its sales channels, and includes distributor and consumerpromotions, trade promotions, advertising, market research, product development,and participation in trade shows and exhibitions.  The Company participates in numerousconferences and is a member of more than 15 industry organizations.  Certain members of the Company’s managementserve on the boards of a number of industry organizations, including theAmerican Meat Institute, the School Nutrition Association, the American SchoolFood Service Association, the American Commodity Distribution Association, andthe National Association of Convenience Stores.

 

The Company is actively involved in all aspects ofdeveloping food solution systems to meet customers’ needs.  The Company’smarketing department works directly with each of the its sales divisions,brokers, and customers to define product and menu needs, assess marketopportunities, and create and implement packaging, merchandising, and marketingstrategies.  The Company’s ability todevelop and implement innovative food solutions is an important aspect of theCompany’s success.

 

The Company employs 14 food scientists and culinaryexperts in the product and process development department.  Theseemployees primarily work in four of the Company’s five manufacturingfacilities.  Ongoing food production research and development activitiesinclude development of new products, improvement of existing products, andrefinement of food production processes.  These activities resulted in thelaunch of approximately 628 new SKUs in fiscal 2008.  Approximately 32% ofthe Company’s fiscal 2008 net revenues were derived from product SKUs developedduring the last two fiscal years.  In both fiscal 2008 and fiscal 2007,the Company spent approximately $1.8 million on product developmentprograms.  In fiscal 2006, the Companyspent approximately $1.9 million on product development programs.

 

***Raw Materials.  ***The primary raw materialsused in the Company’s food processing operations are boneless beef, chicken andpork, flour, yeast, seasonings, cheese, breading, soy proteins, peanut butter,and packaging supplies.   Meat proteins are generally purchased underseven day payment terms, with the exception of a few that require payment atthe time the product is shipped.  Historically, the Company has not hedgedin the futures markets, and over time, the Company’s raw material costs havefluctuated with movement in the relevant commodity markets.  The Companyattempts to manage raw material fluctuations through purchase orders,market-related pricing contracts, fixed-price contracts, and by passing on suchcost increases to customers.

 

The Company purchases all of its raw materials fromoutside sources.  The Company does not depend on a single source for anysignificant item except for, as requested by a customer, the utilization of asingle source raw material supplier for production specific to that customer. The single source supplier allows for consistent supply and competitive pricingfor the Company.  The Company believes that its sources of supply for rawmaterials are adequate for its present needs. However, as a result of the Company’s financial situation, vendors andsuppliers may terminate their relationship with the Company or tighten credit.

 

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***Trademarks andLicensing.  ***The Company markets itsproducts under a number of brand names, such as PierreTM, Zartic®, Z-Bird®,Circle Z®, Jim’s Country Mill Sausage®, Clovervale Farms®, Chef’s Pantry®, FastChoice®, Rib-B-Q®, Blue Stone GrillTM, Hot ‘n’ Ready®, Big AZ®, Chicken FryZ®,Smokie Grill®, and Chop House®.  The Company regards its trademarks andservice marks as having significant value in marketing its food products. The Company also has proprietary rights, including trade secret and otherintellectual property protection, in formulations and processes used to makeits products.  In addition, the Company has licenses to sell sandwichesusing well-known brands, such as Checkers®, Rally’s®, Krystal®, Tony Roma’s®,and Nathan’s Famous®.  The term of each such license is subject to renewaland satisfaction of sales volume requirements.

 

***Seasonality.  ***The Company experiences seasonal fluctuations in sales and operatingresults as a result of sales to school districts.  Sales to schooldistricts decline significantly during summer, late November, andDecember.  During fiscal 2008, fiscal 2007, and fiscal 2006, schoolsrepresented approximately 25%, 24%, and 20%, respectively, of the Company’s netrevenues.

 

***Competition.  ***The food manufacturing business is highly competitive and is oftenaffected by changes in tastes and eating habits of the public, economicconditions affecting the public’s spending habits, and other demographicfactors.  The Company competes with manufacturers and distributors ofvalue-added meat products, compartmentalized meal, and packaged sandwichsuppliers.  The Company faces competitionfrom a variety of meat processing companies in sales of its protein products,including Advance Food Company, Tyson, JTM Food Group, King’s Command Foods, Inc.,Don Lee Farms, and from smaller local and regional operations.  Thesandwich industry is extremely fragmented and has few large direct competitors,however, indirect competition in the form of numerous other productsexists.  Pierre’s competitors in the sandwich industry include SaraLee/Jimmy Dean Foods, Bridgford Foods Corp., Deli Express, and Landshire. In sales of biscuit and yeast roll products, the Company competes with a numberof large bakeries in various parts of the country. The Company’s currentfinancial situation and its resulting uncertainty could adversely affect itsability to compete effectively in the marketplace.

 

***GovernmentRegulation****. *The food production industry is subject to extensive federal, state, andlocal regulations.  The Company’s foodprocessing facilities and food products are subject to frequent inspection bythe United States Department of Agriculture (“USDA”), the Food and DrugAdministration (“FDA”), and various state and local health and agriculturalagencies.  Applicable statutes andregulations governing food products include rules for identifying thecontent of specific types of foods, the nutritional value of that food, itsserving size and allergen labeling, as well as rules that protect againstcontamination of products by food-borne pathogens and sanitationrequirements.  Many jurisdictions alsorequire that food manufacturers adhere to good manufacturing practices (thedefinition of which may vary by jurisdiction) with respect to productionprocesses.  The changing politicalclimates along with outside pressures from a variety of special interest groupsappear to have lawmakers questioning the current governmental agency’seffectiveness and structure with respect to food and food processingregulation.  In addition, the animalhandling, food safety practices and procedures in the meat processing industry havebeen subject to more intense scrutiny and oversight by the USDA and futureoutbreaks of diseases among cattle, poultry or pigs could lead to furthergovernmental regulation.  The Company believes that it is in substantialcompliance with such applicable laws and regulations and the Company is notaware of any pending changes in such laws and regulations that are likely tohave a material impact on the Company’s operations.

 

In addition, the Company’s operations are governed bylaws and regulations relating to workplace health and safety that, among otherthings, establish noise standards and regulate fire codes and the use ofhazardous chemicals in the workplace.  The Company is also subject tonumerous federal, state, and local environmental laws.  Under applicable environmental laws, theCompany may be responsible for remediation of environmental conditions and maybe subject to associated liabilities relating to its facilities and the land onwhich its facilities are or had been situated, regardless of whether theCompany leases or owns the facilities or land in question and regardless ofwhether such environmental conditions were created by the Company or by a priorowner or tenant.

 

As described in Note 19 – “Legal Proceedings,” to theCompany’s Consolidated Financial Statements, the Hamilton County Department ofEnvironmental Services (“HCDOES”) determined that in order for the Company tobe compliant with emissions requirements in its Cincinnati, Ohio facility, theCompany must install additional control equipment.  On August 31, 2007, the Companyfinalized a $125,000 settlement with the Ohio EPA to resolve the allegednon-compliance with air pollution laws without any admission of liability.  In addition, as of March 1, 2008, theCompany has installed and spent approximately $1.8 million for emissionscontrol equipment to comply with relevant laws. Furthermore, the Company has and is cooperating with authorities in allaspects of these matters.

 

The Company applied for modified permits to install (“PTIs”)on August 14, 2007 for the emission sources at the plant and alsosubmitted a PTI application on September 20, 2007, for process waterheaters at the plant to come into compliance with applicable regulatoryrequirements.  These PTI applications arecurrently being reviewed and processed by HCDOES.  In connection with the PTI applicationsreview, HCDOES requested on October 5, 2007 that the Company assessfugitive emissions from its cooking operations and provide that assessment tothe agency.  The Company’s environmentalconsultant conducted a fugitive emissions assessment and has re-submitted itsPTI applications to HCDOES, which is currently processing those applications.

 

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On August 16, 2006, the Company purchased Clovervale pursuantto a Share and Asset Purchase Agreement (the “Clovervale Agreement”). TheClovervale Agreement included certain indemnities granted by the sellingshareholder to the Company, including an indemnity for environmental non-compliancethat was not disclosed by the selling shareholder in the Clovervale Agreement. OnJuly 24, 2007, the Company received notification from the City of AmherstBuilding and Utilities Department that the Company’s Clovervale facility, whichwas acquired as part of the Acquisition of Clovervale, was in violation of thecity’s ordinance for high strength oil and grease discharges.  The City of Amherst requested that theCompany meet with the City and comply with wastewater dischargerequirements.  The Company’senvironmental consultant is assessing compliance with the City of Amherstwastewater discharge requirements and although the extent of noncompliance andpossible costs to comply are unknown at this point, the Company has made aclaim for indemnity with the selling shareholder under the ClovervaleAgreement.

 

The Company’s operations are subject to licensing andregulation by a number of governmental authorities, which include, amongothers, health, safety, sanitation, building, and fire agencies.  TheCompany is subject to laws governing relationships with employees, includingminimum wage requirements, overtime, working conditions, and citizenshiprequirements.  Operating costs areaffected by increases in costs of providing health care benefits, the minimumhourly wage, unemployment tax rates, sales taxes, and other similar mattersover which the Company may have no control.

 

***Employees.**** *As of March 1, 2008, theCompany employed approximately 2,629 persons.  The Company’s employees arenon-unionized.  The Company hasexperienced no work stoppage attributable to labor disputes, and considersemployee relations to be good.

 

**Financial Information AboutGeographic Areas***.*** **Substantially all revenues and long-lived assets of the Company arederived from and reside in the United States.** **Less than 2% of the Company’ssales revenues are derived from outside the United States and are primarilyfrom sales to Canada.

 

**Item1A.    *RiskFactors***

 

***T******he Company is currently in default under its senior creditagreement and therefore may not have access to financing necessary to supportits business and to satisfy its obligations as they come due. ***The Company is currently indefault under its senior credit facility as a result of its failure, amongother things, to satisfy the financial covenants of its Credit Agreement as of March 1,2008.  These defaults entitle the lendersunder the senior credit facility, among other things, to receive defaultinterest and to declare all amounts outstanding thereunder, together withaccrued and unpaid interest, to be immediately due and payable.  In addition, as a result of these defaults,the Company is currently prohibited from borrowing under its revolving creditfacility.  As of March 1, 2008, theCompany had $11.6 million of cash and cash equivalents on hand.  On July 15, 2008, the Company isrequired to make an interest payment on the Notes of $6.2 million, and unlessthe Company can restructure its existing senior indebtedness or secureadditional financing prior to that time, the Company may not have sufficientliquidity to make that payment and thereafter continue to satisfy its liquidityand working capital requirements.  Inlight of current market conditions for debt financing, the Company’s currentfinancial condition and the Company’s lack of significant unencumbered assets,it is possible that the Company will be unable to secure additional financingand/or restructure its current indebtedness. If the Company is unable to secure additional financing or restructureits current indebtedness, it may be required to file for bankruptcy protection.

 

***The Company’s financialstatements have been prepared assuming that the Company will continue as agoing concern.  However, the Company iscurrently in default under its senior credit agreement, and if the Company isunable to amend the terms of or to restructure or refinance its currentoutstanding indebtedness, the Company may not be able to continue as a goingconcern. ***The Company’sindependent registered public accounting firm has included an explanatoryparagraph in its opinion that accompanies the Company’s audited consolidatedfinancial statements as of and for the year ended March 1, 2008,indicating that the Company’s current liquidity position raises substantialdoubt about the Company’s ability to continue as a going concern.  The Company is currently in default under itssenior credit facility as a result of its failure, among other things, tosatisfy the financial covenants of its Credit Agreement as of March 1,2008.  These defaults entitle the lendersunder the senior credit facility, among other things, to declare all amountsoutstanding thereunder, together with accrued and unpaid interest, to beimmediately due and payable.  An accelerationunder the senior credit facility would constitute an event of default under theindenture governing the Notes, entitling the indenture trustee or the holdersof at least 25% of the Notes outstanding to declare all amounts owing under theNotes to also be immediately due and payable.  In addition, the defaults under the Company’ssenior credit facility creates a default under the Company’s interest rate swapagreement. On June 16, 2008, the Company voluntarily terminated the swapagreement. As a result of early termination, approximately $4.0 million in netsettlement payments are due and payable upon demand.  The Company does not currently have cashavailable to satisfy these obligations if they were to be accelerated orterminated.  The Company is currentlyexploring various strategic and restructuring alternatives, including arestructuring of its outstanding indebtedness. If the Company is unable to successfully restructure its indebtedness,it may be unable to continue as a going concern, which will be dependent, amongother things, upon the Company’s ability to return to profitable operations inthe future and to obtain the necessary financing to meet its obligations andpay its liabilities when they come due. Failure to continue as a going concern may cause the Company to be unableto realize its assets and discharge its liabilities in the normal course ofbusiness and could cause investors to suffer the loss of all or a substantialportion of their investment in the Company.

 

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***The Company’s current financial condition has adversely affected itsbusiness operations and its business prospects.***  The Company’s current financial condition andits resulting uncertainty have been disruptive to the business.  Management of the Company has devotedsubstantial time and attention to addressing the situation, thereby reducing itsfocus on operating the business.  Inaddition, the Company’s current financial condition and its resultinguncertainty may also cause employee attrition, vendors and suppliers toterminate their relationship with the Company or to tighten credit; and couldresult in the loss of existing customers or the Company’s inability to attractnew customers.  Any of these developmentscould have a material adverse effect on the Company’s business, operatingresults, financial condition and liquidity.

 

***The Company’sability to service its debt and meet its cash requirements depends on manyfactors, some of which are beyond its control. These factors could have amaterial adverse affect on the Company’s business, financial condition andresults of operations***.  TheCompany’s ability to satisfy its obligations in the future will depend onfuture operating performance and financial results, which will be subject, inpart, to factors beyond the Company’s control, including interest rates andgeneral economic, financial, and business conditions.  If the Company isunable to generate sufficient cash flow, it may be required to refinance itscurrent debt, enter into an amendment to its Credit Agreement, or redirect asubstantial portion of its cash flow to debt service, which as a result, mightnot be available for its operations or other purposes, sell some of its assetsor operations, reduce or delay capital expenditures, revise or delay itsoperations or strategic plans.  If the Company is required to take any ofthese actions, it could have a material adverse effect on its business,financial condition and results of operations.  In addition, the Companycannot guarantee it would be able to take any of these actions, that theseactions would enable it to continue to satisfy its capital requirements, orthat these actions would be permitted under the terms of its Notes or CreditAgreement.

 

***Any materialchanges to, cutbacks in, or termination of the USDA’s Commodity Program couldhave a material adverse effect on the Company’s sales to schools and theCompany’s financial condition.***  ******A substantialportion of the products that the Company sells to schools use commoditiesprovided to the schools through the USDA’s Commodity Program.  These programs provide food and nutritionassistance to certain eligible institutions. The programs are designed to assist farmers in order to maintain stablecommodity prices and to provide nutritious foods to children.  The Companyproduces many of its pre-cooked and ready-to-cook proteins using commoditiesprovided by customers through this program, which it converts to finishedproducts and sells to its customers.  Ifthis program were terminated or significantly curtailed due to budgetaryconstraints, or if the program were changed in a way that neutralizes what theCompany believes is its competitive advantage in complying with programguidelines, the Company may be unable to continue to sell these products toschools at current volumes.  In addition,the Company provided a letter of credit in the amount of $5.7 million in fiscal2008 to its insurance carrier for the underwriting of certain performance bonds. If the Company is unable to renew orobtain a new letter of credit provided to its insurance carrier for theunderwriting of the performance bonds required by this program, the Company maybe ineligible to participate in this program.  A material change to,cutback in, or termination of the USDA’s Commodity Program, or the Company’sfailure to meet the program requirements, could have an adverse effect on theCompany’s financial condition and operating results.

 

In addition, in order to participate in the USDA’sCommodity Reprocessing Program, the Company must provide, on or prior to July 1,2008, a letter of credit to secure a performance bond required by theUSDA.  Due to the Company’s currentfinancial condition, the Company may be required to fund all or a substantialportion of the required letter of credit. If the Company does not have the ability to fund or cannot otherwiseprovide the required letter of credit, the Company will be unable toparticipate in the USDA’s Commodity Reprocessing Program, which will have amaterial adverse effect on the Company’s financial condition and operatingresults

 

***Restrictivecovenants in the Company’s debt instruments restrict or prohibit the Company’sability to engage in or enter into a variety of transactions, which couldadversely affect the Company.***  ******The indenturegoverning the Company’s Notes and the Company’s Credit Agreement containvarious restrictive covenants that limit the Company’s discretion in operatingits business.  In particular, those agreements limit the Company’s abilityto, among other things:

 

·                  incur additionalindebtedness;

·                  make certain investments oracquisitions;

·                  create liens on its assets tosecure additional debt;

·                  enter into commodity hedgingor similar agreements;

·                  engage in certaintransactions with affiliates;

·                  merge, consolidate ortransfer substantially all of its assets; and

·                  transfer and sell assets.

 

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

 

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***The Company is subject to ongoing financial covenants under its CreditAgreement, and the Company is not in compliance with those covenants as of March 1,2008.  As a result, the lenders undersuch facility may accelerate the Company’s borrowings.  If the Company is unable to enter into anamendment or waiver of such financial covenants, it will be unable to borrowadditional amounts and may be forced to declare bankruptcy.*** Effective June 30, 2004, theCompany obtained a $190 million credit facility, which subsequently increasedin order to finance two acquisitions made by the Company.   In addition,funds available under this facility are available for working capitalrequirements, permitted investments and general corporate purposes.  Allof the Company’s indebtedness under the Credit Agreement is secured by afirst-priority security interest in substantially all of the Company’sassets.  As of March 1, 2008, theCompany’s borrowings under this credit facility totaled $241.0 million.

 

As of September 1, 2007,the Company was in default under the consolidated leverage ratio covenant inits Credit Agreement.  Effective October 10,2007, the Company obtained a waiver of such default from the required lendersand entered into an amendment to the Credit Agreement, which amended, amongother things, the financial covenants in the Credit Agreement and increased theapplicable interest rates for term loans and the revolving creditfacility.  As of March 1, 2008, theCompany was in default under the financial covenants in its CreditAgreement.  Failure to meet thesecovenants allows the lenders under Credit Agreement to declare all amountsoutstanding thereunder, together with accrued interest, to be immediately dueand payable.  An acceleration under theCompany’s credit facility would trigger a cross-default in the indenturegoverning its Notes, thereby allowing its bondholders to accelerate therepayment of all amounts outstanding on the Notes.  On June 2, 2008, the Company receivednotice from its senior lenders that the default rate of interest under thesenior credit facility will be charged as of February 29, 2008.  In addition, the default prohibits theCompany from renewing or obtaining new letters of credit, which are required tooperate the business, including to secure a performance bond required by theUSDA under its Commodity Program.  Thedefault also causes a cross-default under the Company’s interest rate swapagreements.  The Company is activelyevaluating various strategic and restructuring alternatives.  The default of the Company under its CreditAgreement could have a material adverse effect to the Company’s results ofoperations and financial position.

 

***Changes in the Company’scredit ratings may have a negative impact on the Company’s financing cost, theavailability of capital, and the interest rate the Company pays on borrowingson its credit facility.**** *Some of the Company’s debt is rated byStandard & Poor’s and Moody’s, and there are a number of factorsbeyond the control of the Company with respect to such ratings.  A downgrade in such ratings could increasethe Company’s cost of capital should the Company refinance all or a portion ofits debt, or attempt to obtain additional financing in the future.  In addition, a downgrade could increase theinterest rate the Company pays on borrowings under its credit facility.  The recent downgrade of the Company’s ratinghas resulted in a termination of the Company’s credit card program foremployees of the Company.  An increase inthe Company’s cost of capital could adversely affect the Company’s results ofoperations and financial position.

 

***Changes inaccounting standards and subjective assumptions, estimates and judgments bymanagement related to complex accounting matters could significantly affect theCompany’s reported results of operations or financial position. ***Generally accepted accounting principles and related accountingpronouncements, implementation guidelines and interpretations with regard to awide range of matters that are relevant to the Company’s business, such asrevenue recognition, asset impairment, inventories, self-insurance, tax mattersand litigation, are highly complex and involve many subjective assumptions,estimates and judgments. Changes in these rules or their interpretation orchanges in underlying assumptions, estimates or judgments could significantlychange the Company’s reported or expected financial performance or financialposition.

 

***If the Company’smanagement determines that its goodwill or other intangible assets areimpaired, the Company may be required to write off part or all of such assets,which would adversely affect its financial position and results of operations.***  ******The Company has goodwill and otherintangible assets of approximately $112.1 million and $357.8 million as of March 1,2008 and March 3, 2007, respectively, which constituted approximately 32%and 60%, respectively, of its total assets. The amount of goodwill and other intangible assets as of March 1,2008 reflects impairment charges taken by the Company in the current year as aresult of its periodic evaluation of goodwill and other intangible assets.  Such impairment charges included a total of$172.1 million and $47.3 million for goodwill and other intangible assets,respectively.  In addition, the Companyalso took impairment charges of approximately $3.0 million related to formulasdeveloped for a customer that the Company classifies as other non-currentassets.  The Company will continue toperiodically evaluate goodwill and other intangible assets forimpairment.  Any future determination requiring the write off of asignificant portion of the Company’s goodwill or other intangible assets couldadversely affect the Company’s results of operations and financial position.

 

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***Increases in theprice of raw materials, particularly beef, chicken, pork, and cheese, orincreases in the cost of manufacturing, distribution, and other costs, couldreduce the Company’s operating margins if the Company is unable to offset suchincreasing costs by increasing prices to its customers.***** **The Company’s foodprocessing operations require the use of raw materials, labor, energy, fuel,and other inputs related to the production and distribution of its foodproducts. * *The primary raw materials used in the Company’s food processingoperations are boneless beef, chicken, and pork, flour, yeast, seasonings,cheese, breading, soy proteins, peanut butter, and packaging supplies.  Meat proteins are generally purchased under seven day payment terms, with theexception of a few that require payment at the time the product isshipped.  Historically, the Company has not hedged in the futures markets,and over time, the Company’s raw material costs have fluctuated with movementin the relevant commodity markets.  During fiscal 2008, the weightedaverage prices the Company paid for beef, chicken, pork, and cheese increasedby approximately 1.5%, 24.6%, 7.4%, and 37.1%, respectively, over the weightedaverage prices the Company paid for these raw materials during fiscal2007.  While historically the Company has attempted to manage suchfluctuations through purchase orders, market-related pricing contracts,fixed-price contracts, and by passing on such cost increases to customers, theCompany has not always been successful and may be unable to protect itself fromfuture increases in the prices of raw materials on a timely basis, or atall.  In addition, some of the Company’s customers purchase products basedon bid contracts with set prices, which would prevent the Company fromrecovering any raw materials price increases from these customers during thelife of those contracts.  If prices for beef, chicken, pork, and cheesewere to increase significantly without a commensurate increase in the price forprocessed food products, the Company’s financial condition and operatingresults could be adversely affected.

 

***If the Company’sproducts become contaminated or are mislabeled, the Company may be subject toproduct liability claims, product recalls, and increased scrutiny byregulators, any of which could adversely affect the Company and its business.***  ******Beef, chicken, and pork products arevulnerable to contamination by organisms producing food-borne illnesses. These organisms are generally found in the environment, and, as a result, thereis a risk that as a result of food processing, they could be found in theCompany’s products.  For example,******E. coli******is one of many food-borne pathogens commonlyassociated with beef products.  In addition, certain of the Company’sproducts contain wheat gluten, which has potential contamination risks. If contaminated products are shipped for distribution, illness and death couldresult if the pathogens are not eliminated by processing at the foodservice orconsumer level.  The risk can be controlled, but not eliminated, by use ofgood manufacturing practices and finished product testing.  Also, productspurchased from others for re-packing or distribution may contain contaminantsthat the Company is unable to identify.  The Company may also encounterthe same risks if a third party tampers with its products or if its productsare inadvertently mislabeled.  Shipment of adulterated products, even ifinadvertent, is a violation of law and may lead to product liability claims,product recalls and increased scrutiny by federal and state regulatoryagencies, any of which could have a material adverse effect on the Company’sreputation, business, prospects, results of operations, and financialcondition.

 

***The Company’sinsurance and indemnification agreements may be inadequate to cover all theliabilities the Company may incur and could have an adverse effect on theCompany and its business.*** ******TheCompany faces the risk of exposure to product liability claims and adversepublic relations in the event that the consumption of its products causesinjury or illness.  If a product liability claim is successful, theCompany’s insurance may not be adequate to cover all liabilities it may incur,including harm to its reputation, and the Company may not be able to continueto maintain such insurance, or obtain comparable insurance at a reasonablecost, if at all.  The Company generally seeks contractual indemnificationand insurance coverage from its suppliers, but this indemnification orinsurance coverage is limited by the creditworthiness of the indemnifying partyand its insurance carriers, if any, as well as the insured limits of anyinsurance provided by those suppliers.  If the Company does not haveadequate insurance or contractual indemnification available, product liabilityclaims relating to defective products could have a material adverse effect onits reputation, business, prospects, financial condition, and operatingresults.

 

***A decline in meatconsumption, or in the consumption of processed food products or the Company’sfailure to identify or react to changing demand for its products, would have amaterial adverse effect on the Company’s business, financial condition, andoperating results. ***Adverse publicity relating to health concernsand the nutritional value of meat and meat products or individual statesimplementing nutrition guidelines limiting the degree to which the Company cansell its products could adversely affect demand for the Company’sproducts.  In addition, as substantially all of the Company’s operationsconsist of the production and distribution of processed food products, a changein consumer preferences relating to processed food products or in consumerperceptions regarding the nutritional value of processed food products couldsignificantly reduce the Company’s sales volume.  A reduction in demandfor the Company’s products caused by these factors would have a materialadverse effect on the Company’s business, financial condition, and operatingresults.

 

The food industry in general is subject to changingconsumer trends, demands, and preferences.  The Company’s processedprotein and bakery products compete with other processed convenience foods, aswell as other foods.  The Company’s failure to anticipate, identify orreact to changes in consumer preferences could lead to, among other things,reduced demand and reduced margins for its products, and could have a materialadverse effect on its business, financial condition, and operating results.

 

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***Outbreaks ofdisease among cattle, chicken or pigs could significantly reduce demand for theCompany’s products and restrict its ability to produce meat and sandwichproducts, adversely affecting its sales volume and financial condition.***   An outbreak of disease affectinglivestock, such as bovine spongiform encephalopathy (commonly referred to as “madcow disease” or BSE), foot-and-mouth disease, Asian bird flu, or most recently,the contamination of wheat gluten, could result in reductions in demand andrestrictions on sales of products to the Company’s customers or purchases ofmeat and poultry products from its suppliers.  Health concerns about BSEin particular have had an adverse impact on the livestock industry and on salesof beef products in Europe, South America and Japan in past years, which, inturn, could have an adverse impact on the Company’s financial condition andresults of operations.

 

***The categories ofthe food industry in which the Company operates are highly competitive, and theCompany’s inability to compete successfully could adversely affect itsbusiness, results of operations, and financial condition.*** Competition in each of the categories ofthe food industry in which the Company operates is intense.  The Company’sformed, pre-cooked and ready-to-cook protein products compete with the productsof several meat processors, which include Advance Food Company, Tyson, JTM FoodGroup, King’s Command Foods, Inc., and Don Lee Farms, in addition tocompeting with smaller local and regional producers.  The market forhand-held convenience sandwiches has low barriers to entry and is extremelyfragmented, with several direct competitors, including Sara Lee/Jimmy DeanFoods, Bridgford Foods Corp., Deli Express, and Landshire, and indirectcompetition from a variety of substitute products.  Many of the Company’scompetitors in each of these categories have substantially greater financialresources, name recognition, research and development, marketing, and humanresources.  In addition, if any of the Company’s competitors develop newor enhanced products that are superior to the Company’s products, or market andsell their products more successfully than the Company, the Company may beunable to compete successfully with any or all of these companies. Increased competition for any of the Company’s products could result in pricereductions, reduced margins or loss of market share, any of which couldnegatively affect the Company’s business, results of operations, and financialcondition.

 

***The Company’s topten customers have historically accounted for a significant portion of its netrevenues and its largest customer accounted for approximately 11% of netrevenues for fiscal 2008. ***The Company’s top ten customers accounted forapproximately 46% and 51% of its net revenues in fiscal 2008 and fiscal 2007,respectively.  In particular, the Company’s largest customer accounted forapproximately 11% and 14% of net revenues in fiscal 2008 and fiscal 2007, respectively. If, for any reason, one of the Company’s key customers were to purchasesignificantly less of the Company’s products in the future or were to terminatepurchases from the Company, or if for any reason the Company was unable torenew an existing contract with a key customer on favorable terms, or at all,and the Company was not able to sell its products to new customers atcomparable or greater levels, its business, financial condition, and operatingresults would suffer.

 

***The consolidationof and market strength among the Company’s retail and foodservice customers mayput pressure on its operating margins.*** In recent years, the trend among theCompany’s retail and foodservice customers, such as warehouse clubs andfoodservice distributors, has been toward consolidation.  In addition, theCompany’s customers include one of the five largest quick-service hamburgerrestaurant chains in the United States.  These factors have resulted inincreased negotiating strength among many of the Company’s customers, which hasand may continue to allow them to exert pressure on the Company with respect topricing terms, product quality, and the introduction of new products.  Tothe extent the Company’s customer base continues to consolidate, competitionfor the business of fewer customers may intensify.  If the Company cannotcontinue to negotiate favorable contracts, whether upon renewal or otherwise,with these customers, implement appropriate pricing and introduce new productofferings acceptable to its customers, or if the Company loses its existinglarge customers, its profitability could decrease.

 

***Significantincreases in the cost of distribution would have an adverse effect on theCompany’s financial condition and operating results.*** The Company’s distribution costs includefuel for transportation and electricity for cold storage.  Significantincreases in these distribution costs would adversely affect the Company’sfinancial condition and operating results.  In addition to Zar Tran, theCompany uses a core group of contract carriers that have established ratesbased on mileage to regions or destination states.  A fuel surchargeaddendum is a component of all rates to offset the fluctuating price of dieselfuel, primarily to limit the contract carrier’s exposure.  These fuelsurcharges have risen in past years and remain at a historic high.  Ifthese surcharges continue to rise, or if the Company is unable to passincreased distribution costs on to its customers in the form of higher pricesfor our products, its financial condition and operating results would suffer.

 

The Company uses commercial cold storage vendors to store finishedgoods.  A major component of cold storage operations expense iselectricity cost.  Although the Company tries to minimize storage costs,any significant increase in electricity rates for the vendor are passed alongin the form of higher storage rates.  If the Company’s storage ratesincrease significantly, it may be unable to pass thesecosts on to itscustomers, which would have an adverse effect on its financial condition andoperating results.

 

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***The Company maynot properly execute, or realize anticipated cost savings or benefits from, itsSKU rationalization initiative, its inventory reduction initiative, itsproduction cost containment initiatives, or any other ongoing initiatives.  If the Company fails to implement suchinitiatives, anticipated cost savings and benefits would not be realized, whichcould adversely affect the Company’s financial condition and operating results.*** The Company’s success is partly dependent uponproperly executing, and realizing cost savings or other benefits from, itsstock keeping unit (“SKU”) rationalization initiative, its inventory reductioninitiative, its production cost containment initiative, and other ongoinginitiatives.  These initiatives areprimarily designed to make the Company more efficient in the manufacturing anddistribution of its products, which is necessary in the Company’s highlycompetitive industry.  If the Companyfails to implement its initiatives, anticipated cost savings and benefits fromsuch initiatives would be significantly reduced and it could adversely affectthe Company’s financial condition and operating results.

 

***The Companymanufactures many of its products using proprietary formulations and marketsits products under a variety of brand names. The termination of, or failure torenew a license agreement under which the Company sells branded products, thereduction in value of an underlying license or its inability to protectownership of proprietary formulations, could negatively impact the Company’sability to produce and sell its products.*** The market for the Company’s productsdepends to a significant extent upon the proprietary formulations used inmanufacturing its products and the goodwill associated with the brand namesunder which its products are sold.  The Company relies on patent,trademark and trade secret law to establish and protect its intellectual propertyrights, including its proprietary formulations.  The Company may berequired from time to time to bring lawsuits against third parties to protectits intellectual property.  Similarly, from time to time the Company maybe party to proceedings in which third parties challenge its rights, includingthose to the Company’s product formulations.  Any lawsuits or otheractions the Company brings to enforce its rights may not be successful, and theCompany may in fact be found to infringe on the intellectual property rights ofothers, in either of which case the Company may not be able to prevent othersfrom using such intellectual property and/or may be prevented from using suchintellectual property, including proprietary formulations.

 

In addition to its own brand names, the Company haslicenses with third parties that own certain trademarks or trade names used inthe marketing of some of the Company’s products.  In the event that anysuch license is terminated, the Company may lose the right to use or havereduced rights to use the intellectual property covered by suchagreement.  In such event, the Company may not be able to secure licensesto use alternative trademarks or trade names in the marketing of its products,and its products may not be as attractive to customers.  In addition,certain events, including events beyond the Company’s control, could makecertain of its brand names, or the brand names it licenses, less attractive toits customers, making its products less desirable as a result.  Any lossin the value of a brand name or loss of a license for a brand name couldadversely affect the Company’s sales volume for affected products.

 

***The Company issubject to extensive governmental regulations, which require significantcompliance expenditures and the Company’s failure to comply with suchregulations could adversely affect the Company’s financial condition andresults of operations.***  ******TheCompany is subject to extensive federal, state and localregulations.   Its food processing facilities and food products aresubject to frequent inspection by the USDA, FDA, and various state, and localhealth and agricultural agencies.  Applicable statutes and regulationsgoverning food products include rules for identifying the content ofspecific types of foods, the nutritional value of that food and its servingsize, as well as rules that protect against contamination of products byfood-borne pathogens.  Many jurisdictions also require that foodprocessors adhere to good manufacturing practices (the definition of which mayvary by jurisdiction) with respect to production processes.  Recently, thefood safety practices and procedures in the meat processing industry have beensubject to more intense scrutiny and oversight by the USDA and future outbreaksof diseases among cattle, poultry or pigs could lead to further governmentalregulation.  In addition, the Company’s production and distributionfacilities are subject to various federal, state and local laws and regulationsrelating to workplace safety and workplace health.  Failure to comply withall applicable laws and regulations could subject the Company to civilremedies, including fines, injunctions, product recalls or seizures andcriminal sanctions, any of which could have a material adverse effect on theCompany’s business, financial condition and results of operations. Furthermore, compliance with current or future laws or regulations couldrequire the Company to make material expenditures or otherwise adversely affectthe way the Company operates its business, financial condition and operatingresults.

 

***Compliance withenvironmental regulations may result in significant costs and the Company’sfailure to comply with environmental regulations may result in civil as well ascriminal penalties and liability for damages.***  ******The Company’s operations are subject toextensive and increasingly stringent regulations pertaining to the discharge ofmaterials into the environment and the handling and disposition ofwastes.  Failure to comply with these regulations can have seriousconsequences for the Company, including criminal as well as civil andadministrative penalties and negative publicity.  The Company hasincurred, and could incur in the future, significant capital and operatingexpenditures to avoid violations of these laws and regulations. Additional environmental requirements imposed in the future could requirecurrently unanticipated investigations, assessments or expenditures, and mayrequire the Company to incur significant additional costs.

 

***Labor disruptionsor increased labor costs could adversely affect the Company’s business.*** As of March 1, 2008, the Companyhad approximately 2,629 employees.  The Company considers its relationswith its employees to be good.  However, the Company could experience amaterial labor disruption or significantly increased labor costs at one or moreof its facilities in the future, which would have a material adverse effect onits business, financial condition and operating results.

 

11

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*** ***

***The Company sellsa large percentage of its products to schools, which subjects its sales volumesand, thus, its operating results, to seasonal variations.***  ******The Company’s quarterly operatingresults are affected by the seasonal fluctuations of its sales and operatingprofits.  The Company derived approximately 25% and 24% of its netrevenues in fiscal 2008 and fiscal 2007, respectively, from sales toschools.  Since schools comprise a significant portion of the Company’scustomer base, sales of its products tend to be lower during the summer months,late November, and December.  These lower sales volumes negatively impactits operating profits and increase working capital requirements during thecorresponding quarters of each fiscal year.

 

***The Companyproduces its ready-to-cook and pre-cooked protein products, compartmentalizedmeals, hand-held convenience sandwiches, and specialty bread products in itsfive manufacturing and processing facilities.   A material disruption atone of these plants or an increase in demand causing inability to meet customerdemands could seriously harm the Company’s financial condition and operatingresults.***  ******A materialdisruption at any of the Company’s manufacturing and processing facilitiescould be caused by a number of different events, including:

 

·                  maintenance outages;

·                  prolonged power failures;

·                  equipment failure;

·                  chemical spill or release;

·                  fires, floods, earthquakes or other naturaldisasters; or

·                  other operational problems.

 

Any material malfunction or prolonged disruption inthe operations at any of its facilities could prevent the Company fromfulfilling orders to existing customers, and would limit its ability to sellproducts to new customers.  Any material malfunction or prolonged disruptionat one of the Company’s manufacturing facilities, or a significant increase incustomer demands, could result in the Company’s inability to meet manufacturingrequirements.  Any of these events could adversely affect the Company’sbusiness, financial condition and operating results.

 

***The Companydepends upon the continued services of certain members of its senior managementteam, without whom its business operations would be significantly disrupted.***  ******The Company’s success depends, in part,on the continued contributions of its executive officers and other keyemployees.  The Company’s management team has significant industryexperience and would be difficult to replace.  If the Company loses orsuffers an extended interruption in the service of one or more of its seniorofficers, its financial condition and operating results may be adverselyaffected.  Moreover, the market for qualified individuals may be highlycompetitive and the Company may not be able to attract and retain qualifiedpersonnel to replace or succeed members of its senior management or other keyemployees, should the need arise.

 

***If the Company isunable to maintain or upgrade its information systems and software programs orif the Company is unable to convert to alternate systems in an efficient andtimely manner, the Company’s operations may be disrupted or become lessefficient.*** TheCompany depends on a variety of information systems for the efficientfunctioning of its business.  The Companyrelies on certain software vendors to maintain and periodically upgrade many ofthese systems so that they can continue to support the Company’s business.  The software programs supporting many of theCompany’s systems were licensed to the Company by independent softwaredevelopers.  Costs and potential interruptions associated with theimplementation of new or upgraded systems and technology or with maintenance oradequate support of existing systems could disrupt or reduce the efficiency ofthe Company’s business.

 

***Acquisitions bythe Company and the integration of such businesses acquired by the Companycould impair the Company’s business, financial condition, and operatingresults.*** ******The Company made twosignificant acquisitions during fiscal 2007. Although the Company has procedures in place to conduct due diligencereviews of potential acquisition candidates, there is no assurance that suchprocedures will detect all potential problems.  Acquisitions involveinherent uncertainties including the ability to identify suitable acquisitioncandidates and negotiate acceptable terms for the acquisition, the ability tointegrate the acquired businesses into a larger organization, and theavailability of management resources to oversee the operations of thebusinesses.  Successful integration requires the consolidation offinancial functions and synergies, the integration of key personnel, and themaintenance and growth of the existing business.  The Company hasexperienced difficulty in fiscal 2008 and fiscal 2007 integrating suchacquisitions, and if the Company is unable to successfully complete suchintegrations, it could adversely affect the Company’s business, financialcondition and operating results.

 

***The Company isexposed to potential risks from legislation requiring companies to evaluatecontrols under Section 404 of the Sarbanes-Oxley Act of 2002, and theCompany’s evaluation of its internal controls only provides reasonableassurances.***** **The Company’s management has evaluated and tested the Company’s internalcontrols in order to allow management to report on such internal controls, asrequired by Section 404 of the Sarbanes-Oxley Act of 2002.  The Company has incurred, and expects tocontinue to incur, significant expenses and a diversion of management’s time tomeet the requirements of Section 404. If the Company is not able to continue to meet the requirements of Section 404in a timely manner or with adequate compliance, it would be required todisclose material weaknesses, if any, if they develop or are uncovered and theCompany may be subject to sanctions or investigation by regulatory authorities,such as the Securities and Exchange Commission (the “SEC”).  Any such action could negatively impact theperception of the Company.  In addition,the Company’s internal controls may not prevent or detect all errors andfraud.  A control system, no matter howwell designed and operated, is based upon certain assumptions and can provideonly reasonable assurance that the objectives of the control system will be met.

 

12

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Although the Company was not required to include inthis annual report an attestation report of the Company’s registered publicaccounting firm regarding internal control over financial reporting, theCompany was required to conducted an evaluation of the effectiveness of itsinternal control over financial reporting based on the framework in InternalControl – Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission. As a result of this evaluation, management identified a materialweakness in its internal controls over financial reporting, however, remedialactions are expected to result in correcting the weakness.  See Item 9A(T), “Controls and Procedures,”herein for further discussion.

 

**Item 1B.   *Unresolved Staff Comments***

 

Not Applicable.

 

**Item 2.   *Properties***

 

The Company’s corporateheadquarters is located in a facility it owns in Cincinnati, Ohio.  Inaddition to the administrative offices located at the Company’s headquarters,the Company utilizes office space in its other manufacturing and processingfacilities. The Company produces its ready-to-cook and fully-cooked proteinproducts, compartmentalized meals, hand-held convenience sandwiches, andspecialty bread products in its five manufacturing and processingfacilities.  Set forth below is certain information relating to Pierre’sprincipal operating facilities (including these five manufacturing andprocessing facilities), all of which are owned by the Company.

 
| **Location**              | ** ** | **Square Feet** | ** ** | **Description**                                |
|---------------------------|------------|-----------------|------------|------------------------------------------------|
| Cincinnati, Ohio          |       | 26,427          |       | Corporate Headquarters, Administrative Offices |
| Cincinnati, Ohio          |       | 197,545         |       | Manufacturing                                  |
| Claremont, North Carolina |       | 150,000         |       | Manufacturing                                  |
| Amherst, Ohio             |       | 115,689         |       | Manufacturing/Administrative Offices           |
| Easley, South Carolina    |       | 61,277          |       | Manufacturing/Warehouse                        |
| Cedartown, Georgia        |       | 124,674         |       | Manufacturing (1)                              |
| Cedartown, Georgia        |       | 58,444          |       | Manufacturing/Administrative Offices (1)       |
| Cedartown, Georgia        |       | 10,920          |       | Depot/Administrative Offices (1)               |
| Rome, Georgia             |       | 166,836         |       | Manufacturing                                  |
| Rome, Georgia             |       | 28,226          |       | Administrative Offices (2)                     |
| Rome, Georgia             |       | 40,084          |       | Laboratory/Administrative Offices              |
| Hamilton, Alabama         |       | 11,900          |       | Manufacturing (3)                              |

 

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(1)   Acquired as part of the Acquisition of Zartic,however, as disclosed by the Company in a Current Report on Form 8-K filedwith the SEC on February 8, 2008, the Company closed one of itsmanufacturing facilities in Cedartown, Georgia effective February 8,2008.  The Company has recordedimpairment charges of approximately $6.9 million for this facility duringfiscal 2008.  The other facilities inCedartown, Georgia are being used by Zar Tran and for storage ofequipment.  See Item 7 “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources” in this report for furtherdiscussion.

 

(2)   Acquired as part of the Acquisition of Zartic, however, subsequent tosuch acquisition, functions previously performed in these offices were moved tothe Company’s corporate offices in Cincinnati, Ohio or to one of its othermanufacturing facilities.  As a result,the Company classified this administrative office Building and certainFurniture and Fixtures located within such facility as assets held for sale asof March 1, 2008.  Effective May 12,2008, the administrative office building, and the furniture and fixtureslocated in this office building located in Rome, Georgia were sold.  Undera temporary occupancy letter agreement, the Company has the right to occupyportions of the building through August 10, 2008 at no charge exceptfor the utility expenses.  See Note 6, “Assets Held for Sale”, to theCompany’s Consolidated Financial Statements for discussion.

 

(3)   Acquired as part of the Acquisition ofZartic.  However, subsequent to theAcquisition of Zartic, as previously disclosed in the Company’s QuarterlyReport on Form 10-Q filed with the SEC for the quarter ended June 2,2007, on July 14, 2007, this manufacturing facility was destroyed by afire.  See Item 7 “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources” in this report for furtherdiscussion.

 

All of the Company’s manufacturing facilities arefederally inspected facilities. ** **The Company is highly committed to the quality of its products and the safetyof its operations.  The Company’s modern equipment is cleanable andmonitored by physical, chemical, and microbiological quality assuranceprograms.  The Company believes that its facilities are generally in goodcondition and that they are suitable for their current uses.  The Companynevertheless engages periodically in construction and other capital improvementprojects that the Company believes are necessary to expand and improve theefficiency of its facilities.  In addition to the facilities owned by theCompany, warehouse facilities are leased by the Company throughout the UnitedStates and Canada.

 

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** **

**Item 3.   *Legal Proceedings***

 

On March 20, 2006, Hamilton County Department ofEnvironmental Services (“HCDOES”) sent a Notice of Violation (“NOV”) to theCompany alleging that the Company’s Cincinnati, Ohio facility violated itspermit limits for particulate matter (“PM”) from certain cooking operations andreserved the right to pursue an enforcement action and a civil penalty in thefuture.  On July 7, 2006, HCDOESsent another NOV to the Company alleging that the Company was in violation ofits permit limits for PM emissions and again reserved the right to pursue anenforcement action in the future.

 

On May 21, 2007, the Director of the Ohio EPAinvited the Company to enter into consent findings and orders with the OhioEPA, in lieu of referral to the Ohio Attorney General’s Office and the filingof an enforcement action in court.  On August 31,2007, the Company settled claims with Ohio EPA for $125,000, without anyadmission of liability.  In response tothe NOVs, the Company has purchased and installed emissions control equipmentcosting approximately $1.8 million to comply with relevant laws.

 

The Companyis cooperating with authorities in all aspects of these matters.  The Company applied for modified permits toinstall (“PTIs”) on August 14, 2007 for the emission sources at the plantand also submitted a PTI application on September 20, 2007, for processwater heaters at the plant to come into compliance with applicable regulatoryrequirements.  These PTI applications arecurrently being reviewed and processed by HCDOES.  In connection with the PTI applicationsreview, HCDOES requested on October 5, 2007 that the Company assessfugitive emissions from its cooking operations and provide that assessment tothe agency.  The Company’s environmentalconsultant conducted a fugitive emissions assessment and has re-submitted itsPTI applications to HCDOES, which is currently processing those applications.

 

On August 16, 2006, the Company purchased thestock of Clovervale through a Share and Asset Purchase Agreement (“ClovervaleAgreement”).  The Clovervale Agreementincluded certain indemnities granted by the selling shareholder to the Company,including an indemnity for environmental non-compliance that was not disclosedby the selling shareholder in the Clovervale Agreement.  On July 24, 2007, the Company receivednotification from the City of Amherst Building and Utilities Department thatthe Company’s Clovervale facility, which was acquired as part of theAcquisition of Clovervale, was in violation of the city’s ordinance for highstrength oil and grease discharges.  TheCity of Amherst requested that the Company meet with the City and comply withwastewater discharge requirements.  TheCompany’s environmental consultant is assessing compliance with the City ofAmherst wastewater discharge requirements and although the extent of noncomplianceand possible costs to comply are unknown at this point, the Company has made aclaim for indemnity with the selling shareholder under the Clovervale Agreement..

 

Zartic, LLC and Pierre Foods, Inc. have recentlyreceived grand jury subpoenas requesting production of documents relating tosales to certain prime vendors to the U.S. Department of Defense.  Zartic, LLC and Pierre Foods, Inc. arein the process of responding to the subpoenas and the Company is incurringlegal fees and expenses as a result. Although the Company has not been advisedthat it is a target of the investigation, because the grand jury’sinvestigation is not complete, it is not now possible to evaluate thelikelihood of an unfavorable outcome or to estimate the amount or range of anypotential loss that may result from the investigation.

 

The Company continuouslyevaluates contingencies based upon the best available information.  TheCompany believes it has recorded appropriate liabilities to the extentnecessary in cases where the outcome of such liabilities is considered probableand reasonably estimable, and that its assessment of contingencies isreasonable.   To the extent that resolution of contingencies resultsin amounts that vary from management’s estimates, future earnings will becharged or credited accordingly.

 

As part of its ongoingoperations in the food processing industry, the Company is subject to extensivefederal, state, and local regulations and its food processing facilities andfood products are subject to frequent inspection, audits and inquiries by theUSDA, the FDA, and various local health and agricultural agencies and byfederal, state, and local agencies responsible for the enforcement ofenvironmental, labor, and other laws and regulations.  The Company is alsoinvolved in various legal actions arising in the normal course ofbusiness.  These matters are continuously being evaluated and, in somecases, are being contested by the Company and the outcome is not predictable.Consequently, an estimate of the possible loss or range of loss associated withthese actions cannot be made.  Although occasional adverse outcomes (orsettlements) may occur and could possibly have an adverse effect on the resultsof operations in any one accounting period, the Company believes that the finaldisposition of such matters will not have a material adverse effect on theCompany’s consolidated financial position.

 

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** **

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

 

None.

 

**PART II**

 

**Item5.    *Market for the Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity******Securities***

 

Since the Company’s going-private transaction on July 26,2002, the Company has been a wholly-owned subsidiary of PFMI; accordingly,there is no public trading market for the Company’s common stock.  TheCompany did not declare a cash dividend during fiscal 2008, fiscal 2007, orfiscal 2006.  The Company’s debt instruments restrict its ability to paydividends.  See Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Liquidity and Capital Resources” in thisreport and Note 8 – “Financing Arrangements,” to the Company’s ConsolidatedFinancial Statements.  Regardless of the scope of such restrictions, the Company’spolicy is to reinvest any earnings rather than pay dividends.

 

The Company has no compensation plans or individualarrangements under which equity securities of the Company are authorized forissuance; however, Holding, the sole stockholder of PFMI, implemented a stockoption plan in fiscal 2005 pursuant to which options to purchase shares ofcommon stock of Holding may be issued to officers, employees and consultants ofthe Company.

 

The following table sets forth the number of sharesof common stock of Holding subject to options granted pursuant to Holding’soption plan and shares of restricted stock available for issuance under theHoldings restricted stock plan, which are the only outstanding equitycompensation plans relating to the Company.

 
| ** **                                                  | ** ** | **Equity Compensation Plan Information**                                                                     | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                      | ** ** | **Number of Securities to  be Issued Upon  Exercise of   Outstanding Options  (a)** | ** ** | **Weighted-Average  Exercise Price of  Outstanding  Options  (b) (1)** | ** ** | **Number of Securities  Remaining  Available for Future Issuance  under Equity Compensation  Plans (excluding Securities  Reflected in Column (a))  (c)** | ** ** |
| Equity Compensation Plans Approved by  Security-Holders     |       | 91,628                                                                                                                      |       | $ | 10.00 |   | 72,150 |   |
|                                                        |       |                                                                                                                        |       |   |   |   |   |
| Equity Compensation Plans Not Approved by  Security-Holders |       | —                                                                                                                      |       | N/A |   | 183,500 | (2) |
|                                                        |       |                                                                                                                        |       |   |   |   |   |
| TOTAL                                                       |       | 91,628                                                                                                                      |       | $ | 10.00 |   | 255,650 |   |
|                                                             |            |                                                                                                                             |            |  |  |  |  |  |  |

 

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

 

(2)           Shares available for future issuance under therestricted stock plan adopted by the Board of Directors of Holding effective January 10,2008.

 

15

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

 

The following selectedhistorical financial information has been derived from audited consolidatedfinancial statements of the Company. Such financial information should be read in conjunction with theconsolidated financial statements of the Company, the notes thereto and theother financial information contained elsewhere herein.  See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and the Company’s consolidatedfinancial statements and supplementary data.

 
| ** **                                                                     | ** ** | ** **                                                         | ** ** | ** **           | ** ** | ** **           | ** ** | **Successor(2)**     | ** ** | **Predecessor(2)**   | ** ** | ** **           | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                     | ** ** | **Fiscal 2008**                                               | ** ** | **Fiscal 2007** | ** ** | **Fiscal 2006** | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** |
| ** **                                                                     | ** ** | **(in thousands, except per share data)** | ** ** |
|                                                                           |       |                                                               |       |                 |       |                 |       |                 |       |                 |       |                 |       |
| STATEMENT OF OPERATIONS DATA:                                                  |       |                                                               |       |                 |       |                 |       |                 |       |                 |       |                 |       |
| Revenues, net                                                                  |       | $                                                                  | 643,270    |                 | $          | 487,843              |       | $                    | 431,633    |                 | $          | 294,867              |       | $ | 115,549 |   | $ | 358,549 |   |
| Cost of goods sold                                                             |       | 497,214                                                            |       | 344,164              |       | 309,274              |       | 217,323              |       | 87,025               |       | 254,235              |       |
| Selling, general, and administrative  expenses                                 |       | 126,379                                                            |       | 85,404               |       | 67,839               |       | 39,826               |       | 26,447               |       | 79,982               |       |
| Impairment of goodwill, other intangible  assets, and other non-current assets |       | 222,377                                                            |       | —               |       | —               |       | —               |       | —               |       | —               |       |
| Impairment of fixed assets                                                     |       | 6,925                                                              |       | —               |       | —               |       | —               |       | —               |       | —               |       |
| (Gain) loss on disposition of property, plant,  and equipment, net             |       | 402                                                                |       | (2                   | )          | 6                    |       | 5                    |       | 340                  |       | 11                   |       |
| Depreciation and amortization                                                  |       | 36,560                                                             |       | 30,368               |       | 30,638               |       | 23,170               |       | 1,545                |       | 4,605                |       |
| Operating income (loss)                                                        |       | (246,587                                                           | )          | 27,908               |       | 23,876               |       | 14,543               |       | 192                  |       | 19,716               |       |
| Interest expense                                                               |       | (42,256                                                            | )          | (25,377              | )          | (22,331              | )          | (19,493              | )          | (6,538               | )          | (16,979              | )          |
| Other income                                                                   |       | 490                                                                |       | 115                  |       | 152                  |       | 24                   |       | 2                    |       | —               |       |
| Income tax benefit (provision)                                                 |       | 46,748                                                             |       | (846                 | )          | 465                  |       | 597                  |       | 2,080                |       | (1,303               | )          |
| Net income (loss)                                                              |       | (241,605                                                           | )          | 1,800                |       | 2,162                |       | (4,329               | )          | (4,264               | )          | 1,434                |       |
|                                                                           |       |                                                               |       |                 |       |                 |       |                 |       |                 |       |                 |       |
| NET INCOME (LOSS) PER SHARE - BASIC AND  DILUTED:                              |       |                                                               |       |                 |       |                 |       |                 |       |                 |       |                 |       |
|                                                                           |       |                                                               |       |                 |       |                 |       |                 |       |                 |       |                 |       |
| Net income (loss)                                                              |       | $                                                                  | (2,416.05  | )                    | $          | 18.00                |       | $                    | 21.62      |                 | $          | (43.29               | )          | $ | (42.64 | ) | $ | 14.34 |   |
|                                                                           |       |                                                               |       |                 |       |                 |       |                 |       |                 |       |                 |       |
| OTHER DATA:                                                                    |       |                                                               |       |                 |       |                 |       |                 |       |                 |       |                 |       |
| Capital expenditures                                                           |       | $                                                                  | 7,772      |                 | $          | 8,658                |       | $                    | 7,150      |                 | $          | 3,677                |       | $ | 2,084 |   | $ | 10,041 |   |
|                                                                           |       |                                                               |       |                 |       |                 |       |                 |       |                 |       |                 |       |
| BALANCE SHEET DATA:                                                            |       |                                                               |       |                 |       |                 |       |                 |       |                 |       |                 |       |
| Working capital (deficit) (1)                                                  |       | $                                                                  | (274,881   | )                    | $          | 87,755               |       | $                    | 61,997     |                 | $          | 62,145               |       | n/a |   | $ | 46,110 |   |
| Total assets                                                                   |       | 349,458                                                            |       | 599,829              |       | 472,425              |       | 496,588              |       | n/a                  |       | 175,771              |       |
| Total debt                                                                     |       | 368,526                                                            |       | 358,844              |       | 244,994              |       | 263,580              |       | n/a                  |       | 143,694              |       |
| Shareholder’s equity                                                      |       | (91,831                                                            | )          | 149,820              |       | 148,058              |       | 146,023              |       | n/a                  |       | 6,621                |       |

 

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| (1)    |   | Working  capital (deficit) is calculated as current assets less current liabilities,  which at March 1, 2008 reflects the reclassification of certain  long-term debt as current.                                                                                                                                                           |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| (2)    |   | As  a result of the Acquisition of Pierre, the Company’s fiscal year ended March  5, 2005 is comprised of two short periods.   The periods of March 7, 2004 through June 30, 2004 and July 1, 2004  through March 5, 2005 are referred to as “predecessor fiscal 2005” and  “successor fiscal 2005,” respectively. |

 

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** **

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

 

The following discussion relates to the financialcondition and results of operations for fiscal 2008, fiscal 2007, and fiscal2006.  This section should be read inconjunction with the Company’s consolidated financial statements and consideredwith “Risk Factors” discussed in Item 1A above, Item 7A – “Quantitative andQualitative Disclosures About Market Risk” below, and “Cautionary StatementsRegarding Forward Looking Statements,” which precedes Part I, Item 1above.

 

Pierre operates on a 52-week or 53-week fiscal yearending on the first Saturday in March or if the last day of February isa Saturday, the last day of February.  Each quarter of the fiscal yearcontains 13 weeks except for the infrequent fiscal years with53 weeks.  The results for all years presented contain 52 weeks.

 

**Executive Summary**

 

The Company experienced significant raw material andfuel price increases consistent with the relevant commodity market increases. TheCompany has had limited ability to pass along price increases due to customerresistance. Additionally, the company developed a SKU and inventory reductionstrategy which initially increased costs for obsolete inventory and distressedsales, and resulted in a significant inventory decline.  The Company continues to integrate theAcquisition of Zartic and the Acquisition of Clovervale, but has not achievedthe expected synergies.  The Cedartownfacility was closed February 8, 2008 and the Hamilton plant was destroyed byfire on July 14, 2007. Due to these and other developments, the Company failedto satisfy the financial covenants in its senior credit facility for thequarter ended March 1, 2008, and as a result, is currently in defaultunder that facility.  On June 2,2008, the Company’s lenders sent the Company a notice indicating that all outstandingborrowings under the facility shall bear a default rate of interest beginning February 29,2008.  The default rate is 2% higher thanthe non-default rate, and has resulted in an additional $1.2 million ininterest as of May 31, 2008.  On June 2,2008, the Company’s lenders also sent a notice to the Company indicating thatit was in default for failing to deliver its audited financial statements andreport to the lenders.  As a result ofthese defaults, the Company’s lenders are entitled to various rights andremedies, including, among others, the right to accelerate the indebtednessunder the facility and to foreclose on the security for the facility.  In addition, as a result of these defaults,the Company is currently prohibited from borrowing under its revolving creditfacility.

 

As of March 1, 2008, the Company had $5.6million of cash and cash equivalents on-hand. As of the end of the Company’s first quarter of fiscal 2009, which endedMay 31, 2008, the Company had $9.8 million of cash and cash equivalents onhand.  However, an interest payment of$6.2 million is due on July 15, 2008 under the Notes, and unless theCompany can resolve its current default situation with its senior lenders orotherwise secure additional financing prior to that time, the Company may nothave sufficient liquidity to make the interest payment and to continue itsoperations.

 

An acceleration under the senior credit facilitywould constitute an event of default under the indenture governing the Notes,entitling the indenture trustee or the holders of at least 25% of the Notesoutstanding to declare all amounts owing under the Notes to also be immediatelydue and payable.  If the required lendersunder the senior credit facility exercise their right to accelerate theindebtedness, a cross-default will be triggered under the Notes.  In addition, the default under the seniorcredit facility has caused a cross-default under the Company’s interest rate swapagreement.  On June 16, 2008, theCompany voluntarily terminated its swap agreement.   As a result of the termination,approximately $4.0 million in net settlement payments will be due and payableupon demand.  The Company does notcurrently have cash available to satisfy these obligations if they were to beaccelerated or payment demanded.

 

The Company recently sold an office building in Rome,Georgia for $1.0 million, the proceeds of which were paid to the senior lendersto reduce outstanding debt.  The Companyalso received a payment of approximately $2.0 million in insurance proceeds on May 30,2008 from the destruction by fire of its Hamilton, Alabama facility.  This payment was in addition to the paymentof $1 million received by the Company in the third quarter fiscal 2008.  Due to the default under the senior creditfacility, the Company must pay the entire $2 million received on May 30, 2008to the senior lenders.  The Company alsoexpects a federal income tax refund of approximately $6.5 million in the secondquarter fiscal 2009.

 

The Company has recently taken and expects tocontinue to take actions to improve its liquidity, including implementation ofa number of initiatives designed to conserve cash, increase profitability, andoptimize the cost structure of the business to reflect the current marketenvironment, including:

 

·                  Supportingmore efficient inventory management by eliminating product duplication andunprofitable product lines, and implementing new strategies for increasedinventory turns.

 

·                  Strengtheningand streamlining the organizational structure to improve the Company’smarketing-driven product focus and exiting unprofitable business ventures.

 

·                  Enhancingthe customer experience through a new communication process that providesreal-time, cumulative feedback to the Company’s plants and quality controlstaff.

 

·                  Investingin new research programs to focus key resources on supporting profitable,multi-year initiatives for customers and employees.

 

17

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The Company reviews goodwilland indefinite lived intangible assets for impairment annually.  The Company performed an evaluation of suchimpairment as of March 1, 2008, and determined that $172.1 million, $47.3million, $3.0 million, and $6.9 million of impairment of goodwill, otherintangible assets, non-current assets, and fixed assets, respectively, existedas of March 1, 2008.  As a result ofthis impairment and the other factors described below, the Company suffered anet loss of $241.6 million for fiscal 2008 compared with net income ofapproximately $1.8 million for fiscal 2007.

 

The Company’s currentfinancial condition and the current defaults under its senior credit facilityhave required substantial attention of management and an increased reliance onprofessional advisors, and the uncertainty and reduced liquidity created by thecurrent situation may have a material adverse effect on the Company’soperations and its employee, customer, vendor and supplier relationships.  If, as a result of the current situation,vendors or suppliers were to terminate their relationships with the Company orto tighten credit, the Company were to lose existing customers and be unable toattract new ones, or the Company were to experience employee attrition, the Companycould suffer a material adverse effect on its business, operating results,financial condition and liquidity.

 

In order to continue itsparticipation in the USDA Commodity Program, which directly constitutesapproximately 8% of the Company’s annual net revenues, on or before July 1,2008, the Company must amend or provide a new letter of credit to secure aperformance bond required by the USDA.  TheCompany provided a letter of credit in the amount of $5.7 million in fiscal2008 to its insurance carrier for the underwriting of certain performancebonds. The Company may be required to fund all or a substantial portion of therequired letter of credit and may not be able to do so as a result of itscurrent financial situation and its inability to borrow additional funds underits credit facility.  The failure toparticipate in the USDA Commodity Program may also negatively impact sales to schoolcustomers who purchase other products in addition to those that are part of theUSDA Commodity Program.

 

The Company’s independentregistered public accounting firm has included an explanatory paragraph in itsopinion that accompanies the Company’s audited consolidated financialstatements as of and for the year ended March 1, 2008, indicating that theCompany’s current liquidity position raises substantial doubt about the Company’sability to continue as a going concern. As a result, the Company has reclassified its borrowings under itssenior credit facility (including term loan and line of credit) and its Notes ascurrent liabilities.  The Company doesnot currently have in place any agreements or commitments for short-termfinancing or any agreements or commitments for additional long-term financing.

 

In response to these developments, the Company iscurrently exploring various strategic and restructuring alternatives, includinga restructuring of its outstanding indebtedness.  If the Company is unable to successfullyrestructure its indebtedness, it may be unable to continue as a going concern,which will be dependent, among other things, upon the Company’s ability toreturn to profitable operations in the future and to obtain the necessaryfinancing to meet its obligations and pay its liabilities when they comedue.  Failure to continue as a goingconcern may cause the Company to be unable to realize its assets and dischargeits liabilities in the normal course of business and could cause investors tosuffer the loss of all or a substantial portion of their investment in theCompany.

 

**Results ofOperations**

 

Results for fiscal 2008, fiscal 2007, and fiscal 2006 areshown below:

 
| ** **                                                                     | ** ** | **Fiscal  2008**   | ** ** | **Fiscal  2007** | ** ** | **Fiscal  2006** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                     | ** ** | **(in  millions)** | ** ** |
| Revenues, net                                                                  |       | $                  | 643.3      |             | $          | 487.8            |       | $ | 431.6 |   |
| Cost of goods sold                                                             |       | 497.2              |       | 344.1            |       | 309.3            |       |
| Selling, general, and administrative                                           |       | 126.4              |       | 85.4             |       | 67.8             |       |
| Impairment of goodwill, other intangible assets,  and other non-current assets |       | 222.4              |       | —           |       | —           |       |
| Impairment of fixed assets                                                     |       | 6.9                |       | —           |       | —           |       |
| Net loss on disposition of property, plant, and  equipment                     |       | 0.4                |       | —           |       | —           |       |
| Depreciation and amortization                                                  |       | 36.6               |       | 30.4             |       | 30.6             |       |
| Operating income (loss)                                                        |       | (246.6             | )          | 27.9             |       | 23.9             |       |
| Interest expense, net                                                          |       | (41.8              | )          | (25.3            | )          | (22.2            | )          |
| Income (loss) before income tax                                                |       | (288.4             | )          | 2.6              |       | 1.7              |       |
| Income tax benefit (provision)                                                 |       | 46.8               |       | (0.8             | )          | 0.5              |       |
| Net income (loss)                                                              |       | $                  | (241.6     | )                | $          | 1.8              |       | $ | 2.2 |   |

 

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***Fiscal 2008 Compared to Fiscal 2007***

 

***Revenue, net***.  Net revenues increased by $155.5 million infiscal 2008 compared to fiscal 2007, or 31.9%.  This increase wasprimarily due to (1) increased sales volume due to the Acquisition ofZartic (approximately $128.0 million); (2) increased sales volume due tothe Acquisition of Clovervale (approximately $17.6 million); (3) increasedsales volume due to an increase in sales to most of the Company’s end marketsand changes in sales mix (approximately $14.8 million); (4) increasedsales volume as a result of the Company’s current inventory reductioninitiative (approximately $1.3 million); and (5) net price increases tocustomers (approximately $1.1 million); offset by (6) decreased sales totwo National Accounts restaurant chains (approximately $7.6 million).

 

***Cost of goodssold.  ***Cost of goods sold increased by$153.1 million in fiscal 2008 compared to fiscal 2007, or 44.5%.  This increase was primarily due to (1) increasedsales volume due to the Acquisition of Zartic (approximately $102.2 million); (2) increasedraw material costs (approximately $19.5 million); (3) increased expense asa result of increased net revenues due to volume and mix growth (approximately$16.3 million); (4) increased sales volume due to the Acquisition ofClovervale (approximately $13.5 million); (5) increased labor costs(approximately $3.3 million); (6) increased sales volume related to theCompany’s current inventory reduction initiative (approximately $2.8 million); (7) increasedexpense as a result of missing the USDA required yields of production andinventory losses associated with the Company’s USDA Commodity Program liability(approximately $2.0 million); (8) increased expense related to anadjustment to the Company’s inventory reserve associated with the Company’scurrent inventory reduction initiative (approximately $1.6 million); (9) increasedproduct costs related to product outsourcing as a result of the destruction ofthe Hamilton, Alabama facility (approximately $1.4 million); (10) increasedexpenses related to the closure of the Cedartown, Georgia facility(approximately $1.4 million); (11) increased expense resulting from excessiveequipment downtime on three of the larger fry lines in the Company’s Rome,Georgia facility (approximately $1.0 million); (12) increased expenses due toproduct donations made in conjunction with the Company’s current inventoryreduction initiative (approximately $0.4 million); and (13) increased expensesrelated to the Westland/Hallmark Meat Co. recall (approximately $0.2 million);partially offset by (14) decreased sales volume to two National Accountsrestaurant chains (approximately $7.1 million); (15) decreased overhead costs(approximately $5.0 million); and (16) favorable formulation mix andmanufacturing yields (approximately $0.4 million).

 

As a percentage of revenues, cost of goods soldincreased from 70.5% to 77.3%, an increase of 6.8%. This increase was primarilydue to (1) the net impact of increases in prices paid for raw materialproteins and favorable formulation mix (approximately 3.9%); (2) increasedvolume growth and a change in sales mix (approximately 1.0%); (3) increasedlabor costs (approximately 0.7%); (4) sales of higher-cost products as aresult of the Acquisition of Zartic (approximately 0.6%); (5) increasedsales volume related to the Company’s current inventory reduction initiative(approximately 0.4%); (6) increased expense as a result of missed yieldsand inventory losses associated with the Company’s USDA Commodity Programliability (approximately 0.4%); (7) increased expense related to aninventory obsolescence charge resulting from the implementation of the Company’scurrent inventory reduction initiative (approximately 0.3%); (8) increasedproduct costs related to product outsourcing as a result of the destruction ofthe Hamilton, Alabama facility (approximately 0.3%); (9) increasedexpenses as a result of the closure of the Cedartown, Georgia facility(approximately 0.3%); (10) increased expense due to the excessiveequipment downtime on three of the larger fry lines in the Company’s Rome,Georgia facility (approximately 0.2%); and (11) increased expenses due toproduct donations made in conjunction with the Company’s current inventoryreduction initiative (approximately 0.1%); partially offset by (12)decreases in overhead costs (approximately 1.0%); (13) decreased sales volumeto two National Accounts restaurant chains (approximately 0.2%); and (14)decreased expenses due to increased revenues related to net price increases tocustomers (approximately 0.2%).

 

The primary materials used in the Company’s foodprocessing operations include boneless beef, chicken, pork, flour, yeast,seasonings, cheese, breading, soy proteins, peanut butter, and packagingsupplies.  Meat proteins are generally purchased under 7-day paymentterms.  Historically, the Company has not hedged in the futures markets,and over time, the Company’s raw material costs have fluctuated with movementin the relevant commodity markets.  Additionally, the Company hasmarket-related pricing contracts that require the Company to immediately passalong commodity price variances.  Excluding these market-related pricingcontracts, in fiscal 2008, net prices paid for raw materials increasedapproximately $17.4 million versus prices paid during fiscal 2007.  Net prices paid for meat proteins increasedapproximately $10.5 million versus prices paid during 2007, of whichapproximately $7.0 million was attributable to the Acquisition of Zartic.  Net prices paid for raw materials excludingmeat proteins increased approximately $6.9 million versus prices paid during2007.

 

Approximately 31.1% of total sales during fiscal 2008were protected from commodity exposure, of which 23.1% were attributable tomarket-related pricing contracts, while the other 8.0% were related to the USDACommodity Program, which also insulates the Company from raw material pricefluctuations.  During fiscal 2007, approximately 33.4% of total sales wereprotected from commodity exposure, of which 26.3% were attributable tomarket-related pricing contracts, while the other 7.1% were related to the USDACommodity Program.

 

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The following table represents the increase in theweighted average prices the Company paid for beef, chicken, pork, and cheeseexcluding unfavorable formulation mix and market-related pricing contractsduring fiscal 2008 compared to fiscal 2007:

 
| ** ** | ** ** | **Increase   Fiscal 2008    Compared to   Fiscal 2007** | ** ** |
|------------|------------|--------------------------------------------------------------------------------------------|------------|
| Beef       |       | 1.5                                                                                        | %          |
| Chicken    |       | 24.6                                                                                       | %          |
| Pork       |       | 7.4                                                                                        | %          |
| Cheese     |       | 37.1                                                                                       | %          |
| Aggregate  |       | 7.4                                                                                        | %          |

 

***Selling, general,and administrative.  ***Selling, general, andadministrative expense increased by $41.0 million, or 48.0%.  Thisincrease was primarily due to (1) increased volume as a result of theAcquisition of Zartic (approximately $23.6 million); (2) increased volumeas a result of the Acquisition of Clovervale (approximately $4.1 million); (3) increasedexpenses related to increased sales volume and mix shift across most of theCompany’s end-markets (approximately $3.5 million); (4) increased sellingexpense related to increased promotional activity and demonstration expenses(approximately $3.4 million); (5) increased professional fees, whichincluded professional fees to assist the Company with the integration of Zarticand Clovervale, and with assisting the Company procedures related to theCompany’s credit facility (approximately $2.7 million); (6) increasedadministrative expenses, primarily due to bad debt associated with thebankruptcy of a customer, insurance, wages, and travel (approximately $2.1million); (7) increased marketing expense related to the implementation ofthe Company’s current inventory reduction initiative (approximately $1.6million); (8) increased freight (approximately $1.3 million), primarilydue to increased fuel surcharges; and (9) increased storage expense(approximately $1.1 million) due to increased replenishment costs and the buildof inventories associated with the Acquisition of Zartic; partially offset by (10) decreasedcompensation expense (approximately $0.9 million); (11) decreased expensesrelated to a decrease in sales volume to two National Accounts restaurantchains (approximately $0.4 million); and (12) other miscellaneous items.  As a percentage of revenues, selling,general, and administrative expense increased from 17.5% to 19.6%.

 

***Impairment of goodwill, otherintangible assets, and other non-current assets. ***As discussed in “CriticalAccounting Policies,” in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 142 (“SFAS 142”)—”Goodwill and Other IntangibleAssets,” the Company tests recorded goodwill and intangibles with indefinitelives for impairment at least annually. During the fourth quarter of fiscal 2008, the Company performed theannual impairment review of goodwill and indefinite-lived intangible assets,and also assessed whether the indefinite-lived intangible assets continue tohave indefinite lives.  As a result, theCompany recognized impairment charges during fiscal 2008 of $172.1 million and$1.0 million for goodwill and indefinite-lived intangible assets,respectively.  The impairments were dueprimarily to a declining outlook for the Company as a result of lower grossmargins related primarily to significant raw material price increases, andincreased selling and distribution costs with limited ability to pass alongprice increases to customers. In addition, certain synergies expected to resultfrom the Acquisition of Zartic and the Acquisition of Clovervale have not beenrealized to the extent initially anticipated. No impairments existed at March 3, 2007 or March 4, 2006.

 

In addition, all other intangible assets are reviewedfor impairment in accordance with SFAS 144, “Accounting for the Impairment orDisposal of Long-Lived Assets” (“SFAS 144”).  The Company’s significant declining outlook, combined with theimpairment indicated in the performance of the first step of the goodwillimpairment analysis, indicated that the carrying amounts of amortizableintangible assets may not be recoverable. Accordingly, the Company performed impairment assessments for itsamortizable intangible assets as required under SFAS 144.  Such evaluation resulted in the Companyrecognizing an impairment loss during fiscal 2008 totaling $46.3 million.  In addition, the Company recognized animpairment charge of approximately $3.0 million related to finite-livedformulas developed for a customer that the Company classifies as othernon-current assets.  No impairmentsexisted at March 3, 2007.  See Note7, “Goodwill and Other Intangible Assets” to the Company’s ConsolidatedFinancial Statements for further discussion on such impairments.

 

***Impairment of fixed assets. ***The Company evaluates thecarrying values of long-lived assets for impairment by assessing recoverabilitybased on forecasted operating cash flows on an undiscounted basis in accordancewith SFAS 144.  As a result of an expectationthat it is more likely than not that certain assets of the Company will bedisposed of prior to the end of their economic useful lives, The Company’smanagement performed such evaluation and determined an impairment in the amountof $6.9 million existed at March 1, 2008, which primarily related to theCedartown, Georgia facility.  See Note 5,“Property, Plant, and Equipment” to the Company’s Consolidated FinancialStatements for further discussion of this impairment.  In addition, due to the factors noted withrespect to the impairment indicators that existed related to the amortizableintangible assets, management performed evaluations of impairment with respectto the Company’s fixed assets expected to be held and used.  These evaluations were based upon theexpected undiscounted future cash flows attributable to asset groups.  No impairment was indicated as a result ofsuch evaluations.  No impairment occurredduring fiscal 2007 and fiscal 2006.

 

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***Depreciation andamortization. ***Depreciation and amortization expenseincreased by $6.2 million primarily due to increased depreciation expense(approximately $4.7 million) and increased amortization expense (approximately$1.4 million).  The increased depreciation expense was primarily due tothe increase in the Company’s plant, property, and equipment as a result of theAcquisition of Zartic and the Acquisition of Clovervale.  The increase in amortization expense wasprimarily due to additional amortization expense as a result of additionalamortizable intangible assets recorded in conjunction with the Acquisition ofZartic and the Acquisition of Clovervale; offset by the decrease as a result ofthe accelerated methods of amortization used for the amortizable intangibleassets recorded in conjunction with the Acquisition of Pierre.

 

***Interest expenseand other income, net. ***Interest expense and otherincome, net consists primarily of interest on fixed and variable-rate long-termdebt.  Interest expense and other income, net increased by $16.5 million,or 65.3%.  This increase is primarily dueto (1) increased average outstanding borrowings under the term loan as aresult of Amendment No. 2 to the Company’s credit facility in order tofinance the Acquisition of Clovervale and Amendment No. 3 to the Company’sCredit Agreement in order to finance the Acquisition of Zartic (averageoutstanding borrowings of approximately $227.1 million and $144.2 million infiscal 2008 and fiscal 2007, respectively); (2) change in fair value ofinterest rate swaps (approximately $6.9 million); and (3) increasedaverage borrowings under the Company’s revolving credit facility.  TheCompany’s average outstanding long-term debt during fiscal 2008 was $366.7million versus $270.0 million during fiscal 2008 and fiscal 2007,respectively.  The weighted average interest rates were 8.8% and 8.4% forfiscal 2008 and fiscal 2007, respectively.

 

***Income taxes. ***The effective tax rate forfiscal 2008 was 16.2% compared to 32.0% for fiscal 2007.  The change inthe effective tax rate is primarily due to the impairment of non-deductiblegoodwill, changes in the Company’s expected pre-tax income (loss) relative tothe impact of other permanent items, and an increase in the valuation allowanceagainst deferred tax assets, partially offset by the relative impact of thereversal of previously recorded domestic manufacturing deductions as a resultof filing tax loss carryback claims and the elimination of theExtra-Territorial income deduction.

 

***Fiscal 2007 Compared to Fiscal 2006***

 

***Revenue, net***.  Net revenues increased by $56.2 million infiscal 2007 compared to fiscal 2006, or 13.0%.  This increase wasprimarily due to (1) increased sales volume as a result of the Acquisitionof Zartic (approximately $36.2 million); (2) increased sales volume as aresult of the Acquisition of Clovervale (approximately $18.5 million); (3) increasedsales volume within the Warehouse Club selling channel (approximately $20.2million); and (4) increased sales volume across most of the Company’sother end-markets. This increased sales volume was offset by (5) decreasedsales volume to the National Accounts end-market (approximately$24.2 million), of which approximately $18.5 million was specific totwo large restaurant chain customers due to promotional activity of productsnot produced by the Company; (6) a decrease in revenues due to lower netsales prices (approximately $8.7 million) as a result of decliningcommodity protein pricing attributable to market-related pricing contracts withtwo large National Accounts restaurant chain customers; and (7) a decreasein revenues due to a change in mix to lower priced product offerings.

 

***Cost of goodssold.  ***Cost of goods sold increased by$34.9 million in fiscal 2007 compared to fiscal 2006, or 11.3%. Thisincrease was primarily due to (1) increased sales volume as a result ofthe Acquisition of Zartic (approximately $26.8 million); (2) increasedsales volume as a result of the Acquisition of Clovervale (approximately $14.8million); (3) increased sales volume within the Warehouse Club sellingchannel (approximately $13.9 million); (4) increased sales volumeacross most of the Company’s other end-markets (approximately $11.6 million); (5) increasedlabor and overhead costs related to complying with the Department of HomelandSecurity’s Basic Pilot Employment Verification Program (approximately $2.9million); and (6) increased costs due to decreased efficiencies related todecreased sales volume to the National Accounts end-market and increases inother overhead expenses which include utilities, insurance, maintenance parts,and property taxes.  These increases werepartially offset by (1) decreased sales volume to the National Accountsend-market (approximately $22.2 million); and (2) decreased raw materialprotein costs (approximately $17.3 million), of which $8.9 million was dueto declining commodity protein pricing attributable to market-related pricingcontracts with two large National Accounts restaurant chain customers.

 

As a percentage of revenues, cost of goods solddecreased from 71.7% to 70.5%, a decrease of 1.2%. This decrease was primarilydue to (1) the net impact of decreased prices paid for raw materialproteins and formulation mix (approximately 2.4%), of which 0.7% isattributable to market-related pricing contracts with two large NationalAccounts restaurant chain customers; (2) decreased costs as a result of achange in mix due to increased volume of lower cost products (approximately1.0%); partially offset by (3) increased labor and overhead costs (approximately0.7%); (4) a change in mix due to increased volume as a result of theAcquisition of Zartic (approximately 0.3%) and the Acquisition of Clovervale(approximately 0.4%); and (5) increased costs due to decreasedefficiencies related to decreased sales volume to the National Accountsend-market and increases in other overhead expenses which include utilities,insurance, maintenance parts, and property taxes.

 

The primary materials used in the Company’s foodprocessing operations include boneless beef, chicken, pork, flour, yeast,seasonings, cheese, breading, soy proteins, and packaging supplies.  Meatproteins are generally purchased under 7-day payment terms.  Historically,the Company has not hedged in the futures markets, and over time, the Company’sraw material costs have fluctuated with movement in the relevant commoditymarkets.  Additionally, the Company has market-related pricing contractsthat require the Company to immediately pass along commodity price variances.

 

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Approximately 33.4% of total sales for fiscal 2007were protected from commodity exposure, of which 26.3% were attributable tomarket-related pricing contracts, while the other 7.1% were related to the USDACommodity Program, which also helps to insulate the Company from raw materialprice fluctuations.  For fiscal 2006, approximately 42.0% of total saleswere protected from commodity exposure, of which 35.8% were attributable tomarket-related pricing contracts, while the other 6.2% were related to the USDACommodity Program.

 

The following table represents the(increase)/decrease in the weighted average prices the Company paid for beef,chicken, pork, and cheese excluding unfavorable formulation mix andmarket-related pricing contracts during fiscal 2007 compared to fiscal 2006:

 
| ** ** | ** ** | **(Increase)/Decrease   Fiscal 2008    Compared to   Fiscal 2007** | ** ** |
|------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| Beef       |       | 5.9                                                                                                   | %          |
| Chicken    |       | (1.9                                                                                                  | )%         |
| Pork       |       | 4.6                                                                                                   | %          |
| Cheese     |       | 11.2                                                                                                  | %          |
| Aggregate  |       | 6.4                                                                                                   | %          |

 

***Selling, general,and administrative.  ***Selling, general, and administrativeexpenses increased by $17.6 million, or 25.9%.  This increase wasprimarily due to (1) increased volume as a result of the Acquisition ofZartic (approximately $6.6 million); (2) increased selling expenses(approximately $6.5 million); (3) increased distribution costs(approximately $9.8 million); (4) increased volume as a result of theAcquisition of Clovervale (approximately $3.3 million); and (5) increasedadministrative costs, which included approximately $0.6 million ofintegration expenses related to the Acquisition of Zartic and the Acquisitionof Clovervale offset in part by decreased incentive compensation expense. As apercentage of revenues, selling, general, and administrative expenses increasedfrom 15.7% to 17.5%.  Increased sellingexpense was incurred primarily as a result of the Acquisition of Zartic and theAcquisition of Clovervale (approximately $2.5 million), as well as increasedvolume and a shift in sales mix to customers with higher burden rates for salesand marketing expenses, including demonstration expenses (approximately $1.0million) related to growth in the Warehouse Club selling channel.

 

Increased distribution expenses resulted primarilyfrom higher storage costs (approximately $1.9 million) resulting from inventoriesbuilt to maintain customer service levels for customer requirements, andincreased freight costs due to higher fuel surcharges, and increased salesvolumes across most of the Company’s end-markets (approximately$1.1 million).

 

***Depreciation andamortization. ***Depreciation andamortization expense decreased by $0.3 million primarily due to decreasedamortization (approximately $2.0 million); offset by increased depreciationexpense (approximately $1.7 million).  The decrease in amortizationexpense was primarily due to the accelerated methods of amortization used forthe amortizable intangible assets recorded in conjunction with the Acquisitionof Pierre; offset by additional amortization expense as a result of additionalamortizable intangible assets recorded as a result of the Acquisition of Zarticand the Acquisition of Clovervale.  The increased depreciation expense wasprimarily due to the allocation of the Acquisition of Zartic and theAcquisition of Clovervale purchase prices and valuations of property, plant,and equipment as a result of purchase accounting due to the Acquisition ofZartic and the Acquisition of Clovervale.

 

***Interest expenseand other income, net.  ***Interest expense and otherincome, net consists primarily of interest on fixed and variable-rate long-termdebt.  Interest expense and other income, net increased by$3.1 million, or 13.9%.  This increase is primarily due to increasedaverage outstanding borrowings under the term loan as a result of Amendment No. 2in order to finance the Acquisition of Clovervale and Amendment No. 3 inorder to finance the Acquisition of Zartic, increased floating interest ratesrelated to the Company’s variable-rate interest (approximately 8.75% in fiscal2007 compared with approximately 8.15% in fiscal 2006), and increased averageborrowings under the Company’s revolving credit facility (approximately $270.0million in fiscal 2007 compared with approximately $253.7 million in fiscal2006).

 

***Income taxes. ***The effective tax rate forfiscal 2007 was 32.0% compared to 27.4% for fiscal 2006.  The change inthe effective tax rate is primarily due to (1) the phase-out of Ohiofranchise tax and the phase-in of a gross receipts tax referred to as theCommercial Activity Tax (“CAT”); (2) the impact of permanent differencesbetween GAAP and tax basis income/deductions; (3) the estimated impact ofthe Section 199 adjustment (the “Domestic Manufacturing Deduction”) infiscal 2007; (4) the impact of Extra-Territorial Income deduction (“ETI”)in fiscal 2007 as a result of the Company’s sales and business activity inforeign countries (primarily Canada); and (5) the true-up of the provisionto return differences in conjunction with the filing of the fiscal 2006 federaltax return on November 15, 2006.

 

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**Liquidity and Capital Resources**

 

During fiscal 2008, as of September 1, 2007, theCompany was in default under the consolidated leverage ratio covenant in itsCredit Agreement.  Effective October 10,2007, the Company obtained a waiver of such default from the required lendersand entered into Amendment No. 4 to the Credit Agreement, which amended,among other things, the financial covenants in the Credit Agreement andincreased the applicable interest rates for term loans and the revolving creditfacility.  The rates as of March 1,2008 reflect the increases in the applicable interest rates.

 

The Company’s independentregistered public accounting firm has included an explanatory paragraph in itsopinion that accompanies the Company’s audited consolidated financialstatements as of and for the year ended March 1, 2008, indicating that theCompany’s current liquidity position raises substantial doubt about the Company’sability to continue as a going concern. As of March 1, 2008, the Company is in default under its senior creditfacility as a result of its failure, among other things, to satisfy thefinancial covenants of its Credit Agreement as of such date.  These defaults entitle the lenders under thesenior credit facility, among other things, to declare all amounts outstandingthereunder, together with accrued and unpaid interest, to be immediately dueand payable.  An acceleration under thesenior credit facility would constitute an event of default under the indenturegoverning the Notes, entitling the indenture trustee or the holders of at least25% of the Notes outstanding to declare all amounts owing under the Notes toalso be immediately due and payable.  Inaddition, the defaults under the Company’s senior credit facility creates adefault under the Company’s interest rate swap agreement.  On June 16, 2008, the Company voluntarilyterminated its swap agreement.  As aresult of the termination, approximately $4.0 million in net settlementpayments will be due and payable on demand. The Company does not currently have cash available to satisfy theseobligations if they were to be accelerated or payment demanded.  The Company is currently exploring variousstrategic and restructuring alternatives, including a restructuring of itsoutstanding indebtedness.  If the Companyis unable to successfully restructure its indebtedness, it may be unable tocontinue as a going concern, which will be dependent, among other things, uponthe Company’s ability to return to profitable operations in the future and toobtain the necessary financing to meet its obligations and pay its liabilitieswhen they come due.  

 

The following tablesummarizes the Company’s net cash provided by (used in) operating, investing,and financing activities for fiscal 2008, fiscal 2007, and fiscal 2006.

 
| ** **                      | ** ** | **Fiscal 2008**                  | ** ** | **Fiscal 2007**                  | ** ** | **Fiscal 2006**                  | ** ** |
|---------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                      | ** ** | **For the Year Ended** | ** ** | **For the Year Ended** | ** ** | **For the Year Ended** | ** ** |
| ** **                      | ** ** | **March 1, 2008**           | ** ** | **March 3, 2007**           | ** ** | **March 4, 2006**           | ** ** |
| ** **                      | ** ** | **(in millions)**                | ** ** |
| Net cash provided by (used in): |       |                                  |       |                                  |       |                                  |       |
| Operating activities            |       | $                                     | 3.1        |                                  | $          | 13.8                                  |       | $ | 28.5 |   |
| Investing activities            |       | $                                     | (6.1       | )                                     | $          | (122.0                                | )          | $ | (7.2 | ) |
| Financing activities            |       | $                                     | 8.5        |                                  | $          | 105.8                                 |       | $ | (18.8 | ) |

 

***Net cash providedby operating activities.  ***Net cash provided byoperating activities was $3.1 million, $13.8 million, and $28.5 millionfor fiscal 2008, fiscal 2007, and fiscal 2006, respectively.  The decreasein net cash provided by operating activities for fiscal 2008 compared to netcash provided by operating activities for fiscal 2007 was primarily due to (1) anet loss in fiscal 2008 compared to net income in fiscal 2007; (2) achange in deferred income taxes during fiscal 2008 that was substantiallygreater than the change in the prior year comparable period; and (3) anincrease in other non-current assets during fiscal 2008 compared to a decreasein fiscal 2007; offset by (4) an impairment of goodwill, other intangibleassets, and other non-current assets during fiscal 2008 that did not occur infiscal 2007; (5) a decrease in inventories during fiscal 2008 compared toan increase in the prior year comparable period; (6) an impairment offixed assets during fiscal 2008 that did not occur during fiscal 2007; (7) achange in the fair value of interest rate swaps entered into during fiscal2008; (8) depreciation and amortization expense in fiscal 2008 compared toless depreciation and amortization expense in fiscal 2007; (9) an increasein other long-term liabilities during fiscal 2008 compared with a decrease infiscal 2007; (10) an increase in refundable income taxes, prepaidexpenses, and other current assets during fiscal 2008 compared with a greaterincrease in fiscal 2007; (11) an increase in accounts receivable during fiscal2008 compared with a greater increase during fiscal 2007; (12) an increase inaccounts payable and other accrued liabilities during fiscal 2008 compared toless of an increase in the prior year comparable period; (13) amortization ofdeferred loan origination fees in fiscal 2008 compared to less amortization infiscal 2007; and (14) a loss on disposition of property, plant, and equipmentduring fiscal 2008 compared with a gain during fiscal 2007; and (14)amortization of deferred loan fees in fiscal 2008 compared to less amortizationin fiscal 2007.

 

The primary components of the net cash provided byoperating activities for fiscal 2008 were (1) an impairment of goodwill,other intangible assets, and other non-current assets (approximately $222.4million) recorded in conjunction with the Company’s tests performed inaccordance with SFAS 142 and SFAS 144; (2) depreciation and amortization(approximately $36.6 million), of which $13.7 million related to depreciationof fixed assets and $22.9 million related to amortization of intangible assets;(2) an impairment of fixed assets (approximately $6.9 million) primarilyrelated to the plant closure in Cedartown, Georgia and assets related to theCompany’s distribution operations; (3) a change in the fair value ofinterest rate swaps (approximately $6.9 million); (4) a decrease in inventories(approximately $6.0 million); (5) amortization of deferred loan fees(approximately $2.4 million); (6) an increase in trade accounts payableand other accrued liabilities (approximately $5.1 million); and (7) a losson disposition of property, plant, and equipment, net (approximately $0.4million); offset by (8) a net loss (approximately $241.6 million) infiscal 2008; (9) an increase in refundable income taxes, prepaid expenses,and other current assets (approximately $1.5 million); (9) a change in deferredincome taxes (approximately $39.9 million); and (10) an increase inreceivables (approximately $0.5 million).

 

23

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The primary components of the net cash provided byoperating activities for fiscal 2007 were (1) depreciation andamortization of intangible assets (approximately $30.4 million), of which $8.9million relates to depreciation of fixed assets and $21.4 million relates toamortization of intangible assets; (2) an increase in trade accounts payableand other accrued liabilities (approximately $3.7 million); (3) amortizationof deferred loan fees (approximately $1.7 million); and (4) a decrease inother non-current assets (approximately $0.4 million); offset by (5) anincrease in inventories (approximately $7.4 million) due to an inventory buildto satisfy existing customer needs, new customers needs, and new product lines;(6) a decrease in other long-term liabilities (approximately $4.1 million)primarily as a result of the payment to the selling shareholders in theAcquisition of Pierre, as required by the tax sharing and indemnificationagreement, in conjunction with the filing of the federal tax return on November 15,2006, partially offset by an increase related to the deferred compensation planand an increase due to a change in the estimated obligation under the taxsharing and indemnification agreement; (7) a change in deferred incometaxes (approximately $5.6 million); (8) an increase in receivables(approximately $2.7 million), primarily the result of increased sales; and (9) anincrease in refundable income taxes, prepaid expenses, and other current assets(approximately $4.4 million).

 

The primary components of the net cash provided byoperating activities for fiscal 2006 were (1) depreciation andamortization of intangible assets (approximately $30.6 million), of which $7.2million relates to depreciation of fixed assets and $23.4 million relates toamortization of intangible assets; (2) a decrease in refundable incometaxes, prepaid expenses, and other current assets (approximately $2.2 million),primarily due to the tax provision recorded as a result of the income in fiscal2006, reducing previously recorded tax benefits; (3) an increase in tradeaccounts payable and other accrued liabilities (approximately $0.8 million);and (4) amortization of deferred loan fees (approximately $1.7 million);offset by (5) a decrease in other long-term liabilities (approximately$4.3 million) primarily as a result of the payment to the selling shareholdersin the Acquisition of Pierre as required by the tax sharing agreement,partially offset by an increase in liability for deferred compensation; (6) adecrease in deferred income taxes (approximately $2.3 million); and (7) anincrease in inventories (approximately $1.9 million) due to an inventory buildto satisfy existing customer needs, new customers needs, and new product lines.

 

***Net cash used ininvesting activities.  ***Net cash used in investingactivities for fiscal 2008, fiscal 2007, and fiscal 2006 was $6.1 million,$122.1 million, and $7.2 million, respectively. The primary components forfiscal 2008 were plant improvements and routine capital expenditures(approximately $7.8 million), offset by casualty insurance proceeds(approximately $1.0 million) received by the Company as a result of the fire atthe Company’s Hamilton, Alabama facility (see “Acquisition of Zartic” forfurther discussion).  The primarycomponents for fiscal 2007 were the Acquisition of Clovervale (approximately$21.8 million), the Acquisition of Zartic (approximately $91.6 million),plant improvements, which included required upgrades on existing controlequipment, and routine capital expenditures (approximately $8.7 million).The primary components for fiscal 2006 were plant improvements and routinecapital expenditures.

 

***Net cash providedby (used in) financing activities.  ***Net cashprovided by financing activities was $8.5 million for fiscal 2008. Theprimary components were (1) net borrowings under the Company’s revolving creditfacility (approximately $13.2 million); offset by (2) principal paymentson long-term debt (approximately $3.5 million); and (3) loanorigination fees (approximately $1.2 million) as a result of Amendment No. 4to the Credit Agreement.

 

*** ***Net cash provided byfinancing activities was $105.8 million for fiscal 2007.  The primary components were (1) increaseterm loan borrowings provided by Amendment No. 3 ($100.0 million) for theAcquisition of Zartic; (2) increased term loan borrowings provided by AmendmentNo. 2 ($24.0 million) for the Acquisition of Clovervale; and (3) netborrowings under the Company’s revolving credit facility (approximately $0.8million); offset by (4) principal payments on long-term debt(approximately $14.7 million); (5) repayment of debt (approximately$1.6 million) acquired in conjunction with the Acquisition of Clovervale;and (6) loan origination fees (approximately $2.6 million) as a result ofAmendment No. 1, Amendment No. 2, and Amendment No. 3 to theCredit Agreement.

 

Net cash used in financing activities was $18.8million for fiscal 2006.  The primarycomponents were (1) principal pre-payments on long-term debt(approximately $17.8 million); (2) net repayments under the revolvingloan under the Company’s credit facility (approximately $0.8 million); (3) areturn of capital to parent (approximately $0.1 million); and (4) loanorigination fees (approximately $0.1 million).

 

24

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***Acquisition ofPierre. ***As previouslydiscussed in Item 1 of this report, on June 30, 2004, the shareholders ofPFMI sold their shares of stock in PFMI to Holding, an affiliate of MDP. As part of the same transaction, the Company merged with Pierre Merger Corp.,an affiliate of MDP, with the Company being the surviving corporation followingthe merger.   In conjunction with thisacquisition, effective June 30, 2004, the Company obtained a$190 million credit facility from a new lender which includes a six-yearvariable-rate $150 million term loan, a five-year variable-rate $40million revolving credit facility, and a $10 million letter of creditsubfacility.  Funds available under thisfacility are available for working capital requirements, permitted investments,and general corporate purposes.  Borrowingsunder the facility bear interest at floating rates based upon the interest rateoption selected from time to time by the Company and are secured by afirst-priority security interest in substantially all of the Company’sassets.  At March 1, 2008, base rateborrowings under the term loan portion of the facility bear interest at primerate plus 2.75% to 3.0% determined by the Company’s corporate credit rating andbase rate borrowings under the revolving credit portion of the facility bearinterest at prime rate plus pricing levels ranging from 2.5% to 3.0% determinedby the consolidated leverage ratio of the Company.  At March 1, 2008,the interest rates for base rate borrowings under both the revolving creditfacility and the term loans were 9.00% (prime of 6.0% plus 3.0%).   On June 2, 2008, the Company’s seniorlenders sent a notice to the Company indicating that all borrowings under thecredit facility shall bear a default rate of interest beginning February 29,2008.  The default rate of interest is 2%higher than the non-default rate, which resulted in an additional $1.2 millionin interest as of May 31, 2008. Also on June 2, 2008, the senior lenders sent a notice to theCompany indicating that it was in default for failing to deliver its auditedfinancial statements and report to the lenders. As a result of these defaults, the Company’s lenders are entitled tocertain rights and remedies, including, among others, the right to acceleratethe indebtedness under the facility and to foreclose on the security for thefacility.  In addition, as a result ofthese defaults, the Company is currently prohibited from borrowing under itsrevolving credit facility.

 

The Company reduces itsexposure to interest rate fluctuations through the use of LIBOR tranches andinterest rate swaps.  The following tablesummarizes the Company’s outstanding borrowings as of March 1, 2008,including the amount, the respective rate of interest, and the date ofexpiration.  The interest rates listedbelow include the impact of interest rate swap agreements in place as of March 1,2008.

 
| ** **                               | ** ** | **Amount  (in thousands)** | ** ** | **Interest Rate** | ** ** | **Swap/LIBOR  Maturity Date** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|------------------------|------------|------------------------------------|------------|
| Term loan LIBOR tranche:                 |       | $                               | 27,000     |                   | 6.97       | %                                  | 08/19/08   |   |
| Term loan Swap tranche:                  |       | $                               | 25,000     |                   | 9.14       | %                                  | 08/16/08   |   |
| Term loan Swap tranche:                  |       | $                               | 150,000    |                   | 9.14       | %                                  | 08/16/09   |   |
| Term loan Swap tranche:                  |       | $                               | 25,000     |                   | 8.52       | %                                  | 05/18/09   |   |
| Revolving credit facility LIBOR tranche: |       | $                               | 14,000     |                   | 8.84       | %                                  | 04/30/08   |   |

 

The defaults under the credit facility has caused across-default under the Company’s Swap Agreement.  On June 16, 2008, the Companyvoluntarily terminated its swap agreement.  As a result of the termination, the approximately $4.0 million in netsettlement payments will be due and payable upon demand.

 

Repayment of borrowings under the $150.0 million termloan was initially $375,000 per quarter, which began on September 4, 2004,with a balloon payment of $141.4 million due on June 30, 2010. The Company has made all such scheduled quarterly payments totaling $8.6million to date and prepayments on the term loan totaling $34.4 million. As a result of Amendment No. 3, scheduled quarterly repayments are$250,000 per quarter.  During fiscal2008, the Company made prepayments of $2.0 million, and as such, is notrequired to resume scheduled quarterly payments until February 28,2009.  The remaining outstanding balance of $225.8 million (afterconsidering scheduled quarterly payments of $1.2 million) is due on June 30,2010.

 

Also in conjunction with the Acquisition of Pierre,the Company issued the Notes.  Theproceeds of the Notes, together with the equity contributions from MDP andcertain members of management and borrowings under the Company’s creditfacility, were used to finance the Acquisition of Pierre and to repayoutstanding indebtedness.  The defaultsunder the credit facility entitles the senior lenders to, among other things,declare all amounts outstanding thereunder, together with accrued and unpaidinterest, to be immediately due and payable. An acceleration under the senior credit facility would constitute anevent of default under the indenture governing the Notes, entitling theindenture trustee or the holders of at least 25% of the Notes outstanding todeclare all amounts owing under the Notes to also be immediately due andpayable.  If the required lenders underthe senior credit facility exercise their right to accelerate the indebtedness,a cross-default will be triggered under the Notes.

 

The Company does not currently have cash available tosatisfy its obligations under the senior credit facility, the Notes and theSwap Agreement if they were to be accelerated or payment demanded.

 

25

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

 

***Acquisition ofZartic.  ***In conjunction with the Acquisition of Zartic,on December 11, 2006, the Company entered into Amendment No. 3 to itsCredit Agreement.  Amendment No. 3provided for, among other things, an increase in borrowings with respect to theCompany’s term loan totaling $100.0 million.  A copy of Amendment No. 3 is included asExhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filedwith the SEC on January 16, 2007.

 

On July 14, 2007, the Company’s manufacturingfacility located in Hamilton, Alabama was destroyed by a fire.  The Hamilton plant, which was acquired by theCompany as part of the Acquisition of Zartic, was primarily used for processingsausage products and employed approximately 45 people prior to the fire.  Although the exact cause of the fire has notbeen determined, it is likely that it was related, directly or indirectly, to alightning strike at the facility on July 9, 2007.  The facility was deemed to be a completeloss.  The Company received a payment ofapproximately $2.0 million in insurance proceeds on May 30, 2008 from thedestruction of the facility.  Thispayment was in addition to the payment of $1 million received by the Company inthe third quarter fiscal 2008.  Due tothe default under the senior credit facility, the Company must pay the entire$2.0 million received on May 30, 2008 to the senior lenders.

 

In addition, the Company is executing a disasterrecovery plan designed to continue the supply of affected products to theCompany’s customers until an ultimate decision is made whether to rebuild thefacility.  The Company incurred $1.4million in increased production costs related to outsourcing under the disasterrecovery plan.  Management has submittedfor reimbursement of these costs under the business interruption portion of theinsurance claim.  Subsequent to fiscal2008 year end, the Company received a second advance of $1.0 million on theproperty portion of the insurance claim and an initial advance of $1.0 millionon the business interruption portion of the claim.

 

On February 8, 2008, theCompany announced that it would be closing its Cedartown, Georgia manufacturingfacility. The plant closing was completed by fiscal 2008 year end.  As a result of the plant closure, the Companyrecognized $1.4 million in expenses, primarily related to employee severanceand relocation, equipment decommissioning costs, and equipment and inventorymoving costs.  In addition, the Companyincurred impairment charges of $6.4 million related to property, plant andequipment at the facility. See Note 5, “Property, Plant and Equipment” andNote 6, “Assets Held for Sale” for further discussion of the impairment charge.

 

***Cash, Cash Equivalent,and Borrowing Availability. *** As of March 1, 2008, the Company had cashand cash equivalents on hand of $5.6 million, (see “Critical AccountingPolicies and Estimates” below for further discussion on the Company’s treatmentof cash and cash equivalents) and outstanding borrowings under its revolvingcredit facility of $14.0 million.  As of March 3, 2007, the Companyhad cash and cash equivalents on hand of $0.1 million, outstanding borrowingsunder its revolving credit facility of $0.8 million, and borrowing availabilityof approximately $35.7 million.   Asof the end of the Company’s first quarter of fiscal 2009, which ended May 31,2008, the Company had $9.8 million of cash and cash equivalents on hand.  As of March 1, 2008, the Company hadborrowings under the term loan portion of its credit facility of $227.0 millionand $125.0 million of the 9.875% Notes outstanding.  Also as of March 3,2007, the Company had borrowings under its term loan of $229.0 million and$125.0 million of the Notes outstanding.  The maturity date of the$40 million revolving credit facility is June 30, 2009.   The Company is required to satisfy certainfinancial covenants under its Credit Agreement. As of March 1, 2008, the Company failed to satisfy these covenantsand therefore, was and continues to be in default under its Credit Agreement,and has no borrowing availability as a result of the default.

 

An interest payment of $6.2 million is due on July 15,2008 under the Notes, and unless the Company can secure additional financingprior to that time, the Company may not have sufficient liquidity to continueits operations.  The Company’s ability tosatisfy its obligations, including the obligation to make principal andinterest payments under the Notes, will depend on the Company’s ability toobtain a waiver of such defaults from the required lenders and enter into anamendment to its Credit Agreement.  Ifthe Company is unable to obtain a waiver of such defaults or otherwise torestructure its indebtedness, it may be required to file for bankruptcyprotection.

 

The Company recently sold an office building in Rome,Georgia for $1.0 million, the proceeds of which were paid to the senior lendersto reduce outstanding debt.  In addition,the Company received a payment of approximately $2.0 million in insuranceproceeds on May 30, 2008 from the destruction by fire of its Hamilton, Alabamafacility.  This payment was in additionto the payment of $1 million received by the Company in the third quarterfiscal 2008.  Due to the default underthe senior credit facility, the Company must pay the entire $2.0 millionreceived on May 30, 2008 to the senior lenders. In addition, the Companyexpects a federal income tax refund of approximately $6.5 million in the secondquarter fiscal 2009.

 

26

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

 

Initially, the Company recorded a net long-termliability to the selling shareholders totaling $10.3 million for the estimatedobligations under the tax sharing and indemnification agreement.  Duringthe Company’s fiscal 2007 year, the Company increased the estimated obligationunder the tax sharing and indemnification agreement by approximately $1.3million based on the differences in the tax rate initially used to estimate theliability, the actual payments to the selling shareholders, and the estimatedremaining obligation to the selling shareholders.  The adjustment to theliability to the selling shareholders resulted in a corresponding increase ingoodwill related to the Acquisition of Pierre.

 

As of March 1, 2008, the Company has utilized$24.2 million of the Deal Related NOLs and $1.7 million in other deal relatedexpenses.  Also as of March 1, 2008, the Company has submitted paymentsbased on the tax benefits received, net of other tax assessments due to theCompany from the selling shareholders, to an escrow account (approximately $4.0million) and directly to the selling shareholders (approximately $5.7million).  As of March 1, 2008, the Company has a remaining liabilityto the selling shareholders totaling $1.9 million (which reflects theaforementioned $1.3 million adjustment during fiscal 2007).  Payments totaling $0.3 million were made tothe selling shareholders during fiscal 2008. Of the remaining liability, approximately $0.1 million is classified ascurrent, as the Company expects to submit payments to the selling shareholdersduring its fiscal 2009 year.  Theremaining liability is classified as long-term based on the expected timing ofthe remaining payments to the selling shareholders.  The Company expectsto fully utilize the Deal Related NOLs and other deal related expenses;however, the timing of the future payments of the long-term portion is unknown.

 

***Capital Expenditures.  ***The Company has budgeted approximately $8.0 million for capitalexpenditures for fiscal 2009.  Theseexpenditures include a provision for capacity expansion, system upgrades, androutine food processing capital improvement projects and other miscellaneousexpenditures within the Company’s existing facilities.  Due to the uncertainty with respect to theCompany’s long-term financing arrangements, the Company is not able todetermine whether financing will be available to fund these capital expenditures.

 

If the Company experiences significant annual revenuegrowth in the future, the Company would be required to raise and investadditional capital for additional plant expansion projects to provide operatingcapacity to satisfy increased demand and specific customer requirements. Due to the uncertainty with respect to the Company’s long-term financingarrangements, the Company is not able to determine whether financing will beavailable to fund any expansion projects.

 

**Commercial Commitments, Contingencies, and ContractualObligations**

 

The Company provided a letter of credit in the amountof $5.7 million, $2.8 million, and $5.5 million in fiscal 2008, fiscal 2007,and fiscal 2006, respectively, to its insurance carrier for the underwriting ofcertain performance bonds. The Company also provides secured letters of creditto its insurance carriers for outstanding and potential workers’ compensationand general liability claims.  Letters ofcredit for these claims totaled $675,000 in both fiscal 2008 and fiscal 2007,and $110,000 in fiscal 2006.  Since the Companyis in default of its covenants under its Credit Agreement, the Company isunable to renew existing letters of credit or obtain new letter of credit withouta waiver from the required lenders under the Credit Agreement.  The Company’s current letter of credit to itsinsurance carrier for the underwriting of certain performance bonds expires on September 30,2008.  Under the Company’s USDA CommodityProgram, the Company must provide, on or before July 1, 2008, a letter ofcredit to secure a performance and required by the USDA. The Company may berequired to fund all or a substantial portion of the required letter of credit.The Company’s letters of credit to its insurance carriers for outstanding andpotential workers’ compensation and general liability claims expire on November 8,2008 and January 17, 2009.

 

The Company is involved in various legal proceedings.Management believes, based on the advice of legal counsel, that the outcome ofsuch proceedings will not have a materially adverse effect on the Company’sfinancial position or future results of operations and cash flows. See Item 3 – ”LegalProceedings” of this report and Note 19 – “Legal Proceedings,” to the Company’sConsolidated Financial Statements for further discussion of proceedings as of March 1,2008.

 

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The followingtables summarize our contractual obligations and commitments as of March 1,2008:

 
| ** **                                | ** ** | **Commitments by Fiscal Year** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                | ** ** | **(in thousands)**                       | ** ** |
| ** **                                | ** ** | **Total**                                     | ** ** | **Less than  1 Year** | ** ** | **1 – 3  Years** | ** ** | **3 – 5  Years** | ** ** | **More than  5 Years** | ** ** |
|                                      |       |                                          |       |   |   |   |   |   |   |   |   |
| Letters of credit                         |       | $                                             | 6,370      |   | $ | 6,370 |   | $ | — |   | $ | — |   | $ | — |   |
| Purchase commitments for capital projects |       | 911                                           |       | 911 |   | — |   | — |   | — |   |
| Purchase commitments for raw materials    |       | 9,183                                         |       | 9,183 |   | — |   | — |   | — |   |
| Purchase commitments for natural gas      |       | 751                                           |       | 751 |   | — |   | — |   | — |   |
| Other miscellaneous services              |       | 5                                             |       | 3 |   | 2 |   | — |   | — |   |
| Total                                     |       | $                                             | 17,220     |   | $ | 17,218 |   | $ | 2 |   | $ | — |   | $ | — |   |

 
| ** **                                             | ** ** | **Contractual Obligations by Fiscal Year** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                             | ** ** | **(in thousands)**                                        | ** ** |
| ** **                                             | ** ** | **Total**                                                      | ** ** | **Less than  1 Year** | ** ** | **1 – 3  Years** | ** ** | **3 – 5  Years** | ** ** | **More than  5 Years** | ** ** |
| Long-term debt (3)                                     |       | $                                                              | 366,000    |   | $ | 250 |   | $ | 240,750 |   | $ | 125,000 |   | $ | — |   |
| Capital lease obligations (1)                          |       | 2,716                                                          |       | 1,667 |   | 1,026 |   | 23 |   | — |   |
| Operating lease obligations                            |       | 7,340                                                          |       | 5,388 |   | 1,917 |   | 35 |   | — |   |
| Interest for early termination of swap (3)             |       | 6,866                                                          |       | 6,866 |   | — |   | — |   | — |   |
| Interest on fixed-rate debt (2)                        |       | 56,143                                                         |       | 12,741 |   | 24,886 |   | 18,516 |   | — |   |
| Interest on variable-rate debt (2)                     |       | 31,475                                                         |       | 5,444 |   | 26,031 |   | — |   | — |   |
| Severance obligations under employment  agreements (4) |       |                                                           | 2,486      |   | — |   | — |   | — |   | 2,486 |   |
| Total                                                  |       | $                                                              | 473,026    |   | $ | 32,356 |   | $ | 294,610 |   | $ | 143,574 |   | $ | 2,486 |   |
|                                                        |            |                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)           Capital lease obligations include interestcomponent related to leases.

(2)           Estimated payments for interest are based onactual interest rates for fixed and variable-rate debt outstanding as of March 1,2008 assuming that the outstanding balances remain unchanged until maturity.

(3)           The Company has reclassified its borrowingsunder the term loan, its revolving line of credit, and its Notes as a result ofthe default under the Credit Agreement discussed above.  In addition, early termination of the swapagreement due to the default would require the Company to settle by payingapproximately $6.9 million in interest as of March 1, 2008.  Subsequent to year end, as a result of thedefault under the senior credit facility, cross-default under the Company’sSwap Agreement occurred.  On June 16,2008, the Company voluntarily terminated its Swap agreement.  As a result of the termination, the Company willowe approximately $4.0 million to the lender in net settlement payments upondemand.

(4)           Payment of severanceobligations is contingent upon the termination of employment of the relatedemployees.  As these dates are notdeterminable, all such amounts have been presented as payable in more than 5years.

 

In conjunction with the Acquisition of Pierre, theCompany and the selling shareholders entered into a tax sharing andindemnification agreement containing certain representations and warranties ofthe selling shareholders with respect to taxes. As of the end of fiscal 2008, the Company has recorded the remainingliability, which is classified as both current and long-term based on theexpected timing of the remaining payments to the selling shareholders.  While the Company expects to fully utilizethe Deal Related NOLs and other deal related expenses, the obligations to theselling shareholders under the tax sharing and indemnification agreement andthe timing of future payments are unknown, and therefore, excluded from thetable above. ** **See “Tax Sharing Agreement withSelling Shareholders” for further discussion.

 

**Inflation**

 

During fiscal 2008, fiscal2007, and fiscal 2006, the Company experienced increased pricing forcommodities and packaging materials used to manufacture its products and thecost to distribute its products, and expects this trend to continue.  The Company attempts to manage such increasesthrough purchase orders, market-related pricing contracts, and by passing onsuch cost increases to its customers. The Company believes that the rising cost for commodities, packaging,and distribution are partially attributable to the spike in oil and natural gasprices.  Although the Company believesthat it will be able to offset some or all of the impact of raw material,packaging, and distribution cost increases in the future through sales priceincreases and through cost saving initiatives, there is no assurance that theCompany’s operating results will not continue to be negatively impacted.

 

**Critical Accounting Policies andEstimates**

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of America (“GAAP”)requires the appropriate application of certain accounting policies, many ofwhich require the Company to make estimates and assumptions about future eventsand their impact on amounts reported in the financial statements and relatednotes.  Since future events and theimpact of those events cannot be determined with certainty, the actual resultswill inevitably differ from the Company’s estimates.  Such differences could be material to thefinancial statements.

 

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The Company believes its application of accountingpolicies, and the estimates inherently required therein, are reasonable.  These accounting policies and estimates areconstantly reevaluated, and adjustments are made when facts and circumstancesdictate a change.  Historically, theCompany’s application of accounting policies has been appropriate, and actualresults have not differed materially from those determined using necessaryestimates.

 

The financial statements have been prepared on agoing concern basis, which contemplates the realization of assets and thesettlement of liabilities and commitments in the normal course ofbusiness.  The accompanying financialstatements do not include any adjustments relating to the recoverability andclassification of recorded asset amounts or to the amounts and classificationof liabilities that may be necessary if the Company is unable to continue as agoing concern.

 

The following critical accounting policies affect theCompany’s more significant judgments and estimates used in the preparation ofits financial statements.

 

***Cash and cashequivalents.*** For financial statement presentation purposes, the Company presents bookoverdrafts, principally outstanding checks in excess of cash on hand with thesame financial institution, as accounts payable.   As of March 1, 2008, the Company hadactual cash of $11.6 million (of which $11.4 million was held in accounts withthe Company’s bank that is primarily responsible for its cash management),which was offset by outstanding checks of $6.0 million, resulting in a netreclassification of $6.0 million and a remaining net cash on hand balance of$5.6 million.  The remaining cash balance represents cash on hand inexcess of outstanding checks.  TheCompany considers all highly liquid investments purchased with an originalmaturity of three months or less to be cash equivalents.   As of March 1, 2008, the Company had nocash equivalents.

 

***RevenueRecognition. ***The Company records revenues from its sales offood products at the time title transfers. Standard shipping terms are FOB destination. Based on these terms, titlepasses at the time the product is delivered to the customer.  Revenue is recognized as the net amount to bereceived by the Company after deductions for estimated discounts, productreturns, and other allowances.  Theseestimates are based on historical trends and expected future payments (see also“Promotions” below).  The Company recordsrevenues and related expenses associated with Zar Tran at the time the deliveryis completed.

 

***Goodwill and OtherIntangible Assets.  ***In conjunction with the Acquisition of Pierre, the Acquisition ofClovervale, and the Acquisition of Zartic, the Company’s management performedvaluations of the Company’s other intangible assets for financial reportingpurposes.  Assets identified through eachof these valuation processes included formulas, customer relationships,licensing agreements, non-compete agreements, and certain trade names andtrademarks.

 

In accordance with SFAS 142, the Company testsrecorded goodwill and intangibles with indefinite lives for impairment at leastannually.  As of March 1, 2008, theCompany performed the annual impairment review of goodwill and indefinite-livedintangible assets, and also assessed whether the indefinite-lived intangibleassets continue to have indefinite lives. As a result, the Company recognized impairment charges during fiscal2008 of $172.1 million and $1.0 million for goodwill and indefinite-livedintangible assets, respectively.  Noimpairments of goodwill or indefinite-lived intangible assets existed at March 3,2007 or March 4, 2006.

 

In addition, all other intangible assets with finitelives are reviewed for impairment in accordance with SFAS 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets” (“SFAS 144”).  The Company’s amortizable intangible assetsare amortized using primarily accelerated amortization methods, in addition tothe straight-line amortization method, in order to allocate expected benefitderived from the assets over the estimated useful life of such assets.  As of March 1, 2008, the Companyperformed the annual impairment review of finite-lived intangible assets withfinite lives and determined an impairment existed.  Such impairment resulted in the Companyrecognizing an impairment loss during fiscal 2008 totaling $46.3 million.  In addition, the Company recognized animpairment charge of approximately $3.0 million related to finite livedformulas developed for a customer that the Company classifies as othernon-current assets.  No impairmentexisted at March 3, 2007 or March 4, 2006.  See Note 7, “Goodwill and Other IntangibleAssets” to the Company’s consolidated financial statements for furtherdiscussion on such impairments.

 

The impairment analyses performed by the Companyrelied on financial forecasts of income and cash flow that are attributable tothe Company’s reporting units and indefinite-lived intangible assets and thendiscounted to present value at rates reflective of the Company’s cost ofcapital.  Future changes in the Company’s financial forecasts or cost ofcapital might adversely affect the value of the Company’s reporting units orindefinite-lived intangible assets.  The Company will continue to performimpairment tests on an annual basis and on an interim basis, if certainconditions exist.

 

***Promotions*****.**  Promotional expenses associated withcustomer rebates, marketing promotions, and special pricing arrangements arerecorded as a reduction of revenues or as selling expense at the time the saleis recorded.  Certain of these expenses are estimated based on historicaltrends, expected future payments to be made under these programs, and expectedfuture customer deductions to be taken under these programs.  The Companybelieves the estimates recorded in the financial statements are reasonableestimates of the Company’s liabilities under these programs.

 

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***Self-insuranceLiabilities.*** The Company is primarily self-insured formedical and workers’ compensation claims. An estimated provision for claims reported and for claims incurred butnot yet reported under the self-insurance programs is recorded and revisedperiodically based on historical experience and management judgment.  Changes in assumptions for such matters asmedical costs and actual experience could cause estimates to change in the nearterm.  In fiscal 2008, the workerscompensation reserve was based on a discount rate of 5.0% which is notsignificantly different from the risk free interest rate as of March 1, 2008.

 

***Stock-BasedCompensation.  ***The Company treats the options to purchase shares of common stock ofHolding issued to employees of the Company (“Options”) as stock-basedcompensation for employees of the Company. Prior to fiscal 2007, as permittedunder GAAP, the Company accounted for the Options under the recognition andmeasurement principles of Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”), and related Interpretationsusing the intrinsic value method. Accordingly, no compensation expense wasrecognized for the stock option plan in the Company’s condensed consolidated statementsof operations.

 

Effective March 5, 2006, as required for thefirst annual reporting period beginning after December 15, 2005 fornon-public companies (as defined in SFAS 123(R)), the Company adoptedSFAS 123(R) using the prospective adoption method.  The new statement requires compensationexpense associated with share-based payments to employees to be recognized inthe financial statements based on their fair values.**** Upon the adoption ofSFAS 123(R), because the Company had used the minimum value method priorto the adoption, the Company was required to apply the provisions of thestatement only prospectively for any newly issued, modified or settled awardafter the date of initial adoption.  Nonew Options were issued, modified or settled subsequent to adoption.

 

The long-term incentive portion of the Company’scompensation program also includes the issuance of restricted stock of Holdingto employees of the Company.  The Companyaccounts for such compensation under SFAS 123(R).

 

***New Accounting Pronouncements*****.**  In September 2006, the FASB issuedSFAS No. 157, “Fair Value Measurements” (“SFAS 157”).  The objectiveof SFAS 157 is to define fair value, establish a framework for measuring fairvalue, and expand disclosures about fair value measurement.  SFAS 157 iseffective for annual fiscal years beginning after November 15, 2007 andinterim periods within these fiscal years.  Two FASB Staff Positions (“FSP”)on SFAS 157 were subsequently issued.  OnFebruary 12, 2007, FSP No. 157-2 delayed the effective date of SFAS157 for non-financial assets and non-financial liabilities that are recognizedor disclosed at fair value in the financial statements on a nonrecurringbasis.  This FSP is effective for fiscalyears beginning after November 15, 2008. On February 14, 2007, FSP No. 157-1 excluded FASB No. 13,“Accounting for Leases,” and other accounting pronouncements that address fairvalue measurements for purposes of lease classification or measurement underFASB No. 13.  However, this scopeexception does not apply to assets acquired and liabilities assumed in abusiness combination that are required to be measured at fair value under FASB No. 141R,“Business Combinations.”  This FSP iseffective upon initial adoption of SFAS 157. The Company is currently assessing the impact of SFAS 157 on the Company’sconsolidated financial statements.

 

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS159”).  SFAS 159 permits entities to choose to measure many financialinstruments and certain other items at fair value that are not currentlyrequired to be measured at fair value.  The objective of SFAS 159 is toimprove financial reporting by providing entities with the opportunity to mitigatevolatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions.  SFAS 159 is effective for the first fiscal year that beginsafter November 15, 2007.  The Company is currently assessing theimpact of SFAS 159 on the Company’s consolidated financial statements.

 

In December 2007, the FASB issued SFAS141R.  SFAS 141R modifies the accountingfor business combinations by requiring that acquired assets and assumed liabilitiesbe recorded at fair value, contingent consideration arrangements be recorded atfair value on the date of the acquisition, and pre-acquisition contingencieswill generally be accounted for in purchase accounting at fair value.  The pronouncement also requires thattransactions costs be expensed as incurred, acquired research and developmentbe capitalized as an indefinite-lived intangible asset, and the requirements ofSFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities” be met at the acquisition date in order to accrue for arestructuring plan in purchase accounting. SFAS 141R is required to be adopted prospectively, other than anexception for income taxes, effective for fiscal years beginning after December 15,2008.  The Company has not yet assessedthe impact of SFAS 141R on the Company’s consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements—an amendment ofARB No. 51” (“SFAS 160”).  SFAS 160modifies the reporting for noncontrolling interest in the balance sheet andminority interest income/expense in the income statement.  The pronouncement also requires thatincreases and decreases in the noncontrolling ownership interest amount beaccounted for as equity transactions. SFAS 160 is required to be adopted prospectively, with limitedexceptions, effective for fiscal years beginning on or after December 15,2008.  The Company has not yet assessedthe impact of SFAS 160 on the Company’s consolidated financial statements.

 

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**Item 7A.  *Quantitative and Qualitative Disclosures About MarketRisk***

 

The Company is exposed to market risk stemming fromchanges in interest rates, commodity prices, and foreign exchange rates.  Changes in these factors could cause fluctuations in the Company’s financialcondition, results of operations and cash flows.  The Company owned noderivative financial instruments or non-derivative financial instruments heldfor trading purposes at March 1, 2008 or March 3, 2007.  Certainof the Company’s outstanding non-derivative financial instruments at March 1,2008 and March 3, 2007 are subject to interest rate risk, but not subjectto foreign currency or commodity price risk.

 

***Interest Rate Risk*****.**  The Company’s interest rate risk,includes the potential losses arising from changing interest rates and theimpact such changes have on long-term debt. The Company’s policy is to manage interest rate risk by maintaining acombination of fixed and variable-rate financial instruments in amounts andwith maturities that management considers appropriate.  As a result of the Company’s default underthe financial covenants in its senior credit facility for the quarter ended March 1,2008 previously discussed in Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” the risksassociated with long-term debt at March 1, 2008 have increased since March 3,2007.

 

Of the long-term debt outstanding at March 1,2008, the $125.0 million of Notes and the $2.5 million of capital leasesaccrue interest at fixed interest rates, while the $227.0 millionoutstanding borrowings under the Term B Loan facility and the revolving creditfacility accrue interest at a variable interest rate.  At March 1, 2008, the Company hadoutstanding borrowings totaling $14.0 million under the revolving creditfacility.  A rise in prevailing interestrates could have adverse effects on the Company’s financial condition and resultsof operations.  A 25 basis point increasein the reference rates for the Company’s average variable-rate debt outstandingduring fiscal 2008 would have increased the Company’s net loss for that periodby approximately $0.5 million.

 

Effective October 29, 2007 and August 16, 2007,the Company entered into interest rate swap agreements (the “Swaps”) to reduceits exposure to interest rate fluctuations on portions of its term loan withthe objective of minimizing the impact of interest rate fluctuations andstabilizing cash flows.  The Swaps havenotional amounts of $25.0 million and $175.0 million with fixed rates of4.52% and 5.14%, respectively, thereby effectively converting portions of thefloating rate term debt to fixed rate obligations of 8.52% and 9.14%,respectively, as of March 1, 2008 (4.52% and 5.14% plus applicablemargin).  The October 29, 2007 swapwill expire on May 18, 2009.  Aportion of the August 16, 2007 swap with a notional amount of $25.0million will expire on August 16, 2008, with the remaining $150.0million expiring on August 16, 2009. The difference between the three-month LIBOR rate and respective swaprates will be settled in cash on the interest payment dates.  In accordance with SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities,” as amended, (“SFAS 133”),**the Swaps do not qualify for ‘‘Cash FlowHedge Accounting’’ treatment.  The changein the fair value of the Swaps of approximately $6.9 million is reflected as anincrease in interest expense in fiscal 2008. As of March 1, 2008, the Company has recorded a liability totaling$6.9 million to recognize the Swaps at fair value.  Subsequent to year end, as a result of thedefault under the senior credit facility, a cross-default under the Company’sSwap Agreement occurred.  On June 16,2008, the Company voluntarilyterminated its Swap agreement.  As a result of the termination, the Company willowe the lender approximately $4.0 million in net settlement payments.

 

The following table summarizes the Company’s marketrisks associated with long-term debt outstanding at March 1, 2008.  The table presents principal cash outflowsand related interest rates by maturity date.

 
| ** **           | ** ** | **March 1, 2008  Expected Maturities in Fiscal Years  Long-Term Debt** | ** ** |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| **Fiscal Year** | ** ** | **Variable-Rate  Long-Term  Debt**                                                                        | ** ** | **Fixed-Rate  Long-Term  Debt** | ** ** | **Weighted  Average  Interest  Rate** | ** ** |
| ** **           | ** ** | **(in thousands)**                                                                                   | ** ** | ** ** | ** ** |
| 2009                 |       | 250                                                                                                       |       | 1,534 |   | 7.70 | % |
| 2010                 |       | 14,750                                                                                                    |       | 781 |   | 8.74 | % |
| 2011                 |       | 226,000                                                                                                   |       | 188 |   | 8.81 | % |
| 2012                 |       | —                                                                                                    |       | 23 |   | 9.06 | % |
| 2013                 |       | —                                                                                                    |       | 125,000 |   | 9.88 | % |
| Thereafter           |       | —                                                                                                    |       | — |   | — | % |
| Total                |       | $                                                                                                         | 241,000    |   | $ | 127,526 |   | 8.40 | % |
|                 |       |                                                                                                      |       |   |   |   |   |
| Fair Value           |       | $                                                                                                         | 241,000    |   | $ | 85,026 |   |   |   |

 

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***Foreign Exchange Rate Risk.***   TheCompany bills customers in foreign countries in US dollars, with the exceptionof sales to Canada.  The Company does not believe the foreign exchangerate risk on Canadian sales is material.  However, a significant declinein the value of currencies used in certain regions of the world as compared tothe US dollar could adversely affect product sales in those regions because theCompany’s products may be more expensive for those customers to pay for intheir local currency.  At March 1, 2008 and March 3, 2007, alltrade receivables were denominated in US dollars.

 

***Commodity Price Risk*****. **Certain raw materials used in food processingoperations are susceptible to commodity price changes. Increases in the pricesof certain commodity products could result in higher overall productioncosts.  The primary raw materials used in the Company’s food processingoperations are boneless beef, chicken and pork, flour, yeast, seasonings,cheese, breading, soy proteins, peanut butter, and packaging supplies. During fiscal 2008, the weighted average prices the Company paid for beef, chicken,pork, and cheese (increased) by approximately (1.5%), (24.6%), (7.4%) and(37.1%), respectively, over the weighted average prices the Company paid forthese raw materials during fiscal 2007. During fiscal 2007, the weighted average prices the Company paid forbeef, chicken, pork, and cheese (increased) decreased by approximately 5.9%,(1.9%), 4.6%, and 11.2%, respectively, over the weighted average prices theCompany paid for these raw materials during fiscal 2006.  The Company attempts to manage suchfluctuations through purchase orders, market-related pricing contracts,fixed-price contracts, and by passing on such cost increases to customers,however has been unable to successfully protect the Company against allincreases.  At March 1, 2008, the Companyevaluated commodity pricing risks and determined it was not currentlybeneficial to use derivative financial instruments to hedge the Company’scurrent positions with respect to such pricing exposures.  In addition, the Company’s Credit Agreementrestricts the Company’s ability to use derivative financial instruments.

 

***Fair Value of Financial Instruments*****. **The Company’s non-derivative financial instruments consist primarily ofcash and cash equivalents, trade receivables, trade payables and long-term debt.  The estimated fair values of the financial instruments have beendetermined by the Company using available market information and appropriatevaluation techniques.  Considerable judgment is required, however, tointerpret market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of theamounts that the Company could realize in a current market exchange.  Theuse of different market assumptions and/or estimation methodologies may have amaterial effect on the estimated fair value amounts.  See further discussion in Note 13, “DisclosuresAbout Fair Values of Financial Instruments,” to the Company’s ConsolidatedFinancial Statements.

 

**Item 8.   *Financial Statements andSupplementary Data***

 

The Company’s ConsolidatedFinancial Statements required by this Item are on pages F-1 through F-35of this report.

 

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

 

None.

 

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

 

Not applicable.

 

**Item 9A(T).   *Controls and Procedures***

 

***Evaluation ofDisclosure Controls and Procedures.  ***As of the end of the period covered by thisreport, the Company performed an evaluation, under the supervision and with theparticipation of its management including the President and Chief ExecutiveOfficer, Vice President and Chief Financial Officer, and the Vice President,Finance, of the effectiveness of the Company’s disclosure controls andprocedures (as such term is defined in Exchange Act Rules 13a-15(e) and15d-15(e)). Based upon this evaluation, the Company’s President and ChiefExecutive Officer, Vice President and Chief Financial Officer, and the VicePresident, Finance, have concluded that as of March 1, 2008, the Company’sdisclosure controls and procedures were ineffective because of the materialweakness in internal controls over financial reporting described in Management’sReport on Internal Control Over Financial Reporting.

 

Due to the material weakness described in Management’sReport on Internal Control Over Financial Reporting, the Company’s managementperformed additional analyses and other procedures including reviewing allsignificant account balances and disclosures in the consolidated financialstatements contained in this annual report on Form 10-K to ensure that theCompany’s consolidated financial statements are in accordance with generallyaccepted accounting principles. Accordingly, management believes that the consolidated financialstatements included in this report fairly present, in all material respects,the Company’s financial condition, results of operations, and cash flows forall periods presented.

 

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***Management’sReport on Internal Control Over Financial Reporting****. *Management isresponsible for establishing and maintaining adequate internal control overfinancial reporting as such term is defined in Exchange Act Rule 13a-15(f).  The Company’s internal control over financialreporting includes those policies and procedures that (i) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the Company arebeing made only in accordance with authorizations of management and directorsof the Company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof assets that could have a material effect on the financial statements.

 

Internal control over financial reporting is designedto provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements prepared for externalpurposes in accordance with generally accepted accounting principles.  Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Under the supervision and with the participation ofmanagement, including the President and Chief Executive Officer, Vice Presidentand Chief Financial Officer, and Vice President, Finance, the Company conductedan evaluation of the effectiveness of its internal control over financialreporting based on the framework in Internal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.  A material weakness is a control deficiency,or combination of control deficiencies, that results in a reasonableprobability that a material misstatement of the annual or interim financialstatements will not be prevented or detected on a timely basis.  Management identified the following materialweakness in our internal control over financial reporting as of March 1,2008:

 

·                  Inadequatecontrols – accrued commodity accounts. This material weakness is primarily attributable to a breakdown in theCompany’s information and communication controls, resulting in the lack oftimely disclosure and communication of certain changes made by the USDA to itsCommodity Program to the Company’s finance and treasury functions.  This ultimately resulted in a situation inwhich a proper analysis of the liability related to the Commodity Program wasnot being performed.  As a result of thismaterial weakness, an audit adjustment was recorded in conjunction with theaudit of the Company’s fiscal 2008 consolidated financial statements prior tothe issuance of such financial statements contained in this Form 10-K.

 

Because of this material weakness, managementconcluded that the Company did not maintain effective control over financialreporting as of March 1, 2008.

 

Management has undertaken procedures in order toconclude that reasonable assurance exists regarding the reliability offinancial reporting and the preparation of the consolidated financialstatements contained in this annual report. Accordingly, management believes that the consolidated financialstatements included in this annual report fairly present, in all materialrespects, the Company’s financial position, results of operation, and cashflows for the periods presented.

 

This annual report does not include an attestationreport of the Company’s registered public accounting firm regarding internalcontrol over financial reporting. Management’s report was not subject to attestation by the Company’sregistered public accounting firm pursuant to temporary rules of the SECthat permit the Company to provide only management’s report in this annualreport.

 

***Changes inInternal Controls.  ***There have been no changes in the Company’s internal controls overfinancial reporting during the quarter ended March 1, 2008 that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting. However, in an effort to remediate the identified material weakness, theCompany’s management is in the process of implementing a number of changes toits internal control over financial reporting including**:**

 

·                TheCompany’s finance staff will calculate the obligation and related liabilitymonthly in conjunction with the monthly close procedures.

 

·                Calculations will be reviewed and approved bya member of the Company’s management prior to recording any adjustments to suchliability.

 

While the Company believesthat the remedial actions will result in correcting the weakness in ourinternal control over financial reporting, the exact timing of when theconditions will be corrected is dependent upon future events, which may or maynot occur.

 

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

 

None.

 

**PART III**

 

**Item 10.    *Directors, Executive Officers, and CorporateGovernance***

 

**Directors and Executive Officers**

 

ROBIN P. SELATI, DIRECTOR,age 42, has served as a director since June 2004.  Mr. Selati is a Managing Director of MDPand joined the firm in 1993.  Prior tojoining MDP in 1993, Mr. Selati was associated with Alex Brown &Sons Incorporated in the consumer/retail investment banking group.  Mr. Selati also serves on the Board ofDirectors of Carrols Restaurant Group Inc., Tuesday Morning Corporation, Ruth’sChris Steak House, Inc., and The Yankee Candle Company.

 

NICHOLAS W. ALEXOS, DIRECTOR, age 44, has served asa director since June 2004.  Prior to co-founding MDP in 1993, Mr. Alexoswas with First Chicago Venture Capital for four years.  Mr. Alexosalso serves on the Board of Directors of VWR International, Inc. andSirona Dental Systems, Inc.

 

GEORGE A. PEINADO, DIRECTOR,age 38, has served as a director since June 2004.  Mr. Peinado is a Managing Director ofMDP and joined the firm in 2004.  Priorto joining MDP, Mr. Peinado was with DLJ Merchant Banking Partners andMorgan Stanley & Co.  Mr. Peinadoalso serves on the Board of Directors of The Yankee Candle Company and CDWCorporation.

 

SCOTT W. MEADER, DIRECTOR,age 46, became a director in October 2004. Mr. Meader was formerly the President and Chief Executive Officerof Milnot Holding Corp., having served in that position from 1997 until2006.  Prior to Milnot Holding Corp., Mr. Meaderheld various positions with Burns Philps Foods PLC, Pet Incorporated, A.T.Kearney and Quaker Oats Co.  Mr. Meader also serves as Chairman of theBoard of Directors for Nellson Nutraceuticals Inc.

 

NORBERT E. WOODHAMS,PRESIDENT, CHIEF EXECUTIVE OFFICER, DIRECTOR AND CHAIRMAN OF THE BOARD, age 62,became the Company’s President and Chief Executive Officer in December 1999and became a director in June 2004 upon completion of the Acquisition ofPierre.  He was elected as Chairman ofthe Board of the Company effective January 11, 2005.  Immediately prior to his election to thoseoffices, Mr. Woodhams was President of Pierre Foods, LLC, the Company’sformer operating subsidiary, having served in that position since the Company’sacquisition of Pierre Cincinnati in June 1998.

 

CYNTHIA S. HUGHES, VICEPRESIDENT AND CHIEF FINANCIAL OFFICER, age 55, became the Company’s VicePresident and Chief Financial Officer in February 2008.  Immediately prior, she was the ChiefFinancial Officer of Effox, a division of CECO Environmental Corp, serving inthat position since 2003.  Prior to 2003,Ms. Hughes was the Chief Financial Officer of Klosterman Baking Company, Inc.and held various positions within Pierre and its predecessors.

 

ANTHONY J. SCHRODER, SENIORVICE PRESIDENT OF SALES, age 41, has served in his current position since November 2007.  Immediately prior, he was the Group VicePresident Vending, Convenience Store, and Warehouse Club/Retail Divisions,having served in that position since December 2006.  In addition to holding various salesmanagement positions, he began his career as a Production Supervisor with theCompany starting in February 1990. He currently serves on the Board of Directors for the National AutomaticMerchandising Association.

 

JOSEPH W. MEYERS, VICEPRESIDENT, FINANCE, age 41, has served as the Company’s Vice President, Financesince February 2008.  Immediatelyprior, he was the Company’s Chief Financial Officer, serving that positionsince January 2007.  Prior tobecoming the Company’s Chief Financial Officer, he served as Vice President,Finance, having served in that position since February 2003.  He also held various accounting and financepositions with the Company since 1996.

 

**Audit Committee Financial Expert**

 

The Board of Directors of theCompany has determined that Nicholas W. Alexos is an “audit committee financialexpert” as defined in Item 407(d)(5) of Regulation S-K promulgated by theSEC.  Although the Company does not currently have securities listed on anational exchange or on an inter-dealer quotation system, it has selected thedefinition of “independent” promulgated by the New York Stock Exchange (“NYSE”)to determine whether its directors are independent.  Mr. Alexos is aManaging Partner of Madison Dearborn Partners, LLC, the general partner ofMadison Dearborn Partners IV, L.P., which is the general partner of MadisonDearborn Capital Partners IV, L.P., which holds approximately 89.6% of theissued and outstanding capital stock of Holding, and therefore, the Board ofDirectors has determined that Mr. Alexos is not independent.

 

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**Code of Ethics**

 

The Board of Directorsadopted a Code of Ethics effective January 10, 2006, which is applicableto all officers, directors, and employees of the Company.  The portion ofsuch Code of Ethics that constitutes a “Code of Ethics” as defined in Item 406of Regulation S-K under the Exchange Act is filed as Exhibit 14 to theCompany’s Quarterly Report on Form 10-Q filed with the SEC on January 17,2006.

 

**Item 11.  *Executive Compensation***

 

**Compensation Discussion and Analysis**

 

***General Overview.  ***As part of the Acquisition of Pierre, MDP,Norbert E. Woodhams, the Company’s President and Chief Executive Officer, andRobert C. Naylor, the Company’s former Senior Vice President of Sales andMarketing, became the owners of Holding.  Following the closing of theAcquisition of Pierre, Nicholas Alexos, George Peinado, and Robin Selati, eachan employee of an affiliate of MDP, and Mr. Woodhams became directors ofthe Company.  In January 2005, Scott Meader, who is not affiliatedwith MDP or the Company, was added as a director of the Company.  Atpresent, the Company’s Compensation Committee is comprised of Messrs. Alexos,Peinado and Selati.

 

Also, in connection with theAcquisition of Pierre, MDP negotiated compensation arrangements with Messrs. Woodhamsand Naylor, each of whom entered into an employment agreement withHolding.  The compensation paid to Messrs. Woodhamsand Naylor since the closing of the Acquisition of Pierre reflect suchnegotiations.  In addition, as part of the Acquisition of Pierre, each of Messrs. Woodhamsand Naylor were awarded stock options to purchase shares of common stock ofHolding.  They also investedapproximately $4.9 million in a deferred compensation plan, which is fundedthrough a rabbi trust that owns preferred stock of Holding.

 

Mr. Naylorretired from the Company, effective October 31, 2007.  In connection with such retirement, theCompany entered into an agreement, which became effective November 6,2007, pursuant to which Mr. Naylor was paid the severance payments andother benefits described in his employment agreement, except that in lieu ofone-year of coverage under the Company’s life and long-term disabilityinsurance programs, Mr. Naylor was paid $121,799.  The Company alsotransferred title and ownership of a trailer and vehicle to Mr. Naylor,which had an approximate value of $25,000.

 

OnNovember 28, 2007, Anthony J. Schroder became the Company’s Senior VicePresident of Sales, and entered into an employment agreement with theCompany.  The compensation payable to Mr. Schroder in his EmploymentAgreement reflects an increase in his compensation commensurate with the changein his duties resulting from his promotion to Senior Vice President of Sales,and at the rate that the Compensation Committee deemed to be appropriate forthe market.  In addition, Holding enteredinto a restricted stock agreement with Mr. Schroder, which was effective January 11,2008 and pursuant to which Mr. Schroder purchased 5,000 shares ofrestricted common stock of Holding for $0.25 per share.  Such shares vest daily over four years.

 

OnFebruary 18, 2008, Cynthia S. Hughes became the Company’s Vice Presidentand Chief Financial Officer.  Inconnection with the employment of Ms. Hughes, the Company entered into anemployment agreement with Ms. Hughes. Ms. Hughes compensation in her employment agreement was set by theCompensation Committee based on the market rates for similar positions.  In addition, Holding entered into arestricted stock agreement with Ms. Hughes effective as of February 18,2008, pursuant to which Ms. Hughes purchased 5,000 shares of restrictedcommon stock of Holding for $0.25 per share. Such shares vest daily over four years.

 

Following the Acquisition ofPierre, effective September 5, 2004, certain members of the Company’smanagement, including Joseph W. Meyers, the Company’s Vice President, Finance,and Anthony J. Schroder who was then the Company’s Vice President of Sales,Marketing, and New Product Development for the Vending division, were awardedoptions to purchase shares of common stock of Holding.  MDP and the Company believe that the equityownership in Holding further aligns the interests of the Company’s executiveofficers and other management with those of MDP and other equity investors andencourages the Company’s executive officers and other management to operate thebusiness in a manner that enhances the Company’s equity value.

 

Throughout this analysis,Norbert E. Woodhams, the Company’s President and Chief Executive Officer,Cynthia S. Hughes, the Company’s Vice President and Chief Financial Officer,Anthony J. Schroder, the Company’s Senior Vice President of Sales, Joseph W.Meyers, the Company’s Vice President, Finance, and Robert C. Naylor, theCompany’s former Senior Vice President of Sales and Marketing, are referred toas the “named executive officers.

 

35

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*** ***

***Executive Compensation Philosophy. ***The Company’s executive compensation programis administered by the Compensation Committee of the Company’s Board ofDirectors.  The role of the Committee is to review and approve salariesand other compensation of the named executive officers of the Company, toadminister the stock option plan of Holding, to administer the restricted stockplan of Holding, to review and approve stock option grants and restricted stockawards under such plans to all employees of the Company, including the namedexecutive officers of the Company, and to review and approve the annual cashincentive plans for all employees, including the named executiveofficers.  The Company’s compensation philosophy is that total cashcompensation should vary with performance and long-term incentive should beclosely aligned with the interests of the Company’s stockholder and thestockholders of Holding.  The objectives of the Company’s compensationpolicies are to:

 

·                 Providea level of compensation that will allow the Company to attract, motivate,retain, and reward talented executives who have the ability to contribute tothe Company’s success;

·                 Linkexecutive compensation to the Company’s success through the use of bonuspayments based in whole or in part on the Company’s performance;

·                 Alignthe interests of the executives with those of the Company’s stockholder and thestockholders of Holding;

·                 Providetotal compensation that is competitive with other food processing companies ofcomparable sales volume and financial performance; and

·                 Motivateand reward high levels of performance or achievement.

 

***Components ofExecutive Compensation Program. ***The primary elements of the Company’sexecutive compensation programs are:

 

·                  Basesalary;

·                  Annualincentive compensation;

·                  Stockoptions;

·                  Restrictedstock;

·                  Benefitsand perquisites;

·                  Severanceand change-in-control payments; and

·                  Deferredcompensation.

 

***Base Salary. ***As part of the Acquisition of Pierre, MDP negotiated employmentagreements with each of Messrs. Woodhams and Naylor.  In addition,during fiscal 2008, the Company negotiated employment agreements with Mr. Schroderand Ms. Hughes.  The base salariesof each are specified in their respective employment agreement.  For each of Messrs. Woodhams and Naylor,the respective employment agreements provide for an annual increase forcost-of-living increases.    For each of Mr. Schroderand Ms. Hughes, their respective base salaries are reviewed annually andmay be increased based on performance.

 

***Annual IncentiveCompensation.  ***In addition to base salary, each named executive officer hasparticipated in an annual cash incentive plan, which constitutes the variable,performance-based component of an executive’s cash compensation.  Theannual cash incentive plan is designed to reward members of management andother key individuals for performance in the applicable fiscal year.  Thefiscal 2008 plan, and the plans in prior years, provided for a target incentiveopportunity for each participant consistent with market practice for suchparticipant’s position or job function.  The annual incentive plan wasstructured to provide a “pool” of dollars based upon the Company’s attainmentof certain EBITDA targets for the applicable fiscal year, which are approved bythe Compensation Committee.  For purposes of the incentive plan, EBITDA iscalculated by adding to, or to the extent a benefit, subtracting from, netincome (loss) the following: (i) interest expense, (ii) income tax(provision) benefit, and (iii) amortization and depreciation, each asshown on the Company’s Consolidated Financial Statements.  The achievementof the maximum payout targets is challenging for the Company unless the Companyexperiences significant sales growth or significantly reduces expenses duringthe fiscal year.  During fiscal 2008, the minimum EBITDA targets were notmet under the Fiscal 2008 Executive Incentive Compensation Plan, and therefore,none of the named executive officers received any pay-out under the plan.

 

***StockOptions.  ***The long-term incentive portion of the Company’s compensation programincludes stock options to purchase shares of common stock of Holding.  Thepurposes of providing long-term equity incentives are to promote the Company’slong-term growth and profitability by aligning the interests of the Company’sexecutives with the interests of the stockholder of the Company and thestockholders of Holding.  The options granted to the named executiveofficers were originally made as part of the Acquisition of Pierre and noadditional options have been granted to any of the named executive officerssince that time.  The options are for a ten year term.  For eachoption, 40% vests daily over a five year period and 60% vests based upon theCompany’s achievement of certain performance goals.  The performance goalswere set by MDP in conjunction with the Acquisition of Pierre and are tied tothe enterprise value of the Company, which is calculated by multiplying a fixedEBITDA target by a pre-determined multiple and then deducting (i) the netdebt (long-term debt, less current installments plus the current installmentsof long-term debt, less cash on hand, each as shown in the Company’sConsolidated Financial Statements and footnotes thereto) and (ii) preferredequity of Holding ($133.0 million) and unpaid accumulated dividends onsuch equity, which accrue at 10% per annum on the original principal amount andon all accrued, but unpaid dividends from June 30, 2004. For purposes ofthe stock option plan, EBITDA is calculated in the same manner as for theannual cash incentive plan, described immediately above.  To date, theperformance targets have not been met and therefore, none of theperformance-based options have vested.  The exercise price of alloutstanding options to purchase shares of common stock of Holding is $10.00 pershare.

 

36

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*** ***

***Restricted Stock.***  Thelong-term incentive portion of the Company’s compensation program also includesthe issuance of restricted stock of Holding. 5,000 shares of restricted common stock of Holding were sold for $0.25per share to each of Mr. Schroder and Ms. Hughes in connection with theiremployment with the Company.  Thepurposes of issuing restricted stock to named executive officers are the sameas those described above for stock options.  The restricted shares issuedto Mr. Schroder and Ms. Hughes vest daily over a four year period.

 

***Severance andChange in Control Benefits.  ***As part of the Acquisition of Pierre, theCompany entered into employment agreements with each of Messrs. Woodhamsand Naylor.  In addition, during fiscal 2008, the Company entered intoemployment agreements with each of Mr. Schroder and Ms. Hughes.  Each employment agreement provides forcertain severance benefits to be paid to the named executive officer if theCompany terminates the named executive officer’s employment without “cause,”the named executive officer resigns at any time for “good reason”, each asdefined in the applicable employment agreement, or with respect to Messrs. Woodhamsor Naylor, the Company elects not to renew the term of the agreement or thenamed executive officer resigns without good reason or elects not to renew theterm of his employment agreement (and in either such case the Company electsthat he be bound by the non-competition provisions).  In addition, eachemployment agreement provides for severance payments if the named executiveofficer elects not to renew the term of his agreement or if he resigns withoutgood reason; provided, however, the Company may elect not to make the severancepayments in such circumstances in which case, the named executive officer wouldnot be bound by the non-competition provisions in his agreement.  TheCompany believes that in these situations, the Company should providereasonable severance benefits to assist the named executive officer with thistransition, recognizing that it may take time for a named executive officer tofind comparable employment elsewhere.

 

Any unvested stock options and restricted stock heldby a named executive officer immediately vest upon a change-in-control of theCompany or Holding.  The Company believes that such accelerated vestingcould align the interests of the named executive officer with the interests ofthe stockholder of the Company and the other stockholders of Holding in theevent of a sale of the Company when the named executive officer’s interestsmight otherwise be opposed to the sale of the Company.

 

***Benefits andPerquisites.  ***The Company’s named executive officers participate in a retirementsavings plan, which includes contributory and non-contributory provisions, aswell as various health and welfare benefit plans on the same basis as othersalaried employees.  The Company’s objective is to offer all salariedemployees, including the named executive officers, a benefits package that iscompetitive within the food processing industry.  In addition, the Companyprovides certain athletic and social club memberships for Mr. Woodhams(and previously provided such memberships to Mr. Naylor), which areconsidered to be commensurate with their respective positions in the Companyand beneficial for sales and marketing objectives.  Each of the Company’s named executiveofficers is provided with a Company automobile to use or a monthly allowancefor the use of an automobile.

 

***DeferredCompensation.  ***In connection with the Acquisition of Pierre, Messrs. Woodhams andNaylor invested approximately $4.9 million in a deferred compensationplan.  This deferred compensation plan is funded through a rabbi trustthat owns preferred stock of Holding with an aggregate liquidation value ofapproximately $6.9 million at March 1, 2008.  As with stock optionsand restricted stock, the deferred compensation promotes the Company’slong-term growth and profitability by aligning the interests of the executiveswith those of the Company’s stockholder and the stockholders of Holding.  Mr. Naylor continues to participate inthis plan despite his retirement from the Company in fiscal 2008.

 

37

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**Summary Compensation Table**

 

The following information presents compensationinformation for services to the Company, for fiscal 2008 and fiscal 2007, foreach of the named executive officers.

 

**SUMMARY COMPENSATION TABLE**

 
| **Name and Principal  Position** | ** ** | **Fiscal  Year** | ** ** | **Salary  ($)** | ** ** | **Bonus ($)** | ** ** | **Option  Awards  ($) (1)** | ** ** | **Non-Equity  Incentive Plan  Compensation  ($) (2)** | ** ** | **Change in  Pension Value  and  Non-qualified  Compensation  Earnings ($)** | ** ** | **All Other  Compensation  ($)** | ** ** | **Total ($)** | ** ** |
|--------------------------------------------|------------|------------------|------------|-----------------|------------|---------------|------------|----------------------------------|------------|-----------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------|------------|
|                                       |       |             |       |            |       |          |       |                             |       |                                                            |       |                                                                                        |       |                                  |       |               |       |
| Norbert E. Woodhams,                       |       |             |       |            |       |          |       |                             |       |                                                            |       |                                                                                        |       |                                  |       |               |       |
| President and Chief                        |       | 2008             |       | 398,607         |       | —        |       | 9,538                            |       | —                                                          |       | 371,352                                                                                     | (3)        | 159,647                               | (4)        | 939,144            |       |
| Executive Officer                          |       | 2007             |       | 394,574         |       | —        |       | 9,538                            |       | 139,887                                                         |       | 337,500                                                                                     | (5)        | 160,552                               | (6)        | 1,042,051          |       |
|                                       |       |             |       |            |       |          |       |                             |       |                                                            |       |                                                                                        |       |                                  |       |               |       |
| Robert C. Naylor, Senior Vice              |       |             |       |            |       |          |       |                             |       |                                                            |       |                                                                                        |       |                                  |       |               |       |
| President of                               |       | 2008             |       | 193,479         |       | —        |       | 3,814                            |       | —                                                          |       | 275,517                                                                                     | (7)        | 261,180                               | (8)        | 733,990            |       |
| Sales and Marketing                        |       | 2007             |       | 263,050         |       | —        |       | 5,869                            |       | 93,258                                                          |       | 250,470                                                                                     | (9)        | 151,660                               | (10)       | 764,307            |       |
|                                       |       |             |       |            |       |          |       |                             |       |                                                            |       |                                                                                        |       |                                  |       |               |       |
| Cynthia S. Hughes,                         |       |             |       |            |       |          |       |                             |       |                                                            |       |                                                                                        |       |                                  |       |               |       |
| Vice President and                         |       |             |       |            |       |          |       |                             |       |                                                            |       |                                                                                        |       |                                  |       |               |       |
| Chief Financial Officer                    |       | 2008             |       | 8,077           |       | 15,000        | (11)       | —                           |       | —                                                          |       | —                                                                                      |       | 932                                   | (12)       | 24,009             |       |
|                                       |       |             |       |            |       |          |       |                             |       |                                                            |       |                                                                                        |       |                                  |       |               |       |
| Joseph W. Meyers,                          |       | 2008             |       | 230,000         |       | —        |       | 661                              |       | —                                                          |       | —                                                                                      |       | 22,302                                | (13)       | 252,963            |       |
| Vice President, Finance                    |       | 2007             |       | 136,408         |       | —        |       | 661                              |       | 22,516                                                          |       | —                                                                                      |       | 20,209                                | (14)       | 179,794            |       |
|                                       |       |             |       |            |       |          |       |                             |       |                                                            |       |                                                                                        |       |                                  |       |               |       |
| Anthony J. Schroder,                       |       |             |       |            |       |          |       |                             |       |                                                            |       |                                                                                        |       |                                  |       |               |       |
| Senior Vice President                      |       |             |       |            |       |          |       |                             |       |                                                            |       |                                                                                        |       |                                  |       |               |       |
| of Sales                                   |       | 2008             |       | 150,796         |       | —        |       | 461                              |       | —                                                          |       | —                                                                                      |       | 8,776                                 | (15)       | 160,033            |       |

 

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| (1)    |   | Amounts shown in this  column relatedto stock options granted under Holding’s Stock Option Plan. The  amounts are valued based on the compensation cost that the Company would have  recognized during fiscal 2008 under FASB 123(R) had the Company not  adopted FASB 123(R) using the prospective adoption method.                                                                  |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| (2)    |   | Payment Pursuant to the  Company’s Fiscal 2007 Executive Incentive Compensation Plan.                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| (3)    |   | Represents dividends on the  deferred stock bonus held in Mr. Woodham’s account under the Pierre  Foods, Inc. Deferred Compensation Plan, including 10% per annum on the  initial value of $2,790,000 ($279,000) and 10% per annum on all unpaid  dividends through the end of fiscal 2008 ($92,352).  See Nonqualified Deferred  Compensation table for additional information. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| (4)    |   | Represents $109,091 in life  insurance premiums, $10,638 in disability insurance premiums, $26,733 in  automobile lease payments, $7,586 in matching contributions made by the  Company to the Company’s 401(k) plan, and $5,599 in club memberships.                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| (5)    |   | Represents dividends on the  deferred stock bonus held in Mr. Woodham’s account under the Pierre  Foods, Inc. Deferred Compensation Plan, including 10% per annum on the  initial value of $2,700,000 ($279,000) and 10% per annum on all unpaid  dividends through the end of fiscal 2007 ($58,500). See Nonqualified Deferred  Compensation table for addition information.         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| (6)    |   | Represents $109,091 in life  insurance premiums, $13,042 in disability insurance premiums, $20,448 in  automobile lease payments, $7,737 in matching contributions made by the  Company to the Company’s 401(k) plan, and $10,234 in club memberships.                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| (7)    |   | Represents dividends on the  deferred stock bonus held in Mr. Naylor’s account under the Pierre  Foods, Inc. Deferred Compensation Plan, including 10% per annum on the  initial value of $2,070,000 ($207,000) and 10% per annum on all unpaid  dividends through the end of fiscal 2008 ($68,517).  See Nonqualified  Deferred Compensation table for additional information.  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| (8)    |   | Represents $112,428 in  severance payments, $113,287 in life insurance premiums, $12,658 in  disability insurance premiums, $16,973 in automobile lease payments, and  $5,834 in matching contributions made by the Company to the Company’s  401(k) plan.                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| (9)    |   | Represents dividends on the  deferred stock bonus held in Mr. Naylor’s account under the Pierre  Foods, Inc. Deferred Compensation Plan, including 10% per annum on the  initial value of $2,070,000 ($207,000) and 10% per annum on all unpaid  dividends through the end of fiscal 2007 ($43,470).  See Nonqualified  Deferred Compensation table for additional information.  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| (10)   |   | Represents $109,091 in life  insurance premiums, $9,971 in disability insurance premiums, $18,996 in  automobile lease payments, $7,575 in matching contributions made by the  Company to the Company’s 401(k) plan, and $6,027 in club memberships and  payment for opting out of the Company’s health insurance coverage.                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| (11)   |   | Represents $15,000 for a  one-time bonus in connection with commencement of employment with the  Company.                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| (12)   |   | Represents $346 in  automobile lease payments and $586 in matching contributions made by the  Company to the Company’s 401(k) plan.                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| (13)   |   | Represents $16,773 in  automobile lease payments and $5,529 in matching contributions made by the  Company to the Company’s 401(k) plan.                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| (14)   |   | Represents $12,166 in  automobile lease payments, $3,692 in matching contributions made by the  Company to the Company’s 401(k) plan, and$4,351 in a prize won at an employee holiday  party.                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| (15)   |   | Represents $5,006 in  automobile lease payments and $3,770 in matching contributions made by the  Company to the Company’s 401(k) plan.                                                                                                                                                                                                                                                    |

 

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**Employment Contracts**

 

In connection with the Acquisition of Pierre, each ofMessrs. Woodhams and Naylor entered into an employment agreement withHolding, which provided for employment through June 29, 2005.  Theterm of each employment agreement automatically renewed after a one-year term,and will continue to renew for successive one-year terms unless either partygives the other party written notice of its intent not to renew at least 60days prior to the expiration of the then-current term.  Pursuant to suchagreements, Mr. Woodham’s base salary was set at $375,000 per year and Mr. Naylor’swas set at $250,000 per year, in each case subject to annual adjustments forinflation.  In addition, both are entitled to (i) participate in theannual incentive compensation plan for senior executives of Pierre, (ii) participatein employee benefit programs in which senior executives of Pierre are generallyeligible to participate, (iii) use of a company car, and (iv) obtainreimbursement of all reasonable out-of-pocket expenses.  If the namedexecutive officer is terminated without cause, dies or becomes disabled, or heresigns for good reason (each as defined in the employment agreement), he willbe entitled to receive his base salary for one year and to continue toparticipate in employee welfare benefit plans during the one-year period. Each employment agreement contains customary nondisclosure of confidentialinformation provisions and noncompetition covenant with Pierre for a period ofone year after termination of employment.

 

EffectiveOctober 31, 2007, Mr. Naylor retired from the Company.  In connection with such retirement, theCompany entered into an agreement, which became effective November 6,2007, pursuant to which Mr. Naylor was paid the severance payments andother benefits described in his employment agreement , except that in lieu ofone-year of coverage under the Company’s life and long-term disabilityinsurance programs, Mr. Naylor was paid $121,799.  The Company alsotransferred title and ownership of a trailer and vehicle to Mr. Naylor,which had an approximate value of $25,000.

 

EffectiveNovember 28, 2007, Mr. Schroder entered into an employment agreementwith the Company, which provided for employment for a term of three years.  Pursuant to such agreement, Mr. Schroder’sbase salary was set at $180,000 per year, subject to annual increases based onthe discretion of the Chief Executive Officer.  In addition, Mr. Schroderis entitled to (i) participate in the annual incentive compensation planfor senior executives of Pierre, (ii) participate in employee benefitprograms in which senior executives of Pierre are generally eligible toparticipate, (iii) receive a car allowance, and (iv) obtainreimbursement of all reasonable out-of-pocket expenses.  If the namedexecutive officer is terminated without cause, dies or becomes disabled, or heresigns for good reason (each as defined in the employment agreement), he willbe entitled to receive his base salary and reimbursement of the employerportion of COBRA premiums for one year or if such termination occurs after asale of the Company (as defined in the employment agreement), for up to twoyears following the sale of the Company. Mr. Schroder’s employment agreement contains customarynondisclosure of confidential information provisions and noncompetitioncovenant with Pierre for a period of one year after termination of employment.

 

Effective February 18, 2008, Ms. Hughesentered into an employment agreement with the Company, which provided foremployment for a term of four years. Pursuant to such agreement, Ms. Hughes’ base salary was set at$210,000 per year, subject to annual increases based on the discretion of theChief Executive Officer.  In addition, Ms. Hughes is entitled to (i) participatein the annual incentive compensation plan for senior executives of Pierre, inaddition to receiving a one-time bonus of $15,000 to be paid on February 29,2008, (ii) participate in employee benefit programs in which seniorexecutives of Pierre are generally eligible to participate, (iii) receivecar allowance, and (iv) obtain reimbursement of all reasonableout-of-pocket expenses.  If the named executive officer is terminatedwithout cause, dies or becomes disabled, or she resigns for good reason (eachas defined in the employment agreement), she will be entitled to receive herbase salary and reimbursement of the employer portion of COBRA premiums for oneyear or if such termination occurs after a sale of the Company (as defined inthe employment agreement), for up to two years following the sale of theCompany.  Mr. Hughes’ employment agreement contains customarynondisclosure of confidential information provisions and noncompetitioncovenant with Pierre for a period of one year after termination of employment.

 

**Grants ofPlan-Based Awards in Fiscal 2008**

 

Under the Company’s Fiscal 2008 Executive IncentiveCompensation Plan, upon the achievement of applicable EBITDA (earnings beforeinterest, tax, depreciation, and amortization) measures, the payout to thenamed executive officers could have ranged from a minimum of 0% to a maximum of200% of his or her annual base salary for each of Messrs. Woodhams,Naylor, Meyers, and Schroder, and for Ms. Hughes, except that for Messrs. Schroderand Naylor, and Ms. Hughes, the payout would be pro-rated based on theduration of their employment during fiscal 2008, had the Company achieved therequired EBITDA measures.   If the measures were exceeded, the namedexecutive officers could have earned an unlimited amount based upon the extentto which the EBITDA performance exceeded the targeted amounts, as determined bythe Compensation Committee (with input of Mr. Woodhams with respect topayouts for Messrs. Meyers, Naylor, and Schroder, and Ms. Hughes). The Company’s EBITDA for fiscal 2008 was not at the minimum target levels andtherefore, no named executive officer received a payout.  However, asnoted above, in connection with their respective Employment Agreements, Mr. Schroderand Ms. Hughes, each purchased 5,000 shares of restricted common stockunder Holding’s 2008 Restricted Stock Plan.

 

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**GRANTS OF PLAN-BASED AWARDS**

 
| ** **                                                             | ** ** | **Estimated Future Payouts Under Non-Equity Incentive Plan  Awards (1)** | ** ** | **All Other Stock Awards** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Name**                                                               | ** ** | **Grant  Date**                                                                                             | ** ** | **Threshold  ($)**                        | ** ** | **Target  ($)** | ** ** | **Maximum  ($)** | ** ** | **Number of  Shares of  Stock or Units  (#)** | ** ** | **Grant Date  Fair Value of  Stock Awards  ($)** | ** ** |
| Norbert E. Woodhams, President and Chief  Executive Officer            |       | 4/5/07                                                                                                      |       | -0-                                       |       | $ | 797,214 |   | $ | 797,214 | (2) | -0- |   | -0- |   |
|                                                                   |       |                                                                                                        |       |                                      |       |   |   |   |   |   |   |   |   |
| Robert C. Naylor, former Senior Vice  President of Sales and Marketing |       | 4/5/07                                                                                                      |       | -0-                                       |       | $ | 388,679 |   | $ | 388,679 | (2) | -0- |   | -0- |   |
|                                                                   |       |                                                                                                        |       |                                      |       |   |   |   |   |   |   |   |   |
| Cynthia S. Hughes, Vice President and Chief  Financial Officer (3)     |       | 2/18/08                                                                                                     |       | -0-                                       |       | $ | 13,846 |   | $ | 13,846 | (2) | 5,000 |   | -0- | (4) |
|                                                                   |       |                                                                                                        |       |                                      |       |   |   |   |   |   |   |   |   |
| Joseph W. Meyers, Vice President, Finance                              |       | 4/5/07                                                                                                      |       | -0-                                       |       | $ | 460,000 |   | $ | 460,000 | (2) | -0- |   | -0- |   |
|                                                                   |       |                                                                                                        |       |                                      |       |   |   |   |   |   |   |   |   |
| Anthony J. Schroder, Senior Vice President  of Sales (3)               |       | 4/5/07                                                                                                      |       | -0-                                       |       | $ | 204,231 |   | $ | 204,231 | (2) | 5,000 |   | -0- | (4) |

 

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(1)      None were paid.

 

(2)      Assumes that the target EBITDA performance measure is met but notexceeded.  If the target EBITDA performance measure is exceeded, the namedexecutive officer can earn an unlimited amount based upon the extent to whichthe target is exceeded, as determined by the Compensation Committee (with inputfrom Mr. Woodhams with respect to awards for Ms. Hughes and Messrs. Schroder,Meyers, and Naylor).

 

(3)      For each of Mr. Schroder and Ms. Hughes, 5,000 shares ofrestricted common stock of Holding were sold to each in connection with theiremployment with the Company, for $0.25 per share.  Such shares vest daily over a four yearperiod.

 

(4)      Named executive officer purchased for fair market value.

 

**Outstanding Equity Awards at Fiscal 2008 Year-End**

 

The following table summarizes the outstanding equityawards held by each named executive officer at March 1, 2008.  Thetable reflects options to purchase common stock of Holding and shares ofrestricted stock of Holding.

 

**OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END**

 
| ** **                                                      | ** ** | **Option Awards**                                                                 | ** ** | **Stock Awards**                                                                     | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| **Name**                                                        | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Un-exercisable** | ** ** | **Equity  Incentive  Plan  Awards:  Number of  Securities  Underlying  Unexercised  Unearned  Options (#)** | ** ** | **Option  Exercise  Price ($)** | ** ** | **Option  Expiration  Date** | ** ** | **Number of  Shares or  Units of  Stock That  Have Not  Vested (#)** | ** ** | **Market  Value of  Shares or  Units of  Stock That  Have Not  Vested ($ )** | ** ** | **Equity  Incentive  Plan Awards:  Number of  Unearned  Shares, Units  or Other  Rights That  Have Not  Vested** | ** ** | **Equity  Incentive Plan  Awards:  Market or  Payout Value  of Unearned  Share, Units or  Other Rights  That Have Not  Vested** | ** ** |
| Norbert E.  Woodhams, President and Chief Executive Officer(1)  |       | 15,616                                                                                 |       | -0-                                                                                       |       | 37,612 | (1) | $ | 10.00 |   | 6/30/2014 |   | -0- |   | N/A |   | -0- |   | N/A |   |
|                                                            |       |                                                                                   |       |                                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cynthia S.  Hughes,  Vice President and Chief Financial Officer |       | -0-                                                                                    |       | -0-                                                                                       |       | -0- |   | N/A |   | N/A |   | 4,960 | (4) | $ | 1,240 | (5) | -0- |   | N/A |   |
|                                                            |       |                                                                                   |       |                                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Joseph W. Meyers,  Vice President, Finance (2)             |       | 1,028                                                                                  |       | -0-                                                                                       |       | 2,661 | (2) | $ | 10.00 |   | 10/20/2014 |   | -0- |   | N/A |   | -0- |   | N/A |   |
|                                                            |       |                                                                                   |       |                                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Anthony J.  Schroder,   Senior Vice President of Sales          |       | 716                                                                                    |       | -0-                                                                                       |       | 1,853 | (3) | $ | 10.00 |   | 10/20/2014 |   | 4,830 | (6) | $ | 1,208 | (5) | -0- |   | N/A |   |

 

----

(1)      Option for a total of 53,228 shares of common stock of Holding wasgranted to Mr. Woodhams effective June 30, 2004, of which 60% vestdaily over a 5-year period, and 40% vest over 7 years if certain EBITDA targetsare met.

 

(2)      Option for a total of 3,869 shares of common stock of Holding wasgranted to Mr. Meyers effective September 5, 2004, of which 60% vestdaily over a 5-year period, and 40% vest over 7 years if certain EBITDA targetsare met.

 

40

----

 

(3)     Option for a total of 2,569 shares of common stock of Holding wasgranted to Mr. Schroder effective September 5, 2004, of which 60%vest daily over a 5-year period, and 40% vest over 7 years if certain EBITDAtargets are met.

 

(4)      Vested shares of restricted stock of Holding purchased by Ms. Hugheseffective February 18, 2008.  Theshares vest daily over a 4-year period.

 

(5)      Fair market value of $0.25 per share.

 

(6)      Vested shares of restricted stock of Holding purchased by Mr. Schrodereffective January 11, 2007.  Theshares vest daily over a 4-year period.

 

**Option Exercises and Stock Vested**

 

No named executive officer exercised any stockoptions of Holding during fiscal 2008. The following table summarizes as of March 1, 2008 the number ofshares of restricted common stock of Holding that have vested and the aggregatedollar value realized upon vesting of stock, or upon the transfer of an awardfor value:

 
| ** **                                                     | ** ** | **Stock Awards**                                              | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **Name**                                                       | ** ** | **Number of Shares  Acquired on Vesting  (#)** | ** ** | **Value Realized on  Vesting  ($)** | ** ** |
|                                                           |       |                                                               |       |   |   |
| Cynthia S. Hughes, Vice President and Chief  Financial Officer |       | 40                                                                 | (1)        | -0- | (2) |
|                                                           |       |                                                               |       |   |   |
| Anthony J. Schroder, Senior Vice President  of Sales           |       | 170                                                                | (1)        | -0- | (2) |

 

----

(1)   Shares of Restricted Stock of Holding purchased by the named executiveofficer for $0.25 per share, the fair market value at the time of purchase.

 

(2)   The fair market value per share was $0.25 per share at March 1,2008, the same as the purchase price per share paid by the named executiveofficer.

 

**Nonqualified Deferred Compensation**

 

In connection with the Acquisition of Pierre, theCompany established the Pierre Foods, Inc. Deferred Compensation Planpursuant to which Messrs. Woodhams and Naylor hold deferred stock bonusawards.  The awards are held in an account for such named executiveofficer and are to be paid out upon the earliest to occur of the dissolutionand liquidation of the Company or Holding, determination by the Company of achange in applicable tax laws, the termination of employment of the namedexecutive officer due to his death or disability, the redemption of securitiesissued by the Company or any affiliate of the Company (which are held in therabbi trust established for the plan), or June 30, 2016.  Inaddition, the Compensation Committee may distribute the account to the namedexecutive officer upon termination of his employment for any reason.  TheDeferred Compensation Plan holds 4,860 shares of preferred stock of Holding andeach participant’s account is deemed to receive all dividends, interest, earningsand other property which would have been received with respect to the preferredstock of Holding if such account were actually invested in the preferred stock.

 

The following table summarizes the nonqualifieddeferred compensation held by each of Messrs. Woodhams and Naylor as of March 1,2008.  Neither Messrs. Meyers and Schroder, nor Ms. Hughes,  had any nonqualified deferred compensation atany time during fiscal 2008.

 
| **Name**                                                        | ** ** | **Executive  Contributions  in Last FY ($)** | ** ** | **Registrant  Contributions  in Last FY ($)** | ** ** | **Aggregate  Earnings in  Last FY ($)** | ** ** | **Aggregate  Withdrawals/  Distributions ($)** | ** ** | **Aggregate  Balance at  Last FYE ($)** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------------|------------|
| Norbert E. Woodhams, President and Chief  Executive Officer     |       | -0-                                                         |       | -0-                                                          |       | $                                                      | 371,352    | (1)                                                 | -0-        |                                                   | $          | 3,993,633 | (2) |
| Robert C. Naylor, Senior Vice President of  Sales and Marketing |       | -0-                                                         |       | -0-                                                          |       | $                                                      | 275,517    | (1)                                                 | -0-        |                                                   | $          | 2,963,014 | (2) |

 

----

(1)      Included in the Summary Compensation Table.

 

(2)      Includes the initial deferred stock bonus account of $2,790,000 for Mr. Woodhamsand $2,070,000 for Mr. Naylor, and accrued, but unpaid dividends on suchamounts as of March 1, 2008.  Inconjunction with Mr. Naylor’s retirement from the Company, the Board ofDirectors did not distribute to Mr. Naylor his deferred stock bonusaccount.  As such, Mr. Naylorcontinues to earn dividends.

 

41

----

 

**PotentialPayments Upon Termination or Change-in Control**

 

***Severance Benefits. ***Each of Messrs. Woodhams and Schroder, and Ms. Hughes, areentitled to certain severance benefits under their respective employmentagreements if (i) the Company terminates the named executive officer’semployment without “cause” (as defined in the employment agreement), (ii) thenamed executive officer resigns for “good reason” (as defined in employmentagreement), or (iii) with respect to Mr. Woodhams, the Company electsnot to renew the term of his employment agreement or he resigns without goodreason or he elects not to renew the term of his employment agreement (and ineither such case, the Company elects that Mr. Woodhams be bound by thenon-competition provisions in his employment agreement. In any such event, thenamed executive officer will continue to receive his or her base salary andbenefits to the date of termination.  Inaddition, Mr. Woodhams will receive his base salary and health and welfarebenefits for one year following termination of employment, and with Mr. Schroderand Ms. Hughes will receive his or her base salary and reimbursement forthe employer portion of COBRA premiums for the one year after termination ofemployment if a sale of the Company has not occurred and is not pending at thetime of termination, or the longer of two years from the date of the sale ofthe Company or one year after termination of employment if a sale of the Companyhas occurred or is pending.  In addition,except in the case of termination of the named executive officer for cause orhis resignation without good reason, each of Messrs. Woodhams andSchroder, and Ms. Hughes, are entitled to receive upon termination ofemployment, a pro rata portion of his or her annual incentive award for theyear of termination.  In each case, theseverance benefits are provided only upon the named executive officer signing,and not revoking, a general release in favor of the Company.

 

If termination of the named executive officer isinitiated by the Company for cause or by the named executive officer withoutgood reason or with respect to Messrs. Woodhams and Naylor, the namedexecutive officer does not renew the term of his agreement (and in either ofthe last two cases, the Company elects not to pay severance in which case thenamed executive officer is not bound by the non-competition provision in hisemployment agreement), the named executive officer will not be entitled to any severancepayments other than salary and benefits accrued through the termination date.

 

Aspreviously discussed above, effective October 31, 2007, Mr. Naylorretired from the Company.  In connectionwith such retirement, the Company entered into an agreement, which becameeffective November 6, 2007, pursuant to which Mr. Naylor was paid theseverance payments and other benefits described in his employment agreement ,except that in lieu of one-year of coverage under the Company’s life andlong-term disability insurance programs, Mr. Naylor was paid$121,799.  The Company also transferred title and ownership of a trailerand vehicle to Mr. Naylor, which had an approximate value of $25,000.

 

***Non-Competition Provisions. ***Each of Messrs. Woodhams and Schroder, and Ms. Hughes, issubject to non-competition restrictions in his or her employment agreement fora one-year period following termination of employment for any reason.  However, for Messrs. Woodhams, if hedoes not renew the term of his employment agreement or if he resigns withoutgood cause (as defined in the agreement) and in either case, the Company electsnot to pay severance benefits to him, he is not bound by the non-competitionrestrictions.  Mr. Naylor iscurrently subject to the non-competition provision in his employment agreementas a result of his retirement in fiscal 2008.

 

***Potential Payments upon Termination orChange-in-Control***.  Upon the termination of employment of anynamed executive officer, all options to purchase shares of common stock ofHolding held by such named executive officer, which have not vested prior tothe date of termination of employment, expire and are forfeited.  All vested options held by the namedexecutive officer also expire and are forfeited upon the termination of hisemployment unless such termination of employment was (i) due to the namedexecutive officer’s death or disability, in which case, the vested optionsexpire 180 days following termination of employment, or (ii) by theCompany without cause (as defined in the named executive officer’s employmentagreement or if there is no such agreement, the stock option plan) or is due tothe resignation or retirement of the named executive officer, in which cases,the vested options expire 60 days following the date of termination.

 

Upon termination of employment of a named executiveofficer, the Company or MDP may purchase any shares of common stock of Holdingheld by such executive officer and any unvested restricted common stock isforfeited. The purchase price for such shares is the fair market value asdetermined in good faith by the Compensation Committee (or if no suchCommittee, the full Board of Directors) of Holding, taking into account allrelevant factors determinative of value (including lack of liquidity, butwithout regard to any discounts for minority interests).

 

If there is a change-in-control of Holding, whichincludes (i) the sale of the Company to an independent third partypursuant to which such party acquires capital stock of Holding possessing the votingpower under normal circumstances to elect a majority of the Board of Directorsof Holding or (ii) the sale of all or substantially all of the assets ofthe Company (on a consolidated basis), any options to purchase shares of commonstock of Holding and any restricted stock of Holding held by any of the namedexecutive officers that have not vested prior to such change-in-control,automatically vest, subject in the case of stock options, to limitationsrelating to the number that vest pursuant to the performance-vestingprovisions.

 

Belowis a summary of the estimated termination/severance benefits that would be paidin various circumstances as of March 1, 2008:

 

42

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| **Name**                            | ** ** | **Termination  With  Cause (1)** | ** ** | **Termination  Without  Cause (2)** | ** ** | **Death or  Disability** | ** ** | **Change-In-  Control** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|------------------------------------------|------------|-------------------------------|------------|-------------------------|------------|
| Norbert E. Woodhams                 |       |                                  |       |                                     |       |                          |       |                    |       |
| Cash severance(4)                   |       | $                                     | —     |                                     | $          | 1,195,821                     |       | $                       | 1,195,821  |   | $ | — |   |
| Health and welfare benefits         |       | $                                     | —     |                                     | $          | 119,729                       |       | $                       | 119,729    |   | $ | — |   |
| Purchase of Common Stock Options(3) |       | $                                     | —     |                                     | $          | —                        |       | $                       | —     |   | $ | — |   |
| Deferred Compensation               |       | $                                     | 4,364,976  | (5)                                      | $          | 4,364,976                     | (5)        | $                       | 4,364,976  | (5) | $ | — |   |
|                                |       |                                  |       |                                     |       |                          |       |                    |       |
| Cynthia S. Hughes                   |       |                                  |       |                                     |       |                          |       |                    |       |
| Cash severance(4)                   |       | $                                     | —     |                                     | $          | 630,000                       | (7)        | $                       | 630,000    |   | $ | — |   |
| Health and welfare benefits         |       | $                                     | —     |                                     | $          | —                        |       | $                       | —     |   | $ | — |   |
| Purchase of Restricted Stock(6)     |       | $                                     | —     |                                     | $          | —                        |       | $                       | —     |   | $ | — |   |
|                                |       |                                  |       |                                     |       |                          |       |                    |       |
| Joseph W. Meyers                    |       |                                  |       |                                     |       |                          |       |                    |       |
| Purchase of Common Stock Options(3) |       | $                                     | —     |                                     | $          | —                        |       | $                       | —     |   | $ | — |   |
|                                |       |                                  |       |                                     |       |                          |       |                    |       |
| Anthony J. Schroder                 |       |                                  |       |                                     |       |                          |       |                    |       |
| Cash severance(4)                   |       | $                                     | —     |                                     | $          | 540,000                       | (7)        | $                       | 540,000    |   | $ | — |   |
| Health and welfare benefits         |       | $                                     | —     |                                     | $          | —                        |       | $                       | —     |   | $ | — |   |
| Purchase of Common Stock Options(3) |       | $                                     | —     |                                     | $          | —                        |       | $                       | —     |   | $ | — |   |
| Purchase of Restricted Stock(6)     |       | $                                     | —     |                                     | $          | —                        |       | $                       | —     |   | $ | — |   |

 

----

| (1)       |   | Includes termination by the  Company for cause, resignation by the named executive officer without good  reason, or for Mr. Woodhams, he resigns without good reason or elects  not to renew the term of his employment agreement and the Company elects not  to pay severance in which case, the noncompetition provisions are not  enforceable against Mr. Woodhams.                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|-----------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|  (2) |   | Includes  (a) termination of the named executive officer’s employment by the  Company without cause, (b) termination of employment due to the death or  disability of the named executive officer, (c) resignation by the named  executive officer without good reason, (d) for Mr. Woodhams,  election by the Company not to renew the term of the named executive  officer’s employment agreement, or (e) for Mr. Woodhams, election by  the named executive officer not to renew the term of his other employment  agreement or resignation by the named executive officer with good reason, in  each case if the Company elects to pay the severance (in which case, the  named executive officer is bound by the non-competition provisions in his  employment agreement). |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (3)       |   | Assumes that the named  executive officer does not exercise his vested options within the time limits  set forth in his stock option agreement, rather, the named executive officer  forfeits the shares due to the strike price for such Options being greater  than the estimated fair market value of the underlying shares of common stock  of Holding as of March 1, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (4)       |   | Cash severance includes  payment for base salary and the annual incentive award for the year of  termination. The named executive officer is entitled to a pro rata portion of  his annual incentive award. The table includes the amount that the named  executive officer would receive if he receives a full year of his annual  incentive award, assuming the Company met (but did not exceed) the  performance targets.                                                                                                                                                                                                                                                                                                                                                                                                 |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (5)       |   | Assumes that the  Compensation Committee elects to distribute the named executive officer’s  deferred stock bonus account to the named executive officer upon termination  of employment, including by reason of death or disability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (6)       |   | Assumes that the Company or  MDP elects to purchase the named executive officer’s shares. The amounts  shown include the repurchase of the restricted stock by the Company at the  estimated fair market value as of March 1, 2008 less the amount paid by  the named executive officer at the time of purchase.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (7)       |   | With respect to  Ms. Hughes and Mr. Schroder, assumes that a sale of the Company  occurs on the date of termination of employment, and therefore, each will  receive his or her base salary for two years after termination of employment:  $1,260,000 and $1,080,000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

Asnoted above, Mr. Naylor retired from the Company, effective October 31,2007.  In connection with suchretirement, the Company entered into an agreement, which became effective November 6,2007, pursuant to which Mr. Naylor was paid the severance payments andother benefits described in his employment agreement, except that in lieu ofone-year of coverage under the Company’s life and long-term disabilityinsurance programs, Mr. Naylor was paid $121,799.  The Company alsotransferred title and ownership of a trailer and vehicle to Mr. Naylor,which had an approximate value of $25,000.

 

43

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**Compensation of Directors**

 

During fiscal 2008, directors of the Company who areemployees or affiliates of MDP did not receive fees for services as directors.Scott W. Meader, a director who is not an employee of the Company or anyaffiliate of MDP, receives $35,000 annually. In addition, upon his election as a director of the Company, Holdingentered into a restricted stock agreement with Mr. Meader pursuant towhich Mr. Meader purchased 2,000 shares of common stock of Holding for$10.00 per share.  The shares vest asfollows:  187 shares vested upon execution of the restricted stockagreement and the remaining 1,813 vest over 41⁄2 years provided that Mr. Meadercontinues to be a director of the Company and Holding.  In the event that he ceases to be a directorof the Company or Holding, Holding has an option to repurchase the vestedshares at the greater of the fair market value or $10.00 per share and theunvested shares at $10.00 per share.  IfHolding does not exercise such option, MDP then has the option to purchase theshares on the same terms.  The shares arealso subject to restrictions, including restrictions on transfer, set forth inthe Stockholder’s Agreement dated June 30, 2004 among certain stockholdersof Holding.  All of the Company’s directorsare reimbursed for out-of-pocket expenses incurred in connection with attendingall Board and Board committee meetings.

 

**DIRECTOR COMPENSATION**

 
| **Name**        | ** ** | **Fees Earned or Paid in Cash($)** | ** ** | **Stock Awards($ )** | ** ** | **Total ($)** | ** ** |
|-----------------|------------|-------------------------------------------------------------|------------|--------------------------------|------------|--------------------|------------|
| Scott W. Meader |       | $                                                           | 35,000     |                           | $          | 894                | (1)        | $ | 35,894 |   |
|                 |            |                                                             |            |                                |            |                    |            |  |  |  |

 

----

(1) Representsrestricted stock vested in fiscal 2008.

 

**CompensationCommittee Interlocks and Insider Participation**

 

None of the Company’s executive officers has arelationship that would constitute an interlocking relationship with executiveofficers or directors of another entity or insider participation incompensation decisions.

 

**CompensationCommittee Report**

 

The Compensation Committee has reviewed and discussedthe Compensation Discussion and Analysis with management.  Based on that review and discussion, theCompensation Committee recommended to the Board of Directors that theCompensation Discussion and Analysis be included in this Annual Report on Form 10-K.

 

Respectfully submitted,

 

Nicholas W. AlexosGeorge A. PeinadoRobin P. Selati

 

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

 

The information set forth in Item 5 of Part IIof this Report regarding equity compensation plans is hereby incorporated byreference.

 

**Security Ownership of Certain Beneficial Owners andManagement**

 

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

 

The following table setsforth certain information with respect to the beneficial ownership of the commonstock of Holding as of March 1, 2008, by (1) each person known by theCompany to own beneficially more than five percent of the outstanding shares ofcommon stock of Holding; (2) each of the directors and executiveofficers of the Company; and (3) all of the directors and executiveofficers of the Company as a group. Unless otherwise stated, each of the persons in the table has solevoting and investment power with respect to the securities beneficially owned.Percentage ownership is based on 1,585,199 shares of common stock of Holdingoutstanding as of March 1, 2008.

 

44

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| **Name of Beneficial Owner**                  | ** ** | **Number of Shares  of Common Stock  Beneficially Owned** | ** **         | **Percent of  Outstanding  Common Stock** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------------------------------------|--------------------|-----------------------------------------------------|------------|
| Madison Dearborn Capital Partners IV, L.P.                   |       | 1,420,000                                                                          | (1)                | 89.6                                                | %          |
| Norbert E. Woodhams                                          |       | 42,308                                                                             | (2)                | 2.6                                                 | %          |
| Cynthia S. Hughes                                            |       | 5,000                                                                              | (5)                | *                                                   | (4)        |
| Joseph W. Meyers                                             |       | 1,077                                                                              | (3)                | *                                                   | (4)        |
| Anthony Schroder                                             |       | 5,750                                                                              | (8)                | *                                                   | (4)        |
| Nicholas W. Alexos                                           |       | 1,420,000                                                                          | (6)                | 89.6                                                | %          |
| Scott W. Meader                                              |       | 2,000                                                                              | (7)                | *                                                   | (4)        |
| Robin P. Selati                                              |       | 1,420,000                                                                          | (6)                | 89.6                                                | %          |
| George A. Peinado                                            |       | 1,420,000                                                                          | (6)                | 89.6                                                | %          |
| All directors and executive officers as a  group (8 persons) |       | 1,476,135                                                                          | (2)(3)(5)(6)(7)(8) | 92.1                                                | %          |

 

----

| (1)    | MDP IV holds more than 5%  of the issued and outstanding common stock of Holding. The listed shares are  directly owned by Madison Dearborn Capital Partners IV, L.P. (“MDCP IV”).  Madison Dearborn Partners IV, L.P. (“MDP IV”) is the general partner of MDCP  IV and Madison Dearborn Partners, LLC (“MDP LLC”) is the general  partner of MDP IV. MDP IV and MDP LLC may therefore be deemed to have shared  voting and dispositive power with respect to all of the shares owned by MDCP  IV. The address for MDCP IV, MDP IV, and MDP LLC is Three First National  Plaza, Suite 3800, Chicago, Illinois 60602. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (2)    | Includes 16,308 shares  subject to options exercisable within 60 days by Mr. Woodhams.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (3)    | Includes 1,077 shares  subject to options exercisable within 60 days by Mr. Meyers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (4)    | Less than one percent (1%).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (5)    | Represents shares of  restricted stock of Holding sold to Ms. Hughes on February 18,  2008. Such shares vest daily over four years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (6)    | Messrs. Selati,  Alexos, and Peinado are Managing Directors of MDP LLC, the general partner of  MDP IV, which in turn is the general partner of MDCP IV. Messrs. Selati,  Alexos, and Peinado disclaim beneficial ownership of those shares, except to  the extent of any pecuniary interest therein.                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (7)    | Represents shares of  restricted stock of Holding sold to Mr. Meader on July 12, 2005. Of  such shares, 187 shares vested immediately and the remaining shares vest  daily over four and one half years.                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (8)    | Represents shares of  restricted stock of Holding sold to Mr. Schroder on November 28,  2007. Such shares vest daily over four years. In addition, includes 750  shares subject to options exercisable within 60 days by Mr. Schroder.                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

**Item 13.****     *****CertainRelationships, Related Transactions, and Director Independence***

 

***Transactions with RelatedPersons.  ***Norbert J. Woodhams, one of the Company’s Vice Presidents, is the son ofNorbert E. Woodhams, the Company’s President and Chief Executive Officer,and a director and Chairman of the Board. In fiscal 2008, Norbert J. Woodhams received a base salary of$140,000 and did not earn a bonus under the Company’s annual cash incentiveplan.  In fiscal 2007, Norbert J.Woodhams received a base salary of $117,000 and earned a bonus of $40,000 underthe Company’s annual cash incentive plan. The base salary and cash incentive earned by Norbert J. Woodhams is consistentwith the earnings of other Company employees with similar responsibilities.

 

TheCompany utilizes an independent food broker owned by a family member of AnthonyJ. Schroder, the Company’s Senior Vice President of Sales.  This independent food broker providesservices including, but not limited to, selling Pierre’s products, processingpurchase orders from distributors, managing pricing, providing samples tocustomers, participation in trade shows, and training sales representatives tosell Pierre’s product.  The Companycompensates the broker primarily by payment of sales commissions, which isconsistent with compensation to their other independent food brokers.  The Company paid sales commissions to thisbroker totaling $120,118 in fiscal 2008.

 

45

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***Review, Approval, or Ratification of Transactions with Related Persons***.****** The Company and its Audit Committeehave adopted written procedures, which relate to related partytransactions.  Pursuant to those procedures,any related party transaction that would be required to be reported in thisreport, must first be presented to and approved by the Company’s ChiefExecutive Officer and Chief Financial Officer, and if the transaction ismaterial, also by the Audit Committee before the Company makes a bindingcommitment to the related party.  TheCompany expects all of its employees to comply with such procedures.  For each related party transaction presentedfor approval, the Company will consider all relevant factors including whetherthe proposed transaction would be entered into in the ordinary course of ourbusiness on customary business terms, whether any related party has been orwill be involved in the negotiation of the proposed transaction on the Company’sbehalf, and whether the proposed transaction appears to have been negotiated onan arms-length basis without interference or influence on the Company by anyrelated party.  The Company may conditionits approval on any restrictions it deems appropriate, including receivingassurances from any related party that he or she will refrain fromparticipating in the negotiation of the proposed transaction on the Company’sbehalf and in the ongoing management of the business relationship on theCompany’s behalf should the proposed transaction be approved. If after atransaction has been completed, the Company discovers that it is a relatedparty transaction, the Company will promptly advise management and if thetransaction was material, it will also advise the Audit Committee.  In that case, the Company may honor thecontractual commitment if entered into in good faith by an authorizedrepresentative of the Company, but the Company may impose appropriaterestrictions on the continued maintenance of the business relationship similarto those described above.  If the Company’sPresident and Chief Executive Officer, Chief Financial Officer, or any memberof the Company’s Audit Committee has a direct or indirect interest in aproposed transaction, that individual must disclose his or her interest in theproposed transaction and refrain from participating in the approvalprocess.  Mr. Schroder became one ofthe Company’s named executive officers in conjunction with his promotion toSenior Vice President of Sales, and as such, payments to a broker that was inplace prior to such promotion are considered related party transactions.  Because this broker was in place prior to hispromotion, the Company’s policies and procedures with respect to related partytransactions were not followed when such relationships were established.  The Company expects to continue this brokerrelationship.

 

***DirectorIndependence.  ***Although the Company does not currently have securities listed on anational securities exchange or on an inter-dealer quotation system, it hasselected the definition promulgated by the New York Stock Exchange (“NYSE”) todetermine which of its directors qualifies as independent.  Using the independence tests promulgated bythe NYSE, the Company’s Board of Directors has determined that Scott W. Meaderis an independent director.  In makingthis determination, the Board of Directors considered that Mr. Meaderholds 2,000 shares of restricted stock of Holding, but that such shares wereissued to him in connection with his agreement to serve as a director of theCompany.  Mr. Meader has no othermaterial relationship with the Company.

 

Under the NYSE rules, the Company is considered a “controlledcompany” because more than 50% of the Company’s voting power is held by a singleperson.  Accordingly, even if the Companywas a listed company under NYSE, it would not be required by NYSE rules tomaintain a majority of independent directors on its Board of Directors, norwould it be required to maintain a compensation committee or a nominatingcommittee comprised entirely of independent directors.  The Company does not maintain a nominatingcommittee and the Company’s Compensation Committee does not include anyindependent director.

 

**Item 14.    *PrincipalAccountant Fees and Services***

 

The following table presents fees billed forprofessional audit services rendered by Deloitte & Touche LLP for theaudit of the Company’s annual financial statements for fiscal 2008 and fiscal2007, and for other services rendered by Deloitte & Touche LLPduring those periods:

 
| ** **         | ** ** | **Fiscal 2008** | ** ** | **Fiscal 2007** | ** ** |
|--------------------|------------|----------------------|------------|----------------------|------------|
| Audit fees(1)      |       | $                    | 610,000    |                 | $          | 712,000 |   |
| Audit-related fees |       | —               |       | —               |       |
| Tax fees           |       | —               |       | —               |       |
| All other fees     |       | —               |       | —               |       |
|               |       |                 |       |                 |       |
| Total              |       | $                    | 610,000    |                 | $          | 712,000 |   |

 

----

(1)          Audit fees during both fiscal 2008 and fiscal 2007 consisted of fees forservices performed in the audits of the consolidated financial statements ofthe Company, in addition to assistance with review of other documents filedwith the SEC.

 

**Policy on Board of Directors Pre-Approval of Audit andPermissible Non-audit Services of Independent Accountants**

 

The Audit Committee of the Board of Directors of theCompany has responsibility for appointing, setting compensation, and overseeingthe work of the public accountant. In recognition of this responsibility, theAudit Committee of the Board of Directors has established a policy topre-approve all audit and permissible non-audit services provided by the publicaccountant.

 

46

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**PART IV**

 

**Item 15.****     *****Exhibitsand Financial Statement Schedules***

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

 

47

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**SIGNATURES**

 

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

 
|                      | PIERRE FOODS, INC. |
|---------------------------|--------------------|
|                      |               |
|                      |               |
|                      | By:                | /s/  CYNTHIA S. HUGHES |
|                      |               | Cynthia S. Hughes |
|                      |               | Vice President and Chief Financial Officer |
|                      |               |
| Dated: June 16, 2008 |               |

 

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of Pierre Foods, Inc.,in the capacities and on the dates indicated.

 

 
| **Signature**                | ** ** | **Title**                                  | ** ** | **Date**           |
|------------------------------|------------|--------------------------------------------|------------|--------------------|
|                         |       |                                       |       |               |
| /s/ NORBERT E. WOODHAMS |       | Chief Executive Officer and                |       | June 16, 2008 |
| Norbert E. Woodhams          |       | President (Principal Executive Officer),   |       |               |
|                         |       | Director and Chairman of the Board         |       |               |
|                         |       |                                       |       |               |
| /s/ CYNTHIA S. HUGHES   |       | Vice President and Chief Financial Officer |       | June 16, 2008 |
| Cynthia S. Hughes            |       | (Principal Financial Officer)              |       |               |
|                         |       |                                       |       |               |
|                         |       |                                       |       |               |
| /s/ JOSEPH W. MEYERS    |       | Vice President, Finance                    |       | June 16, 2008 |
| Joseph W. Meyers             |       | (Principal Accounting Officer)             |       |               |
|                         |       |                                       |       |               |
|                         |       |                                       |       |               |
| /s/ NICHOLAS W. ALEXOS  |       |                                       |       |               |
| Nicholas W. Alexos           |       | Director                                   |       | June 16, 2008 |
|                         |       |                                       |       |               |
|                         |       |                                       |       |               |
| /s/ SCOTT W. MEADER     |       | Director                                   |       | June 16, 2008 |
| Scott W. Meader              |       |                                       |       |               |
|                         |       |                                       |       |               |
|                         |       |                                       |       |               |
| /s/ GEORGE A. PEINADO   |       | Director                                   |       | June 16, 2008 |
| George A. Peinado            |       |                                       |       |               |
|                         |       |                                       |       |               |
|                         |       |                                       |       |               |
| /s/ ROBIN P. SELATI     |       | Director                                   |       | June 16, 2008 |
| Robin P. Selati              |       |                                       |       |               |

 

48

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|            | ** **                                                                   | **INDEX TO EXHIBITS**                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |
|-----------------|------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|            |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
| **DESCRIPTION** | ** **                                                                   | **LOCATION**                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|            |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| (2)             | PLAN OF ACQUISITION,  REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|            |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|            | 2.1                                                                          | Stock Purchase Agreement,  dated May 11, 2004, among PF Management, Inc., the PF  Management, Inc. Shareholders, David R. Clark, as Shareholders Agent,  and Pierre Holding Corp. (filed as Exhibit 10.12 to the Company’s Annual  Report on Form 10-K, filed with the Securities and Exchange Commission  On May 17, 2004)                                                                                                      |   | **     |
|            |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|            | 2.2                                                                          | Share and Asset Purchase  Agreement dated August 18, 2006, among Pierre Foods, Inc.,  Clovervale Farms, Inc., Cawrse Properties, LLC, Clovervale  Realty, Inc. and Richard S. Cawrse, Jr. (filed as Exhibit 2.1  to the Company’s Current Report of Form 8-K, filed with the Securities  and Exchange Commission on August 22, 2006)                                                                                   |   | **     |
|            |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|            | 2.3                                                                          | Asset Purchase Agreement  dated November 3, 2006, among Pierre Newco I, LLC, Pierre Newco II, LLC,  Zartic, Inc., Zar Tran, Inc., JEM Sales, Inc., MNM Leasing  Company, LLC, James E. Mauer, Jeffrey J. Mauer, Christopher W. Mauer, and  Tamara L. Mauer (filed as Exhibit 2.1 to the Company’s Current Report of  Form 8-K, filed with the Securities and Exchange Commission on  December 15, 2006)                     |   | **     |
|            |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|            | 2.4                                                                          | First Amendment to Asset  Purchase Agreement dated December 11, 2006, among Pierre Newco I, LLC,  Pierre Newco II, LLC, Zartic, Inc., Zar Tran, Inc., JEM  Sales, Inc., MNM Leasing Company, LLC, James E. Mauer, Jeffrey J. Mauer,  Christopher W. Mauer, and Tamara L. Mauer (filed as Exhibit 2.2 to the  Company’s Current Report of Form 8-K, filed with the Securities and  Exchange Commission on December 15, 2006) |   | **     |
|            |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
| (3)(i)          | ARTICLES OF INCORPORATION                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|            |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|            | 3(i).1                                                                       | Articles of Restatement of  Pierre Foods, Inc., dated July 30, 2002 incorporating Restated  Articles of Incorporation (filed as Exhibit 3.3 to the Company’s  Quarterly Report on Form 10-Q, filed with the Securities and Exchange  Commission on October 15, 2002)                                                                                                                                                                  |   | **     |
|            |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|            | 3(i).2                                                                       | Articles of Merger of  Pierre Foods, Inc. and Pierre Merger Corp., dated June 30, 2004  (filed as Exhibit 3.2 to the Company’s Registration Statement on  Form S-4, filed with the Securities and Exchange Commission on  September 27, 2004)                                                                                                                                                                                         |   | **     |
|            |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|            | 3(i).3                                                                       | Articles of Organization of  Fresh Foods Properties, LLC, dated December 10, 1997 (filed as  Exhibit 3.4 to the Company’s Registration Statement on Form S-4,  filed with the Securities and Exchange Commission on September 27, 2004)                                                                                                                                                                                                    |   | **     |
|            |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
| (3)(ii)         | BYLAWS                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|            |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|            | 3(ii).1                                                                      | Amended and Restated Bylaws  of Pierre Foods, Inc., dated September 18, 2002 (filed as  Exhibit 3.3 to the Amendment No. 2 to the Company’s Registration  Statement on Form S-4, filed with the Securities and Exchange Commission  on February 3, 2005)                                                                                                                                                                         |   | **     |
|            |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
|            | 3(ii).2                                                                      | Operating Agreement of  Fresh Foods Properties, LLC (filed as Exhibit 3.5 to the Company’s  Registration Statement on Form S-4, filed with the Securities and Exchange  Commission on September 27, 2004)                                                                                                                                                                                                                                       |   | **     |
|            |                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |
| (4)             | INSTRUMENTS DEFINING THE  RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|                 |                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |        |        |  |

 

49

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|   | 4.1                                                          | Indenture, dated as of  June 30, 2004, between Pierre Merger Corp. and U.S. Bank National  Association, Trustee (filed as Exhibit 4.1 to the Company’s Registration  Statement on Form S-4, filed with the Securities and Exchange Commission  on September 27, 2004)                                                                                                                                                                |   | **     |
|--------|--------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
|   | 4.2                                                          | First Supplemental  Indenture, dated as of June 30, 2004, among Pierre Foods, Inc.,  Fresh Foods Properties, LLC and U.S. Bank National Association, Trustee  (filed as Exhibit 4.2 to the Company’s Registration Statement on  Form S-4, filed with the Securities and Exchange Commission on September 27,  2004)                                                                                                             |   | **     |
|   |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
|   | 4.3                                                          | Second Supplemental  Indenture, dated as of September 13, 2006, among Clovervale  Farms, Inc., Chefs Pantry, Inc., Clovervale  Transportation, Inc., Pierre Real Property, LLC, Pierre  Foods, Inc., the other Guarantors listed therein, and U.S. Bank National  Association, Trustee (filed as Exhibit 4.3 to the Company’s Annual Report on  Form 10-K, filed with the Securities and Exchange Commission on June 15,  2007) |   | **     |
|   |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
|   | 4.4                                                          | Third Supplemental  Indenture, dated as of January 5, 2007, among Zartic, LLC, Zar Tran,  LLC, Zartic Real Property, LLC, Zar Tran Real Property, LLC, Warfighter  Foods, LLC, Pierre Foods, Inc., the other Guarantors listed therein, and  U.S. Bank National Association, Trustee (filed as Exhibit 4.4 to the  Company’s Annual Report on Form 10-K, filed with the Securities and Exchange  Commission on June 15, 2007)                  |   | **     |
|   |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
|   | 4.5                                                          | Registration Rights  Agreement, dated June 30, 2004, among Pierre Foods, Inc. and Banc  of America LLC and Wachovia Capital Markets, LLC (filed as Exhibit 4.3  to the Company’s Registration Statement on Form S-4, filed with the  Securities and Exchange Commission on September 27, 2004)                                                                                                                                  |   | **     |
|   |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
| (10)   | MATERIAL CONTRACTS                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|   |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
|   | Management Contracts and  Compensatory Plans or Arrangements |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|   |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|   | 10.1                                                         | Third Amendment to  Incentive Agreement, dated as of May 11, 2004, between Pierre  Foods, Inc. and Norbert E. Woodhams (filed as Exhibit 10.13 to the  Company’s Annual Report on Form 10-K, filed with the Securities and  Exchange Commission on May 17, 2004)                                                                                                                                                                |   | **     |
|   |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
|   | 10.2                                                         | Employment Agreement dated  as of May 11, 2004 between Pierre Holding Corp. and Norbert E. Woodhams  (filed as Exhibit 10.15 to the Company’s Registration Statement on  Form S-4, filed with the Securities and Exchange Commission on September 27,  2004)                                                                                                                                                                         |   | **     |
|   |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
|   | 10.3                                                         | Letter Agreement dated  October 29, 2007 among Robert C. Naylor, Pierre Holding Corp. and Pierre  Foods, Inc. (filed as Exhibit 10.1 to the Company’s Current Report  on Form 8-K, filed with the Securities and Exchange Commission on November 8,  2007)                                                                                                                                                                      |   | **     |
|   |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
|   | 10.4                                                         | Employment Agreement dated  February 18, 2008 between Pierre Foods, Inc. and Cynthia S. Hughes  (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed with the Securities and Exchange Commission on February 15, 2008)                                                                                                                                                                                     |   |   |
|   |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
|   | 10.5                                                         | Employment Agreement dated  November 28, 2007 between Pierre Foods, Inc. and Anthony Schroder                                                                                                                                                                                                                                                                                                                                                       |   | *      |
|   |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
|   | 10.6                                                         | Pierre Foods, Inc.  Deferred Compensation Plan (filed as Exhibit 10.17 to the Company’s  Registration Statement on Form S-4, filed with the Securities and  Exchange Commission on September 27, 2004)                                                                                                                                                                                                                               |   | **     |
|   |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
|   | 10.7                                                         | Pierre Holding Corp. 2004  Stock Option Plan (filed as Exhibit 10.1 to the Company’s Quarterly  Report on Form 10-Q, filed with the Securities and Exchange Commission  on January 18, 2005)                                                                                                                                                                                                                                              |   | **     |
|   |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
|   | 10.8                                                         | Form of Option  Agreement (filed as Exhibit 10.2 to the Company’s Quarterly Report on  Form 10-Q, filed with the Securities and Exchange Commission on  January 18, 2005)                                                                                                                                                                                                                                                            |   | **     |
|   |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
|   | 10.9                                                         | Pierre Holding Corp. 2008  Restricted Stock Plan (filed as Exhibit 10.2 to the Company’s Current  Report on Form 8-K filed, filed with the Securities and Exchange  Commission on February 15, 2008)                                                                                                                                                                                                                                      |   | **     |
|   |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
|   | 10.10                                                        | Form of Restricted  Stock Agreement                                                                                                                                                                                                                                                                                                                                                                                                                      |   | *      |
|   |                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
|   | 10.11                                                        | Restricted Stock Agreement  dated July 12, 2005 between Pierre Holding Corp. and Scott W. Meader  (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K  filed with the Securities and Exchange Commission on July 15, 2005)                                                                                                                                                                                            |   | **     |

 

 

50

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|   | Other Material Contracts                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|   | 10.12                                                                                                                                                                             | Assignment and Assumption  and Subordination Agreement dated as of March 8, 2004, between Pierre  Foods, Inc. and PF Management, Inc. (filed as Exhibit 10.20 to  the Company’s Annual Report on Form 10-K, filed with the Securities and  Exchange Commission on March  9, 2004)                                                                                                                                                                                                                                                                                                                                                                                                         |   | ** |
|   |                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|   | 10.13                                                                                                                                                                             | Termination Agreement,  dated as of March 8, 2004, between Columbia Hill Aviation, LLC and  Pierre Foods, Inc. (filed as Exhibit 10.21 to the Company’s Annual  Report on Form 10-K, filed with the Securities and Exchange Commission  March 9, 2004)                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | ** |
|   |                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|   | 10.14                                                                                                                                                                             | Termination Agreement,  dated as of March 8, 2004, between PF Purchasing, LLC and Pierre  Foods, Inc. (filed as Exhibit 10.22 to the Company’s Annual Report  on Form 10-K, filed with the Securities and Exchange Commission  March 9, 2004)                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | ** |
|   |                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|   | 10.15                                                                                                                                                                             | Termination Agreement,  dated as of March 8, 2004, between PF Distribution, LLC and Pierre  Foods, Inc. (filed as Exhibit 10.23 to the Company’s Annual Report  on Form 10-K, filed with the Securities and Exchange Commission  March 9, 2004)                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | ** |
|   |                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|   | 10.16                                                                                                                                                                             | Credit Agreement, dated as  of June 30, 2004, among Pierre Merger Corp., Wachovia Bank, National  Association, as administrative and collateral agent, Wachovia Capital  Markets, LLC and Banc of America Securities LLC, as joint lead arrangers and  book-running managers, and a syndicate of banks, financial institutions and  other institutional lenders party thereto (filed as Exhibit 10.14 to the  Registration Statement on Form S-4, filed with the Securities and  Exchange Commission on September 27, 2004)                                                                                                                                                                              |   | ** |
|   |                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|   | 10.17                                                                                                                                                                             | Amendment No. 1 to  Credit Agreement, dated as of April 3, 2006, among Pierre  Foods, Inc., the Lenders, and Wachovia Bank, National Association, as  Administrative Agent (filed as Exhibit 10.1 to the Company Current  Report on Form 8-K, filed with the Securities and Exchange Commission on  April 7, 2006)                                                                                                                                                                                                                                                                                                                                                                             |   | ** |
|   |                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|   | 10.18                                                                                                                                                                             | Amendment No. 2 dated  August 21, 2006 to the Credit Agreement dated June 30, 2004, among  Pierre Foods, Inc., the Lenders, and Wachovia Bank, National  Association, as Administrative and Collateral Agent, Wachovia Capital  Markets, LLC and Banc of America Securities LLC, as joint lead arrangers and  book-running managers, as amended by Amendment No. 1 dated April 3,  2006 (filed as Exhibit 10.1 to the Company Current Report on  Form 8-K, filed with the Securities and Exchange Commission on  August 22, 2006)                                                                                                                                               |   | ** |
|   |                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|   | 10.19                                                                                                                                                                             | Amendment No. 3 dated  December 11, 2006 to the Credit Agreement dated June 30, 2006 among  Pierre Merger Corp., Wachovia Bank, National Association, as administrative  and collateral agent, Wachovia Capital Markets, LLC, and Bank of America  Securities, LLC, as joint lead arrangers and book-running managers, and a  syndicate of banks, financial institutions and other institutional lenders  party thereto, as amended by Amendment No. 1 dated April 3, 2006  and Amendment No. 2 dated August 21, 2006 (filed as  Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed  with the Securities and Exchange Commission on January 16, 2007) |   | ** |
|   |                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|   | 10.20                                                                                                                                                                             | Amendment No. 4 and  Waiver No. 2 dated October 10, 2007 to the Credit Agreement dated  June 30, 2004 among Pierre Foods, Inc., the Lenders listed therein,  Wachovia Bank, National Association, and Wachovia Bank, National Association,  as Administrative Agent (filed as Exhibit 10.1 to the Company’s Current  Report on Form 8-K filed with the Securities and Exchange Commission on  October 11, 2007)                                                                                                                                                                                                                                                                 |   | ** |
|   |                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|   | 10.21                                                                                                                                                                             | Amended and Restated Tax  Sharing and Indemnification Agreement, dated as of May 11, 2004, among  PF Management, Inc., the PF Management, Inc. Shareholders, David R.  Clark as Shareholders Agent and Pierre Holding Corp. (filed as  Exhibit 10.18 to the Registration Statement on Form S-4, filed with  the Securities and Exchange Commission on September 27, 2004)                                                                                                                                                                                                                                                                                                                      |   | ** |
|   |                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| (12)   | CALCULATION OF RATIO OF  EARNINGS TO FIXED CHARGES                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | *      |
|   |                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| (14)   | CODE  OF ETHICS (filed as Exhibit 14 to the Company’s Quarterly Report on  Form 10-Q   filed with the Securities and Exchange Commission on January 17, 2006) |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | **     |
|   |                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| (21)   | SUBSIDIARIES OF THE  REGISTRANT                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|   |                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
|   | 21                                                                                                                                                                                | Subsidiaries of Pierre  Foods, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | * |
|   |                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |
| (31)   | RULE  13a-14(a)/15(d)-14(a) CERTIFICATIONS                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |

 

51

----

 
|   | 31.1                              | Rule 13a-14(a) Certification  of Chief Executive Officer of the Company                                                  |   | *      |
|--------|-----------------------------------|------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |                              |                                                                                                                               |   |   |
|   | 31.2                              | Rule 13a-14(a) Certification  of Chief Financial Officer of the Company                                                  |   | *      |
|   |                              |                                                                                                                               |   |   |
|   | 31.3                              | Rule 13a-14(a) Certification  of Vice President, Finance of the Company                                                  |   | *      |
|   |                              |                                                                                                                               |   |   |
| (32)   | SECTION 1350  CERTIFICATIONS |                                                                                                                               |   |
|   | 32                                | Section 1350  Certification of Chief Executive Officer, Chief Financial Officer, and Vice  President, Finance, of the Company |   | *      |

 

 

----

*       Filed herewith.

 

**     Indicates that Exhibit is incorporated by reference in this report from aprevious filing with the Commission.

 

52

----

 

**PIERRE FOODS, INC.**

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING  FIRM                                                                                       |   | F-2    |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                           |   |   |
| CONSOLIDATED FINANCIAL STATEMENTS:                                                                                                             |   |   |
|                                                                                                                                           |   |   |
| Consolidated  Balance Sheets—March 1, 2008 and March 3, 2007                                                                    |   | F-3    |
|                                                                                                                                           |   |   |
| Consolidated  Statements of Operations—for the years ended March 1, 2008, March 3, 2007, and March 4,  2006                |   | F-4    |
|                                                                                                                                           |   |   |
| Consolidated  Statements of Shareholder’s Equity—for the years ended March 1, 2008, March 3, 2007, and March 4,  2006 |   | F-5    |
|                                                                                                                                           |   |   |
| Consolidated Statements of Cash Flows—for the years  ended March 1, 2008,  March 3, 2007, and March 4, 2006                |   | F-6    |
|                                                                                                                                           |   |   |
| Notes to Consolidated Financial Statements                                                                                                     |   | F-7    |

 

F-1

----

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors andShareholder of

Pierre Foods, Inc.

Cincinnati, Ohio

 

We have audited theaccompanying consolidated balance sheets of Pierre Foods, Inc. andsubsidiaries (the “Company”) as of March 1, 2008 and March 3, 2007,and the related consolidated statements of operations, shareholder’s equity,and cash flows for the years ended March 1, 2008, March 3, 2007, and March 4,2006.  These financial statements are theresponsibility of the Company’s management.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  The Company isnot required to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting.  Our audits included consideration ofinternal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of the Company at March 1, 2008 and March 3, 2007,and the results of its operations and its cash flows for the years ended March 1,2008, March 3, 2007, and March 4, 2006 in conformity with accountingprinciples generally accepted in the United States of America.

 

The accompanying consolidatedfinancial statements for the year ended March 1, 2008 have been preparedassuming that the Company will continue as a going concern.  However, as discussed in Note 8 to theconsolidated financial statements, the Company is currently in default underits credit agreement and has been unable to negotiate an amendment with its lender.  There can be no assurance that the Companycan obtain additional financing on terms acceptable to it, if at all.  Additionally, there can be no assurance thatthe Company will be able to realize its assets and discharge its liabilities inthe normal course of business and avoid seeking the protection of applicablefederal and state bankruptcy laws.  Thesematters raise substantial doubt about the Company’s ability to continue as agoing concern. Management’s plans concerning these matters are also discussedin Note 1 to the consolidated financial statements. The consolidated financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

 

 
| /s/ DELOITTE &  TOUCHE LLP |
|-------------------------------------|
| Cincinnati, Ohio                    |
| June 16, 2008                  |

 

F-2

----

 

**PIERRE FOODS, INC.**

 

**CONSOLIDATEDBALANCE SHEETS**

**(in thousands, except share data)**

 
| ** **                                                                                                                     | ** ** | **March 1,** | ** ** | **March 3,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                                                                     | ** ** | **2008**          | ** ** | **2007**          | ** ** |
|                                                                                                                           |       |              |       |              |       |
| **ASSETS**                                                                                                                     |       |              |       |              |       |
| CURRENT ASSETS:                                                                                                                |       |              |       |              |       |
| Cash and cash equivalents                                                                                                      |       | $                 | 5,561      |              | $          | 89 |   |
| Accounts receivable, net                                                                                                       |       | 46,421            |       | 46,139            |       |
| Inventories                                                                                                                    |       | 64,686            |       | 68,496            |       |
| Refundable income taxes                                                                                                        |       | 6,785             |       | 4,613             |       |
| Deferred income taxes                                                                                                          |       | 14,076            |       | 5,159             |       |
| Assets held for sale                                                                                                           |       | 4,048             |       | —            |       |
| Prepaid expenses and other current assets                                                                                      |       | 4,910             |       | 5,553             |       |
| Total current assets                                                                                                           |       | 146,487           |       | 130,049           |       |
|                                                                                                                           |       |              |       |              |       |
| PROPERTY, PLANT, AND EQUIPMENT, NET                                                                                            |       | 80,360            |       | 98,560            |       |
| OTHER ASSETS:                                                                                                                  |       |              |       |              |       |
| Other intangibles, net                                                                                                         |       | 68,162            |       | 139,551           |       |
| Goodwill                                                                                                                       |       | 43,938            |       | 218,222           |       |
| Deferred loan origination fees                                                                                                 |       | 7,111             |       | 8,267             |       |
| Other                                                                                                                          |       | 3,400             |       | 5,181             |       |
| Total other assets                                                                                                             |       | 122,611           |       | 371,221           |       |
| Total Assets                                                                                                                   |       | $                 | 349,458    |              | $          | 599,830 |   |
|                                                                                                                           |       |              |       |              |       |
| **LIABILITIES AND SHAREHOLDER’S EQUITY  (DEFICIT)**                                                                       |       |              |       |              |       |
| CURRENT LIABILITIES:                                                                                                           |       |              |       |              |       |
| Current installments of long-term debt                                                                                         |       | $                 | 367,534    |              | $          | 1,558 |   |
| Trade accounts payable                                                                                                         |       | 22,957            |       | 20,567            |       |
| Accrued payroll and payroll taxes                                                                                              |       | 7,902             |       | 7,116             |       |
| Accrued interest                                                                                                               |       | 2,394             |       | 5,569             |       |
| Accrued promotions                                                                                                             |       | 6,058             |       | 3,278             |       |
| Accrued taxes (other than income and  payroll)                                                                                 |       | 999               |       | 1,096             |       |
| Accrued interest-rate swap liability                                                                                           |       | 6,866             |       | —            |       |
| Other accrued liabilities                                                                                                      |       | 6,658             |       | 3,111             |       |
| Total current liabilities                                                                                                      |       | 421,368           |       | 42,295            |       |
| LONG-TERM DEBT, less current installments                                                                                      |       | 992               |       | 357,286           |       |
| DEFERRED INCOME TAXES                                                                                                          |       | 14,076            |       | 45,662            |       |
| OTHER LONG-TERM LIABILITIES                                                                                                    |       | 4,853             |       | 4,767             |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                  |       | —            |       | —            |       |
| Total Liabilities                                                                                                              |       | 441,289           |       | 450,010           |       |
|                                                                                                                           |       |              |       |              |       |
| SHAREHOLDER’S EQUITY (DEFICIT):                                                                                           |       |              |       |              |       |
| Common stock - Class A, 100,000 shares  authorized, issued, and outstanding at March 1, 2008 and March 3,  2007 |       | 150,199           |       | 150,188           |       |
| Accumulated deficit                                                                                                            |       | (242,030          | )          | (368              | )          |
| Total Shareholder’s Equity (Deficit)                                                                                      |       | (91,831           | )          | 149,820           |       |
| Total Liabilities and Shareholder’s Equity  (Deficit)                                                                     |       | $                 | 349,458    |              | $          | 599,830 |   |

 

See accompanying notes toconsolidated financial statements.

 

F-3

----

 

**PIERRE FOODS, INC.**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(in thousands, except share and per share data)**

 
| ** **                                                                     | ** ** | **Fiscal 2008**           | ** ** | **Fiscal 2007**           | ** ** | **Fiscal 2006**           | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                                                     | ** ** | **For the 52-Weeks** | ** ** | **For the 52-Weeks** | ** ** | **For the 52-Weeks** | ** ** |
| ** **                                                                     | ** ** | **Ended**                      | ** ** | **Ended**                      | ** ** | **Ended**                      | ** ** |
| ** **                                                                     | ** ** | **March 1, 2008**    | ** ** | **March 3, 2007**    | ** ** | **March 4, 2006**    | ** ** |
|                                                                           |       |                           |       |                           |       |                           |       |
| REVENUES, NET:                                                                 |       | $                              | 643,270    |                           | $          | 487,843                        |       | $ | 431,633 |   |
|                                                                           |       |                           |       |                           |       |                           |       |
| COSTS AND EXPENSES:                                                            |       |                           |       |                           |       |                           |       |
| Cost of goods sold                                                             |       | 497,214                        |       | 344,164                        |       | 309,274                        |       |
| Selling, general, and administrative  expenses                                 |       | 126,379                        |       | 85,404                         |       | 67,839                         |       |
| Impairment of goodwill, other intangible  assets, and other non-current assets |       | 222,377                        |       | —                         |       | —                         |       |
| Impairment of fixed assets                                                     |       | 6,925                          |       | —                         |       | —                         |       |
| (Gain) loss on disposition of property,  plant, and equipment, net             |       | 402                            |       | (2                             | )          | 6                              |       |
| Depreciation and amortization                                                  |       | 36,560                         |       | 30,368                         |       | 30,638                         |       |
| Total costs and expenses                                                       |       | 889,857                        |       | 459,934                        |       | 407,757                        |       |
| OPERATING INCOME (LOSS)                                                        |       | (246,587                       | )          | 27,909                         |       | 23,876                         |       |
| INTEREST EXPENSE AND OTHER INCOME:                                             |       |                           |       |                           |       |                           |       |
| Interest expense                                                               |       | (42,256                        | )          | (25,377                        | )          | (22,331                        | )          |
| Other income                                                                   |       | 490                            |       | 115                            |       | 152                            |       |
| Interest expense and other income, net                                         |       | (41,766                        | )          | (25,262                        | )          | (22,179                        | )          |
|                                                                           |       |                           |       |                           |       |                           |       |
| INCOME (LOSS) BEFORE INCOME TAX BENEFIT  (PROVISION)                           |       | (288,353                       | )          | 2,647                          |       | 1,697                          |       |
|                                                                           |       |                           |       |                           |       |                           |       |
| INCOME TAX BENEFIT (PROVISION)                                                 |       | 46,748                         |       | (847                           | )          | 465                            |       |
|                                                                           |       |                           |       |                           |       |                           |       |
| NET INCOME (LOSS)                                                              |       | $                              | (241,605   | )                              | $          | 1,800                          |       | $ | 2,162 |   |
|                                                                           |       |                           |       |                           |       |                           |       |
| NET INCOME (LOSS) PER COMMON SHARE - BASIC  AND DILUTED                        |       |                           |       |                           |       |                           |       |
|                                                                           |       |                           |       |                           |       |                           |       |
| Net income (loss) per common share - basic  and diluted                        |       | $                              | (2,416.05  | )                              | $          | 18.00                          |       | $ | 21.62 |   |
|                                                                           |       |                           |       |                           |       |                           |       |
| WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC  AND DILUTED                       |       | 100,000                        |       | 100,000                        |       | 100,000                        |       |

 

See accompanying notes to consolidatedfinancial statements.

 

F-4

----

 

**PIERREFOODS, INC.**

 

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDER’S EQUITY (DEFICIT)**

**(inthousands)**

 
| ** **                                                      | ** ** | **Common**       | ** ** | ** **   | ** ** | **Total**                 | ** ** |
|-----------------------------------------------------------------|------------|------------------|------------|--------------|------------|---------------------------|------------|
| ** **                                                      | ** ** | **Stock**        | ** ** | **Retained** | ** ** | **Shareholder’s**    | ** ** |
| ** **                                                      | ** ** | **Class A** | ** ** | **Deficit**  | ** ** | **Equity (Deficit)** | ** ** |
|                                                            |       |             |       |         |       |                      |       |
| BALANCE AT MARCH 5, 2005                                   |       | $                | 150,352    |         | (4,330     | )                         | $          | 146,022 |   |
| Net income                                                      |       | —           |       | 2,162        |       | 2,162                     |       |
| Expenses paid on behalf of parent                               |       | (126             | )          | —       |       | (126                      | )          |
|                                                            |       |             |       |         |       |                      |       |
| BALANCE AT MARCH 4, 2006                                   |       | 150,226          |       | (2,168       | )          | 148,058                   |       |
| Net income                                                      |       | —           |       | 1,800        |       | 1,800                     |       |
| Expenses paid on behalf of parent                               |       | (38              | )          | —       |       | (38                       | )          |
|                                                            |       |             |       |         |       |                      |       |
| BALANCE AT MARCH 3, 2007                                   |       | 150,188          |       | (368         | )          | 149,820                   |       |
| Net loss                                                        |       | —           |       | (241,605     | )          | (241,605                  | )          |
| Cumulative effect—FIN 48 adoption                          |       | —           |       | (57          | )          | (57                       | )          |
| Capital contributed (net of expenses paid  on behalf of parent) |       | 11               |       | —       |       | 11                        |       |
|                                                            |       |             |       |         |       |                      |       |
| BALANCE AT MARCH 1, 2008                                   |       | $                | 150,199    |         | $          | (242,030                  | )          | $ | (91,831 | ) |
|                                                                 |            |                  |            |              |            |                           |            |  |  |  |

 

See accompanying notes toconsolidated financial statements.

 

F-5

----

 

**PIERRE FOODS, INC.**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(in thousands)**

 
| ** **                                                                                | ** ** | **Fiscal 2008**           | ** ** | **Fiscal 2007**           | ** ** | **Fiscal 2006**           | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                                                                | ** ** | **For the 52-Weeks** | ** ** | **For the 52-Weeks** | ** ** | **For the 52-Weeks** | ** ** |
| ** **                                                                                | ** ** | **Ended**                      | ** ** | **Ended**                      | ** ** | **Ended**                      | ** ** |
| ** **                                                                                | ** ** | **March 1, 2008**    | ** ** | **March 3, 2007**    | ** ** | **March 4, 2006**    | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                      |       |                           |       |                           |       |                           |       |
| Net income (loss)                                                                         |       | $                              | (241,605   | )                              | $          | 1,800                          |       | $ | 2,162 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |       |                           |       |                           |       |                           |       |
| Depreciation and amortization                                                             |       | 36,560                         |       | 30,368                         |       | 30,638                         |       |
| Impairment of goodwill, other intangible  assets, and other non-current assets            |       | 222,377                        |       | —                         |       | —                         |       |
| Amortization of deferred loan origination  fees                                           |       | 2,371                          |       | 1,691                          |       | 1,652                          |       |
| Change in deferred income taxes                                                           |       | (39,858                        | )          | (5,577                         | )          | (2,320                         | )          |
| Change in fair value of interest rate swaps                                               |       | 6,866                          |       | —                         |       | —                         |       |
| (Gain) loss on disposition of property,  plant, and equipment, net                        |       | 402                            |       | (2                             | )          | 6                              |       |
| Impairment of fixed assets                                                                |       | 6,925                          |       | —                         |       | —                         |       |
| (Increase) decrease in other non-current  assets                                          |       | (20                            | )          | 355                            |       | (381                           | )          |
| Increase (decrease) in other long-term  liabilities                                       |       | (111                           | )          | (4,113                         | )          | (4,349                         | )          |
| Changes in operating assets and  liabilities, net of acquired assets and liabilities:     |       |                           |       |                           |       |                           |       |
| Receivables                                                                               |       | (497                           | )          | (2,650                         | )          | (43                            | )          |
| Inventories                                                                               |       | 5,994                          |       | (7,407                         | )          | (1,922                         | )          |
| Refundable income taxes, prepaid expenses,  and other current assets                      |       | (1,461                         | )          | (4,373                         | )          | 2,213                          |       |
| Trade accounts payable and other accrued  liabilities                                     |       | 5,140                          |       | 3,705                          |       | 808                            |       |
| Other assets                                                                              |       | —                         |       | —                         |       | —                         |       |
| Total adjustments                                                                         |       | 244,688                        |       | 11,997                         |       | 26,302                         |       |
| Net cash provided by operating activities                                                 |       | 3,083                          |       | 13,797                         |       | 28,464                         |       |
|                                                                                      |       |                           |       |                           |       |                           |       |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                      |       |                           |       |                           |       |                           |       |
| Net cash used in the Acquisition of Zartic                                                |       | (63                            | )          | (91,603                        | )          | —                         |       |
| Net cash provided by (used in) the  Acquisition of Clovervale                             |       | 711                            |       | (21,845                        | )          | —                         |       |
| Capital expenditures                                                                      |       | (7,772                         | )          | (8,658                         | )          | (7,150                         | )          |
| Proceeds from casualty insurance                                                          |       | 1,000                          |       | —                         |       | —                         |       |
| Proceeds from sale of property, plant, and  equipment                                     |       | 35                             |       | 23                             |       | —                         |       |
| Net cash used in investing activities                                                     |       | (6,089                         | )          | (122,083                       | )          | (7,150                         | )          |
|                                                                                      |       |                           |       |                           |       |                           |       |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                      |       |                           |       |                           |       |                           |       |
| Net borrowings (repayments) on revolving  credit agreement                                |       | 13,200                         |       | 800                            |       | (790                           | )          |
| Principal payments on long-term debt                                                      |       | (3,518                         | )          | (14,689                        | )          | (17,797                        | )          |
| Loan origination fees                                                                     |       | (1,215                         | )          | (2,627                         | )          | (60                            | )          |
| Additional borrowings on term loan                                                        |       | —                         |       | 124,000                        |       | —                         |       |
| Repayment of debt acquired in the  Acquisition of Clovervale                              |       | —                         |       | (1,612                         | )          | —                         |       |
| Capital contributions (return of capital to  parent), net                                 |       | 11                             |       | (38                            | )          | (126                           | )          |
| Net cash provided by (used in) financing  activities                                      |       | 8,478                          |       | 105,834                        |       | (18,773                        | )          |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                     |       | 5,472                          |       | (2,452                         | )          | 2,541                          |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF  YEAR                                             |       | 89                             |       | 2,541                          |       | —                         |       |
| CASH AND CASH EQUIVALENTS, END OF YEAR                                                    |       | $                              | 5,561      |                           | $          | 89                             |       | $ | 2,541 |   |

 

See accompanying notes to consolidated financialstatements.

 

F-6

----

 

**PIERRE FOODS, INC.**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**1.****                                     ****BASIS OF PRESENTATION ANDACQUISITIONS**

 

***Description ofBusiness. ***Pierre Foods, Inc. and its subsidiaries (the “Company” or “Pierre”)manufacture, market, and distribute high-quality, differentiated processed foodsolutions, focusing on formed, pre-cooked and ready-to-cook protein products,compartmentalized meals, and hand-held convenience sandwiches.   TheCompany’s products include, but are not limited to, beef, pork, poultry, bakeryitems, vegetables, fruits, cobblers, and peanut butter and jelly bars,sandwiches and cups.  Pierre offers comprehensive food solutions to itscustomers, including proprietary product development, special ingredients andrecipes, as well as custom packaging and marketing programs.  Pierre’s pre-cooked and ready-to-cookproteins include flamebroiled burger patties, homestyle meatloaf, chickenstrips, and boneless, barbecued pork rib products.  Pierre markets its pre-cooked andready-to-cook protein products to a broad array of customers that includerestaurant chains, schools, military, and other foodservice providers.

 

In this document, unless the context otherwiserequires, the term “Company” or “Pierre” refers to Pierre Foods, Inc. andits current and former subsidiaries.  The Company’s fiscal years ended March 1,2008, March 3, 2007, and March 4, 2006 are referred to as “fiscal2008”,  “fiscal 2007”, and “fiscal 2006”, respectively.

 

***Going Concern.***The Company’s independent registered publicaccounting firm has included an explanatory paragraph in its opinion thataccompanies these audited consolidated financial statements as of and for theyear ended March 1, 2008, indicating that the Company’s current liquidityposition raises substantial doubt about the Company’s ability to continue as agoing concern.  The Company is currentlyin default under its senior credit facility as a result of its failure, amongother things, to satisfy the financial covenants of its Credit Agreement as of March 1,2008.  These defaults entitle the lendersunder the senior credit facility, among other things, to declare all amountsoutstanding thereunder, together with accrued and unpaid interest, to beimmediately due and payable.  Anacceleration under the senior credit facility would constitute an event ofdefault under the indenture governing the Notes, entitling the indenturetrustee or the holders of at least 25% of the Notes outstanding to declare allamounts owing under the Notes to also be immediately due and payable.  In addition, the defaults under the Company’ssenior credit facility creates a default under the Company’s interest rate swapagreement.  On June 16, 2008, the Companyvoluntarily terminated its Swap Agreement. As a result of the earlytermination, approximately $4.0 million in net settlement payments will bepayable upon demand.  The Company doesnot currently have cash available to satisfy these obligations if they were tobe accelerated or payment demanded.

 

Furthermore, as a result of these defaults, theCompany is currently prohibited from borrowing under its revolving creditfacility.  On July 15, 2008, theCompany is required to make an interest payment on the Notes of $6.2 million,and unless the Company can restructure its existing senior indebtedness orsecure additional financing prior to that time, the Company may not havesufficient liquidity to make that payment and thereafter continue to satisfyits liquidity and working capital requirements. In light of current market conditions for debt financing, the Company’scurrent financial condition and the Company’s lack of significant unencumberedassets, the Company may not be able to secure additional financing and/orrestructure its current indebtedness.  Ifthe Company is unable to secure additional financing or restructure its currentindebtedness, it may be required to file for bankruptcy protection.

 

Also as a result of these defaults, the Company maybe unable to renew its letters of credit in place  to its insurance carrier for the underwritingof certain performance bonds and to its insurance carriers for outstanding andpotential workers’ compensation and general liability claims.  In order for the Company to continue itsparticipation in the USDA Commodity Program, which directly constitutesapproximately 8% of the Company’s annual net revenues, on or before July 1,2008, the Company must amend or provide a new letter of credit to secure aperformance bond required by the USDA. The Company may be required to fund all or a substantial portion of therequired letter of credit and may not be able to do so as a result of itscurrent financial situation and its inability to borrow additional funds underits credit facility.  The failure toparticipate in the USDA Commodity Program may also negatively impact sales tocustomers who purchase commercial products in addition to those that are partof the USDA Commodity Program.

 

The Company’s current financial condition and itsresulting uncertainty have been disruptive to the business.  Management of the Company has devotedsubstantial time and attention toaddressing the situation, thereby reducing its focus on operating thebusiness.  In addition, the Company’scurrent financial condition and its resulting uncertainty may also causeemployee attrition, vendors and suppliers to terminate their relationship withthe Company or to tighten credit; and could result in the loss of existingcustomers or the Company’s inability to attract new customers.  Any of these developments could have amaterial adverse effect on the Company’s business, operating results, financialcondition and liquidity.

 

The Company is currently exploring various strategicand restructuring alternatives, including a restructuring of its outstandingindebtedness.  If the Company is unableto successfully restructure its indebtedness, it may be unable to continue as agoing concern, which will be dependent, among other things, upon the Company’sability to return to profitable operations in the future and to obtain thenecessary financing to meet its obligations and pay its liabilities when theycome due.

 

The Company has recently taken and expects tocontinue to take actions to improve its liquidity, including implementation ofa number of initiatives designed to conserve cash, increase profitability, andoptimize the cost structure of the business to reflect the current marketenvironment, including:

 

·                  Supportingmore efficient inventory management by eliminating product duplication andunprofitable product lines, and implementing new strategies for increasedinventory turns.

 

·                  Strengtheningand streamlining the organizational structure to improve the Company’smarketing-driven product focus and exiting unprofitable business ventures.

 

·                  Enhancingthe customer experience through a new communication process that providesreal-time, cumulative feedback to the Company’s plants and quality controlstaff.

 

·                  Investingin new research programs to focus key resources on supporting profitable,multi-year initiatives for customers and employees.

 

F-7

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***Acquisition ofPierre.****  *On June 30, 2004, theshareholders of PF Management, Inc. (“PFMI”), the sole shareholder ofPierre, sold their shares of stock in PFMI (the “Acquisition of Pierre”) toPierre Holding Corp. (“Holding”), an affiliate of Madison Dearborn Partners,LLC (“MDP”).  As part of the same transaction, the Company merged withPierre Merger Corp., an affiliate of MDP, with the Company being the survivingcorporation following the merger.  Thefair value adjustments related to the Acquisition of Pierre, were pushed downto the Company from Holding, which primarily included adjustments in property,plant, and equipment, inventories, goodwill, other intangible assets andrelated deferred taxes.  The Company issued $125.0 million of 9-7/8%Senior Subordinated Notes due July 15, 2012 (the “Notes”) and entered intoa $190 million credit facility ($150 million term loan and $40 million revolvingcredit facility) (“Credit Agreement”).  The proceeds of the Notes,together with the equity contributions from MDP and certain members ofmanagement and borrowings under the Company’s credit facility, were used tofinance the Acquisition of Pierre and to repay outstanding indebtedness.

 

***Acquisition ofClovervale.***  On August 21, 2006, the Company acquiredall of the outstanding shares of stock of Clovervale Farms, Inc., two ofits subsidiaries, and certain of the real property used in its business (“Clovervale”).  The acquisition of Clovervale is referred toherein as the “Acquisition of Clovervale”.  The preliminary aggregatepurchase price was $22.8 million, which was paid in cash at the closing. After repayment of indebtedness and other post-closing adjustments, thepreliminary net purchase price was $21.8 million and was subject to apost-closing working capital adjustment.  Subsequent to finalizing suchadjustment, the net purchase price was $21.1 million.  Pierre funded the Acquisition of Clovervalethrough an amendment to its Credit Agreement (“Amendment No. 2”). See Note 8, “Financing Arrangements” herein for further discussion.  Pierre’s investment in Clovervale was basedon the expectation that such an investment would increase the Company’spresence with targeted customer channels and add capacity and productioncapabilities in order to increase product offerings.

 

Prior to the Acquisition of Clovervale, Clovervalewas a privately held company with operations in Amherst, Ohio and Easley, SouthCarolina. Clovervale manufactured and sold a variety of food items includingindividually proportioned entrees, vegetables, fruit, cobblers, peanut butterand jelly bars, sandwiches and cups, sherbets, apple sauce and other similarproducts through various customer channels including schools, military,hospitals, and senior citizen meal programs.  Since the Acquisition ofClovervale, the Company has integrated the operations of Clovervale with thoseof Pierre.  Facilities acquired in the Acquisition of Clovervale currentlyemploy approximately 122 people in Amherst, Ohio and Easley, SouthCarolina.  These facilities primarily manufacture products for sale anddistribution by Pierre.

 

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

 

The Acquisition of Clovervale was recorded under thepurchase method of accounting.  The net purchase price has been allocatedto assets acquired and liabilities assumed based on the estimated fair marketvalue at the date of the Acquisition of Clovervale.  The allocation of thenet purchase price is as follows:

 
| ** **                          | ** ** | **(in thousands)** | ** ** |
|-------------------------------------|------------|-------------------------|------------|
| Current  assets                     |       | $                       | 5,131      |   |
| Property,  plant, and equipment     |       | 12,877                  |       |
| Non-current  assets                 |       | 17                      |       |
| Goodwill                            |       | 6,032                   |       |
| Other  intangibles                  |       | 2,730                   |       |
| Debt and  other liabilities assumed |       | (4,409                  | )          |
| Deferred tax  liabilities           |       | (1,244                  | )          |
| Net assets  acquired                |       | $                       | 21,134     |   |

 

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

 

The initial allocation of the preliminary netpurchase price to specific assets and liabilities was based, in part, uponpreliminary appraisals, and was therefore subject to change.  During thequarter ended September 1, 2007, the Company finalized its allocation ofthe purchase price.

 

F-8

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***Acquisition ofZartic. ***On December 11, 2006, the Companyacquired substantially all of the assets of Zartic, Inc. and itsaffiliated distribution company, Zar Tran, Inc., and certain real propertyand other assets used in the businesses (collectively,  “Zartic”). The acquisition of Zartic is referred to herein as the “Acquisition of Zartic”. The preliminary aggregate purchase price was $94.0 million, plus the assumptionof certain liabilities, which was paid in cash at the closing and is subject tocertain post-closing adjustments.  After repayment of indebtedness andother post-closing adjustments, the preliminary net purchase price was $91.8million and was subject to additional post-closing adjustments. Subsequent to finalizing such adjustments, the net purchase price was $91.7million.  Pierre funded the Acquisitionof Zartic through an amendment to its Credit Agreement (“Amendment No. 3”).  See Note 8, “Financing Arrangements” hereinfor further discussion.  Pierre’sinvestment in Zartic was based on the expectation that such an investment wouldincrease the Company’s presence with targeted customer channels and addcapacity and production capabilities in order to increase product offerings.

 

Prior to the Acquisition of Zartic, Zartic was aprivately held company that manufactured, sold, delivered, and distributed avariety of food items including packaged beef, poultry, pork, and veal productsthrough its operations in Rome, Georgia, Cedartown, Georgia, and Hamilton,Alabama.  Subsequent to the Acquisition of Zartic, the Company hasintegrated the operations of Zartic with those of Pierre.  As of March 1,2008, facilities acquired in the Acquisition of Zartic employedapproximately 788 people at its main manufacturing facility in Rome,Georgia.  The Cedartown, Georgia manufacturing facility was closed February 8,2008, however, other facilities in Cedartown are currently used by Zar Tran, inaddition to being used for storage of equipment.  The Hamilton, Alabama facility was destroyedin a fire on July 14, 2007.  Facilities acquired in the Acquisitionof Zartic primarily manufacture products for sale and distribution by Pierre.

 

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

 

The Acquisition of Zartic was recorded under thepurchase method of accounting.  The preliminary net purchase price wasallocated to assets acquired and liabilities assumed based on the estimatedfair market value at the date of the Acquisition of Zartic.  The initialallocation of the preliminary net purchase price to specific assets and liabilitieswas based, in part, upon preliminary appraisals, and was therefore subject tochange.  During the fourth quarter of fiscal 2008, the Company finalizedits allocation of the net purchase price as follows:

 
| ** **                          | ** ** | **(in thousands)** | ** ** |
|-------------------------------------|------------|-------------------------|------------|
| Current  assets                     |       | $                       | 27,256     |   |
| Property,  plant, and equipment     |       | 29,809                  |       |
| Non-current  assets                 |       | 320                     |       |
| Goodwill                            |       | 22,139                  |       |
| Other  intangibles                  |       | 27,700                  |       |
| Debt and  other liabilities assumed |       | (15,558                 | )          |
| Net assets  acquired                |       | $                       | 91,666     |   |

 

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

 

***Unaudited Pro Forma Results***.******  ******The following tables present unauditedpro forma information for fiscal 2007, as if the Acquisition of Clovervale andthe Acquisition of Zartic had been completed at the beginning of fiscal 2007.

 
| ** **         | ** ** | **Fiscal 2007**    | ** ** |
|--------------------|------------|-------------------------|------------|
| ** **         | ** ** | **Actual**              | ** ** | **Pro Forma** | ** ** |
| ** **         | ** ** | **(in thousands)** | ** ** |
| Revenues           |       | $                       | 487,843    |   | $ | 623,621 |   |
|               |       |                    |       |   |   |
| Net income  (loss) |       | $                       | 1,800      |   | $ | (13,207 | ) |

 

These unaudited pro forma results, based onassumptions deemed appropriate by the Company’s management, have been preparedfor informational purposes only, and are not necessarily indicative of theamounts that would have resulted if the Company had acquired Clovervale andZartic at the beginning of fiscal 2007.  Purchase-related adjustments tothe results of operations include the effects on depreciation and amortization,interest expense, cost of goods sold, and income taxes.

 

F-9

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In addition to the purchase-related adjustments,included in these pro forma results are certain reclassifications of Clovervale’sand Zartic’s expenses, to be consistent with the classifications ofPierre.  These reclassifications include, among other things, thepresentation of various sales discounts previously reported by Clovervale asselling expenses, but more appropriately classified as a reduction of revenues.

 

Also included in these pro forma results are theelimination of interest expense related to Clovervale’s debt and Zartic’s debt,both of which were partially paid off in conjunction with the Acquisition ofClovervale and the Acquisition of Zartic, and will no longer be present in theCompany’s results of operations.  Included in these pro forma results isthe estimated interest expense for the debt incurred by the Company to financethe Acquisition of Clovervale and the Acquisition of Zartic.

 

**2.****                                     ****SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

***Principles ofconsolidation***. The accompanying consolidated financial statements include Pierre Foods, Inc.and subsidiaries.  All intercompanytransactions have been eliminated.

 

***Use of Estimates.**** *The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America (“GAAP”) requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period.  Significant accountingestimates include impairments recorded as a result of the Company’s analyses ofgoodwill, intangible assets and other long-lived assets, in addition toaccounting estimates of sales discounts and promotional allowances,sales-in-transit for the purpose of recognizing revenue and the related costsin the appropriate period, inventory reserves, insurance reserves, deferredincome tax assets and liabilities, including but not limited to valuationallowances, and useful lives assigned to intangible and fixed assets. Actual results could differ from those estimates.

 

***Fiscal year.***  TheCompany operates on a 52-week or 53-week fiscal year ending on the firstSaturday in March or if the last day of February is a Saturday, thelast day of February.  Each quarter of the fiscal year contains 13 weeksexcept for the infrequent fiscal years with 53 weeks.  The results forfiscal 2008, fiscal 2007, and fiscal 2006 contain 52 weeks.

 

***Cash and cashequivalents.***  For financial statement presentation purposes, the Company presents bookoverdrafts, principally outstanding checks in excess of cash on hand with thesame financial institution, as accounts payable.   As of March 1,2008, the Company had cash on hand of $11.6 million (of which $11.4 million washeld in accounts with the Company’s bank that is primarily responsible for itscash management), which was offset by outstanding checks of $6.0 million,resulting in a remaining net cash on hand balance of $5.6 million.  Theremaining cash balance represents cash on hand in excess of outstanding checks.  The Company considers all highly liquidinvestments purchased with an original maturity of three months or less to becash equivalents.  As of March 1, 2008, the Company had no cashequivalents.

 

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

 

***Inventories***. Inventories are stated at the lower of cost (first-in, first-out) ormarket.  The Company records reserves toreduce the carrying values of inventories to expected realizable value afterconsidering expected disposition of the inventory, and if applicable, expectedsales price and incremental costs to sell.

 

***Property, plant,and equipment***. Property, plant, and equipment are stated at cost or fair value at the date ofacquisition.  Expenditures for maintenance and repairs which do notsignificantly extend the useful lives of assets are charged to operationswhereas additions and betterments, including interest costs incurred duringconstruction, which was not material for any year presented, are capitalized.

 

Depreciation of property, plant and equipment isprovided over the estimated useful lives of the respective assets on thestraight-line basis.  Leasehold improvements are depreciated over theshorter of their estimated useful lives or the terms of the respectiveleases.  Property under capital leases is amortized over the terms of therespective leases.  Depreciation expense, along with amortization ofintangible assets, is recorded as a separate line item in the consolidatedstatements of operations.  Cost of goods sold and selling, general andadministrative expenses exclude depreciation expense.  Depreciationexpense excluded from cost of goods sold totaled approximately $10.8 million,$7.5 million, and $6.3 million during fiscal 2008, fiscal 2007, and fiscal2006, respectively.

 

F-10

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In accordance with SFAS 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” the Company evaluates therecoverability of property, plant, and equipment not held for sale by comparingthe carrying amount of the asset or group of assets against the estimatedundiscounted future cash flows expected to result from the use of the asset orgroup of assets and their eventual disposition. If the undiscounted future cash flows are less than the carrying valueof the asset or group of assets being evaluated, an impairment loss isrecorded.  The loss is measured as thedifference between the fair value and carrying value of the asset or group ofassets being evaluated.  Assets to bedisposed of are reported at the lower of the carrying amount or the fair valueless cost to sell.  The estimated fairvalue would be based on the best information available under the circumstances,including prices for similar assets or the results of valuation techniques,including the present value of expected future cash flows using a discount ratecommensurate with the risks involved. The Company performed an evaluation as of March 1, 2008 anddetermined an impairment of approximately $6.9 million existed.  See Note 5, “Property, Plant, and Equipment”herein for further discussion of this impairment.  No impairment occurred during fiscal 2007 orfiscal 2006.

 

***Goodwill and OtherIntangible Assets*****.*  ***In conjunction with the Acquisition of Pierre,the Acquisition of Clovervale, and the Acquisition of Zartic, the Company’smanagement performed valuations of the Company’s other intangible assets forfinancial reporting purposes.  Assetsidentified through each of these valuation processes included formulas,customer relationships, licensing agreements, non-compete agreements, andcertain trade names and trademarks.

 

In accordance with SFAS 142, the Company testsrecorded goodwill and intangibles with indefinite lives for impairment at leastannually.  As of March 1, 2008, theCompany performed the annual impairment review of goodwill and indefinite-livedintangible assets, and also assessed whether the indefinite-lived intangibleassets continue to have indefinite lives. As a result, the Company recognized impairment charges during fiscal2008 of $172.1 million and $1.0 million for goodwill and indefinite-livedintangible assets, respectively.  Noimpairments of goodwill or indefinite-lived intangible assets existed at March 3,2007 or March 4, 2006.

 

In addition, all other intangible assets with finitelives are reviewed for impairment in accordance with SFAS 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets” (“SFAS 144”).  The Company’s amortizable intangible assetsare amortized using primarily accelerated amortization methods, in addition tothe straight-line amortization method, in order to allocate expected benefitderived from the assets over the estimated useful life of such assets.  As of March 1, 2008, the Company performedthe annual impairment review of all other intangible assets with finite livesand determined an impairment existed. Such impairment resulted in the Company recognizing an impairment lossduring fiscal 2008 totaling $46.3 million. In addition, the Company recognized an impairment charge ofapproximately $3.0 million related to finite lived formulas developed for acustomer that the Company classifies as other non-current assets.  No impairment existed at March 3, 2007or March 4, 2006.  See Note 7, “Goodwilland Other Intangible Assets” for further discussion on such impairments.

 

As noted above, the impairment analyses relied onfinancial forecasts of income and cash flows that are attributable to theCompany’s reporting unit and indefinite-lived intangible assets and thendiscounted to present value at rates reflective of the Company’s cost ofcapital.  Future changes in the Company’s financial forecasts or cost ofcapital might adversely affect the value of the Company’s reporting unit orindefinite-lived intangible assets.  The Company will continue to performimpairment tests on an annual basis and on an interim basis, if certainconditions exist.

 

***Deferred LoanOrigination Fees***.  Deferred loan origination fees associatedwith the Company’s revolving credit facility and long-term debt are amortizedbased on the term of the respective agreements, except for those feesassociated with the Company’s Term loan under its credit facility, which areamortized based on the effective interest rate method.  All amortizationexpense related to deferred loan origination fees is included in interestexpense.

 

***Promotions***.  Promotional expenses associated withrebates, marketing promotions, and special pricing arrangements are recorded asa reduction of revenues or as selling expense at the time the sale isrecorded.  Certain of these expenses are estimated based on historicaltrends, expected future payments to be made under these programs, and expectedfuture customer deductions to be taken under these programs.  The Companybelieves the estimates recorded in the financial statements are reasonableestimates of the Company’s liability under these programs.

 

***Concentration ofCredit Risk and Significant Customer*****.**   Financial instruments that potentiallysubject the Company to concentrations of credit risk consist primarily of tradereceivables.  The Company performs periodic credit evaluations of itscustomers’ financial condition and generally does not require collateral. The Company encounters a certain amount of credit risk as a result of aconcentration of receivables among a few significant customers.  Sales tothe Company’s largest customer were approximately 11%, 14%, and 21% of netrevenues for fiscal 2008, fiscal 2007, and fiscal 2006, respectively. Accounts receivable at March 1, 2008 and March 3, 2007 includedreceivables from the Company’s largest customer totaling $3.0 million and $3.8million, respectively.

 

F-11

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***Stock-Options andStock Based Compensation*****.**  On June 30, 2004, Holding adopted a stock option plan, pursuant towhich the Board of Directors of Holding may grant options to purchase anaggregate of 163,778 shares of common stock of Holding.  Such options maybe granted to directors, employees and consultants of Holding and itssubsidiaries, including the Company.  At March 1, 2008, options topurchase a total of 91,628 shares of common stock of Holding had been issued tomembers of management of the Company (the “Options”) and 72,150 were reservedfor future issuance.  At March 3,2007, Options to purchase 126,219 shares had been issued to members ofmanagement of the Company and 37,559 were reserved for future issuance. All outstanding Options were granted at $10 per share and expire ten years fromthe date of grant.  A portion of each outstanding Option vests daily on apro-rata basis over a five-year period from the date of grant and the remainingportion of each outstanding Option vests seven years from the date of grant,subject to accelerated vesting based on the achievement of certain performancemeasures.

 

The Company treats the Options as stock-basedcompensation for employees of the Company.  Prior to fiscal 2007, aspermitted under GAAP, the Company accounted for the Options under the recognitionand measurement principles of Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”), and related Interpretations usingthe intrinsic value method.  Accordingly, no compensation expense wasrecognized for the stock option plan in the Company’s consolidated statementsof operations.

 

Effective March 5, 2006, as required for thefirst annual reporting period beginning after December 15, 2005 fornon-public companies (as defined in Statement of Financial Accounting StandardsNo. 123(R), “Share-Based Payment,” (“SFAS 123(R)”), the Company adoptedSFAS 123(R) using the prospective adoption method.  The new statementrequires compensation expense associated with share-based payments to employeesto be recognized in the financial statements based on their fair values. Upon the adoption of SFAS 123(R), because the Company had used the minimumvalue method prior to the adoption, the Company was required to apply theprovisions of the statement only prospectively for any newly issued, modifiedor settled award after the date of initial adoption.  During fiscal 2008,1,284 new Options were issued, and subsequently forfeited in fiscal 2008.  In addition, 34,591 Options were forfeited inconjunction with the retirement of one of the Company’s officers.  No new Options were issued, modified orsettled in fiscal 2007.  Upon the adoption of SFAS 123(R) the proforma effect of fair value accounting for prior periods presented are no longerpresented as the Company used the minimum value method.

 

The Company’s managementperformed a valuation analysis of the Options.  The estimated totalstock-based employee compensation expense was determined using theBlack-Scholes-Merton option pricing model with the following weighted averageassumptions:

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

 

In addition, effective January 10, 2008, theBoard of Directors of Holding adopted a restricted stock plan pursuant to whichcommon shares of Holding may be issued to officials, employees and consultantsof the Company, subject to vesting restrictions.  A total of 200,000 restricted shares may beissued under such plan.

 

***Derivative Instruments. ***The Company accounts for derivative financial instruments in accordancewith SFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities,” as amended (“SFAS 133”). SFAS 133 requires that all derivatives be recorded in the balance sheetas either assets or liabilities at fair value. Accounting for changes in the fair value of a derivative depends onwhether it qualifies and has been designated as part of a hedging relationship.  For derivatives that qualify and have beendesignated as hedges for accounting purposes, changes in fair value have no netimpact on earnings, to the extent the derivative is considered perfectlyeffective in achieving an offsetting change in fair value or cash flowsattributable to the risk being hedged, until the hedged item is recognized inearnings (commonly referred to as the “hedge accounting” method).  Effective October 29, 2007 and August 16,2007, the Company entered into interest rate swap agreements (the “Swaps”) toreduce its exposure to interest rate fluctuations on portions of its term loanwith the objective of minimizing the impact of interest rate fluctuations andstabilizing cash flows.  The Company’sderivative financial instruments did not qualify for hedge accounting and thechange in fair value is recorded as interest expense.  See Note 14, “Interest Rate Swaps” herein forfurther discussion.

 

***Advertising Costs.***   The Company expenses advertising costsas incurred.  Advertising expense for fiscal 2008, fiscal 2007, and fiscal2006 was approximately $538,000, $465,000, and $428,000, respectively.

 

***Research and Development.*** The Company expenses research and developmentcosts as incurred.  Research and development expense for each of fiscal2008 and fiscal 2007 was approximately $1.8 million.  Research and development expense in fiscal2006 was approximately $1.9 million.

 

***Income Taxes.*** Effective March 4, 2007, the Company adopted FASB Interpretation No. 48,“**Accountingfor Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109”**(“FIN 48”), which requires that the financial statement effectsof a tax position taken or expected to be taken in a tax return be recognizedin the financial statements when it is more likely than not, based on thetechnical merits, that the position will be sustained upon examination.

 

F-12

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Therecognition and measurement guidelines of FIN 48 were applied to all of theCompany’s material tax positions as of March 4, 2007, resulting in anincrease in non-current tax liabilities of $809,000, including accruedinterest.  Of this amount, $57,000 was treated as an increase to beginningretained deficit for the cumulative effect of change in accounting principle. The total amount of unrecognized income tax benefits as of March 4, 2007was $809,000, of which $57,000 would affect the Company’s effective income taxrate if recognized.  The difference between the total amount ofunrecognized tax benefits and the amount that impacts the effective income taxrate relates primarily to deferred tax benefits for temporary differencesbetween book and tax return items.  SeeNote 9, “Income Taxes” for discussion of the impact of FIN 48 during fiscal2008.

 

TheCompany’s continuing policy is to recognize interest and penalties related toincome tax matters as tax expense.  The amount of interest and penaltyexpense recorded for fiscal 2008 and fiscal 2007 was not material.  The Company regularly evaluates its ability torealize existing deferred tax assets and a valuation allowance is recorded tothe extent that it is more likely than not that all or a portion of existingdeferred tax assets will not be realized.

 

**Distribution Expense.**  The Company expenses distribution costs as incurred.  Thesecosts include warehousing, fulfillment and freight costs, and are included inselling, general and administrative expense.  Distribution expenseincluded in operations for fiscal 2008, fiscal 2007, and fiscal 2006 wasapproximately $58.4 million, $37.5 million, and $27.7 million, respectively.

 

**Self-insurance.** The Company is self-insured for certain employee medical benefits and workers’compensation benefits.  The Company purchases stop-loss coverage in orderto limit its exposure to any significant level of employee medical and workers’compensation claims.  Self-insurance expenses are accrued based onestimates of the aggregate liability for uninsured claims incurred usinghistorical claims experience.  In fiscal2008, the workers’ compensation reserve was based on a discount rate of 5.0%which is not significantly different from the risk free interest rate as ofMarch 1, 2008.

 

**Business Combinations.**  Acquisitions entered into by the Company are accounted for usingthe purchase method of accounting.  This method requires management tomake significant estimates.  Management must allocate the purchase priceof the acquired entity based on the fair value of the consideration paid or thefair value of the net assets acquired, whichever is more clearly evident. The purchase price is then allocated to the assets acquired and liabilitiesassumed based on their estimated fair values at the acquisition date.  Inaddition, management must identify and estimate the fair values of intangibleassets that should be recognized as assets apart from goodwill.

 

***New Accounting Pronouncements*****.**  In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements” (“SFAS 157”).  The objective of SFAS 157 is to definefair value, establish a framework for measuring fair value, and expanddisclosures about fair value measurement.  SFAS 157 is effective forannual fiscal years beginning after November 15, 2007 and interim periodswithin these fiscal years.  Two FASB Staff Positions (“FSP”) on SFAS 157were subsequently issued.  On February 12,2007, FSP No. 157-2 delayed the effective date of SFAS 157 fornon-financial assets and non-financial liabilities that are recognized ordisclosed at fair value in the financial statements on a nonrecurring basis.  This FSP is effective for fiscal yearsbeginning after November 15, 2008. On February 14, 2007, FSP No. 157-1 excluded FASB No. 13,“Accounting for Leases,” and other accounting pronouncements that address fairvalue measurements for purposes of lease classification or measurement underSFAS No. 13 from the scope of SFAS 157. However, this scope exception does not apply to assets acquired andliabilities assumed in a business combination that are required to be measuredat fair value under FASB No. 141R, “Business Combinations.”  This FSP is effective upon initial adoptionof SFAS 157.  The Company is currentlyassessing the impact of SFAS 157 on the Company’s consolidated financialstatements.

 

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS159”).  SFAS 159 permits entities to choose to measure many financialinstruments and certain other items at fair value that are not currentlyrequired to be measured at fair value.  The objective of SFAS 159 is toimprove financial reporting by providing entities with the opportunity tomitigate volatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions.  SFAS 159 is effective for the first fiscal year that beginsafter November 15, 2007.  The Company is currently assessing theimpact of SFAS 159 on the Company’s consolidated financial statements.

 

In December 2007, the FASB issued SFAS 141R, “Business Combinations”.  SFAS 141R modifies the accounting forbusiness combinations by requiring that acquired assets and assumed liabilitiesbe recorded at fair value, contingent consideration arrangements be recorded atfair value on the date of the acquisition, and pre-acquisition contingencieswill generally be accounted for in purchase accounting at fair value.  The pronouncement also requires thattransaction costs be expensed as incurred, acquired research and development becapitalized as an indefinite-lived intangible asset, and the requirements ofSFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities” be met at the acquisition date in order to accrue for arestructuring plan in purchase accounting. SFAS 141R is required to be adopted prospectively, other than anexception for income taxes, effective for fiscal years beginning after December 15,2008.  The Company has not yet assessedthe impact of SFAS 141R on the Company’s consolidated financial statements.

 

F-13

----

 

In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements—an amendment ofARB No. 51” (“SFAS 160”).  SFAS 160modifies the reporting for noncontrolling interest in the balance sheet andminority interest income/expense in the income statement.  The pronouncement also requires thatincreases and decreases in the noncontrolling ownership interest amount beaccounted for as equity transactions. SFAS 160 is required to be adopted prospectively, with limitedexceptions, effective for fiscal years beginning on or after December 15,2008.  The Company has not yet assessedthe impact of SFAS 160 on the Company’s consolidated financial statements.

 

**3.****                                     ****ACCOUNTS RECEIVABLE**

 

Accountsreceivable consist of the following:

 
| ** **                                                                                                                                        | ** ** | **March 1, 2008** | ** ** | **March 3, 2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **(in thousands)**                                                                                                                           | ** ** | **(in thousands)**     | ** ** |
| Accounts  receivable:                                                                                                                             |       |                        |       |                        |       |
| Trade accounts receivable (less allowance  for doubtful receivables of $571 and $573 at March 1, 2008 and  March 3, 2007, respectively) |       | $                           | 45,218     |                        | $          | 45,017 |   |
| Other  receivables                                                                                                                                |       | 1,203                       |       | 1,122                       |       |
| Total  accounts receivable                                                                                                                        |       | $                           | 46,421     |                        | $          | 46,139 |   |

 

The following is a summary of activity in the allowance for doubtfulreceivables for fiscal 2008, fiscal 2007, and fiscal 2006.

 
| ** **  | ** ** | **Balance  Beginning of the  Period** | ** ** | **Additions Due  to Acquisition  of Clovervale  and  Acquisition of  Zartic** | ** ** | **Additions  Charged to  Costs and  Expenses** | ** ** | **Deduction  Amounts  Charged Off-Net** | ** ** | **Balance  End of the  Period** | ** ** |
|-------------|------------|-------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------|------------|
| ** **  | ** ** | **(in thousands)**                              | ** ** |
|        |       |                                            |       |                                                                                              |       |                                                     |       |                                         |       |                                      |       |
| Fiscal 2008 |       | $                                               | 573        |                                                                                              | $          | —                                                   |       | $                                            | 536        |                                      | $          | 538 |   | $ | 571 |   |
|        |       |                                            |       |                                                                                              |       |                                                     |       |                                         |       |                                      |       |
| Fiscal 2007 |       | $                                               | 308        |                                                                                              | $          | 324                                                      |       | $                                            | 246        |                                      | $          | 305 |   | $ | 573 |   |
|        |       |                                            |       |                                                                                              |       |                                                     |       |                                         |       |                                      |       |
| Fiscal 2006 |       | $                                               | 280        |                                                                                              | $          | —                                                   |       | $                                            | 107        |                                      | $          | 79 |   | $ | 308 |   |

 

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

 

Asummary of inventories by major classification is as follows:

 
| ** **       | ** ** | **March 1, 2008** | ** ** | **March 3, 2007** | ** ** |
|------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **       | ** ** | **(in thousands)**     | ** ** |
|             |       |                        |       |                        |       |
| Finished  Goods  |       | $                           | 50,421     |                        | $          | 54,090 |   |
| Raw  materials   |       | 14,258                      |       | 14,122                      |       |
| Work in  process |       | 7                           |       | 284                         |       |
| Total            |       | $                           | 64,686     |                        | $          | 68,496 |   |

 

F-14

----

 

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

 

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

 
| ** **                                       | ** ** | **Estimated  Useful Life** | ** ** | **March 1, 2008** | ** ** | **March 3, 2007** | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **(in thousands)**         | ** ** |
| ** **                                       | ** ** | ** **                      | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Land                                             |       | n/a                             |       | $                           | 3,782      |                        | $          | 3,782 |   |
| Land  improvements                               |       | 5-20 years                      |       | 43                          |       | 43                          |       |
| Buildings                                        |       | 20-40 years                     |       | 34,137                      |       | 34,135                      |       |
| Machinery  and equipment                         |       | 5-15 years                      |       | 67,033                      |       | 66,959                      |       |
| Machinery  and equipment under capital leases    |       | 5-15 years                      |       | 2,131                       |       | 2,114                       |       |
| Furniture  and fixtures                          |       | 3-15 years                      |       | 6,919                       |       | 5,449                       |       |
| Furniture  and fixtures under capital leases     |       | 3-15 years                      |       | 50                          |       | 50                          |       |
| Automotive  equipment                            |       | 2-5 years                       |       | 1,258                       |       | 1,616                       |       |
| Automotive  equipment under capital leases       |       | 2-5 years                       |       | 3,295                       |       | 3,295                       |       |
| Construction  in progress                        |       | n/a                             |       | 246                         |       | 2,323                       |       |
| Total                                            |       |                            |       | 118,894                     |       | 119,766                     |       |
| Less:  accumulated depreciation and amortization |       |                            |       | 34,486                      |       | 21,206                      |       |
|                                             |       |                            |       | 84,408                      |       | 98,560                      |       |
| Less: net  assets held for sale (1)              |       |                            |       | 4,048                       |       | —                      |       |
| Property,  plant, and equipment, net             |       |                            |       | $                           | 80,360     |                        | $          | 98,560 |   |

 

----

(1)                                  See Note 6, “Assets Held for Sale” for furtherinformation.

 

In accordance with SFAS 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” the Company evaluates therecoverability of property, plant, and equipment to be held and used bycomparing the carrying amount of the asset or group of assets against theestimated undiscounted future cash flows expected to result from the use of theasset or group of assets and their eventual disposition.  If the undiscounted future cash flows areless than the carrying value of the asset or group of assets being evaluated,an impairment loss is recorded.  The lossis measured as the difference between the fair value and carrying value of theasset or group of assets being evaluated. Assets to be disposed of are reported at the lower of the carryingamount or the fair value less cost to sell. The estimated fair value would be based on the best informationavailable under the circumstances, including prices for similar assets or theresults of valuation techniques, including the present value of expected futurecash flows using a discount rate commensurate with the risks involved.  The Company performed an evaluation as of March 1,2008 and determined an impairment of approximately $6.9 million existed.  No impairment occurred during fiscal 2007 orfiscal 2006.

 

**6.****                                     ****ASSETS HELD FOR SALE**

 

Assets held for sale arerecorded at the lower of carrying value or fair value and adjusted if necessaryin accordance with SFAS 144.  Thefollowing table summarizes such assets at March 1, 2008:

 
| ** **                                        | ** ** | **March 1, 2008** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | **(in thousands)**     | ** ** |
| Rome,  Georgia administrative office building (1) |       | $                           | 925        |   |
| Rome,  Georgia furniture and fixtures (1)         |       | 94                          |       |
| Cedartown, Georgia depot/administrative  offices  |       | 434                         |       |
| Cedartown,  Georgia manufacturing building (2)    |       | 4,210                       |       |
| Cedartown,  Georgia manufacturing equipment (2)   |       | 7,055                       |       |
| Total cost                                        |       | 12,718                      |       |
|                                              |       |                        |       |
| Less:  accumulated depreciation                   |       | 1,788                       |       |
| Less:  impairment of assets (3)                   |       | 6,882                       |       |
|                                              |       |                        |       |
| Net assets  held for sale                         |       | $                           | 4,048      |   |

 

----

(1)           Acquired as part of the Acquisition of Zartic,however, subsequent to such acquisition, functions previously performed atthese offices were moved to the Company’s corporate offices in Cincinnati, Ohioor to one of its other manufacturing facilities.  Effective May 12, 2008, theadministrative office building located in Rome, Georgia was sold.  Undera temporary occupancy letter agreement, the Company has the right to occupyportions of the building through August 10, 2008 at no charge exceptfor the utility expenses.  See furtherdiscussion in Note 21, “Subsequent Events,” herein.

 

F-15

----

 

(2)           Acquired as part of the Acquisition of Zartic,however, as disclosed by the Company in a Current Report on Form 8-K filedwith the SEC on February 8, 2008, the Company closed the mainmanufacturing facility in Cedartown, Georgia effective February 8,2008.  In conjunction with this plantclosing, the Company is selling equipment that will not be moved to and used inone of its other manufacturing facilities.

 

(3)           As a result of an expectation that it is more likely than not thatcertain assets of the Company will be disposed of prior to the end of theireconomic useful lives, the Company’s management evaluated the carrying valuesof certain long-lived assets and concluded that an impairment in the amount of$6.9 million existed at March 1, 2008. The evaluation of fair value was based primarily upon management’sestimate of expected net proceeds to be received in sales of these assets. Thisimpairment is primarily related to the closing of the Cedartown, Georgiamanufacturing facility and assets used in the Company’s distributionoperations.

 

**7.**                                      **GOODWILL AND OTHER INTANGIBLEASSETS**

 

The Company conducted its annual assessment forgoodwill impairment during the fourth quarter of fiscal 2008 by applying a fairvalue based test in accordance with SFAS No. 142 and determined that itsgoodwill and indefinite-lived intangible assets were impaired.

 

The goodwill impairment was due primarily to adeclining outlook for the Company as a result of lower gross margins relatedprimarily to significant raw material price increases, and increased sellingand distribution costs with limited ability to pass along price increases tocustomers. In addition, certain synergies expected to result from theAcquisition of Zartic and the Acquisition of Clovervale have not been realizedto the extent initially anticipated.  Thegoodwill impairment assessment was based upon an estimate of the enterprisevalue of the manufacturing reporting unit using a combination of a discountedcash flow approach, comparable company transaction approach and comparabletransaction market approach. The discount rate used in the discounted cashflows approach included a risk premium associated with the uncertainty relatedto the Company’s ability to secure long-term financing.  See Note 1, “Basis of Presentation andAcquisitions” and Note 8, “Financing Arrangements” for further informationregarding the long-term financing situation.

 

The first step of the goodwill impairment testindicated that the net book value of the manufacturing reporting unit exceededits estimated fair value.  The Company hasperformed the second step of the goodwill impairment analysis which requiresthe Company to assign fair values to assets and liabilities of themanufacturing reporting unit to determine the amount of goodwill that would berecorded had the reporting unit been acquired in a business combination and thefair value of the reporting unit was the price paid.  Based on the analysis, the Company hasestimated that the amount of goodwill to be recorded in such a transactionwould be approximately $43.9 million, resulting in an impairment charge of$172.1 million.

 

The tradename impairment was due primarily to theimpact that the declining outlook of the Company is anticipated to have on thefuture cash flows associated with the Company’s indefinite-livedtradenames.  The impairment assessmentwas based upon the estimated fair value of the tradenames using a discountedcash flow approach based on the Company’s expected future cash flows associatedwith the tradenames.  The book value ofthe tradenames exceeded the estimated fair value, resulting in an impairmentcharge of $1.0 million.

 

The significant declining outlook, combined with theimpairment indicated in the performance of the first step of the goodwillimpairment analysis, indicated that the carrying amounts of amortizableintangible assets may not be recoverable. Accordingly, the Company performed impairment assessments for itsamortizable intangible assets as required under SFAS 144.  The first step of the impairment assessmentswas a comparison of the carrying value of the assets to the expected undiscountedfuture cash flows attributable to the respective asset.  For certain of the Company’s formulas,licensing agreements and tradenames, the carrying value exceeded the expectedundiscounted cash flows, requiring a measurement of the impairment by comparingthe fair values to the respective carrying values.  Fair values were estimated using expecteddiscounted cash flows of the assets for the remaining economic lives.  The evaluations resulted in impairmentcharges of $34.6 million, $5.8 million and $5.9 million for formulas, licensingagreements and tradenames, respectively in fiscal 2008.

 

No impairment was recorded for goodwill or intangibleassets in fiscal 2007 or fiscal 2006.

 

F-16

----

 

The grosscarrying amount of goodwill and the gross carrying amount and accumulatedamortization of other intangible assets as of March 1, 2008 are asfollows:

 
| ** **                                | ** ** | **As of March 1, 2008** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | **Useful**                                  | ** ** | **Gross Carrying** | ** ** | **Accumulated** | ** ** | **Net Carrying** | ** ** |
| ** **                                | ** ** | **Life (yrs)**                         | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| ** **                                | ** ** | **(in thousands)**                     | ** ** |
| **Amortizable intangible assets:**        |       |                                        |       |   |   |   |   |   |   |
| Formulas                                  |       | 5-15                                        |       | $ | 59,093 |   | $ | 44,322 |   | $ | 14,771 |   |
| Tradename and trademarks                  |       | 2-20                                        |       | 16,901 |   | 8,771 |   | 8,130 |   |
| Customer relationships                    |       | 10-14                                       |       | 46,000 |   | 20,629 |   | 25,371 |   |
| Licensing agreements                      |       | 10                                          |       | 6,278 |   | 5,778 |   | 500 |   |
| Non-Compete agreement                     |       | 2-3                                         |       | 350 |   | 160 |   | 190 |   |
| **Total amortizable intangible assets**   |       |                                        |       | 128,622 |   | 79,660 |   | 48,962 |   |
|                                      |       |                                        |       |   |   |   |   |   |   |
| **Indefinite-lived intangible assets:**   |       |                                        |       |   |   |   |   |   |   |
| Tradename                                 |       | Indefinite                                  |       | 19,200 |   | — |   | 19,200 |   |
| **Total other intangible assets**         |       |                                        |       | 147,822 |   | 79,660 |   | 68,162 |   |
|                                      |       |                                        |       |   |   |   |   |   |   |
| Goodwill                                  |       | N/A                                         |       | 43,938 |   | — |   | 43,938 |   |
| **Total  goodwill and intangible assets** |       | ** **                                  |       | $ | 191,760 |   | $ | 79,660 |   | $ | 112,100 |   |

 

The following table represents activity related togoodwill and amortizable intangible assets during fiscal 2008:

 
| ** **                                                        | ** ** | **(in thousands)** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|
| **Amortizable intangible assets:**                                | ** ** | ** **              | ** ** |
| ** **                                                        | ** ** | ** **              | ** ** |
| Balance as of March 3, 2007                                  | ** ** | $                       | 119,351    |   |
| Net carrying amount reclassified to other  non-current assets (1) |       | (2,358                  | )          |
| Amortization                                                      |       | (21,732                 | )          |
| Amortizable intangible assets impairment                          |       | (46,299                 | )          |
| Balance as of March 1, 2008                                  | ** ** | $                       | 48,962     |   |
| ** **                                                        | ** ** |                    |       |
| **Indefinite-lived intangible assets:**                           | ** ** |                    |       |
| ** **                                                        | ** ** |                    |       |
| Balance as of March 3, 2007                                  | ** ** | $                       | 20,200     |   |
| Indefinite-lived intangible assets impairment                     |       | (1,000                  | )          |
| Balance as of March 1, 2008                                  | ** ** | $                       | 19,200     |   |
| ** **                                                        | ** ** |                    |       |
| **Goodwill:**                                                     |       |                    |       |
| Balance as of March 3, 2007                                  | ** ** | $                       | 218,222    |   |
| Acquisition of Clovervale                                         |       | (591                    | )          |
| Acquisition of Zartic                                             |       | (1,596                  | )          |
| Goodwill impairment                                               |       | (172,097                | )          |
| Balance as of March 1, 2008                                  | ** ** | $                       | 43,938     |   |

 

 

----

(1)           Represents a reclassification of intangible assets associated withformulas developed for a National Accounts restaurant chain customer.

 

F-17

----

 

**8.**                                      **FINANCING ARRANGEMENTS**

 

Long-term debt is comprised of the following:

 
| ** **                                                                                                                   | ** ** | **March 1, 2008** | ** ** | **March 3, 2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                   | ** ** | **(in thousands)**     | ** ** |
| 9.875% senior notes, interest payable on  January 15 and July 15 of each year, maturing on July 15, 2012  (1) |       | $                           | 125,000    |                        | $          | 125,000 |   |
| Term loan, with floating interest rates,  maturing June 30, 2010 (1)                                                    |       | 227,000                     |       | 229,000                     |       |
| Revolving line of credit, maximum  borrowings of $40 million with floating interest rates, maturing  June 30, 2009 (1)  |       | 14,000                      |       | 800                         |       |
| 4.6% to 10.7% capitalized lease obligations  maturing through fiscal 2012                                                    |       | 2,526                       |       | 4,044                       |       |
| Total long-term debt                                                                                                         |       | 368,526                     |       | 358,844                     |       |
| Less current installments                                                                                                    |       | 367,534                     |       | 1,558                       |       |
| Long-term debt less current installments                                                                                     |       | $                           | 992        |                        | $          | 357,286 |   |

 

----

(1)           The Company has reclassified its borrowingsunder the term loan, its revolving line of credit, and its Notes as a result ofthe default under the Credit Agreement discussed below.

 

Effective June 30, 2004, the Company obtained a$190 million credit facility, which included a six-year variable-rate $150million term loan, a five-year variable-rate $40 million revolving creditfacility and a $10 million letter of credit subfacility.  Funds availableunder this facility were available for working capital requirements, permittedinvestments and general corporate purposes prior to the Company’s currentdefault under its credit agreement.  All of the Company’s indebtednessunder the credit facility is secured by a first-priority security interest insubstantially all of the Company’s assets.  At March 1, 2008, baserate borrowings under the term loan portion of the facility bear interest atprime rate plus 4.75% to 5.0% determined by the Company’s corporate creditrating and base rate borrowings under the revolving credit portion of thefacility bear interest at prime rate plus pricing levels ranging from 4.5% to5.0% determined by the consolidated leverage ratio of the Company.  At March 1,2008, the interest rates for base rate borrowings under both the revolvingcredit facility and the term loans were 11.00% (prime of 6.0% plus 5.0%). However, the Company reduces its exposure to interest rate fluctuations throughthe use of LIBOR tranches and interest rate swaps.  The following tablesummarizes the Company’s outstanding borrowings as of March 1, 2008,including the amount, the respective rate of interest, and the date ofexpiration.  The interest rates listedbelow include the impact of interest rate swap agreements in place as of March 1,2008.

 
| ** **                               | ** ** | **Amount  (in thousands)** | ** ** | **Interest Rate** | ** ** | **Swap/LIBOR  Maturity Date** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|------------------------|------------|------------------------------------|------------|
| Term loan LIBOR tranche:                 |       | $                               | 27,000     |                   | 6.97       | %                                  | 08/19/08   |   |
| Term loan Swap tranche:                  |       | $                               | 25,000     |                   | 9.14       | %                                  | 08/16/08   |   |
| Term loan Swap tranche:                  |       | $                               | 150,000    |                   | 9.14       | %                                  | 08/16/09   |   |
| Term loan Swap tranche:                  |       | $                               | 25,000     |                   | 8.52       | %                                  | 05/18/09   |   |
| Revolving credit facility LIBOR tranche: |       | $                               | 14,000     |                   | 8.84       | %                                  | 04/30/08   |   |

 

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

 

As of September 1, 2007,the Company was in default under the consolidated leverage ratio covenant inits Credit Agreement.  Effective October 10,2007, the Company obtained a waiver of such default from the required lendersand entered into Amendment No. 4 to the Credit Agreement, which amended,among other things, the financial covenants in the Credit Agreement andincreased the applicable interest rates for term loans and the revolving creditfacility.  The applicable interest ratefor term loan borrowings was increased for base rate borrowings to the primerate plus 2.75% to 3.0% and for LIBOR borrowings to the applicable LIBOR rate plus3.75% to 4.0%, each determined based on the Company’s corporate creditrating.  The applicable interest rate forrevolving credit borrowings was increased for base rate borrowings to the primerate plus 2.5% to 3.0% and for LIBOR borrowings to the applicable LIBOR rateplus 3.5% to 4.0%, each determined based upon the Company’s consolidatedleverage ratio.

 

F-18

----

 

As of March 1, 2008, the Company is not incompliance with certain of the amended covenants of its Credit Agreement.  Failure to meet these covenants allows thelenders under the Company’s credit facility to declare all amounts outstandingthereunder, together with accrued interest, to be immediately due andpayable.  An acceleration under theCompany’s credit facility would trigger a cross-default on the indenturegoverning its senior subordinated notes, thereby allowing the Company’sbondholders to accelerate the repayment of all amounts outstanding on theNotes. The Company is currently exploring various strategic and restructuringalternatives, including a restructuring of its outstanding indebtedness TheCompany’s ability to continue as a going concern is dependent upon its abilityto generate sufficient operating cash flows to meet its debt servicerequirements in the future and to retain the necessary financing to meet itsobligations and pay its liabilities when they come due.

 

Repayment of borrowings under the $150.0 million termloan was initially $375,000 per quarter, which began on September 4, 2004,with a balloon payment of $141.4 million due on June 30, 2010. The Company made all such scheduled quarterly payments totaling $8.6 millionfrom the inception of the loan and prepayments on the term loan totaling $34.4million.  As a result of Amendment No. 3, scheduled quarterly repaymentswere reduced to $250,000 per quarter. During fiscal 2008, the Company made prepayments of $2.0 million, and assuch, is not required to resume scheduled quarterly payments until February 28,2009.  The remaining outstanding balance of $225.8 million (afterconsidering scheduled quarterly payments of $1.2 million) is due on June 30,2010.

 

EffectiveOctober 29, 2007 and August 16, 2007, the Company entered intointerest rate swap agreements (the “Swaps”) to reduce its exposure to interestrate fluctuations on portions of its term loan. See Note 14, “Interest Rate Swaps,” herein for further discussion.

 

Significant assumptionsunderlie the belief that the Company will meet its amended debt covenants forthe next 12 months, including, among other things, that there will be nomaterial adverse developments in the business, liquidity or significantunbudgeted capital requirements of the Company, that there will not be anyadditional material goodwill impairment charges, and that increased raw materialcosts can be offset by commensurate increases in prices to customers.  In addition, if the Company is unable tosuccessfully integrate the recently acquired companies, which includesconsolidating the financial functions and obtaining planned synergies, integratingkey personnel, and the maintenance and growth of the existing business, theCompany may be unable to continue to generate sufficient cash flow.  Such inability to generate sufficient cashflow may result in further covenant violations, which could require the Companyto refinance all or a portion of its debt, including the Notes and its creditfacility, obtain additional financing, which as a result, might not beavailable for its operations or other purposes, sell some of its assets oroperations, reduce or delay capital expenditures, or revise or delay itsoperations or strategic plans.  If theCompany is required to take any of these actions, it could have a materialadverse effect on its business and financial condition.  In addition, the Company cannot guarantee itwould be able to take any of these actions, that these actions would enable itto continue to satisfy its capital requirements, or that these actions would bepermitted under the terms of the Notes or Credit Agreement.

 

In conjunction with theAcquisition of Pierre, the Company issued the Notes, with interest payable on January 15and July 15 of each year.  The proceeds of the Notes, together withthe equity contributions from MDP and certain members of management andborrowings under the Company’s credit facility, were used to finance theAcquisition of Pierre and to repay outstanding indebtedness.

 

As of March 1, 2008, the Company had net cashand cash equivalents on hand of net $5.6 million, outstanding borrowings underits revolving credit facility of $14.0 million, and outstanding letters ofcredit of approximately $6.4 million.  Also as of March 1, 2008, theCompany had borrowings under its term loan of $227.0 million and $125.0 millionof Notes outstanding.  As of March 3, 2007, the Company had cash andcash equivalents on hand of $0.1 million, outstanding borrowings under itsrevolving credit facility of $0.8 million, outstanding letters of credit ofapproximately $3.5 million, and borrowing availability of approximately $35.7 million. Also as of March 3, 2007, the Company had borrowings under its term loanof $229.0 million and $125.0 million of Notes outstanding.  The Company isrequired to satisfy certain financial covenants regarding cash flow and capitalexpenditures.  As discussed above, theCompany was in violation of its amended financial covenants as of March 1,2008, and as such, has no borrowing availability.

 
| ** ** | ** ** | **Long-Term Debt—Scheduled Maturities, for the Following Fiscal Years Including Capital Leases (1)** | ** ** |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** ** | ** ** | **(in thousands)**                                                                                                                                          | ** ** |
| ** ** | ** ** | **2009**                                                                                                                                                         | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|       |       |                                                                                                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
|       |       | $                                                                                                                                                                | 1,784      |   | $ | 15,531 |   | $ | 226,188 |   | $ | 23 |   | $ | 125,000 |   | $ | — |   | $ | 368,526 |   |
|            |            |                                                                                                                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)           The long-term debt maturities above representthe scheduled maturities, however, as a result of the Company’s default underits Credit Agreement, borrowings under the term loan, revolving line of credit,and Notes have been reclassified to current liabilities on the balance sheet.

 

F-19

----

 

**9.****            ****INCOME TAXES**

 

The income tax provision (benefit) is summarized as follows:

 
| ** **                | ** ** | **Fiscal 2008**        | ** ** | **Fiscal 2007**        | ** ** | **Fiscal 2006**        | ** ** |
|---------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                | ** ** | **For the Year**  | ** ** | **For the Year**  | ** ** | **For the Year**  | ** ** |
| ** **                | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** |
| ** **                | ** ** | **March 1, 2008** | ** ** | **March 3, 2007** | ** ** | **March 4, 2006** | ** ** |
| ** **                | ** ** | **(in thousands)**     | ** ** |
| Current:                  |       |                        |       |                        |       |                        |       |
| Federal                   |       | $                           | (7,073     | )                           | $          | 6,166                       |       | $ | 1,605 |   |
| State                     |       | 183                         |       | 258                         |       | 250                         |       |
| Total current             |       | (6,890                      | )          | 6,424                       |       | 1,855                       |       |
|                      |       |                        |       |                        |       |                        |       |
| Deferred:                 |       |                        |       |                        |       |                        |       |
| Federal                   |       | (38,452                     | )          | (5,460                      | )          | (947                        | )          |
| State                     |       | (1,406                      | )          | (117                        | )          | (1,373                      | )          |
| Total deferred            |       | (39,858                     | )          | (5,577                      | )          | (2,320                      | )          |
| Total provision (benefit) |       | $                           | (46,748    | )                           | $          | 847                         |       | $ | (465 | ) |

 

Actual income tax provision (benefit) amountsare different from amounts computed by applying a statutory federal income taxrate to income or loss. The computed amount is reconciled to total income taxprovision (benefit).

 
| ** **                                                            | ** ** | **Fiscal 2008**        | ** ** | **Fiscal 2007**        | ** ** | **Fiscal 2006**        | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                            | ** ** | **For the Year**  | ** ** | **For the Year**  | ** ** | **For the Year**  | ** ** |
| ** **                                                            | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** |
| ** **                                                            | ** ** | **March 1, 2008** | ** ** | **March 3, 2007** | ** ** | **March 4, 2006** | ** ** |
| ** **                                                            | ** ** | ** **                  | ** ** | **Percent of**         | ** ** | ** **                  | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** |
| ** **                                                            | ** ** | **Amount**                  | ** ** | **Pretax**                  | ** ** | **Amount**                  | ** ** | **Pretax** | ** ** | **Amount** | ** ** | **Pretax** | ** ** |
| ** **                                                            | ** ** | **(in thousands)**     | ** ** | **Income**                  | ** ** | **(in thousands)**     | ** ** | **Income** | ** ** | **(in thousands)** | ** ** | **Income** | ** ** |
|                                                                  |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |
| Computed (benefit) provision at statutory  rate                       |       | $                           | (98,048    | )                           | 34.0       | %                           | $          | 926 |   | 35.0 | % | $ | 594 |   | 35.0 | % |
| Tax effect resulting from:                                            |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |
| State and local income taxes, net of federal  tax provision (benefit) |       | (1,982                      | )          | 0.7                         |       | (7                          | )          | (0.1 | ) | (52 | ) | (3.1 | ) |
| Change in estimated effective tax rate                                |       | (1,124                      | )          | 0.4                         |       | 5                           |       | — |   | (44 | ) | (2.6 | ) |
| General business credit generated                                     |       | (43                         | )          | —                      |       | (7                          | )          | (0.1 | ) | (11 | ) | (0.6 | ) |
| Impact of Ohio law change on deferred taxes                           |       | —                      |       | —                      |       | —                      |       | — |   | (1,115 | ) | (65.7 | ) |
| Extraterritorial Income Exclusion                                     |       | —                      |       | —                      |       | (55                         | )          | (2.1 | ) | — |   | — |   |
| Domestic Manufacturing Deduction                                      |       | 280                         |       | (0.1                        | )          | (160                        | )          | (6.1 | ) | (61 | ) | (3.6 | ) |
| Change in valuation allowance                                         |       | 2,409                       |       | (0.8                        | )          | 58                          |       | 2.2 |   | — |   | — |   |
| Meals and entertainment                                               |       | 113                         |       | —                      |       | 242                         |       | 9.2 |   | 91 |   | 5.3 |   |
| Permanent differences                                                 |       | (200                        | )          | —                      |       | (123                        | )          | (4.7 | ) | 88 |   | 5.2 |   |
| Write-off of Ohio ITC Credits                                         |       | 831                         |       | (0.3                        | )          | —                      |       | — |   | — |   | — |   |
| Impairment Adjustment for Goodwill                                    |       | 50,986                      |       | (17.7                       | )          |                        |       |   |   |   |   |   |   |
| Other                                                                 |       | 30                          |       | —                      |       | (32                         | )          | (1.3 | ) | 45 |   | 2.7 |   |
| Income tax provision (benefit)                                        |       | $                           | (46,748    | )                           | 16.2       | %                           | $          | 847 |   | 32.0 | % | $ | (465 | ) | (27.4 | )% |

 

F-20

----

 

The approximate tax effect ofeach type of temporary difference and carryforward that gave rise to theCompany’s deferred income tax assets and liabilities for fiscal 2008 and fiscal2007 is as follows:

 
| ** **                               | ** **                    | **March 1, 2008** | ** ** | **March 3, 2007** | ** ** |
|------------------------------------------|-------------------------------|-----------------------------|------------|-----------------------------|------------|
| ** **                               | ** **                    | **Assets**                  | ** ** | **Liabilities**             | ** ** | **Total** | ** ** | **Assets** | ** ** | **Liabilities** | ** ** | **Total** | ** ** |
| ** **                               | ** **                    | **(in thousands)**     | ** ** |
| Current:                                 |                          |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Allowance for doubtful receivables       |                          | $                           | 186        |                        | —     |   | $ | 186 |   | $ | 100 |   | — |   | $ | 100 |   |
| Inventory                                |                          | 2,120                       |       | —                      |       | 2,120 |   | 2,063 |   | — |   | 2,063 |   |
| Accrued bonus                            |                          | 1,752                       |       | —                      |       | 1,752 |   | 1,791 |   | — |   | 1,791 |   |
| Accrued promotional expense              |                          | 2,498                       |       | —                      |       | 2,498 |   | 81 |   | — |   | 81 |   |
| Accrued vacation pay                     |                          | 1,048                       |       | —                      |       | 1,048 |   | 726 |   | — |   | 726 |   |
| Reserve for returns                      |                          | 270                         |       | —                      |       | 270 |   | 157 |   | — |   | 157 |   |
| Reserves - other                         |                          | 1,717                       |       | —                      |       | 1,717 |   | 573 |   | — |   | 573 |   |
| Prepaid expenses                         |                          | —                      |       | (549                        | )          | (549 | ) | — |   | (707 | ) | (707 | ) |
| Accrued worker’s compensation       |                          | 475                         |       | —                      |       | 475 |   | 387 |   | — |   | 387 |   |
| Basis difference in assets held for sale |                          | 1,880                       |       | —                      |       | 1,880 |   | — |   | — |   | — |   |
| Fair value of interest rate swap         |                          | 2,293                       |       | —                      |       | 2,293 |   | — |   | — |   | — |   |
| Other                                    |                          | 386                         |       | —                      |       | 386 |   | — |   | (12 | ) | (12 | ) |
|                                     | Total current                 |                        | 14,625     |                        | (549       | ) | 14,076 |   | 5,878 |   | (719 | ) | 5,159 |   |
|                                     |                          |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Non-current:                             |                          |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Property, plant and equipment            |                          | —                      |       | (8,439                      | )          | (8,439 | ) | — |   | (9,725 | ) | (9,725 | ) |
| Amortization of intangibles              |                          | —                      |       | (6,009                      | )          | (6,009 | ) | — |   | (38,463 | ) | (38,463 | ) |
| Non-qualified deferred compensation plan |                          | 751                         |       | —                      |       | 751 |   | 532 |   | — |   | 532 |   |
| Charitable contribution carryforward     |                          | 56                          |       | —                      |       | 56 |   | — |   | — |   | — |   |
| General business credit                  |                          |                        |       |                        |       |   |   |   |   | — |   | — |   |
| carryforward                             |                          | 864                         |       | —                      |       | 864 |   | 845 |   | — |   | 845 |   |
| Alternative minimum tax credit           |                          |                        |       |                        |       |   |   | — |   | — |   | — |   |
| carryforward                             |                          | 728                         |       | —                      |       | 728 |   | — |   | — |   | — |   |
| Federal loss carryforward                |                          | 876                         |       | —                      |       | 876 |   | 1,186 |   | — |   | 1,186 |   |
| State loss carryforward                  |                          | 644                         |       | —                      |       | 644 |   | 189 |   | — |   | 189 |   |
| Ohio investment tax credit               |                          | —                      |       | —                      |       | — |   | 908 |   | — |   | 908 |   |
| Valuation allowance                      |                          | (3,547                      | )          | —                      |       | (3,547 | ) | (1,134 | ) | — |   | (1,134 | ) |
|                                     | Total non-current             |                        | 372        |                        | (14,448    | ) | (14,076 | ) | 2,526 |   | (48,188 | ) | (45,662 | ) |
|                                     | Total current and non-current |                        | $          | 14,997                      |       | $ | (14,997 | ) | $ | — |   | $ | 8,404 |   | $ | (48,907 | ) | $ | (40,503 | ) |
|                                          |                               |                             |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

At March 1, 2008,federal net operating loss carryforwards of approximately $4.3 million areavailable to offset future federal taxable income.  In addition, the Company has state netoperating loss carryforwards of approximately $20.3 million.  The federal and state net operating losscarryforwards expire between the years 2022-2024 and 2025-2028, respectively.

 

As a result of the change inownership in conjunction with the Acquisition of Pierre, a portion of thefederal and state net operating loss carryforwards are subject to limitationson utilization under Internal Revenue Code Section 382.  As such, management has evaluated theCompany’s ability to utilize those losses and has determined that it is morelikely than not that the loss carryforwards will not be utilized by in the nearterm.  Consequently, the Company hasrecorded a valuation allowance against the full amount of carryforwards.

 

In addition, as of March 1,2008, the Company has federal charitable contribution carryforwards of $0.2million and general business credit carryforwards of approximately $0.9million.  These credit carryforwards areset to expire in 2013 and between the years 2008-2027, respectively.  Also as of March 1, 2008, the Companyhas AMT credit carryforwards of approximately $0.8 million.  These AMT credit carryforwards have noexpiration date.

 

As a result of theAcquisition of Pierre, a portion of the federal and state credit carryforwardsis subject to limitations on utilization under the Internal Revenue Code Section 383.  As such, management has evaluated theCompany’s ability to utilize these losses and has determined that it is morelikely than not that a portion of the federal and state credits will not beutilized by the Company.  A valuationallowance was recorded against the full amounts of federal general businesscredits.

 

In addition, due to theCompany’s significant pre-tax book losses, and concerns with regard to thecompany’s ability to operate as a going concern, a valuation allowance has beenrecorded against the remaining net deferred tax asset.

 

F-21

----

 

In assessing therealizability of deferred tax assets, management considers whether it is morelikely than not that some portion or all of the deferred tax assets will not berealized. The ultimate realization of deferred tax assets is dependent upon thegeneration of future taxable income during the periods in which those temporarydifferences become deductible. Management considers the scheduled reversal ofdeferred tax liabilities, projected future taxable income, and tax planningstrategies in making this assessment. Management believes the existingvaluation allowances as of March 1, 2008 are appropriate.

 

The effective tax rate for fiscal 2008 was 16.2%compared to 32.0% for fiscal 2007.  The change in the effective tax rateis primarily due to the impairment of non-deductible goodwill, changes in theCompany’s expected pre-tax income (loss) relative to the impact of otherpermanent items, and an increase in the valuation allowance against deferredtax assets, partially offset by the relative impact of the reversal ofpreviously recorded domestic manufacturing deductions as a result of filing taxloss carryback claims and the elimination of the Extra-Territorial incomededuction.

 

Effective March 4, 2007, the Company adoptedFIN 48, which requires that the financial statement effects of a taxposition taken or expected to be taken in a tax return be recognized in thefinancial statements when it is more likely than not, based on the technicalmerits, that the position will be sustained upon examination.

 

The Company files income tax returns in the U.S.federal jurisdiction and various state jurisdictions.  The Company has substantially concluded allU.S. federal income tax matters for the tax year ended June 30, 2004.  No federal income tax returns are currentlyunder examination.  With few exceptions,the Company is no longer subject to state or local income tax examinations bytax authorities for its fiscal 2003 tax year.

 

The recognition and measurement guidelines of FIN48 were applied to all of the Company’s material tax positions as of March 4,2007, resulting in an increase in non-current tax liabilities of $809,000,including accrued interest.  Of this amount, $57,000 was treated as anincrease to beginning retained deficit for the cumulative effect of change inaccounting principle.  A reconciliation of the beginning and ending amountof unrecognized tax benefits is as follows:

 
| ** **                                              | ** ** | **(in thousands)** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|
| Balance at March 4, 2007                           |       | $                       | 764        |   |
| Additions for tax positions of the current  fiscal year |       | 720                     |       |
| Additions for tax positions of prior years              |       | —                  |       |
| Reductions for tax positions of prior years             |       | (252                    | )          |
| Settlement with tax authorities                         |       | —                  |       |
| Expiration of the statute of limitations                |       | —                  |       |
| Balance at March 1, 2008                           |       | $                       | 1,232      |   |

 

The net change in the amount of unrecognized taxbenefits during fiscal 2008 was $468,000. The total amount of unrecognized income tax benefits as of March 1,2008, was $1,232,000.  The difference between the total amount ofunrecognized tax benefits and the amount that impacts the effective income taxrate relates primarily to deferred tax benefits for temporary differencesbetween book and tax return items.

 

Due to the presence of tax net operating losscarryforwards, $587,000 of the unrecognized tax benefit is treated as areduction to the net operating loss carryforwards, and $645,000 is classifiedas a noncurrent tax liability.

 

Management has concluded that there will not be amaterial reduction in the unrecognized tax benefit during the next 12 monthsbased on anticipated tax positions taken in the next 12 months, expectedsettlements or payments of uncertain tax positions, and lapses of theapplicable statutes of limitations of unrecognized tax benefits.

 

The Company’s continuing policy is to recognizeinterest and penalties related to income tax matters as tax expense.  The amount of interest and penalty expenserecorded for the fiscal year ended March 1, 2008, was not material.

 

F-22

----

 

**10.****         ****LEASED PROPERTIES**

 

The Company leases certainautos, machinery and equipment, and furniture and fixtures under leasesclassified as capital leases.  The leaseshave original terms ranging from one to six years.  The assets covered under these leases havecarrying values of approximately $2,972,000 and $4,603,000 at March 1,2008 and March 3, 2007, respectively.

 

The Company also leasesmachinery and equipment and real estate under operating leases with terms thatare effective for varying periods through 2013. Certain of these leases have remaining renewal clauses, exercisable atthe Company’s option.

 

At March 1, 2008,minimum rental payments required under operating and capital leases are asfollows:

** **
| ** **                                                                                                     | ** ** | **Minimum Rental Payments** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                     | ** ** | **(in thousands)**               | ** ** |
| ** **                                                                                                     | ** ** | **Operating  Leases**                 | ** ** | **Capital  Leases** | ** ** |
| **Fiscal Year**                                                                                           | ** ** | **March 1, 2008**           | ** ** | **March 1, 2008** | ** ** |
|                                                                                                           |       |                                  |       |   |   |
| 2009                                                                                                           |       | $                                     | 5,388      |   | $ | 1,667 |   |
| 2010                                                                                                           |       | 1,735                                 |       | 826 |   |
| 2011                                                                                                           |       | 182                                   |       | 200 |   |
| 2012                                                                                                           |       | 30                                    |       | 23 |   |
| 2013                                                                                                           |       | 5                                     |       | — |   |
| Later years                                                                                                    |       | —                                |       | — |   |
| Total minimum lease payments                                                                                   |       | $                                     | 7,340      |   | 2,716 |   |
| Less amount representing interest                                                                              |       |                                  |       | (190 | ) |
| Present value of minimum lease payments  under capital leases (see Note 8, “Financing Arrangements”) |       |                                  |       | $ | 2,526 |   |

 

Rental expense was as follows:

 
| ** **  | ** ** | **Fiscal  2008**        | ** ** | **Fiscal  2007** | ** ** | **Fiscal  2006** | ** ** |
|-------------|------------|-------------------------|------------|------------------|------------|------------------|------------|
| ** **  | ** ** | **(in thousands)** | ** ** |
| Real estate |       | $                       | 207        |             | $          | 135              |       | $ | 137 |   |
| Equipment   |       | 7,804                   |       | 4,877            |       | 4,355            |       |
| Total       |       | $                       | 8,011      |             | $          | 5,012            |       | $ | 4,492 |   |

 

**11.****         ****EMPLOYEE BENEFITS**

 

The Company maintains two 401(k) retirementplans for its employees, both of which provide that the Company will make amatching contribution of up to 50% of an employee’s voluntary contribution,limited to the lesser of 5% of that employee’s annual compensation or $15,500during fiscal 2008.  Each of the Company’sfacilities are covered under one of the 401(k) retirement plans, however,individual employee participation is subject to the terms of each plan.  The Company’s contributions under the planswere approximately $0.7 million, $0.6 million, and $0.5 million in fiscal 2008,fiscal 2007, and fiscal 2006, respectively under this plan.

 

The Company provides employee health insurancebenefits to employees.  Prior to January 1, 2008, for each of theyears presented, medical benefits were provided through self-insurance groupmedical plans, and during part of fiscal 2008 and part of fiscal 2007, throughboth self-insured and fully-insured group medical plans.  Subsequent to January 1,2008, all medical benefits provided to employees of the Company are done sothrough self-insurance group medical plans. The Company’s contributions for the self-insured group medical plansincluded in operations were approximately $6.4 million, $4.4 million, and $3.7million, for fiscal 2008, fiscal 2007, and fiscal 2006, respectively.  TheCompany’s contributions for the fully-insured group medical plans, which werereplaced with self-insured group medical plans, included in operations wereapproximately $1.9 million and $0.4 million during fiscal 2008 and fiscal 2007,respectively.

 

In connection with the Acquisition of Pierre, themanagement investors invested approximately $4.9 million in a deferredcompensation plan of Holding.  This initial investment was recorded in thefinancial statements of Holding.  In addition, this deferred compensationplan is funded through a rabbi trust that owns preferred stock of Holding witha stated annual return of 10%.  Anadditional return of 10% on any unpaid dividends is earned annually on theanniversary date of the plan.  The Company reflects the stated return andcorresponding increase in liquidation value as compensation expense in itsconsolidated statements of operations.  The Company recorded compensationexpense of approximately $0.6 million, $0.6 million, and $0.5 million in fiscal2008, fiscal 2007, and fiscal 2006, respectively, associated with the deferredcompensation plan.  The aggregate liquidation value of the deferredcompensation plan was approximately $6.9 million and $6.3 million as of March 1,2008 and March 3, 2007, respectively.

 

F-23

----

 

**12.****         ****STOCK-BASED COMPENSATION**

 

***Stock Options.*** Thefollowing table summarizes changes in options granted for fiscal 2008, fiscal2007, and fiscal 2006:

 
| ** **                    | ** ** | **Shares** | ** ** | **Weighted Average  Exercise Price Per Share** | ** ** |
|-------------------------------|------------|------------|------------|--------------------------------------------------------------------|------------|
|                          |       |       |       |                                                               |       |
| Balance at March 5, 2005 |       | 127,397    |       | $                                                                  | 10.00      |   |
| Options granted               |       | 3,960      |       | $                                                                  | 10.00      |   |
| Options forfeited             |       | 5,138      |       | $                                                                  | 10.00      |   |
| Balance at March 4, 2006 |       | 126,219    |       | $                                                                  | 10.00      |   |
| Options granted               |       | —     |       | $                                                                  | 10.00      |   |
| Options forfeited             |       | —     |       | $                                                                  | 10.00      |   |
| Balance at March 3, 2007 |       | 126,219    |       | $                                                                  | 10.00      |   |
| Options granted               |       | 1,284      |       | $                                                                  | 10.00      |   |
| Options forfeited             |       | 35,875     |       | $                                                                  | 10.00      |   |
| Balance at March 1, 2008 |       | 91,628     |       | $                                                                  | 10.00      |   |

 

The following table summarizes shares available forgrant and excercisable shares as of March 1, 2008, March 3, 2007, andMarch 4, 2006:

 
| ** **                 | ** ** | **March 1, 2008** | ** ** | **March 3, 2007** | ** ** | **March 4, 2006** | ** ** |
|----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Shares available for grant |       | 72,150                      |       | 37,559                      |       | 37,559                      |       |
| Shares exercisable         |       | 26,055                      |       | 26,115                      |       | 16,064                      |       |

 

In connection with the election of Scott W. Meader tothe Company’s Board of Directors in 2005, Holding entered into a restrictedstock agreement with Mr. Meader, pursuant to which Mr. Meaderpurchased 2,000 shares of common stock of Holding for $10.00 per share. Theshares vest as follows: 187 vested upon execution of the restricted stockagreement and the remaining 1,813 vest over 4 1⁄2 years provided that Mr. Meader continues to be a director of theCompany and Holding. In the event that he ceases to be a director of theCompany or Holding, Holding has an option to repurchase the vested shares atthe greater of the fair market value or $10.00 per share and the unvestedshares at $10.00 per share. If Holding does not exercise such option, MDP thenhas the option to purchase the shares on the same terms. The shares are subjectto restrictions, including restrictions on transfer, set forth in theStockholders’ Agreement dated June 30, 2004 among certain stockholders ofHolding.

 

In addition, effective January 10, 2008, theBoard of Directors of Holding adopted a restricted stock plan pursuant to whichcommon shares of Holding may be issued to officials, employees and consultantsof the Company, subject to vesting restrictions.  A total of 200,000 restricted shares may beissued under such plan.  In connectionwith their employment with the Company, 5,000 shares of restricted common stockof Holding were sold to each of Mr. Schroder and Ms. Hughes for $0.25per share.  In addition, 10,000restricted shares were sold to other employees of the Company for $0.25 pershare in fiscal 2008.  No compensationexpense was recorded in fiscal 2008 related to these shares.

 

**13.****         ****DISCLOSURES ABOUT FAIR VALUESOF FINANCIAL INSTRUMENTS**

 

The Company’s non-derivative financial instrumentsconsist primarily of cash and cash equivalents, trade receivables, tradepayables and long-term debt.  The estimated fair values of the financialinstruments have been determined by the Company using available marketinformation and appropriate valuation techniques.  Considerable judgmentis required, however, to interpret market data to develop the estimates of fairvalue.  Accordingly, the estimates presented herein are not necessarilyindicative of the amounts that the Company could realize in a current marketexchange.  The use of different market assumptions and/or estimationmethodologies may have a material effect on the estimated fair value amounts.

 

At March 1, 2008 excluding long-term debt, thebook values of each of the nonderivative financial instruments recorded in theCompany’s balance sheet are considered representative of fair value due tovariable interest rates, short terms to maturity and/or short length of timeoutstanding.

 

The fair value of the Company’s Notes is estimatedbased on quoted market prices and interest rates currently available forissuance of debt with similar terms and maturities.  As of March 1,2008 and March 3, 2007, the fair value of the Notes was approximately$82,500,000 and $130,625,000, respectively.  The carrying value of allother long-term debt is considered representative of its fair value as of March 1,2008 and March 3, 2007 due to variable interest rates.

 

F-24

----

 

**14.****                              ****INTEREST RATE SWAPS**

 

One of the Company’s majormarket risk exposures is potential loss arising from changing interest rates onits long-term debt and its impact on cash flows.  The Company’s policy is to manage interestrate risk by maintaining a combination of fixed and variable-rate financialinstruments in amounts and maturities that management considersappropriate.  To further mitigate itsrisk associated with variable-rate debt, the Company utilizes derivativeinstruments to hedge its exposure to changing rates.

 

The Company accounts for derivative financialinstruments in accordance with SFAS 133 at fair value.  SFAS 133 requires that all derivatives berecorded at fair value on the balance sheet as either assets orliabilities.  Accounting for changes inthe fair value of a derivative depends on whether it qualifies and has beendesignated as part of a hedging relationship. For derivatives that qualify and have been designated as hedges foraccounting purposes, changes in fair value have no net impact on earnings, tothe extent the derivative is considered perfectly effective in achieving an offsettingchange in fair value or cash flows attributable to the risk being hedged, untilthe hedged item is recognized in earnings (commonly referred to as the “hedgeaccounting” method).  The Company did notdesignate its derivative financial instruments as hedges for accountingpurposes, and as a result,  the change infair value is recorded as interest expense.

 

EffectiveOctober 29, 2007 and August 16, 2007, the Company entered intothe Swaps to reduce its exposure to interest rate fluctuations on portions ofits term loan with the objective of minimizing the impact of interest ratefluctuations and stabilizing cash flows. The Swaps have notional amounts of $25.0 million and $175.0 millionwith fixed rates of 4.52% and 5.14%, respectively, thereby effectivelyconverting portions of the floating rate term debt to fixed rate obligations of8.52% and 9.14%, respectively, as of March 1, 2008 (4.52% and 5.14% plusapplicable margin).  The October 29,2007 swap will expire on May 18, 2009. A portion of the August 16, 2007 swap with a notional amount of$25.0 million will expire on August 16, 2008, with the remaining$150.0 million expiring on August 16, 2009.  The difference between the three-month LIBORrate and respective swap rates will be settled in cash on the interest paymentdates.  The change in the fair value ofthe Swaps of approximately $6.9 million is reflected as an increase in interestexpense in fiscal 2008.  As of March 1,2008, the Company has recorded a liability totaling $6.9 million to recognizethe Swaps at fair value.

 

**15.****                              ****BUSINESS SEGMENT**

 

Duringfiscal 2008, fiscal 2007, and fiscal 2006, the Company operated solely inone reportable segment, with the exception of certain immaterialdistribution services by Zar Tran to third parties in fiscal 2008 and fiscal2007.  Sales by major product line are as follows:

 
| ** **                     | ** ** | **Net Revenues by Source** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **(in millions)**                    | ** ** |
| ** **                     | ** ** | **Fiscal 2008**                      | ** ** | **Fiscal 2007** | ** ** | **Fiscal 2006** | ** ** |
| Food processing           |       |                                      |       |   |   |   |   |
| Fully-cooked protein products  |       | $                                         | 359.5      |   | $ | 263.2 |   | $ | 254.8 |   |
| Ready-to-cook protein products |       | 32.6                                      |       | 6.7 |   | — |   |
| Microwaveable sandwiches       |       | 204.9                                     |       | 195.5 |   | 168.4 |   |
| Bakery products and other      |       | 46.3                                      |       | 22.4 |   | 8.4 |   |
| Total food processing          |       | $                                         | 643.3      |   | $ | 487.8 |   | $ | 431.6 |   |

 

Substantially all revenues and long-lived assets are derived from andreside in the United States.

 

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

 

***Letters of Credit.*** TheCompany provided a letter of credit in the amount of $5.7 million, $2.8million, and $5.5 million in fiscal 2008, fiscal 2007, and fiscal 2006,respectively, to its insurance carrier for the underwriting of certainperformance bonds.  The current letter of credit expires in the Company’sfiscal year ending February 28, 2009.  The Company also providessecured letters of credit to its insurance carriers for outstanding andpotential workers’ compensation and general liability claims.  Letters ofcredit for these claims totaled $675,000 in both fiscal 2008 and fiscal 2007,and $110,000 in fiscal 2006.

 

***Legal Proceedings.***  TheCompany is involved in various legal proceedings.  Management believes,based on the advice of legal counsel, that the outcome of such proceedings willnot have a material adverse effect on the Company’s financial position orfuture results of operations and cash flows.  See Note 19 – “LegalProceedings,” for further discussion of proceedings as of March 1, 2008.

 

F-25

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*** ***

***Liability to SellingShareholders.****** ***In conjunction with theAcquisition of Pierre, the Company and the selling shareholders entered into atax sharing and indemnification agreement containing certain representationsand warranties of the selling shareholders with respect to taxes.  Theagreement provides that any net operating loss carryforwards attributable toexpenses relating to the sale of the Company (“Deal Related NOLs”) and certainother deal related expenses, will be for the benefit of the selling shareholders. As of the date of the Acquisition of Pierre, these Deal Related NOLs and otherdeal related expenses totaled approximately $24.2 million and $6.6 million,respectively.  Accordingly, the Company was required pay and has paid to theselling shareholders the amount of any tax benefit attributable to such DealRelated NOLs and other deal related expenses, except that the first $4.0million of such tax benefits was paid into an escrow account that secures theselling shareholders indemnification obligations under the tax sharing andindemnification agreement.   The Company is required to make paymentsto the selling shareholders or the escrow account for tax benefits derived fromsuch utilization 20 days after the filing of the tax return that utilizes suchDeal Related NOLs or other deal related expenses.

 

Initially, the Companyrecorded a net long-term liability to the selling shareholders totaling $10.3million for the estimated obligations under the tax sharing and indemnificationagreement.  During the Company’s fiscal 2007 year, the Company increasedthe estimated obligation under the tax sharing and indemnification agreement byapproximately $1.3 million based on the differences in the tax rate initiallyused to estimate the liability, the actual payments to the sellingshareholders, and the estimated remaining obligation to the sellingshareholders.  The adjustment to the liability to the selling shareholdersresulted in a corresponding increase in goodwill related to the Acquisition ofPierre.

 

As of March 1, 2008, theCompany has utilized $24.2 million of the Deal Related NOLs and $1.7 million inother deal related expenses.  Also as of March 1, 2008, the Companyhas submitted payments based on the tax benefits received, net of other tax assessmentsdue to the Company from the selling shareholders, to an escrow account(approximately $4.0 million) and directly to the selling shareholders(approximately $5.7 million).  As of March 1, 2008, the Company has aremaining liability to the selling shareholders totaling $1.9 million (whichreflects the aforementioned $1.3 million adjustment during fiscal 2007).  Payments totaling $0.3 million were made tothe selling shareholders during fiscal 2008. Of the remaining liability, approximately $0.1 million is classified ascurrent, as the Company expects to submit payments to the selling shareholdersduring its fiscal 2009 year.  Theremaining liability is classified as long-term based on the expected timing ofthe remaining payments to the selling shareholders.  The Company expectsto fully utilize the Deal Related NOLs and other deal related expenses;however, the timing of the future payments of the long-term portion is unknown.

 

**17.          SUPPLEMENTAL CASH FLOWDISCLOSURES—CASH PAID (RECEIVED) DURING THE PERIOD AND NON-CASH TRANSACTIONS**

 
| ** **                                                                                        | ** ** | **Fiscal 2008**    | ** ** | **Fiscal 2007** | ** ** | **Fiscal 2006** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------|------------|----------------------|------------|
|                                                                                              | ** ** | **(in thousands)** | ** ** |
| Cash paid (received) during the period for:                         | ** ** | ** **              | ** ** |
| Interest, net                                                                                     |       | $                       | 35,676     |                 | $          | 19,705               |       | $ | 20,558 |   |
| Income taxes, net                                                                                 |       | $                       | (4,763     | )                    | $          | 9,467                |       | $ | 600 |   |
|                                                                                              |       |                    |       |                 |       |                 |       |
| Non-cash transactions:                                                                            |       |                    |       |                 |       |                 |       |
| Liability to selling shareholders                                                                 |       | $                       | —     |                 | $          | 1,329                |       | $ | — |   |
|                                                                                              |       |                    |       |                 |       |                 |       |
| Acquisition of Zartic adjustments:                                                                |       |                    |       |                 |       |                 |       |
| Adjustment of accounts receivable to fair value                                                   |       | $                       | (215       | )                    | $          | —               |       | $ | — |   |
| Adjustment of inventory to fair value                                                             |       | $                       | 2,184      |                 | $          | —               |       | $ | — |   |
| Adjustment of accounts payable to fair value                                                      |       | $                       | 3          |                 | $          | —               |       | $ | — |   |
| Adjustment of other current assets to fair value                                                  |       | $                       | 156        |                 | $          | —               |       | $ | — |   |
| Adjustment of other accrued liabilities to fair value                                             |       | $                       | 1,088      |                 | $          | —               |       | $ | — |   |
| Adjustment of other long-term liabilities to fair value                                           |       | $                       | (505       | )                    | $          | —               |       | $ | — |   |
|                                                                                              |       |                    |       |                 |       |                 |       |
| Other transactions:                                                                               |       |                    |       |                 |       |                 |       |
| Reclassification of property, plant, and equipment to other assets as  a result of plant fire (1) |       | $                       | 815        |                 | $          | —               |       | $ | — |   |
| Capital lease additions                                                                           |       | $                       | 18         |                 | $          | —               |       | $ | — |   |
| Reclassification of property, plant, and equipment to assets held for  sale                       |       | $                       | 4,048      |                 | $          | —               |       | $ | — |   |
| Reclassification of formulas related to other intangible assets to  other assets                  |       | $                       | 2,358      |                 | $          | —               |       | $ | — |   |

 

----

(1)   See discussion in Note 1, “Basis ofPresentation and Acquisitions” herein.

 

 

F-26

----

** **

**18.          TRANSACTIONS WITH RELATED PARTIES**

 

Norbert J. Woodhams, one ofthe Company’s Vice Presidents, is the son of Norbert E. Woodhams, theCompany’s President and Chief Executive Officer, and a director and Chairman ofthe Board.  In fiscal 2008,Norbert J. Woodhams received a base salary of $140,000 and did not earn abonus under the Company’s annual cash incentive plan.  In fiscal 2007, Norbert J. Woodhams receiveda base salary of $117,000 and earned a bonus of $40,000 under the Company’sannual cash incentive plan.  The basesalary and cash incentive earned by Norbert J. Woodhams is consistent with theearnings of other Company employees with similar responsibilities.

 

The Company utilizes anindependent food broker owned by a family member of Anthony J. Schroder, theCompany’s Senior Vice President of Sales. This independent food broker provides services including, but notlimited to, selling Pierre’s products, processing purchase orders fromdistributors, managing pricing, providing samples to customers, participationin trade shows, and training sales representatives to sell Pierre’sproduct.  The Company compensates thisbroker primarily by payment of sales commissions, which is consistent withcompensation to its other independent food brokers.  The Company paid sales commissions to thisbroker totaling $120,000 in fiscal 2008.

 

The Company and its AuditCommittee have adopted written procedures, which restrict and govern relatedparty transactions.  Pursuant to thoseprocedures, any related party transaction that would be required to be reportedin this report, must first be presented to and approved by the Company’s ChiefExecutive Officer and Chief Financial Officer, and if the transaction ismaterial, also by the Audit Committee before the Company makes a bindingcommitment to the related party.

 

**19.          LEGAL PROCEEDINGS**

 

On March 20, 2006, Hamilton County Department ofEnvironmental Services (“HCDOES”) sent a Notice of Violation (“NOV”) to theCompany alleging that the Company’s Cincinnati, Ohio facility violated itspermit limits for particulate matter (“PM”) from certain cooking operations andreserved the right to pursue an enforcement action and a civil penalty in thefuture.  On July 7, 2006, HCDOESsent another NOV to the Company alleging that the Company was in violation ofits permit limits for PM emissions and again reserved the right to pursue anenforcement action in the future.

 

On May 21, 2007, the Director of the Ohio EPAinvited the Company to enter into consent findings and orders with the OhioEPA, in lieu of referral to the Ohio Attorney General’s Office and the filingof an enforcement action in court.  On August 31,2007, the Company settled claims with Ohio EPA for $125,000, without anyadmission of liability.  In response tothe NOVs, the Company has purchased and installed emissions control equipmentcosting approximately $1.8 million to comply with relevant laws.

 

The Companyis cooperating with authorities in all aspects of these matters.  The Company applied for modified permits toinstall (“PTIs”) on August 14, 2007 for the emission sources at the plantand also submitted a PTI application on September 20, 2007, for processwater heaters at the plant to come into compliance with applicable regulatoryrequirements.  These PTI applications arecurrently being reviewed and processed by HCDOES.  In connection with the PTI applicationsreview, HCDOES requested on October 5, 2007 that the Company assessfugitive emissions from its cooking operations and provide that assessment tothe agency.  The Company’s environmentalconsultant conducted a fugitive emissions assessment and has re-submitted itsPTI applications to HCDOES, which is currently processing those applications.

 

On August 16, 2006, theCompany purchased the stock of Clovervale through a Share and Asset PurchaseAgreement (“Clovervale Agreement”).  TheClovervale Agreement included certain indemnities granted by the selling shareholderto the Company, including an indemnity for environmental non-compliance thatwas not disclosed by the selling shareholder in the Clovervale Agreement.  On July 24, 2007, the Company receivednotification from the City of Amherst Building and Utilities Department thatthe Company’s Clovervale facility, which was acquired as part of theAcquisition of Clovervale, was in violation of the city’s ordinance for highstrength oil and grease discharges.  TheCity of Amherst requested that the Company meet with the City and comply withwastewater discharge requirements.  TheCompany’s environmental consultant is assessing compliance with the City ofAmherst wastewater discharge requirements and although the extent ofnoncompliance and possible costs to comply are unknown at this point, theCompany has made a claim for indemnity with the selling shareholder under theClovervale Agreement.

 

F-27

----

 

Zartic, LLC and Pierre Foods, Inc.recently have received grand jury subpoenas requesting production of documentsrelating to sales to certain prime vendors to the U.S. Department ofDefense.  Zartic, LLC and Pierre Foods, Inc.are in the process of responding to the subpoenas and the Company is incurringlegal fees and expenses as a result. Although the Company has not been advisedthat it is a target of the investigation, because the grand jury’sinvestigation is not complete, the Company is unable to evaluate the likelihoodof an unfavorable outcome or to estimate the amount or range of any potentialloss that may result from the investigation.

 

The Company continuouslyevaluates contingencies based upon the best available information.  TheCompany believes it has recorded appropriate liabilities to the extentnecessary in cases where the outcome of such liabilities is considered probableand reasonably estimable, and that its assessment of contingencies isreasonable.   To the extent that resolution of contingencies resultsin amounts that vary from management’s estimates, future earnings will becharged or credited accordingly.

 

As part of its ongoingoperations in the food processing industry, the Company is subject to extensivefederal, state, and local regulations and its food processing facilities andfood products are subject to frequent inspection, audits and inquiries by theUSDA, the FDA, and various local health and agricultural agencies and byfederal, state, and local agencies responsible for the enforcement ofenvironmental, labor, and other laws and regulations.  The Company is alsoinvolved in various legal actions arising in the normal course ofbusiness.  These matters are continuously being evaluated and, in somecases, are being contested by the Company and the outcome is not predictable.Consequently, an estimate of the possible loss or range of loss associated withthese actions cannot be made.  Although occasional adverse outcomes (orsettlements) may occur and could possibly have an adverse effect on the resultsof operations in any one accounting period, the Company believes that the finaldisposition of such matters will not have a material adverse effect on theCompany’s consolidated financial position.

 

F-28

----

 

**20.          SUBSIDIARY GUARANTORS**

 

Each of the subsidiaries ofPierre Foods, Inc. fully and unconditionally guarantees the Notes on ajoint and several basis.  Thesubsidiaries resulting from the Acquisition of Clovervale and the Acquisitionof Zartic became guarantors from the date of their respective acquisitions infiscal 2007.  Fresh Foods Properties, LLC, which was the onlysubsidiary of Pierre Foods, Inc. prior to fiscal 2007, is inactive andholds two trademarks that are not currently in use by the Company.  Thefollowing presents financial information about Pierre Foods, Inc., as theissuer of the Notes, and the guarantor subsidiaries.  Pierre has nonon-guarantor subsidiaries.  Intercompany transactions are eliminated.

 

The following supplementalcondensed statements of operations for the year ended March 1, 2008,condensed balance sheets as of March 1, 2008 and March 3, 2007, andthe supplemental condensed statements of cash flows for the year ended March 1,2008, depict in separate columns, the issuer (Pierre Foods, Inc.), thesubsidiaries, all of which are guarantors, elimination adjustments, and theconsolidated total.  The financialinformation follows the legal structure of the Company and therefore, may notnecessarily be indicative of the results of operations or financial position ofthe Company, including the subsidiaries, had they been operated as independententities.

 

**Pierre Foods, Inc.**

**Condensed Statements ofOperations**

**For the Year Ended March 1,2008**

 
| ** **                                                                     | ** ** | **Pierre Foods, Inc.** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|------------|------------|
| ** **                                                                     | ** ** | **(Issuer)**                     | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
| ** **                                                                     | ** ** | **(in thousands)**          | ** ** |
|                                                                           |       |                             |       |             |       |             |       |       |       |
| REVENUES, NET:                                                                 |       |                             |       |             |       |             |       |       |       |
| Customers                                                                      |       | $                                | 633,699    |             | $          | 9,571            |       | $          | —     |   | $ | 643,270 |   |
| Intercompany                                                                   |       | —                           |       | 183,006          |       | (183,006         | )          | —     |       |
| Total revenues, net                                                            |       | 633,699                          |       | 192,577          |       | (183,006         | )          | 643,270    |       |
|                                                                           |       |                             |       |             |       |             |       |       |       |
| COSTS AND EXPENSES:                                                            |       |                             |       |             |       |             |       |       |       |
| Cost of goods sold                                                             |       | 497,214                          |       | 172,621          |       | (172,621         | )          | 497,214    |       |
| Selling, general, and administrative expenses                                  |       | 115,966                          |       | 16,303           |       | (5,890           | )          | 126,379    |       |
|                                                                           |       |                             |       |             |       |             |       |       |       |
| Impairment of goodwill, other intangible assets, and other  non-current assets |       | 187,906                          |       | 34,471           |       |             |       | 222,377    |       |
| Impairment of fixed assets                                                     |       | —                           |       | 6,925            |       | —           |       | 6,925      |       |
| (Gain) loss on disposition of property, plant, and equipment, net              |       | 287                              |       | 115              |       | —           |       | 402        |       |
| Depreciation and amortization                                                  |       | 29,765                           |       | 11,290           |       | (4,495           | )          | 36,560     |       |
|                                                                           |       |                             |       |             |       |             |       |       |       |
| Total costs and expenses                                                       |       | 831,138                          |       | 241,725          |       | (183,006         | )          | 889,857    |       |
|                                                                           |       |                             |       |             |       |             |       |       |       |
| OPERATING INCOME (LOSS)                                                        |       | (197,439                         | )          | (49,148          | )          | —           |       | (246,587   | )          |
|                                                                           |       |                             |       |             |       |             |       |       |       |
| INTEREST EXPENSE AND OTHER INCOME:                                             |       |                             |       |             |       |             |       |       |       |
| Interest expense                                                               |       | (41,857                          | )          | (399             | )          | —           |       | (42,256    | )          |
| Other income                                                                   |       | 490                              |       | —           |       | —           |       | 490        |       |
| Interest expense and other income, net                                         |       | (41,367                          | )          | (399             | )          | —           |       | (41,766    | )          |
|                                                                           |       |                             |       |             |       |             |       |       |       |
| LOSS BEFORE INCOME TAX BENEFIT                                                 |       | (238,806                         | )          | (49,547          | )          | —           |       | (288,353   | )          |
|                                                                           |       |                             |       |             |       |             |       |       |       |
| INCOME TAX BENEFIT                                                             |       | 29,679                           |       | 17,069           |       | —           |       | 46,748     |       |
|                                                                           |       |                             |       |             |       |             |       |       |       |
| EQUITY IN NET LOSS OF SUBSIDIARIES                                             |       | (32,478                          | )          | —           |       | 32,478           |       | —     |       |
|                                                                           |       |                             |       |             |       |             |       |       |       |
| NET LOSS                                                                       |       | $                                | (241,605   | )                | $          | (32,478          | )          | $          | 32,478     |   | $ | (241,605 | ) |
|                                                                           |       |                             |       |             |       |             |       |       |       |

 

F-29

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** **

**Pierre Foods, Inc.**

**Condensed Statement ofOperations**

**For the Year Ended March 3,2007**

 
| ** **                                                        | ** ** | **Pierre Foods, Inc.** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|------------|------------|
| ** **                                                        | ** ** | **(Issuer)**                     | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
| ** **                                                        | ** ** | **(in thousands)**          | ** ** |
|                                                              |       |                             |       |             |       |             |       |       |       |
| REVENUES, NET:                                                    |       |                             |       |             |       |             |       |       |       |
| Customers                                                         |       | $                                | 451,674    |             | $          | 36,169           |       | $          | —     |   | $ | 487,843 |   |
| Intercompany                                                      |       | —                           |       | 12,551           |       | (12,551          | )          | —     |       |
| Total revenues, net                                               |       | 451,674                          |       | 48,720           |       | (12,551          | )          | 487,843    |       |
|                                                              |       |                             |       |             |       |             |       |       |       |
| COSTS AND EXPENSES:                                               |       |                             |       |             |       |             |       |       |       |
| Cost of goods sold                                                |       | 316,859                          |       | 38,991           |       | (11,686          | )          | 344,164    |       |
| Selling, general, and administrative expenses                     |       | 78,803                           |       | 7,466            |       | (865             | )          | 85,404     |       |
| (Gain) loss on disposition of property, plant, and equipment, net |       | 5                                |       | (7               | )          | —           |       | (2         | )          |
| Depreciation and amortization                                     |       | 27,275                           |       | 3,093            |       | —           |       | 30,368     |       |
|                                                              |       |                             |       |             |       |             |       |       |       |
| Total costs and expenses                                          |       | 422,942                          |       | 49,543           |       | (12,551          | )          | 459,934    |       |
|                                                              |       |                             |       |             |       |             |       |       |       |
| OPERATING INCOME (LOSS)                                           |       | 28,732                           |       | (823             | )          | —           |       | 27,909     |       |
|                                                              |       |                             |       |             |       |             |       |       |       |
| INTEREST EXPENSE AND OTHER INCOME:                                |       |                             |       |             |       |             |       |       |       |
| Interest expense                                                  |       | (23,429                          | )          | (1,948           | )          | —           |       | (25,377    | )          |
| Other income                                                      |       | 95                               |       | 20               |       | —           |       | 115        |       |
| Interest expense and other income, net                            |       | (23,334                          | )          | (1,928           | )          | —           |       | (25,262    | )          |
|                                                              |       |                             |       |             |       |             |       |       |       |
| INCOME (LOSS) BEFORE INCOME TAX BENEFIT                           |       | 5,398                            |       | (2,751           | )          | —           |       | 2,647      |       |
|                                                              |       |                             |       |             |       |             |       |       |       |
| INCOME TAX BENEFIT (PROVISION)                                    |       | (1,814                           | )          | 967              |       | —           |       | (847       | )          |
|                                                              |       |                             |       |             |       |             |       |       |       |
| EQUITY IN NET LOSS OF SUBSIDIARIES                                |       | (1,784                           | )          | —           |       | 1,784            |       | —     |       |
|                                                              |       |                             |       |             |       |             |       |       |       |
| NET INCOME (LOSS)                                                 |       | $                                | 1,800      |             | $          | (1,784           | )          | $          | 1,784      |   | $ | 1,800 |   |

 

F-30

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**Pierre Foods, Inc.**

**Condensed Balance Sheet**

**March 1, 2008**

 
| ** **                                                                                                  | ** ** | **Pierre Foods, Inc.** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|------------|------------|
| ** **                                                                                                  | ** ** | **(Issuer)**                     | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
| ** **                                                                                                  | ** ** | **(in thousands)**          | ** ** |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| ASSETS                                                                                                      |       |                             |       |             |       |             |       |       |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| CURRENT ASSETS:                                                                                             |       |                             |       |             |       |             |       |       |       |
| Cash and cash equivalents                                                                                   |       | $                                | 5,534      |             | $          | 27               |       | $          | —     |   | $ | 5,561 |   |
| Accounts receivable, net                                                                                    |       | 45,477                           |       | 944              |       | —           |       | 46,421     |       |
| Inventories                                                                                                 |       | 56,161                           |       | 8,525            |       | —           |       | 64,686     |       |
| Refundable income taxes                                                                                     |       | (6,215                           | )          | 13,000           |       | —           |       | 6,785      |       |
| Deferred income taxes                                                                                       |       | 9,840                            |       | 4,236            |       | —           |       | 14,076     |       |
| Assets held for sale                                                                                        |       | —                           |       | 4,048            |       | —           |       | 4,048      |       |
| Prepaid expenses and other current assets                                                                   |       | 3,880                            |       | 1,030            |       | —           |       | 4,910      |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| Total current assets                                                                                        |       | 114,677                          |       | 31,810           |       | —           |       | 146,487    |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| PROPERTY, PLANT, AND EQUIPMENT, NET                                                                         |       | 52,359                           |       | 28,001           |       | —           |       | 80,360     |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| OTHER ASSETS:                                                                                               |       |                             |       |             |       |             |       |       |       |
| Other intangibles, net                                                                                      |       | 50,328                           |       | 17,834           |       | —           |       | 68,162     |       |
| Goodwill                                                                                                    |       | 43,938                           |       | —           |       | —           |       | 43,938     |       |
| Deferred loan origination fees                                                                              |       | 7,111                            |       | —           |       | —           |       | 7,111      |       |
| Investment in subsidiaries                                                                                  |       | 78,539                           |       | —           |       | (78,539          | )          | —     |       |
| Intercompany accounts                                                                                       |       | —                           |       | 7,423            |       | (7,423           | )          | —     |       |
| Other                                                                                                       |       | 3,037                            |       | 363              |       | —           |       | 3,400      |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| Total other assets                                                                                          |       | 182,953                          |       | 25,620           |       | (85,962          | )          | 122,611    |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| Total Assets                                                                                                |       | $                                | 349,989    |             | $          | 85,431           |       | $          | (85,962    | ) | $ | 349,458 |   |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| LIABILITIES AND SHAREHOLDER’S EQUITY                                                                   |       |                             |       |             |       |             |       |       |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| CURRENT LIABILITIES:                                                                                        |       |                             |       |             |       |             |       |       |       |
| Current installments of long-term debt                                                                      |       | $                                | 366,167    |             | $          | 1,367            |       | $          | —     |   | $ | 367,534 |   |
| Trade accounts payable                                                                                      |       | 14,992                           |       | 7,965            |       | —           |       | 22,957     |       |
| Accrued payroll and payroll taxes                                                                           |       | 5,538                            |       | 2,364            |       | —           |       | 7,902      |       |
| Accrued interest                                                                                            |       | 2,394                            |       | —           |       | —           |       | 2,394      |       |
| Accrued promotions                                                                                          |       | 6,058                            |       | —           |       | —           |       | 6,058      |       |
| Accrued taxes (other than income and payroll)                                                               |       | 792                              |       | 207              |       | —           |       | 999        |       |
| Accrued interest-swap liability                                                                             |       | 6,866                            |       | —           |       | —           |       | 6,866      |       |
| Other accrued liabilities                                                                                   |       | 3,572                            |       | 3,086            |       | —           |       | 6,658      |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| Total current liabilities                                                                                   |       | 406,379                          |       | 14,989           |       | —           |       | 421,368    |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| LONG–TERM DEBT, less current installments                                                              |       | 282                              |       | 710              |       | —           |       | 992        |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| DEFERRED INCOME TAXES                                                                                       |       | 22,883                           |       | (8,807           | )          | —           |       | 14,076     |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| INTERCOMPANY ACCOUNTS                                                                                       |       | 7,423                            |       | —           |       | (7,423           | )          | —     |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| OTHER LONG–TERM LIABILITIES                                                                            |       | 4,853                            |       | —           |       | —           |       | 4,853      |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| Total Liabilities                                                                                           |       | 441,820                          |       | 6,892            |       | (7,423           | )          | 441,289    |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| SHAREHOLDER’S EQUITY:                                                                                  |       |                             |       |             |       |             |       |       |       |
| Common stock – Class A, 100,000 shares authorized, issued, and  outstanding at March 1, 2008 |       | 150,199                          |       | 112,800          |       | (112,800         | )          | 150,199    |       |
| Accumulated deficit                                                                                         |       | (242,030                         | )          | (34,261          | )          | 34,261           |       | (242,030   | )          |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| Total shareholder’s equity                                                                             |       | (91,831                          | )          | 78,539           |       | (78,539          | )          | (91,831    | )          |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| Total Liabilities and Shareholder’s Equity                                                             |       | $                                | 349,989    |             | $          | 85,431           |       | $          | (85,962    | ) | $ | 349,458 |   |

 

F-31

----

** **

**Pierre Foods, Inc.**

**Condensed Balance Sheet**

**March 3, 2007**

 
| ** **                                                                                                  | ** ** | **Pierre Foods, Inc.** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|------------|------------|
| ** **                                                                                                  | ** ** | **(Issuer)**                     | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
| ** **                                                                                                  | ** ** | **(in thousands)**          | ** ** |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| ASSETS                                                                                                      |       |                             |       |             |       |             |       |       |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| CURRENT ASSETS:                                                                                             |       |                             |       |             |       |             |       |       |       |
| Cash and cash equivalents                                                                                   |       | $                                | 50         |             | $          | 39               |       | $          | —     |   | $ | 89 |   |
| Accounts receivable, net                                                                                    |       | 35,546                           |       | 10,593           |       | —           |       | 46,139     |       |
| Inventories                                                                                                 |       | 51,001                           |       | 17,495           |       | —           |       | 68,496     |       |
| Refundable income taxes                                                                                     |       | 4,613                            |       | —           |       | —           |       | 4,613      |       |
| Deferred income taxes                                                                                       |       | 4,377                            |       | 782              |       | —           |       | 5,159      |       |
| Prepaid expenses and other current assets                                                                   |       | 3,562                            |       | 1,991            |       | —           |       | 5,553      |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| Total current assets                                                                                        |       | 99,149                           |       | 30,900           |       | —           |       | 130,049    |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| PROPERTY, PLANT, AND EQUIPMENT, NET                                                                         |       | 56,955                           |       | 41,605           |       | —           |       | 98,560     |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| OTHER ASSETS:                                                                                               |       |                             |       |             |       |             |       |       |       |
| Other intangibles, net                                                                                      |       | 110,382                          |       | 29,169           |       | —           |       | 139,551    |       |
| Goodwill                                                                                                    |       | 187,864                          |       | 30,358           |       | —           |       | 218,222    |       |
| Deferred loan origination fees                                                                              |       | 8,267                            |       | —           |       | —           |       | 8,267      |       |
| Investment in subsidiaries                                                                                  |       | 111,665                          |       | —           |       | (111,665         | )          | —     |       |
| Intercompany accounts                                                                                       |       | 2,896                            |       | 670              |       | (3,566           | )          | —     |       |
| Other                                                                                                       |       | 4,840                            |       | 341              |       | —           |       | 5,181      |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| Total other assets                                                                                          |       | 425,914                          |       | 60,538           |       | (115,231         | )          | 371,221    |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| Total Assets                                                                                                |       | $                                | 582,018    |             | $          | 133,043          |       | $          | (115,231   | ) | $ | 599,830 |   |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| LIABILITIES AND SHAREHOLDER’S EQUITY                                                                   |       |                             |       |             |       |             |       |       |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| CURRENT LIABILITIES:                                                                                        |       |                             |       |             |       |             |       |       |       |
| Current installments of long-term debt                                                                      |       | $                                | 190        |             | $          | 1,368            |       | $          | —     |   | $ | 1,558 |   |
| Trade accounts payable                                                                                      |       | 12,698                           |       | 7,869            |       | —           |       | 20,567     |       |
| Accrued interest                                                                                            |       | 5,569                            |       | —           |       | —           |       | 5,569      |       |
| Accrued payroll and payroll taxes                                                                           |       | 4,712                            |       | 2,404            |       | —           |       | 7,116      |       |
| Accrued promotions                                                                                          |       | 2,479                            |       | 799              |       | —           |       | 3,278      |       |
| Accrued taxes (other than income and payroll)                                                               |       | 834                              |       | 262              |       | —           |       | 1,096      |       |
| Other accrued liabilities                                                                                   |       | 2,436                            |       | 675              |       | —           |       | 3,111      |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| Total current liabilities                                                                                   |       | 28,918                           |       | 13,377           |       | —           |       | 42,295     |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| LONG-TERM DEBT, less current installments                                                                   |       | 355,249                          |       | 2,037            |       | —           |       | 357,286    |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| DEFERRED INCOME TAXES                                                                                       |       | 43,542                           |       | 2,120            |       | —           |       | 45,662     |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| INTERCOMPANY ACCOUNTS                                                                                       |       | 670                              |       | 2,896            |       | (3,566           | )          | —     |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| OTHER LONG-TERM LIABILITIES                                                                                 |       | 3,819                            |       | 948              |       | —           |       | 4,767      |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| Total Liabilities                                                                                           |       | 432,198                          |       | 21,378           |       | (3,566           | )          | 450,010    |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| SHAREHOLDER’S EQUITY:                                                                                  |       |                             |       |             |       |             |       |       |       |
| Common stock – Class A, 100,000 shares authorized, issued, and  outstanding at March 3, 2007 |       | 150,188                          |       | 113,448          |       | (113,448         | )          | 150,188    |       |
| Retained deficit                                                                                            |       | (368                             | )          | (1,783           | )          | 1,783            |       | (368       | )          |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| Total shareholder’s equity                                                                             |       | 149,820                          |       | 111,665          |       | (111,665         | )          | 149,820    |       |
|                                                                                                        |       |                             |       |             |       |             |       |       |       |
| Total Liabilities and Shareholder’s Equity                                                             |       | $                                | 582,018    |             | $          | 133,043          |       | $          | (115,231   | ) | $ | 599,830 |   |

 

F-32

----

** **

**Pierre Foods, Inc.**

**Condensed Statement of CashFlows**

**For the Year Ended March 1,2008**

 
| ** **                                               | ** ** | **Pierre Foods, Inc.** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|------------|------------|
| ** **                                               | ** ** | **(Issuer)**                     | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
|                                                     |       |                             |       |             |       |             |       |       |       |
| CASH FLOWS FROM OPERATING ACTIVITIES                     |       | $                                | (12,392    | )                | $          | 15,475           |       | $          | —     |   | $ | 3,083 |   |
|                                                     |       |                             |       |             |       |             |       |       |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                    |       |                             |       |             |       |             |       |       |       |
| Net cash used in the Acquisition of Zartic               |       | (63                              | )          | —           |       | —           |       | (63        | )          |
| Net cash provided by the Acquisition of Clovervale       |       | 711                              |       | —           |       | —           |       | 711        |       |
| Intercompany accounts                                    |       | 9,649                            |       | —           |       | (9,649           | )          | —     |       |
| Capital expenditures                                     |       | (3,227                           | )          | (4,545           | )          | —           |       | (7,772     | )          |
| Casualty insurance proceeds                              |       | 1,000                            |       | —           |       | —           |       | 1,000      |       |
| Proceeds from sale of plant, property and equipment      |       | —                           |       | 35               |       | —           |       | 35         |       |
| Net cash provided by (used in) investing activities      |       | $                                | 8,070      |             | $          | (4,510           | )          | (9,649     | )          | $ | (6,089 | ) |
|                                                     |       |                             |       |             |       |             |       |       |       |
| CASH FLOWS ON FINANCING ACTIVITIES:                      |       |                             |       |             |       |             |       |       |       |
| Net borrowings on revolving credit agreement             |       | 13,200                           |       | —           |       | —           |       | 13,200     |       |
| Principal payments on long-term debt                     |       | (2,190                           | )          | (1,328           | )          | —           |       | (3,518     | )          |
| Intercompany accounts                                    |       | —                           |       | (9,649           | )          | 9,649            |       | —     |       |
| Loan origination fees                                    |       | (1,215                           | )          | —           |       | —           |       | (1,215     | )          |
| Capital contributions (return of capital to parent), net |       | 11                               |       | —           |       | —           |       | 11         |       |
| Net cash provided by (used in) financing activities      |       | $                                | 9,806      |             | $          | (10,977          | )          | 9,649      |       | $ | 8,478 |   |
|                                                     |       |                             |       |             |       |             |       |       |       |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                |       | 5,484                            |       | (12              | )          | —           |       | 5,472      |       |
|                                                     |       |                             |       |             |       |             |       |       |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD           |       | 50                               |       | 39               |       | —           |       | 89         |       |
|                                                     |       |                             |       |             |       |             |       |       |       |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                 |       | $                                | 5,534      |             | $          | 27               |       | $          | —     |   | $ | 5,561 |   |

 

**Pierre Foods, Inc.**

**Condensed Statement of CashFlows**

**For the Year Ended March 3,2007**

 
| ** **                                                          | ** ** | **Pierre Foods, Inc.** | ** ** | **Guarantor**    | ** ** | ** **       | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|------------|------------|
| ** **                                                          | ** ** | **(Issuer)**                     | ** ** | **Subsidiaries** | ** ** | **Eliminations** | ** ** | **Total**  | ** ** |
|                                                                |       |                             |       |             |       |             |       |       |       |
| CASH FLOWS FROM OPERATING ACTIVITIES                                |       | $                                | 13,269     |             | $          | 528              |       | $          | —     |   | $ | 13,797 |   |
|                                                                |       |                             |       |             |       |             |       |       |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                               |       |                             |       |             |       |             |       |       |       |
| Net cash used in the Acquisition of Zartic                          |       | (91,603                          | )          | —           |       | —           |       | (91,603    | )          |
| Net cash provided by the Acquisition of Clovervale                  |       | (21,845                          | )          | —           |       | —           |       | (21,845    | )          |
| Intercompany accounts                                               |       | (2,226                           | )          | —           |       | 2,226            |       | —     |       |
| Capital expenditures                                                |       | (7,868                           | )          | (790             | )          | —           |       | (8,658     | )          |
| Proceeds from sale of plant, property and equipment                 |       | —                           |       | 23               |       | —           |       | 23         |       |
| Net cash provided by (used in) investing activities                 |       | $                                | (123,542   | )                | $          | (767             | )          | 2,226      |       | $ | (122,083 | ) |
|                                                                |       |                             |       |             |       |             |       |       |       |
| CASH FLOWS ON FINANCING ACTIVITIES:                                 |       |                             |       |             |       |             |       |       |       |
| Net borrowings on revolving credit agreement                        |       | 800                              |       | —           |       | —           |       | 800        |       |
| Principal payments on long-term debt                                |       | (14,353                          | )          | (336             | )          | —           |       | (14,689    | )          |
| Borrowing under new term loan                                       |       | 124,000                          |       | —           |       | —           |       | 124,000    |       |
| Repayment of debt in conjunction with the Acquisition of Clovervale |       | —                           |       | (1,612           | )          | —           |       | (1,612     | )          |
| Intercompany accounts                                               |       | —                           |       | 2,226            |       | (2,226           | )          | —     |       |
| Loan origination fees                                               |       | (2,627                           | )          | —           |       | —           |       | (2,627     | )          |
| Return of capital to parent, net                                    |       | (38                              | )          | —           |       | —           |       | (38        | )          |
| Net cash provided by (used in) financing activities                 |       | $                                | 107,782    |             | $          | 278              |       | (2,226     | )          | $ | 105,834 |   |
|                                                                |       |                             |       |             |       |             |       |       |       |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                           |       | (2,491                           | )          | 39               |       | —           |       | (2,452     | )          |
|                                                                |       |                             |       |             |       |             |       |       |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                      |       | 2,541                            |       | —           |       | —           |       | 2,541      |       |
|                                                                |       |                             |       |             |       |             |       |       |       |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                            |       | $                                | 50         |             | $          | 39               |       | $          | —     |   | $ | 89 |   |

 

F-33

----

 

**21.          SUBSEQUENT EVENTS**

 

Subsequentto the Company’s fiscal 2008 year end, the Company notified the administrativeagent for its credit facility, Wachovia Bank, that the Company was not able tomeet the financial covenants contained in the facility as of March 1,2008.  On June 2, 2008, the Company’slenders sent the Company a notice indicating that all borrowings under thefacility shall bear a default rate of interest beginning February 29,2008.  The default rate is 2% higher thanthe non-default rate and has resulted in an additional $1.2 million in interestas of May 31, 2008.  On June 2,2008, the Company’s lenders also sent a notice to the Company indicating thatit was in default for failing to deliver its audited financial statements andreport to the lenders.  As a result ofthese defaults, the Company’s lenders are entitled to various rights andremedies, including, among others, the right to accelerate the indebtednessunder the facility and to foreclose on the security for the facility.  In addition, as a result of these defaults,the Company is currently prohibited from borrowing under its revolving creditfacility.  Furthermore, the default underthe senior credit facility has caused a cross-default under the Company’s SwapAgreement.  On June 16, 2008, theCompany voluntarilyterminated its swap agreement. As a result of the termination, theapproximately $4.0 million in net settlement payments will be due and payableupon demand.  The Company does notcurrently have cash available to satisfy these obligations if they were to beaccelerated or payment demanded.

 

OnMay 2, 2008, the Company entered into an agreement to sell itsadministrative offices, in addition to the furniture and fixtures therein,located in Rome, Georgia for approximately $1.0 million.  Payment was received by the Company on May 13,2008, all of which the Company paid to the senior lenders.  The sale closed on May 12, 2008.  The administrative offices, and the furnitureand fixtures therein, are classified as assets held-for-sale in theconsolidated balance sheet as of March 1, 2008.  See Note 6, “Assets Held for Sale,” forfurther discussion.

 

On July 14, 2007, theCompany’s meat processing plant located in Hamilton, Alabama was destroyed by afire and was deemed to be a complete loss. During fiscal 2008, the Company received a $1.0 million advance on theproperty portion of the insurance claim. Subsequent to fiscal 2008 yearend, theCompany received a second advance of $1.0 million on the property portion ofthe insurance claim and an initial advance of $1.0 million on the businessinterruption portion of the claim.

 

F-34

----

 

**22.          SELECTED QUARTERLY FINANCIAL DATA(UNAUDITED)**

 
| ** **                                       | ** ** | **Fiscal 2008  Quarters Ended**                                      | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **June 2, 2007**                                                     | ** ** | **September 1, 2007** | ** ** | **December 1, 2007** | ** ** | **March 1, 2008** | ** ** |
| ** **                                       | ** ** | **(in thousands, except for per share amounts)** | ** ** |
|                                             |       |                                                                           |       |   |   |   |   |   |   |
| Revenues, net                                    |       | $                                                                              | 157,501    |   | $ | 151,498 |   | $ | 177,124 |   | $ | 157,147 |   |
| Costs and expenses                               |       | $                                                                              | 155,784    |   | $ | 155,301 |   | $ | 177,391 |   | $ | 401,381 |   |
| Operating income (loss)                          |       | $                                                                              | 1,717      |   | $ | (3,803 | ) | $ | (267 | ) | $ | (244,234 | ) |
| Net loss                                         |       | $                                                                              | (4,320     | ) | $ | (8,156 | ) | $ | (7,514 | ) | $ | (221,616 | ) |
| Net loss per common share—basic and diluted |       | $                                                                              | (43.20     | ) | $ | (81.56 | ) | $ | (75.14 | ) | $ | (2,216.16 | ) |

*** ***
| ** **                                                | ** ** | **Fiscal 2007  Quarters Ended**                                      | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                                | ** ** | **June 3, 2006**                                                     | ** ** | **September 2, 2006** | ** ** | **December 2, 2006** | ** ** | **March 3, 2007** | ** ** |
| ** **                                                | ** ** | **(in thousands, except for per share amounts)** | ** ** |
|                                                      |       |                                                                           |       |   |   |   |   |   |   |
| Revenues, net                                             |       | $                                                                              | 105,755    |   | $ | 98,913 |   | $ | 127,137 |   | $ | 156,037 |   |
| Costs and expenses                                        |       | $                                                                              | 99,241     |   | $ | 93,095 |   | $ | 116,976 |   | $ | 150,621 |   |
| Operating income                                          |       | $                                                                              | 6,514      |   | $ | 5,818 |   | $ | 10,161 |   | $ | 5,416 |   |
| Net income (loss)                                         |       | $                                                                              | 680        |   | $ | 130 |   | $ | 2,762 |   | $ | (1,772 | ) |
| Net income (loss) per common share—basic and diluted |       | $                                                                              | 6.80       |   | $ | 1.30 |   | $ | 27.62 |   | $ | (17.72 | ) |

 

F-35

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REPORT OF MANAGEMENT

 

The management of PierreFoods, Inc. is responsible for the preparation and integrity of theconsolidated financial statements of the Company.  The financialstatements and notes have been prepared by the Company in accordance withaccounting principles generally accepted in the United States of America and,in the judgment of management, present fairly and consistently the Company’sfinancial position and results of operations and cash flows.  Thefinancial information contained elsewhere in this annual report is consistentwith that in the financial statements.  The financial statements and otherfinancial information in this annual report include amounts that are based onmanagement’s best estimates and judgments.

 

The Company maintains asystem of internal accounting controls to provide reasonable assurance thatassets are safeguarded and that transactions are executed in accordance withmanagement’s authorization and recorded properly to permit the preparation offinancial statements in accordance with accounting principles generallyaccepted in the United States of America.

 

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

 
| /s/ NORBERT E. WOODHAMS          |                                       | /s/ CYNTHIA S. HUGHES |
|---------------------------------------|--------------------------------------------|----------------------------|
| Norbert E. Woodhams                   |                                       | Cynthia S. Hughes          |
| President and Chief Executive Officer | Vice President and Chief Financial Officer |
|                                  |                                       |
|                                  | /s/ JOSEPH W. MEYERS                  |
|                                  | Joseph W. Meyers                           |
|                                  | Vice President, Finance                    |

 

F-36

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