UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

ANNUAL REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

PIERRE FOODS, INC.

9990 Princeton Road, Cincinnati, Ohio 45246
Telephone: (513) 874-8741
(Address of principal executive offices)

Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:

None

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No x

     The aggregate market value of the voting and non-voting common equity held by non-affiliates as of the last business day of the registrant’s most recently completed second quarter (August 30, 2003) was $0.00.

     The number of shares of Pierre Foods, Inc. Common Stock outstanding as of April 30, 2004 was 100,000. The aggregate market value of Pierre Foods, Inc. Common Stock held by non-affiliates of Pierre Foods, Inc. as of April 30, 2004 was $0.00.

TABLE OF CONTENTS

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PART I

Item 1. Description of Business

General Development of Business

     Pierre Foods, Inc. (the “Company” or “Pierre Foods”) is a producer and marketer of fully-cooked branded and private label protein and bakery products and microwaveable sandwiches for the foodservice market. The Company’s predecessor was founded as a North Carolina corporation in 1966 to own and operate restaurants. The Company’s food processing business was originally developed to support its restaurants, but grew independently to become its principal business. In recognition of this fact, in May 1998, the Company, then known as “WSMP, Inc.,” changed its name to “Fresh Foods, Inc.” In June 1998, the Company consummated the purchase of substantially all of the business in Cincinnati, Ohio, and a portion of the business in Caryville, Tennessee (collectively, “Pierre Cincinnati”), conducted by the Pierre Foods Division of Hudson Foods, Inc. (“Hudson”), a subsidiary of Tyson Foods, Inc. (“Tyson”). Pierre Cincinnati was a value-added food processor selling principally to the foodservice and packaged foods markets. In September 1998, the Company implemented a tax-exempt reorganization of its corporate structure. The reorganization established Fresh Foods, Inc. as a holding company, consolidated 32 subsidiaries into 12 subsidiaries and separated the Company’s food processing and restaurant businesses. In July 1999, the Company sold its ham curing business, and in October 1999, the Company disposed of its restaurant segment. The Company now operates solely in the food processing business, its sole segment. In December 1999, the Company implemented another tax-exempt reorganization of its corporate structure to further streamline its operations into one subsidiary. In July 2000, the Company, then known as “Fresh Foods, Inc.,” changed its name to “Pierre Foods, Inc.”

     In this document, unless the context otherwise requires, the term “Company” refers to Pierre Foods, Inc. and its current and former subsidiaries. The Company’s fiscal year ended March 2, 2002 is referred to as “fiscal 2002,” its fiscal year ended March 1, 2003 is referred to as “fiscal 2003,” and its fiscal year ended March 6, 2004 is referred to as “fiscal 2004.”

Narrative Description of the Business

     The Company produces a wide variety of fully-cooked beef, chicken and pork products, hand-held convenience sandwiches and value-added bakery products. The Company’s product line consists of over 800 stock keeping units (“SKUs”). At its Cincinnati facility, the Company produces specialty beef, chicken and pork products that are typically custom-developed to meet specific customer requirements. The Company also offers proprietary product development, special ingredients and recipes as well as custom packaging and marketing programs to its customers. The Company’s bakery and sandwich assembly plant is located at the Company’s Claremont, North Carolina facility. The Company’s primary markets and distribution channels include national restaurant chains, primary and secondary schools, vending, convenience stores, warehouse clubs and other niche foodservice and packaged foods markets.

     The following table sets forth the Company’s net revenue and percent of revenue contributed during the past three fiscal years by its various product channels and classes:

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Significant Customer

     Sales to Carl Karcher Enterprises Inc (“CKE”) accounted for approximately 24% and 11%, of our net sales in fiscal 2004 and 2003, respectively. No other customer accounted for 10% or more of net sales during fiscal years 2004, 2003 and 2002.

Sales and Marketing

     The Company’s team of sales and marketing professionals has significant experience in the Company’s markets for fully-cooked protein and bakery products and microwaveable sandwiches. The sales, marketing and new product development functions are organized predominantly by distribution channel. In addition to its direct sales force, the Company utilizes a nationwide network of over 80 independent food brokers, all of whom are compensated primarily by payment of sales commissions.

     The Company’s marketing strategy includes distributor and consumer promotions, trade promotions, advertising and participation in trade shows and exhibitions. The Company participates in numerous conferences and is a member of 18 national industry organizations. Company representatives serve on the boards of a number of industry organizations, including the American Meat Institute, the American School Food Service Association, the American Commodity Distribution Association, the National Food Service Management Institute Governing Board and the National Association of Convenience Stores.

Raw Materials

     The primary materials used in the Company’s food processing operations include boneless chicken, beef and pork, flour, yeast, seasonings, breading, soy proteins, and packaging supplies. Meat proteins are generally purchased under seven day payment terms, except for the Company’s largest beef supplier, who requires payment at the time the product is shipped. Historically, raw material costs have remained stable and any price increases have generally been passed on to the customer. During fiscal 2004, the Company experienced a significant increase in the price of beef. The Company managed the increase in beef prices by passing on cost increases to customers and by improving the formulation of beef products. The Company does not hedge in the futures markets.

     The Company purchases all of its raw materials from outside sources. The Company does not depend on a single source for any significant item except for, as requested by a customer, the utilization of a single source raw material supplier for production specific to that customer. The single source supplier allows for consistent supply and competitive pricing for the Company. Furthermore, the Company believes that its sources of supply for raw materials are adequate for its present needs and does not anticipate any difficulty in acquiring such materials in the future.

Trademarks and Licensing

     The Company markets food products under a variety of brand names, including Pierre and Design^TM, Pierre Pizza Parlor^TM, Pierre Main Street Diner^TM, Pierre Select^TM, Fast Bites®, Fast Choice®, Rib-B-Q®, Hot ‘n Ready®, Big AZ®, Chop House®, Deli Breaks™ and Mom ‘n’ Pop’s® brand. The Company regards its trademarks and service marks as having significant value in marketing its food products. Pursuant to licenses acquired, the Company began producing and marketing microwaveable sandwiches under the Checkers, Krystal, Rally’s, Tony Roma’s and Nathan’s Famous brand names through its existing distribution channels. The term of each such license is subject to renewal and satisfaction of sales volume requirements. The Company has national rights to distribute products under the Rally’s, Krystal and Checkers name to vending machines, as well as distribution rights for Tony Roma’s and Nathan’s Famous products.

Seasonality

     Except for sales to school districts, which represent approximately 19% of the Company’s total sales and which decline significantly during summer, late November and December, there is no seasonal variation in the Company’s sales.

Competition

     The food production business is highly competitive and is often affected by changes in tastes and eating habits of the public, economic conditions affecting spending habits and other demographic factors. In sales of meat products, the Company faces strong price competition from a variety of large meat processing concerns, including Tyson, ConAgra, Zartic, Inc. and Advance Food Company, and from smaller local and regional operations. In sales of biscuit and yeast roll products, the Company competes with a number of large bakeries in various parts of the country. The sandwich industry is extremely fragmented, with few large direct competitors but low barriers to entry and indirect competition in the form of numerous other products. The Company’s competitors in the sandwich industry include Market Fare Foods, Bridgford Foods Corp., Jimmy Dean Foods and E.A. Sween.

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Research and Development

     The Company employs nine food technologists in the product and process development department. Ongoing food production research and development activities include development of new products, improvement of existing products and refinement of food production processes. These activities resulted in the launch of approximately 150 new SKUs in fiscal 2004. Over 36.1% of fiscal 2004 food processing sales were related to products developed in the last two years, based on the Company’s definition of a new product. In fiscal 2004, 2003 and 2002, the Company spent approximately $886,000, $649,000 and $373,000, respectively, on product development programs.

Government Regulation

     The food production industry is subject to extensive federal, state and local government regulation. The Company’s food processing facilities and food products are subject to frequent inspection by the United States Department of Agriculture (“USDA”), Food and Drug Administration (“FDA”) and other government authorities. In July 1996, the USDA issued strict new policies against contamination by food-borne pathogens and established the Hazard Analysis and Critical Control Points (“HACCP”) system. The Company is in compliance with all FDA or USDA regulations, including HACCP standards.

     The Company’s operations are governed by laws and regulations relating to workplace safety and worker health that, among other things, establish noise standards and regulate the use of hazardous chemicals in the workplace. The Company also is subject to numerous federal, state and local environmental laws. Under applicable environmental laws, the Company may be responsible for remediation of environmental conditions and may be subject to associated liabilities relating to its facilities and the land on which its facilities are or had been situated, regardless of whether the Company leases or owns the facilities or land in question and regardless of whether such environmental conditions were created by the Company or by a prior owner or tenant. The Company does not believe that compliance with environmental laws will have a substantial material effect upon the capital expenditures, earnings or competitive position of the Company and its subsidiaries.

     The Company’s operations are subject to licensing and regulation by a number of state and local governmental authorities, which include health, safety, sanitation, building and fire agencies. Operating costs are affected by increases in costs of providing health care benefits, the minimum hourly wage, unemployment tax rates, sales taxes and other similar matters over which the Company may have no control. The Company is subject to laws governing relationships with employees, including minimum wage requirements, overtime, working conditions and citizenship requirements.

Employees

     As of March 6, 2004, the Company employed approximately 1,700 persons. The Company has experienced no work stoppage attributed to labor disputes and considers its employee relations to be good.

Item 2. Properties

     Principal Offices. The Company’s main office is located in a facility it owns in Cincinnati, Ohio. The Company also leases 6,000 square feet of executive office space in Hickory, North Carolina from an affiliated party for $116,000 per year at terms no less favorable than those which could be obtained from an unaffiliated third party. The Company also owns and uses a 23,000 square foot building in Claremont, North Carolina for additional office space.

     Food Processing Plants. The Company produces its fully-cooked meat products, packaged sandwiches and specialty bread products at facilities it owns in Cincinnati, Ohio and Claremont, North Carolina. The Cincinnati facility occupies buildings totaling approximately 225,000 square feet, following a 25,000 square foot building expansion during fiscal 2003. The Claremont facility occupies buildings totaling approximately 150,000 square feet.

     The Company believes that its facilities are generally in good condition and that they are suitable for their current uses. The Company nevertheless engages periodically in construction and other capital improvement projects as the Company believes are necessary to expand and improve the efficiency of its facilities.

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Item 3. Legal Proceedings

     Pierre Foods and its subsidiaries are parties in various lawsuits arising in the ordinary course of business. In the opinion of management, any ultimate liability with respect to these matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

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

     No matter was submitted to a vote of security holders during the fourth quarter of fiscal 2004.

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PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     On July 26, 2002, PF Management, Inc. (“PF Management”) closed its management buyout of the Company. This going-private transaction resulted in the Company becoming a wholly-owned subsidiary of PF Management; accordingly, there is no public trading market for the Company’s common stock. The Company had 5,781,480 shares of common stock issued and outstanding and 2,500,000 shares of preferred stock authorized, none of which were outstanding, immediately before the closing. After the closing, the Company amended and restated its Articles of Incorporation to authorize the issuance of up to 100,000 shares of Class A common stock as the only authorized class of capital stock of the Company. All 100,000 shares of authorized common stock were issued to PF Management in connection with the management buyout. All per share amounts have been retroactively restated in the accompanying Consolidated Financial Statements and Notes to Consolidated Financial Statements for all periods presented to reflect the transaction. See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

     The Company did not declare a cash dividend during fiscal 2004 or fiscal 2003. The Company’s debt instruments restrict its ability to pay dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and the Company’s consolidated financial statements and supplementary data. Regardless of the scope of such restrictions, the Company’s policy is to reinvest any earnings rather than pay dividends.

     No securities of the Company were sold by the Company during fiscal 2004.

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Item 6. Selected Financial Data

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

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	(1)		Reflects income from discontinued operations in the amount of $2,828 in fiscal 2000. In addition, reflects gain from disposal of discontinued operations of $6,802 in fiscal 2000.
	(2)		Reflects an extraordinary loss from early extinguishment of debt in the amount of $455 in fiscal 2001 and $52 in fiscal 2000.
	(3)		Reflects a loss due to a cumulative effect of accounting change in the amount of $18,605 in fiscal 2003. See Note 2– Summary of Significant Accounting Policies— to the consolidated financial statements.

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

     Certain statements made in this document are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from expected results. These risks and uncertainties include: substantial leverage and insufficient cash flow from operations; restrictions imposed by the Company’s debt instruments; management control; restriction of payment of dividends; competitive considerations; government regulation; general risks of the food industry; adverse changes in food costs and availability of supplies; dependence on key personnel; potential labor disruptions and other factors, risks and uncertainties identified in Exhibit 99.1 to our Annual Report on Form 10-K filed with the SEC on March 9, 2004. This list of risks and uncertainties is not exhaustive. Also, new risk factors emerge over time. Investors should not place undue reliance on the predictive value of forward-looking statements.

     Results of Operations

     Each quarter of the fiscal year contains 13 weeks except for the infrequent fiscal years with 53 weeks. The results for fiscal 2004 contain 53 weeks. The results for fiscal 2003 and 2002 contain 52 weeks.

     Results for fiscal 2004, 2003 and 2002 are shown below:

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Fiscal 2004 Compared to Fiscal 2003

     Revenues, net. Net revenues increased by $82.2 million, or 29.7%. The increase in net revenues was primarily due to the substantial development of national business with an existing customer, increased retail business with an existing customer, short term co-packing operations and an increase in sales of existing product lines. Of all core customer channels, which include restaurants, schools, vending and convenience stores, the restaurant channel had the greatest increase in demand.

     Cost of goods sold. Cost of goods sold increased by $70.1 million, or 38.1%. As a percentage of revenues, cost of goods sold increased from 66.6% to 70.9%. This increase primarily was due to a change in product mix to lower margin products and increased raw material prices (particularly beef prices), offset by allocating fixed costs over increased production as a result of the Cincinnati plant expansion.. In fiscal 2004, beef, pork and chicken prices increased approximately 13%, 32% and 2%, respectively, compared to fiscal 2003.

     Selling, general and administrative. Selling, general and administrative expenses increased by $8.7 million, or 12.1%, primarily due to an increase in distribution expense on higher product volumes and increased marketing costs. As a percentage of revenues, selling, general and administrative expenses decreased from 25.8% to 22.3%.

     Depreciation and amortization. Depreciation and amortization increased by $0.5 million, or 11.6%, primarily due to the Cincinnati plant expansion. As a percentage of net operating revenues, depreciation and amortization decreased from 1.5% to 1.3%.

     Interest expense and other income, net. The primary component of interest expense and other income, net for fiscal 2004 and fiscal 2003 was interest expense. Interest expense consists primarily of interest on fixed and variable rate long-term debt, in addition to expense incurred due to the early extinguishment of the Company’s $50 million revolving credit loan in fiscal 2004. Net other expense increased by $3.2 million or 23.2% in fiscal 2004 due to increased borrowings under the revolving credit facility and due to the write-off of loan commitment fees and a prepayment penalty associated with the change in credit facilities and early extinguishment of that credit facility, both of which were charged to interest expense (see -— “Liquidity and Capital Resources” below).

     Income tax provision. The effective tax rate for fiscal 2004 was 47.6% compared to 38.7% for fiscal 2003. The increase in the effective tax rate is primarily due to an increase in state tax expense of 3.4% and a decrease in the benefit realized from Columbia Hill Aviation.

Fiscal 2003 Compared to Fiscal 2002

     Revenues, net. Net revenues increased by $33.1 million, or 13.6%. The increase in net revenues was primarily due to the substantial development of new customers, to the introduction of a new sandwich line within the foodservice distribution channel and to increased revenues in existing product lines. Of all core customer channels, which include restaurants, schools, vending and convenience stores, the restaurant channel had the greatest increase in demand.

     Cost of goods sold. Cost of goods sold increased by $23.3 million, or 14.5%. As a percentage of revenues, cost of goods sold increased from 66.1% to 66.6%. This increase primarily was due to a change in product mix to lower margin products and unfavorable insurance and utilities expense, offset by a decrease in the prices of beef, pork and chicken, the Company’s primary raw materials. In fiscal 2003, beef, pork and chicken prices decreased approximately 9%, 34% and 6%, respectively, compared to fiscal 2002. The cost of labor for fiscal 2003 was consistent with fiscal 2002.

     Selling, general and administrative. Selling, general and administrative expenses increased by $9.0 million, or 14.3%, primarily due to an increase in overhead costs to support the increased sales volume. As a percentage of revenues, selling, general and administrative expenses increased from 25.6% to 25.8%.

     Depreciation and amortization. Depreciation and amortization decreased by $2.3 million, or 35.9%, primarily due to the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142 (“SFAS 142”) in fiscal 2003, which discontinued amortization of goodwill and intangibles with indefinite lives, offset by depreciation related to an increase in capital expenditures due to a significant plant expansion. As a percentage of net operating revenues, depreciation and amortization decreased from 2.6% to 1.5%.

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     Interest expense and other income, net. The primary component of interest expense and other income, net for fiscal 2003 and fiscal 2002 was interest expense, which consists primarily of interest on fixed and variable rate long-term debt. Net other expense increased by $0.9 million, or 7.3%. This increase primarily was due to a change in the credit facility and increased borrowings under that facility (see -— “Liquidity and Capital Resources” below).

     Income tax provision. The effective tax rate for fiscal 2003 was 38.7% compared to 99.9% for fiscal 2002. The decrease in the effective tax rate is primarily due to the limitation on the deductibility of executive compensation in fiscal 2002, combined with the effects of permanent differences in fiscal 2002.

Critical Accounting Policies and Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require the Company to make estimates and assumptions about future events and their impact on amounts reported in the financial statements and related notes. Since future events and the impact of those events cannot be determined with certainty, the actual results will inevitably differ from the Company’s estimates. Such differences could be material to the financial statements.

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

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

     Revenue Recognition. Revenue from sales of food processing products is recorded at the time title transfers. Standard shipping terms are FOB destination, therefore title passes at the time the product is delivered to the customer. Revenue is recognized as the net amount to be received after deductions for estimated discounts, product returns and other allowances. These estimates are based on historical trends and expected future payments (see also Promotions below).

     Goodwill and Other Intangible Assets. During fiscal 2002 and prior years, Goodwill and other intangible assets were being amortized using the straight line method over a 30 year period. The carrying value of goodwill and other intangible assets was evaluated periodically as events and circumstances indicate a possible inability to recover its carrying amount. Amortization expense recognized for the fiscal year ended March 2, 2002 was $2.7 million.

     In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS 142, “Goodwill and Other Intangible Assets,” which was effective for the fiscal year beginning March 3, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. Upon the Company’s adoption of SFAS 142 on March 3, 2002, the Company ceased amortizing goodwill and indefinite-lived intangibles. Also effective March 3, 2002, the Company reclassified assembled workforce to goodwill.

     As prescribed under SFAS 142, the Company tested goodwill for impairment during fiscal 2003 using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of the entity with its net asset value (or carrying amount), including goodwill. If the fair value of the entity exceeds its net asset value, goodwill of the entity is considered not impaired and the second step of the goodwill impairment test is not needed. If the net asset value of the entity exceeds the fair market value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the entity’s goodwill with the carrying amount of that goodwill. If the carrying amount of the entity’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Subsequent to recognizing an impairment loss, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Reversal of a previously recognized impairment loss is prohibited.

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     During fiscal 2003, upon adoption of SFAS 142, the Company utilized a valuation technique based on market values of publicly-traded equity, as adjusted, plus publicly-owned subordinated notes, which were determined in conjunction with the management buyout in fiscal 2003 (See Note 1 – Basis of Presentation, Acquisition and Discontinued Operations for discussion on Management Buyout). The Company’s analysis showed that the carrying value of the goodwill exceeded its fair value, requiring the Company to determine the implied fair value of its goodwill. Upon completion of that analysis, management determined that the entire net carrying value of its goodwill was impaired. The carrying amount, $29.0 million, net of the related effect on income taxes, $10.4 million, was written-off by the Company and reported as the Cumulative Effect of an Accounting Change, net of income taxes in the statement of operations. See Note 2 –Summary of Significant Accounting Policies for further discussion.

     Economic Useful Life of Intangible Assets. The Company reviews the economic useful life of its intangible assets annually. The determination of the economic useful life of an intangible asset requires a significant amount of judgment and entails significant subjectivity and uncertainty.

     Promotions. Promotional expenses associated with rebates, marketing promotions and special pricing arrangements are recorded as a reduction of revenues or selling expense at the time the sale is recorded. Certain of these expenses are estimated based on historical trends and expected future payments to be made under these programs. The Company believes the estimates recorded in the financial statements are reasonable estimates of the Company’s liability under the programs.

     Going Concern Assumption. Significant assumptions underlie the belief that the Company anticipates that its fiscal 2005 cash requirements for working capital and debt service will be met through a combination of funds provided by operations and borrowings under its $40 million credit facility, including, among other things, that there will be no material adverse developments in the business, liquidity or significant capital requirements of the Company.

     New Accounting Pronouncements. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143 (“SFAS 143”), “Accounting for Asset Retirement Obligations,” was adopted by the Company beginning March 2, 2003. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement cost. The adoption of SFAS 143 did not have a material impact on the Company’s financial position and results of operations.

     In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (“SFAS 148”) — “Accounting for Stock-Based Compensation — Transition and Disclosure.” This statement amends Statement of Financial Accounting Standards 123, “Accounting for Stock-Based Compensation” to provide alternative methods of transition for an entity that changes to the fair value based method of accounting for stock-based employee compensation and changes the disclosure requirements. This statement was effective for financial statements for fiscal years ending after December 15, 2002. The Company adopted SFAS No. 148 effective March 1, 2003. During fiscal 2003, effective with the management buyout discussed in Note 1, all stock option plans were terminated and all outstanding options were cancelled, however, the necessary disclosure requirements of SFAS 148 are presented in Note 2 of the Notes to Consolidated Financial Statements.

     In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (“SFAS 149”), — “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” The statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities under Statement of Financial Accounting Standards No. 133. SFAS 149 is effective for all contracts entered into or modified after June 30, 2003. This Statement did not have an impact on the Company’s financial statements.

     In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (“SFAS 150”), —“Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement requires certain freestanding financial instruments to be reported as liabilities by their issuers. The provisions of SFAS 150, which also include a number of new disclosure requirements, are effective for instruments entered into or modified after May 31, 2003 and pre-existing instruments as of the beginning of the first interim period that commences after June 15, 2003. This statement did not have an impact on the Company’s financial statements.

     In November 2002, the FASB issued FASB Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), which expands the disclosures a guarantor is required to provide in its annual and interim financial statements regarding its obligations for certain guarantees. Disclosures are required to be included in financial statements issued after December 15, 2002 (see Note 7). FIN 45 also requires the guarantor to recognize a liability for the fair value of an obligation assumed for guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on the Company’s financial position and results of operations.

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     In December 2003, the FASB issued FIN 46R, “Consolidation of Variable Interest Entities” (“FIN 46R”), which replaces the same titled FIN 46 that was issued in January 2003. FIN 46R addresses how to identify variable interest entities and the criteria that require a company to consolidate such entities in its financial statements. FIN 46R is effective for the first reporting period that ends after March 15, 2004. The Company does not believe that the adoption of FIN 46R will have a material impact on its financial position and results of operations.

Liquidity and Capital Resources

     Net cash provided by operating activities was $3.3 million for fiscal 2004, compared to net cash provided by operating activities of $0.04 million and $9.9 million for fiscal 2003 and fiscal 2002, respectively. The increase in net cash provided by operating activities from fiscal 2003 to fiscal 2004 was primarily due to the increase in net income of $18.3 million. The primary components of net cash provided by operating activities for fiscal 2004 were: (1) a decrease in deferred income taxes of $1.3 million; (2) an increase in trade accounts payable and other accrued liabilities of $2.4 million; and (3) the write-off of deferred loan origination fees of $1.2 million; offset by (4) an increase in inventories of $6.4 million and (5) an increase in receivables of $2.0 million. The decrease in net cash provided by operating activities from fiscal 2002 to fiscal 2003 was primarily due to the decrease in net income of $16.8 million resulting from the loss associated with the cumulative effect of accounting change in fiscal 2003. The primary components of net cash provided by operating activities for fiscal 2003 were: (1) an increase in inventories of $8.7 million; (2) an increase in accounts receivable of $2.2 million and (3) an increase in refundable income taxes, prepaid expenses and other assets of $1.7 million; offset by (4) an increase in trade accounts payable and other accrued liabilities of $4.9 million.

     Net cash used in investing activities was $9.8 million for fiscal 2004. The primary components were routine capital expenditures and a significant plant expansion totaling $10.0 million. Net cash used in investing activities was $16.1 million for fiscal 2003. The primary component was routine capital expenditures and a significant plant expansion totaling $16.2 million. Net cash used in investing was $7.3 million for fiscal 2002. The primary components were for routine capital expenditures totaling $6.0 million.

     Net cash provided by financing activities was $6.4 million for fiscal 2004. The primary components were (1) borrowings under the new revolving credit facility of $13.3 million and (2) borrowings under the equipment term loan subline and the real estate term loan subline of $5.0 million each, offset by (3) repayment of revolving credit agreement with former lender of $15.1 million; (4) principal payments on long-term debt of $0.8 million and (5) loan origination fees of $0.7 million. Net cash provided by financing activities was $11.8 million for fiscal 2003. The primary components were (1) borrowing under the revolving credit facility of $15.1 million; offset by (2) loan origination fees of $1.6 million incurred in fiscal 2003 that did not occur in fiscal 2002; (3) special purpose entity distributions of $1.4 incurred in fiscal 2003 that did not occur in fiscal 2002 and (4) principal payments on long-term debt of $0.3 million. Net cash provided by financing activities was $0.2 million for fiscal 2002, due to the capital contribution to the special purpose leasing entity (see Aircraft Operating Lease Agreement below), offset by principal payments on the Company’s capital leases and principal payments related to the obligation of the special purpose leasing entity.

     Effective August 13, 2003, the Company terminated its five-year variable-rate $50 million revolving credit facility. Existing debt issuance costs related to the Company’s former $50 million facility in the amount of $1.2 million were written off and charged to interest expense in conjunction with the termination of this facility. A prepayment penalty in the amount of $1.0 million was paid to the former lender and charged to interest expense, also in conjunction with the termination of this facility. Also effective August 13, 2003, the Company obtained a three-year variable-rate $40 million revolving credit facility from a new lender, which includes a $5 million real estate term loan subline, a $5 million equipment term loan subline and a $7.5 million letter of credit subfacility. Funds available under this new facility are available for working capital requirements, permitted investments and general corporate purposes. Borrowings under the new facility bear interest at floating rates based upon the interest rate option selected from time to time by the Company and are secured by a first-priority security interest in substantially all of the Company’s assets. The interest rate for borrowings under the new revolving credit facility at March 6, 2004 was 5% (prime plus 1%). Borrowings under the new facility are due the earlier of ninety days prior to the redemption of the Company’s Senior Notes due 2006 (“the Notes”) or August 13, 2006. Repayment is also required in the amount of the proceeds from the sale of any collateral. The interest rate for the new real estate term loan subline and the equipment term loan subline is 5.25% (prime plus 1.25%). In addition, the Company is required to satisfy certain financial covenants regarding cash flow and capital expenditures.

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     As of March 6, 2004, the Company had $0.2 million in cash and cash equivalents on hand, had outstanding borrowings under its revolving credit facility of $13.3 million and borrowing availability of approximately $12.9 million. Also, as of March 6, 2004, the Company had borrowings under the real estate subline and the equipment subline of $4.7 million and $4.6 million, respectively. As of March 1, 2003, the Company had $0.3 million in cash and cash equivalents on hand, had outstanding borrowings under the former credit facility of $15.1 million and had approximately $4.6 million of additional borrowing availability.

     Fiscal 2004 net cash provided by operating activities was sufficient to provide necessary working capital and to service existing debt. These cash requirements were satisfied through a combination of funds provided by cash on hand at the end of fiscal 2003, net cash provided by operating activities during fiscal 2004, and borrowings under both the former credit facility and the new credit facility. The Company anticipates that its fiscal 2005 cash requirements for working capital and debt service will be met through a combination of funds provided by operations and borrowings under the new credit facility.

     The Company has budgeted approximately $9.9 million for capital expenditures in fiscal 2005. These expenditures are primarily designated for routine food processing capital improvement projects and other miscellaneous expenditures. The Company believes that funds from operations and funds from its credit facility, as well as the Company’s ability to enter into capital or operating leases, will be adequate to finance these capital expenditures.

     If the Company continues its historical revenue growth trend as expected, then the Company will be required to raise and invest additional capital for additional plant expansion projects to provide operating capacity to satisfy increased demand. The Company believes that future cash requirements for these plant expansion projects would need to be met through other long-term financing sources, such as an increase in borrowing availability under the Company’s credit facility, the issuance of industrial revenue bonds or equity investment. The incurrence of additional long-term debt is governed and restricted by the Company’s existing debt instruments. Furthermore, there can be no assurance that additional long-term financing will be available on advantageous terms (or any terms) when needed by the Company.

     The Company anticipates continued sales growth in key market areas. As noted above, however, this growth will require future capital expansion projects to increase existing plant capacity in order to satisfy increased demand. Sales growth, improved operating performance and expanded plant capacity — none of which is assured — will be necessary for the Company to continue to service existing debt.

     Aircraft Operating Lease Agreement. The Company leases an aircraft from Columbia Hill Aviation, LLC (“Columbia Hill Aviation”), owned 100% by PF Management. Columbia Hill Aviation is not a subsidiary of the Company; however, the Company considers Columbia Hill Aviation a non-independent special purpose entity. Accordingly, Columbia Hill Aviation’s financial condition, results of operations and cash flows have been included in the Company’s consolidated financial statements. Under the terms of the operating lease with Columbia Hill Aviation, and the financing agreements between Columbia Hill Aviation and its creditor, the Company does not maintain the legal rights of ownership to the aircraft, nor does Columbia Hill Aviation’s creditor maintain any legal recourse to the Company. On March 8, 2004 the Company took title to the aircraft. See also “Restructuring of Senior Notes” below concerning the Company’s assumption, subsequent to March 6, 2004, of the airplane lease previously held by Columbia Hill Aviation.

     Logistics Agreement. Effective March 3, 2002, the Company entered into a one-year logistics agreement with PF Distribution, LLC (“PF Distribution”), owned 100% by PF Management. The agreement was amended on March 2, 2003 to provide for a continuous term. Under the agreement, PF Distribution served as the exclusive logistics agent for the Company, and provided all warehousing, fulfillment and transportation services to the Company. The cost of PF Distribution’s services was based on flat rates per pound, which were calculated based on weight and volume characteristics of products, inventory pounds maintained and inventory pounds shipped. Rates were determined based on historical costs and industry standards. In fiscal 2004, distribution expense recorded in selling, general and administrative expense was approximately $31.1 million, of which approximately $30.1 million had been paid to PF Distribution as of March 6, 2004. In fiscal 2003, distribution expense recorded in selling, general and administrative expense was approximately $21.5 million, of which approximately $21.3 million had been paid to PF Distribution as of March 1, 2003. See also “Restructuring of Senior Notes” below concerning the termination, subsequent to March 6, 2004, of the logistics agreement with PF Distribution.

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     Restructuring of Senior Notes. On March 8, 2004, following a consent solicitation in which consents of holders of $112.4 million in aggregate principal amount of the Company’s outstanding Notes, representing 97.74% of the outstanding Notes, consented to a Fourth Supplemental Indenture between the Company and U.S. Bank National Association, as trustee (the “Trustee”), the Company entered into the Fourth Supplemental Indenture with the Trustee. Among other things, the Fourth Supplemental Indenture increased the annual interest rate on the Notes from 10.75% to 12.25% through March 31, 2005 and 13.25% thereafter; required the payment of a cash consent fee equal to 3% of the principal amount of Notes held by each consenting noteholder; granted to the noteholders liens on the assets of the Company and its subsidiaries, such liens being junior to the senior liens securing the Company’s current credit facility, granted to noteholders a repurchase right allowing all of the noteholders to require the Company to repurchase their Notes at par plus accrued interest on March 31, 2005, provided for the payment of a portion of certain cash flow of the Company (referred to as “excess cash”) to reduce the principal amount of Notes outstanding at the end of the Company’s fiscal years; added restrictive covenants limiting the compensation payable to certain senior executives of the Company and limiting future related party transactions; required the termination of all related party transactions, except for certain specifically-permitted transactions (see Item 13, “Certain Relationships and Related Transaction”); provided for the assumption by the Company of approximately $15.4 million of subordinated debt of PF Management; required the Company to comply with certain corporate governance standards, including appointing an independent director acceptable to the Company and the noteholders to its board and hiring an independent auditor to monitor the Company’s compliance with the Indenture; and waived any and all defaults of the Indenture existing as of March 8, 2004.

     The restrictive covenants limiting compensation payable to certain senior executives of the Company contain provisions for bonuses based on the profitability of the Company and cash payments made on the Notes which could significantly increase the limitation.

     Concurrently with the execution of the Fourth Supplemental Indenture the Company took title to an aircraft transferred from a related party subject to existing purchase money debt; forgave the $993,247 related party note receivable from its principal shareholders; cancelled the balances owed by the Company to certain related parties; and assumed the operating leases of PF Distribution in connection with the Fourth Supplemental Indenture. Minimum lease payments on the former PF Distribution operating leases will be $3.0 million during fiscal year 2005, $2.9 million during fiscal year 2006 and $0.5 million during fiscal year 2007.

     As noted above, the Company assumed $15.4 million of subordinated debt of PF Management in connection with the Fourth Supplemental Indenture. Principal payments on the former PF Management debt will be $4.8 million during fiscal year 2005, $3.6 million during fiscal year 2006 and $7.0 million during fiscal year 2007. The interest rates on the former PF Management debt range from 4.4% to 25%.

     Other Events. On May 11, 2004, the shareholders of PF Management, the sole shareholder of the Company, agreed to sell their shares of stock in PF Management to an affiliate of Madison Dearborn Capital Partners (“MDCP”). The sale is scheduled to close on or around June 30, 2004, subject to the satisfaction or waiver of conditions typical of leveraged buyout transactions, including (among others) these:

•     The buyer’s receipt of, and reasonable satisfaction with, consents of certain of the Company’s customers and suppliers and the acquiescence of federal antitrust authorities;

•     The absence at the closing of a material adverse change in the assets, liabilities, business, operations, results or condition of the Company and PF Management since November 29, 2003;

•     The buyer’s receipt of, and reasonable satisfaction with, audited financial statements of the Company for the fiscal year ended March 6, 2004 and of PF Management for the same fiscal year and the two immediately preceding fiscal years;

•     The buyer’s receipt of tenders of not less than a majority of the aggregate principal amount of the Company’s 10-3/4% senior notes due 2006; and

•     The buyer’s receipt of financing necessary to consummate the transaction.

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     The Company’s President and Chief Executive Officer, Norbert E. Woodhams, and its Senior Vice President of Sales and Marketing, Robert C. Naylor, have signed amended employment agreements committing them to continue working for the Company after the sale. The stated term of employment for each executive is one year, but each agreement will renew automatically and continuously year-to-year unless terminated. Messrs. Woodhams and Naylor are both expected to make significant equity investments in the Company under its new owner.

     MDCP has received and has accepted commitment letters from Wachovia Bank, N.A. and Bank of America, N.A., and certain of their affiliates, committing to provide debt financing for this transaction. The debt financing commitments are subject to conditions typical of LBO financing, such as:

•     The receipt of all consents and approvals necessary or, in the reasonable opinion of the banks, desirable in connection with the transaction;

•     The absence at the closing of a material adverse effect on the business of the Company since March 1, 2003; and

•     Completion of MDCP’s purchase of the Company, and the remainder of the transaction, consistent with the terms and conditions of the definitive documentation.

     There is no assurance that any or all of the conditions to the banks’ obligations to finance this transaction will be satisfied or waived or that any or all of the other conditions to the buyer’s and shareholders’ obligations to close the transaction will be satisfied or waived or that the transaction will close in accordance with the agreed-upon terms (or at all).

Commercial Commitments, Contingencies and Contractual Obligations

     The Company provided a secured letter of credit in the amount of $3.5 million in both fiscal 2004 and fiscal 2003 and $1.5 million in fiscal 2002 to its insurance carrier for the underwriting of certain performance bonds. This letter of credit expires in fiscal 2005. The Company also provides secured letters of credit to its insurance carriers for outstanding and potential worker’s compensation and general liability claims. Letters of credit for these claims totaled $75,000 in both fiscal 2004 and fiscal 2003 and $225,000 in fiscal 2002. In addition, the Company provides secured letters of credit to a limited number of suppliers. Letters of credit for suppliers totaled $250,000 in both fiscal 2004 and fiscal 2003 and $500,000 in fiscal 2002.

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     The Company is involved in various legal proceedings. Management believes, based on the advice of legal counsel, that the outcome of such proceedings will not have a materially adverse effect on the Company’s financial position or future results of operations and cash flows.