PIERRE FOODS INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 4, 2004

[ ] 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

PIERRE FOODS, INC.

(Exact name of registrant as specified in its charter)

North Carolina
(State or other jurisdiction of incorporation or organization)

56-0945643
(I.R.S. Employer Identification No.)

9990 Princeton Road
Cincinnati, Ohio 45246
(Address of principal executive offices) (zip code)

Registrant’s telephone number, including area code: (513) 874-8741

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

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 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at October 15, 2004

Class A Common Stock		100,000

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PIERRE FOODS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets


	(Unaudited)
	Successor Pierre		Predecessor Pierre
	September 4, 2004		March 6, 2004
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	—	$	204,865
Certificates of deposit		—		1,240,000
Accounts receivable, net		29,701,962		25,641,608
Inventories		44,313,733		38,974,018
Deferred income taxes		4,580,670		3,569,766
Prepaid expenses and other current assets (includes prepayments to related parties of $24,000 at March 6, 2004)		4,134,090		3,236,867

Total current assets		82,730,455		72,867,124

PROPERTY, PLANT AND EQUIPMENT, NET		57,337,374		60,695,455

OTHER ASSETS:
Trade name, net		39,937,599		38,808,636
Customers, net		27,252,396		—
Licenses, net		11,825,769		—
Formulas, net		92,330,797		—
Goodwill		172,514,704		—
Note receivable – related party		—		993,247
Deferred income taxes		—		482,215
Deferred loan origination fees, net		8,190,098		1,627,601
Other		—		296,694

Total other assets		352,051,363		42,208,393

Total Assets	$	492,119,192	$	175,770,972

See accompanying notes to unaudited consolidated financial statements.

PIERRE FOODS, INC. AND SUBSIDIARIES


	(Unaudited)
	Successor Pierre			Predecessor Pierre
	September 4, 2004			March 6, 2004
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt	$	1,742,773		$	1,628,276
Trade accounts payable		9,926,707			7,170,004
Accrued interest		2,478,680			3,242,623
Accrued payroll and payroll taxes		4,812,915			5,745,950
Accrued promotions		3,853,083			3,064,769
Income taxes payable		—			39,248
Accrued taxes (other than income and payroll)		1,315,383			901,693
Other accrued liabilities (includes related party liabilities of $4,503,219 at March 6, 2004)		897,552			4,964,703

Total current liabilities		25,027,093			26,757,266

LONG-TERM DEBT, less current installments		276,555,448			142,065,760

DEFERRED INCOME TAXES		40,005,957			—

OTHER LONG-TERM LIABILITIES		10,401,716			327,411

SHAREHOLDERS’ EQUITY:
Common stock – Class A, 100,000 shares authorized, issued and outstanding at September 4, 2004 and March 6, 2004		145,577,253			29,438,172
Retained deficit		(5,448,275	)		(17,817,637	)
Note receivable – related party		—			(5,000,000	)

Total shareholders’ equity		140,128,978			6,620,535

Total Liabilities and Shareholders’ Equity	$	492,119,192		$	175,770,972

See accompanying notes to unaudited consolidated financial statements.

PIERRE FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)


				Predecessor Pierre			Successor Pierre
	Predecessor Pierre			For the Period			For the Period
	Thirteen Weeks			June 6, 2004			July 1, 2004
	Ended			Through			Through
	August 30, 2003			June 30, 2004			September 4, 2004
REVENUES	$	81,248,052		$	23,535,282		$	75,439,415

COSTS AND EXPENSES:
Cost of goods sold (includes related party transactions totaling $1,089,235 in predecessor second quarter 2004)		58,209,167			19,980,334			59,432,272
Selling, general and administrative expenses (includes related party transactions totaling $7,568,055 in predecessor second quarter 2004)		18,964,282			7,608,479			9,554,960
Loss on disposition of property, plant and equipment, net		632			—			—
Depreciation and amortization		1,164,222			358,777			5,529,424

Total costs and expenses		78,338,303			27,947,590			74,516,656

OPERATING INCOME (LOSS)		2,909,749			(4,412,308	)		922,759

OTHER INCOME (EXPENSE):
Interest expense		(5,883,160	)		(1,754,115	)		(9,029,105	)
Other income, net		—			1,784			—
Other expense, net		(5,883,160	)		(1,752,331	)		(9,029,105	)

LOSS BEFORE INCOME TAX BENEFIT		(2,973,411	)		(6,164,639	)		(8,106,346	)
INCOME TAX BENEFIT		1,039,296			2,021,385			2,658,071

NET LOSS	$	(1,934,115	)	$	(4,143,255	)	$	(5,448,275	)

NET LOSS PER COMMON SHARE – BASIC AND DILUTED	$	(19.34	)	$	(41.43	)	$	(54.48	)

WEIGHTED AVERAGE SHARES OUTSTANDING BASIC AND DILUTED		100,000			100,000			100,000

See accompanying notes to unaudited consolidated financial statements.

PIERRE FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)


				Predecessor Pierre			Successor Pierre
	Predecessor Pierre			For the Period			For the Period
	Twenty-Six Weeks			March 7, 2004			July 1, 2004
	Ended			Through			Through
	August 30, 2003			June 30, 2004			September 4, 2004
REVENUES	$	162,727,921		$	115,548,564		$	75,439,415

COSTS AND EXPENSES:
Cost of goods sold (includes related party transactions totaling $2,529,440 in predecessor fiscal 2004)		114,429,082			87,025,521			59,432,272
Selling, general and administrative expenses (includes related party transactions totaling $15,408,207 in predecessor fiscal 2004)		39,061,557			26,446,857			9,554,961
Loss on disposition of property, plant and equipment, net		632			339,921			—
Depreciation and amortization		2,314,979			1,544,903			5,529,424

Total costs and expenses		155,806,250			115,357,202			74,516,657

OPERATING INCOME		6,921,671			191,362			922,758

OTHER INCOME (EXPENSE):
Interest expense		(9,330,640	)		(6,537,519	)		(9,029,105	)
Other income, net		—			1,784			—

Other expense, net		(9,330,640	)		(6,535,735	)		(9,029,105	)

LOSS BEFORE INCOME TAX BENEFIT		(2,408,969	)		(6,344,373	)		(8,106,347	)
INCOME TAX BENEFIT		851,089			2,080,337			2,658,071

NET LOSS	$	(1,557,880	)	$	(4,264,035	)	$	(5,448,275	)

NET LOSS PER COMMON SHARE – BASIC AND DILUTED	$	(15.58	)	$	(42.64	)	$	(54.48	)

WEIGHTED AVERAGE SHARES OUTSTANDING BASIC AND DILUTED		100,000			100,000			100,000

See accompanying notes to unaudited consolidated financial statements.

PIERRE FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE PERIOD FROM JUNE 5, 2004 THROUGH SEPTEMBER 4, 2004


	Common			Retained			Receivable			Total
	Stock			Earnings			From			Shareholders’
	Class A			(Deficit)			Shareholder			Equity
PREDECESSOR PIERRE
BALANCE AT JUNE 5, 2004	$	29,098,533		$	(28,262,693	)	$	(5,000,000	)	$	(4,164,160	)
Net loss		—			(4,143,255	)		—			(4,143,255	)

BALANCE AT JUNE 30, 2004		29,098,533			(32,405,948	)		(5,000,000	)		(8,307,415	)
PURCHASE ACCOUNTING ADJUSTMENT		(29,098,533	)		32,405,948			5,000,000			8,307,415
SUCCESSOR PIERRE
PURCHASE ALLOCATION		145,577,253			—			—			145,577,253
Net loss		—			(5,448,275	)		—			(5,448,275	)

BALANCE AT SEPTEMBER 4, 2004	$	145,577,253		$	(5,448,275	)	$	—		$	140,128,978

See accompanying notes to unaudited consolidated financial statements.

PIERRE FOODS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE PERIOD FROM MARCH 6, 2004 THROUGH SEPTEMBER 4, 2004


	Common			Retained			Receivable			Total
	Stock			Earnings			From			Shareholders’
	Class A			(Deficit)			Shareholder			Equity
PREDECESSOR PIERRE
BALANCE AT MARCH 6, 2004	$	29,438,172		$	(17,817,637	)	$	(5,000,000	)	$	6,620,535
Net loss		—			(4,264,035	)		—			(4,264,035	)
Transaction with common shareholder		(339,639	)		(10,324,276	)		—			(10,663,915	)

BALANCE AT JUNE 30, 2004		29,098,533			(32,405,948	)		(5,000,000	)		(8,307,415	)
PURCHASE ACCOUNTING ADJUSTMENT		(29,098,533	)		32,405,948			5,000,000			8,307,415
SUCCESSOR PIERRE
PURCHASE ALLOCATION		145,577,253			—			—			145,577,253
Net loss		—			(5,448,275	)		—			(5,448,275	)

BALANCE AT SEPTEMBER 4, 2004	$	145,577,253		$	(5,448,275	)	$	—		$	140,128,978

See accompanying notes to unaudited consolidated financial statements.

PIERRE FOODS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)


				Predecessor Pierre			Successor Pierre
	Predecessor Pierre			For the Period			For the Period
	Twenty-Six Weeks			March 7, 2004			July 1, 2004
	Ended			Through			Through
	August 30, 2003			June 30, 2004			September 4, 2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(1,557,880	)	$	(4,264,035	)	$	(5,448,275	)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		2,314,979			1,544,903			5,529,424
Amortization of deferred loan origination fees		416,637			716,478			4,504,010
Change in deferred income taxes		—			(675,222	)		(1,820,378	)
Write-off of deferred loan origination fees		1,233,530			—			—
Loss on disposition of property, plant and equipment, net		632			339,921			—
Decrease in other assets		35,716			296,694			—
Increase (decrease) in other long-term liabilities		(179,531	)		(94,477	)		84,115
Changes in operating assets and liabilities:
Receivables		(1,105,635	)		5,660,719			(9,721,073	)
Inventories		(2,059,890	)		(4,911,529	)		1,592,762
Refundable income taxes, prepaid expenses and other current assets		853,617			(455,532	)		(2,747,197	)
Trade accounts payable and other accrued liabilities		2,138,874			2,227,855			614,361

Total adjustments		3,648,929			4,649,810			(1,963,976	)

Net cash provided by (used in) operating activities		2,091,049			385,775			(7,412,251	)

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of property, plant and equipment		500			—			—
Capital expenditures		(7,329,138	)		(2,084,160	)		(455,418	)

Net cash used in investing activities		(7,328,638	)		(2,084,160	)		(455,418	)

See accompanying notes to unaudited consolidated financial statements.


				Predecessor Pierre			Successor Pierre
	Predecessor Pierre			For the Period			For the Period
	Twenty-Six Weeks			March 7, 2004			July 1, 2004
	Ended			Through			Through
	August 30, 2003			June 30, 2004			September 4, 2004
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (repayments) of revolving credit agreement	$	6,023,936		$	7,712,901		$	(18,492,886	)
Principal payments on long-term debt		(60,502	)		(673,526	)		(414,557	)
Loan origination fees		(620,197	)		(3,371,999	)		(8,410,987	)
Payoff of Old Notes		—			—			(115,000,000	)
Issuance of New Notes		—			—			125,000,000
Borrowings under new term loan		—			—			150,000,000
Repayment of debt in conjunction with the Acquisition		—			—			(29,048,031	)
Termination of certificate of deposit		—			—			1,262,245
Return of capital to parent		—			—			(99,201,971	)
Distributions of special purpose leasing entity		(233,000	)		—			—

Net cash provided by financing activities		5,110,237			3,667,376			5,693,813

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(127,352	)		1,968,991			(2,173,856	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		274,329			204,865			2,173,856

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	146,977		$	2,173,856		$	—

See accompanying notes to unaudited consolidated financial statements.

PIERRE FOODS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

On June 30, 2004, the shareholders of PF Management, the sole shareholder of the Company, sold their shares of stock in PF Management (the “Acquisition”) to an affiliate of Madison Dearborn Partners, LLC (“MDP”).

The financial information as of March 6, 2004, included in these financial statements has been derived from the Company’s audited consolidated financial statements. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, the results of operations and the cash flows of the Company for the interim periods. The results of interim operations are not necessarily indicative of the results to be expected for the full fiscal year. These interim unaudited consolidated financial statements should be read in conjunction with the Company’s March 6, 2004 audited consolidated financial statements and notes thereto.

Included in this report are interim unaudited consolidated financial statements that contain all adjustments necessary to present fairly the financial position as of September 4, 2004 and March 6, 2004, the results of operations for the periods from June 6, 2004 through June 30, 2004, July 1, 2004 through September 4, 2004, March 7, 2004 through June 30, 2004, and for the thirteen and twenty-six weeks ended August 30, 2003, and the cash flows of the Company for the periods of March 7, 2004 through June 30, 2004 and July 1, 2004 through September 4, 2004 and the twenty-six weeks ended August 30, 2003. The periods from June 6, 2004 through June 30, 2004 and March 7, 2004 through June 30, 2004 are referred to as “predecessor second quarter 2005” and “predecessor fiscal 2005”, respectively. The period from July 1, 2004 through September 4, 2004 is referred to as “successor fiscal 2005.” The thirteen week and twenty-six week periods ended August 30, 2003 are referred to as “predecessor second quarter 2004” and “predecessor fiscal 2004”, respectively. Financial statement presentation used for fiscal 2004 has been reclassified, where applicable, to conform to financial statement presentation used for both predecessor fiscal 2005 and successor fiscal 2005.

The fair value adjustments related to the Acquisition, which have been pushed down to Pierre Foods, Inc. from Pierre Holding Corp., primarily include adjustments in property, plant and equipment, inventory, goodwill, other intangible assets and related deferred taxes.

The Company reports the results of its operations using a 52-53 week basis. In line with this, each quarter of the fiscal year will contain 13 weeks except for the infrequent fiscal years with 53 weeks.

2. Acquisition

On June 30, 2004, the shareholders of PF Management, the sole shareholder of the Company, sold their shares of stock in PF Management to an affiliate of MDP. In connection with the sale, the following occurred:

• The Company merged with Pierre Merger Corp., an affiliate of MDP, with the Company being the surviving corporation following the merger.

• The Company terminated its three-year variable-rate $40 million revolving credit facility and obtained a $190 million credit facility from a new lender which includes a six-year variable-rate $150 million term loan and a five-year variable rate $40 million revolving credit facility with a $10 million letter of credit subfacility. See Note 4, “Long-Term Debt.”

• The Company terminated its few remaining related party transactions (described in Note 9, “Related Party Transactions”), transferred miscellaneous assets to Messrs. Richardson and Clark, our former Chairman and Vice Chairman, respectively, including its airplane, which was distributed to Mr. Richardson.

• Pierre Merger Corp. closed a cash tender offer and consent solicitation for the Company’s Old Notes (as defined in Note 4). Holders of approximately $106.3 million, or approximately 92%, of aggregate principal amount of the Company’s outstanding Old Notes tendered their Old Notes. The Company, as the surviving corporation of the merger with Pierre Merger Corp., accepted and paid for all Old Notes tendered pursuant to the tender offer. A redemption notice for the Old Notes not tendered (approximately $8.7 million) was issued on June 30, 2004 and these Old Notes were redeemed on July 20, 2004.

• The Company issued $125.0 million of 9-7/8% Senior Subordinated Notes due 2012 (the “New Notes”). The proceeds of the New Notes, together with the equity contributions from MDP and certain members of management (as described below) and borrowings under our new senior credit facility, were used to finance the Acquisition of the Company and to repay outstanding indebtedness.

• The Company’s President and Chief Executive Officer, Norbert E. Woodhams, and its Senior Vice President of Sales, Marketing and New Product Development, Robert C. Naylor, signed 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.

The following table presents selected financial information and unaudited pro forma information for the predecessor second quarter 2004 and for the second quarter 2005, as if the Acquisition had occurred on March 2, 2003 and March 7, 2004, as applicable.


	Predecessor
	Second						Second
	Quarter 2004						Quarter 2005
	Actual			Pro Forma			Actual			Pro Forma
Revenues	$	81,248,052		$	81,202,140		$	98,974,697		$	98,974,697
Net loss	$	(1,934,115	)	$	(3,425,029	)	$	(9,591,530	)	$	(10,212,628	)

The following table presents selected financial information and unaudited pro forma information for the predecessor fiscal 2004, for the predecessor fiscal 2005 and for the fiscal 2005, as if the Acquisition had occurred on March 2, 2003 and March 7, 2004, as applicable.


	Predecessor
	Fiscal						Fiscal
	2004						2005
	Actual			Pro Forma			Actual			Pro Forma
Revenues	$	162,727,921		$	162,681,967		$	190,987,979		$	190,979,374
Net loss	$	(1,557,880	)	$	(4,553,255	)	$	(9,712,310	)	$	(12,919,092	)

These unaudited pro forma results, based on assumptions deemed appropriate by the Company’s management, have been prepared for informational purposes only and are not necessarily indicative of the amounts that would have resulted if the Company had been acquired by MDP on March 2, 2003 or March 7, 2004, as applicable. Purchase related adjustments to the results of operations include the effects on depreciation and amortization, interest expense, cost of goods sold and income taxes.

Included in these pro forma results are certain predecessor fees that the Company does not expect to incur in the future. These include professional fees, primarily related to the restructuring of the Fourth Supplemental Indenture on March 8, 2004 and the Management Buy Out on July 26, 2002. For the predecessor second quarter 2004 and for the combined predecessor second quarter 2005 and successor fiscal 2005, these fees amounted to $448,220 and $336,488, respectively. For the predecessor fiscal 2004 and for the combined predecessor fiscal 2005 and successor fiscal 2005, these fees amounted to $1,183,020 and $2,591,989, respectively.


	Page No.
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets -September 4, 2004 and March 6, 2004		3 - 4
Consolidated Statements of Operations-for the periods from June 6, 2004 through June 30, 2004 and July 1, 2004 through September 4, 2004 and for the Thirteen Weeks Ended August 30, 2003		5
Consolidated Statements of Operations-for the periods from March 7, 2004 through June 30, 2004 and July 1, 2004 through September 4, 2004 and for the Twenty-Six Weeks Ended August 30, 2003		6
Consolidated Statements of Shareholders’ Equity- for the periods from June 5, 2004 through September 4, 2004 and March 6, 2004 through September 4, 2004		7 - 8
Consolidated Statements of Cash Flows -For the periods from March 7, 2004 through June 30, 2004 and July 1, 2004 through September 4, 2004 and for the Twenty-Six Weeks Ended August 30, 2003		9 - 10
Notes to Consolidated Financial Statements		11 - 19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation		20 - 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk		27
Item 4. Controls and Procedures		28
Part II. Other Information:
Item 6. Exhibits		29
Signatures		30
Exhibit 10.14 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 (incorporated by reference to Exhibit 10.14 to the Company’s Form S-4 filed September 27, 2004)
Exhibit 31.1		31
Exhibit 31.2		32
Exhibit 32		33