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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended: March 26, 2005 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: 333-64180 Premium Standard Farms, Inc.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    43-1755411
(I.R.S. Employer Identification No.)805 Pennsylvania Avenue, Suite 200, Kansas City, Missouri
(Address of principal executive office)
    
    64105
(Zip Code)
 Registrants telephone number, including area code: (816) 472-7675 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to 12(g) of the Act: 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 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 þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of 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. þ Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). Yes o No þ There is currently no established public trading market for the common equity of the
Registrant held by non-affiliates. As of May 6, 2005, there were 14,500,000 shares of the
Registrants Class A Common Stock outstanding and 16,428,593 shares of the Registrants Class B
Common Stock outstanding.




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EXPLANATORY NOTES On May 2, 2005, PSF Group Holdings, Inc. merged with and into its wholly owned subsidiary,
Premium Standard Farms, Inc., with Premium Standard Farms, Inc. being the surviving corporation.
As a result, Premium Standard Farms, Inc. is the successor issuer to PSF Group Holdings, Inc. In this report on Form 10-K, the terms we, us and our refer collectively to Premium
Standard Farms, Inc. and subsidiaries. TABLE OF CONTENTS PART I
    
    
    
    
    3Item 1.
    
    Business
    
    
    3Item 2.
    
    Properties
    
    
    19Item 3.
    
    Legal Proceedings
    
    
    20Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    20PART II
    
    
    
    
    21Item 5.
    
    Market for Registrants Common Equity and Related Stockholder Matters
    
    
    21Item 6.
    
    Selected Financial Data
    
    
    22Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    45Item 8.
    
    Financial Statements and Supplementary Data
    
    
    47Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    47Item 9A.
    
    Controls and Procedures
    
    
    47Item 9B.
    
    Other Information
    
    
    47PART III
    
    
    
    
    47Item 10.
    
    Directors and Executive Officers of Registrant
    
    
    47Item 11.
    
    Executive Compensation
    
    
    47Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    47Item 13.
    
    Certain Relationships and Related Transactions
    
    
    48Item 14.
    
    Principal Accounting Firm Fees and Services
    
    
    48PART IV
    
    
    
    
    48Item 15.
    
    Exhibits and Financial Statement Schedules
    
    
    48SIGNATURES
    
    
    52EX-2.4: CERTIFICATE OF OWNERSHIP AND MERGEREX-14.1: CODE OF PROFESSIONAL ETHICS FOR EMPLOYEESEX-21.1: SUBSIDIARIESEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION
  MARKET AND INDUSTRY DATA AND FORECASTS Market data and certain industry data and forecasts used throughout this report on Form 10-K
were obtained from internal company surveys, market research, consultant surveys, publicly
available information, reports of governmental agencies and industry publications and surveys.
Reports prepared or published by the United States Department of Agriculture (the USDA), Informa
Economics, the National Pork Board, the Chicago Mercantile Exchange and the Chicago Board of Trade
were the primary sources for third-party industry data and forecasts. Industry surveys,
publications, consultant surveys and forecasts generally state that the information contained
therein has been obtained from sources believed to be reliable, but that the accuracy and
completeness of such information is not guaranteed. We have not independently verified any of the
data from third-party sources, nor have we ascertained the underlying economic assumptions relied
upon therein. Similarly, internal surveys, industry forecasts and market research, which we
believe to be reliable based upon our managements knowledge of the industry, have not been
independently verified. Forecasts are particularly likely to be inaccurate, especially over long
periods of time. In addition, we do not know what assumptions regarding general economic growth
were used in preparing the forecasts we cite. We do not make any representation as to the accuracy
of information described in this paragraph. Statements as to our market position are based on the
most currently available market data. 2




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FISCAL YEARS Our fiscal year is the 52 or 53-week period ending on the last Saturday in March. Fiscal year
2001 consisted of 53 weeks. Each of fiscal years 2002, 2003, 2004 and 2005 consisted of 52 weeks.
Fiscal years are identified in this report on Form 10-K according to the calendar year in which
they end. For example, the fiscal year ended March 26, 2005 is referred to as fiscal year 2005. 
 PART I 
 Item 1. Business Overview We are one of the largest vertically integrated providers of pork products in the United
States, producing consistent, high-quality pork products for the retail, wholesale, foodservice,
further processor and export markets. We have become a recognized leader in the pork industry
through our vertically integrated business model that combines modern, efficient production and
processing facilities, sophisticated genetics, and strict control over the variables of health,
diet and environment. We are the sixth largest pork processor in the United States, with
processing facilities in Missouri and North Carolina that have the capacity to process
approximately 4.6 million hogs per year. Operating in concert with our processing facilities, we
are the second largest owner of sows in the United States, currently producing approximately 4.5
million hogs per year in operations located on approximately 100,000 acres in Missouri, Texas and
North Carolina. We are able to leverage our vertically integrated operations to produce premium and specialty
products, which typically command higher prices. We tailor our production process to target
discriminating customers willing to pay
for high-quality products. We lower our production costs by controlling hog procurement and
streamlining logistics, transportation and production schedules. For the fiscal year ended March 26, 2005, our business generated total net sales of
approximately $927.6 million and net income of approximately $67.7 million. Fiscal year 2005
results reflected historically high pork and hog prices. The Company believes it is unlikely that the
current favorable price environment will be sustained over time. Consequently, the Company
believes that its net sales and net income for fiscal year 2006 will be substantially lower than in
fiscal year 2005. Recent Developments Reorganization.On May 2, 2005, PSF Group Holdings merged with and into its wholly owned
subsidiary, Premium Standard Farms, Inc., with Premium Standard Farms being the surviving
corporation. Contemplated Initial Public Offering.On March 11, 2005, we filed a registration statement
with the Securities and Exchange Commission (the SEC) relating to an initial public offering of
shares of common stock by certain shareholders. It is not contemplated that any shares will be
sold by us in the initial public offering. Debt Tender.On May 9, 2005, we completed a tender offer and consent solicitation (the
Tender Offer) with respect to the 9 1/4% senior notes due 2011 (the 9 1/4% Notes) pursuant to which
we purchased $173,000,000 principal amount of the aggregate $175,000,000 of the 9 1/4% Notes
previously outstanding and eliminated substantially all of the restrictive covenants relating to
the remaining 9 1/4% Notes. The purchase price and related consent payment was $197.2 million based
on a price determined generally by discounting the redemption price of the 9 1/4% Notes when they may
be first called on June 15, 2006 (i.e., $1,046.25 per $1,000 9 1/4% Note) to present value
using the market yield of a comparable U.S. treasury note as of April 19, 2005 plus 0.50%,
including accrued interest of $6.4 million. The Tender Offer was
financed through borrowings under the existing
bank credit agreement (as amended through May 9, 2005) and available cash and will result in a
charge of approximately $21.8 million to be recognized in the first quarter of fiscal year
2006. Giving effect to the completion of the Tender Offer, we had as
of May 9, 2005 outstanding borrowings
under our credit agreement of approximately $156.9 million and outstanding letters of credit of
approximately $11.2 million, and approximately $51.9 million available for borrowing. 3




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Industry Overview Pork products are the largest source of meat protein in the world and the third largest source
in the United States. According to the USDA, pork processors in the United States processed
approximately 103.4 million hogs in 2004, representing approximately 20.5 billion pounds of pork.
US exports of pork products have grown substantially in recent years. From 1995 through 2004,
exports increased at an 11% compound annual growth rate, with total exports increasing from 0.8
billion pounds to 2.2 billion pounds. The USDA estimates that pork exports increased by 27% in
2004, a substantially higher growth rate, primarily as a result of increased levels of foreign
demand due to a ban by certain foreign countries on the import of U.S. beef related to BSE, the
outbreak of avian influenza affecting the poultry industry, favorable exchange rates and the
continuing development of export markets for U.S. pork. Countries showing substantial increases
include Mexico, China, Russia and Taiwan. Historically, the United States pork industry has been highly cyclical in nature due to the
natural inverse relationship of prices and production and the tendency of independent hog producers
to increase production levels in response to higher hog prices. A typical cycle begins with higher
hog prices, which leads to incremental production. This, in turn, leads to overproduction, which
drives market prices lower. Eventually, lower market prices will generally cause production to
moderate or decline which generally leads to higher market prices. Because of the length of the
production cycle, there is relatively little ability of hog producers to adjust their production in
the short-term, although some changes in supply may occur through net increases or decreases of
pork products held in freezers. The prices for all of these commodities are volatile and the spreads between these prices vary
substantially. High prices for hogs normally hurt the profitability of processing operations
unless pork prices increase sufficiently to offset these cost increases. On the other hand, hog
producers tend to record better results when prices for hogs are high, especially in relation to
grain prices. Therefore, results of our processing segment in certain periods may be
better or worse than results for our production segment, and vice versa. The following graphs set forth various hog, pork and grain price data for recent periods and
illustrate the volatility in market prices. Pork Production, Hog Prices and Pork Prices (BAR CHART)   (1)
    
    Based on USDA statistics published by Informa Economics.(2)
    
    Average annual price based on the market price of lean hogs, as
published by the Chicago Mercantile Exchange. 4




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(3)
    
    Average annual price based on the 185# cutout pricing method, a
standard measure for determining current market prices of pork primal
cuts that is published by the USDA. The costs of pork processors are highly dependent on the cost of hogs, and net sales are
determined in large part by the prices they receive for pork products. Conversely, net sales from
hog production are highly dependent on the prices the producer receives for hogs while the cost of
goods sold is determined in large part by the cost of feed. High feed prices can negatively impact
production results since these increases can raise the costs to the producer. The graphs below
demonstrate how prices for corn and soybean meal, which are the primary components of our feed
costs, have fluctuated over the last 10 years ended December 31, 2004. Corn $/Bushel (LINE GRAPH)   (1)
    
    Average annual price, based on the monthly average of daily close
prices of the Nearby Corn Futures quoted by the Chicago Board of
Trade. Soybean Meal $/Ton (LINE GRAPH)   (1)
    
    Average annual price, based on the monthly average of daily close
prices of the Nearby Soybean Futures quoted by the Chicago Board of
Trade. 5




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Historically, the United States pork industry has been divided into two segments: pork
processing and hog production. As a vertically integrated supplier of pork products, we operate in
both industry segments. Pork Processing The U.S. pork processing industry is highly concentrated, with the top ten processors
representing over 90% of total federally inspected industry capacity as of March 2005, and the
industry is highly competitive. Although customers in the retail, wholesale, foodservice, further
processor and export markets have different product specifications and service requirements,
processors generally compete on the basis of the price and quality of their product. We believe
that this consolidation has been driven by a number of factors, including the desire to achieve
economies of scale in purchasing, processing and regulatory compliance and the increased
concentration among grocery retailers and other customers. The processing industry is geographically concentrated in the hog producing regions of the
U.S., particularly the Midwest and portions of the Southeast. Due to the substantial degree of
fragmentation of the hog production industry, processing operations typically are extremely large
relative to the producers that supply them. As a result, non-integrated processors must acquire
each days supply of hogs from a large number of suppliers, many of whom use varying genetics,
feeding programs and growing environments. We believe that this dichotomy between the hog
requirements of processors and the fragmentation and variation of hog production makes it
relatively difficult for non-integrated pork processors to produce consistent, high-quality
products. Hog Production The hog production industry, although consolidating, remains substantially fragmented and can
be characterized by large variations in costs of production and quality of hogs produced. As a
result, a large portion of the industry is generally characterized by fewer hogs per sow per year,
higher feed-to-gain conversion ratios, higher costs of production, lower quality and less
consistent hogs brought to market. Breeding and farrowing are more efficient in the Spring and
Fall, resulting in fluctuating seasonal production and prices. According to the USDA, the number of U.S. hog producers has declined by more than 85% over the
last 20 years while the average size of production facilities has increased dramatically. We
believe that as the hog production industry moves to more sophisticated production techniques, the
pressures on marginal producers will intensify. In the last several years, a number of operations
have emerged which are based on large-scale, scientific and management-intensive production of
hogs. These operations have grown rapidly. We expect that the hog production industry will see
continued consolidation and integration in the future. We believe that this consolidation is being
driven by a number of factors, including (1) the substantial investments in equipment, improved
breeding herds and process improvements required to achieve economies of scale, meet customers
demand for product quality and consistency and comply with animal welfare and environmental
regulation, and (2) the increasing concentration among processors. Competitive Strengths We believe the following competitive strengths position us to enhance our growth and
profitability:  
    Vertically Integrated, Efficient Operations.We believe that we are
one of the most vertically integrated pork processors in the United
States, owning and operating each of the key steps of production.
In fiscal 2005, 99% of the hogs used by our Milan, Missouri
processing plant were sourced from our Missouri hog production
operation. During the same period, approximately 75% of hogs used
by our Clinton, North Carolina processing plant were supplied by our
owned and contracted North Carolina hog production operations, with
the remaining 25% supplied through long-term contracts with
independent producers. Vertical integration gives us strict control
over our process, from a hogs initial genetic makeup to the pork
product ultimately produced and shipped. This process allows us to
produce high-quality pork and pork products efficiently by combining
cost-effective, high-volume hog production in close proximity to
modern and technically advanced pork processing facilities. We
believe this vertical integration gives us powerful competitive
advantages as compared to non-integrated competitors, such as: 6




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
    A dependable supply of high-quality hogs that lead to high meat quality, processing
efficiencies and improved sales margins;
    Streamlined logistics, feed manufacturing, transportation and production schedules; and
    Control over key factors (genetics, nutrition and environment) that affect cost of hogs
and meat quality, enabling us to market the value, safety, traceability, and quality of
our products to our customers.  
    Strong Market Position with Strategically Located, Efficient
Operations.We are the sixth largest pork processor in the United
States and the second largest hog producer in the United States.
Our large-scale integrated operations, geographic diversification
and strong market position allow us to serve a broad range of
customers, while maintaining economies of scale in production and
marketing. We are also one of the few national pork processors with
an East Coast processing plant and distribution center. Coupled
with our Midwest plant location, we are able to provide
cost-effective overnight delivery of fresh pork to many of the most
populous regions in the United States. Our hog production
operations incorporate advanced breeding, farrowing and finishing
methods. We believe our processing plants are two of the most
modern and technically advanced facilities of their kind in the
United States.
    Premium Product Offerings Focused on Discriminating Customers.By
leveraging our modern, efficient processing operations and our
high-quality production capabilities, we are able to produce
products for discriminating customers who demand and expect
high-quality pork on a consistent basis. In the retail sector we
target high-end independent grocers rather than large national
supermarket chains. Our premium products enable these retail
customers to differentiate their product offerings from those
generally available in large supermarkets. Our premium retail and
export products include Fresh and Tender moisture-enhanced pork,
KenKo-Ton healthy pork for the Japanese market and Natural
Excellence antibiotic-free pork. Also, our integrated business
model allows us to target specific product characteristics required
by specialty branded processed-meat customers. PSF pork was awarded
the Best Taste Award by the American Culinary Institute (ACI) in
2004 and the Gold Medal Taste Award from the American Tasting
Institute (ATI) in 2002. Judged by a panel of professional chefs,
our products were recognized for the best tasting, highest quality
food and culinary product by ACI, and for appearance, freshness and
taste by ATI, with taste being the most important attribute.
    Process Verified Certification.We believe we were the first pork
company to receive Process Verified certification from the USDA
for our entire production and processing supply chain. The Process
Verified certification program is modeled after ISO-9000 quality
management and quality assurance standards. Process Verified
certification helps ensure our customers that food safety, meat
quality, traceability, animal handling and environmental management
standards, among other standards, have been met and benchmarked for
continual improvement. While others in the industry have the
certification for parts of their system, we believe we are the only
company that has currently received the certification for the entire
production and processing supply chain. Our marketing strategy
capitalizes on these attributes and the consistency and quality of
the pork we produce.
    Experienced Management Team.Our senior management has an average of
19 years of industry experience. We believe we have one of the most
experienced management teams in the pork industry in operating
fully-integrated systems with an average of 23 years of industry
experience in production, 31 years in processing, 16 years in
technical and food safety and 19 years in sales. Our experienced
and motivated management team is focused on expanding our position
as one of the premier producer/ processors of high-quality pork and
pork products. Business Strategy We are pursuing a strategy designed to increase our sales margins and returns on invested
capital. Key elements of our strategy include:  
    Focus on High Quality and Value-Added Products.We are seeking to
move more of our products up the value-added chain to improve sales
margins, develop a stronger brand, enhance relationships with key
customers and drive new product development. We intend to continue
to focus on producing high-quality and value-added products, such as
boneless products, marinated pork, moisture-enhanced pork, sliced
bacon, 7




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microwave cooked bacon, smoked hams, sausage and other
processed meats. We plan to continue our focus on marketing these
products to discriminating customers in the retail, wholesale,
foodservice, further processor and export markets in order to
further differentiate our products from those of our more
commodity-oriented competitors.
    Expand Processing Capacity.We continue to seek additional
expansion opportunities with the potential to generate attractive
returns on investment. As an example, through modernization and
efficiency efforts in fiscal year 2003, we completed expansion of
processing capacity at our North Carolina processing plant from
6,500 hogs per day to up to approximately 10,000 hogs per day on a
single shift. At this North Carolina facility, we are now
evaluating the further expansion of our value-added processing
capacity.
    Continue Expansion into International Markets.We believe that
international markets offer significant growth opportunities and we
intend to continue our efforts to develop sales outside the United
States. Over the past ten years, we have expanded our efforts to
increase export sales. Sales to Japan, Mexico, Canada and other
export markets accounted for 10% of our net sales for the fiscal
year ended March 26, 2005. We believe that our presence in these
markets allows us to achieve higher prices for certain pork products
than could be obtained domestically. In particular, we intend to
increase our export volumes to Japan using available capacity at our
North Carolina plant, as the Japanese market ascribes significant
value to premium, process-controlled, traceable products. We also
intend to actively expand sales in other Asian and Latin American
markets, as well as other international regions.
    Pursue Strategic Acquisition, Disposition and Partnership
Opportunities.As a key part of our growth strategy, we evaluate on
an ongoing basis potential industry-related acquisitions,
dispositions and joint ventures. We will continue to evaluate those
opportunities that fit strategically with our objective of producing
more processed meats and other high quality, value-added products.
    Further Improve Cost Structure.We strive to produce high-quality
pork products at a low cost by combining modern and efficient pork
processing with efficient, high volume hog production. We
continually measure our processing and production activities in an
effort to improve our processing yields, develop new value-added
products, lower our costs and increase our hog production
efficiencies. Our History Our hog production business was originally founded in 1988. In 1994, we completed
construction of our Missouri processing plant. Due primarily to start-up costs at the Missouri
farms and plant, combined with a decline in hog prices at the same time feed prices increased, our
predecessor filed for bankruptcy reorganization under Chapter 11 on July 2, 1996. In September
1996, the reorganization became effective and our business emerged from Chapter 11. Since emerging from bankruptcy, we have expanded our business in two significant ways. On May
13, 1998, we expanded our Missouri operations in a series of transactions with ContiGroup. In
these transactions, ContiGroup purchased a 51.0% ownership interest in our outstanding common stock
for $182.3 million. In exchange, we purchased the North Missouri farms hog production operations
then owned by ContiGroup for $75.0 million. These transactions allowed us to operate the Milan,
Missouri plant at full capacity. In fiscal year 2001, we expanded our operations through two acquisitions in North Carolina.
On August 25, 2000, we acquired The Lundy Packing Company and its subsidiaries, which consisted of
hog production and pork processing operations. On September 22, 2000, we acquired Premium Standard
Farms of North Carolina from ContiGroup. In the latter transaction, ContiGroup received cash and
additional shares of our common stock, bringing its overall ownership to 53.1% of our outstanding
common stock. 8




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Products, Marketing and Customers We market our pork products to retail, wholesale, foodservice and further processor customers
in the U.S. and abroad. We focus on discriminating customers in these markets. We primarily
market our products as chilled and frozen pork, sold to:  
    Retailers, retail distributors and wholesalers (accounting for 46%
of our total processing sales in our fiscal year 2005) primarily in
the form of chilled, vacuum-packaged loins, tenderloins, hams,
picnics, butts, ribs, marinated, case-ready, bacon, smoked hams and
sausage;
    Foodservice customers (accounting for 3% of our total processing
sales in our fiscal year 2005) primarily in the form of chilled and
frozen boxed bone-in and boneless loins, ribs, picnics, butts and
further processed smoked meats;
    Further processors (accounting for 40% of our total processing sales
in our fiscal year 2005) primarily in the form of chilled bulk
bone-in and boneless hams, bellies, trimmings, picnics and butts,
variety meats and other products which are used by these customers
to make processed pork products; and
    Export customers (accounting for 11% of our total processing sales
in our fiscal year 2005) primarily in the form of chilled boneless
loins, tenderloins, boneless picnics, fresh bone-in hams, frozen
boneless hams, bellies, as well as frozen ground pork and variety
meats. We are increasingly emphasizing value-added products, such as boneless products, marinated
pork, moisture-enhanced pork, sliced bacon, microwave cooked bacon, smoked hams, sausage and other
processed meats. Our vertical integration and control also allows us to produce specialty
products. These include our Fresh and Tender moisture-enhanced pork, KenKo-Ton healthy pork
for the Japanese market and Natural Excellence antibiotic-free pork. Our North Carolina plant includes further-processing facilities that produce smoked hams,
sliced and microwave cooked bacon, and sausage. We continue to focus on increasing our activities
in the processed meat area. Our marketing strategy seeks to capitalize on the quality of the pork derived from our
controlled supply of high-quality consistent hogs and modern processing operations allowing us to
sell fresh and processed pork at prices that reflect a premium to those received by competitors
selling lower quality products. Our pork processing facilities have been designed to enhance the
realization of this quality by converting standard pork cuts to value-added products through
boning, trimming and other further processing. Furthermore, we target specialty, export and ethnic
markets, in which there is a higher demand for certain pork products. In order to capitalize on a
differentiated product, we have been certified to use the USDA Process Verified seal in connection
with our Missouri and North Carolina processing operations. We sell to domestic customers directly and through regional distributors. In marketing to the
retail channel, we target independent regional supermarkets seeking to differentiate themselves
with meat-case destination premium quality pork. Our target market for further processors
includes companies with established food brands that demand consistent, high quality,
differentiated product. We are increasingly targeting foodservice customers that demand consistent, high-quality
product and are attracted to the traceability, food safety and animal welfare associated with the
Process Verified certification of our product. We believe that the foodservice industry
represents a growth opportunity for us. Our international marketing efforts are directed toward a number of countries, but are
predominantly focused on Japan, which ascribes significant value to our premium, process-controlled
products. In our fiscal year 2005, sales to Japanese customers represented about 6% of our total
sales. Sales to international markets, especially Mexico and Canada, when combined with sales to
Japan, accounted for approximately 10% of our total sales in our fiscal year 2005. International
sales are made both through distributors and directly to customers. Most of our Japanese exports
are sold through a relationship with a Japanese trading partner, to whom we sell exclusively
certain chilled pork products produced at our Milan, Missouri plant that are destined for the
Japanese market. The contract with 9




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this trading partner comes up for renewal in December 2005. Though our sales and marketing efforts are primarily focused on sales of pork products, we
also sell excess hogs from our production facilities to other pork processors. In this respect, we
have contracts with two major pork processors, who purchase substantially all of the hogs produced
at our Texas facilities. The remainder of our excess hog production is sold in privately negotiated transactions.
Finally, both of our facilities sell by-products primarily to the feed processing and pet food
industries. Processing and Production Operations Overview Our processing and production operations are organized as three separate pods located in
Missouri, Texas and North Carolina. Our Missouri and North Carolina pods each combine processing
plants and hog production facilities. Our Texas pod has only hog production operations. The
geographic separation of our pods enhances biosecurity and puts us closer to our customers and feed grain suppliers, allowing us to minimize
shipping costs. Shipping, via truck, is important in a number of aspects of hog production,
particularly the delivery of feed to hog production units, the shipment of feeder pigs to finishing
units, and the shipment of finished hogs to processing plants. We utilize our own truck fleet and
related transportation facilities for hauling feed and hogs, which allows us to reduce the risk of
disease and enhances the scheduling and process coordination that our integrated approach provides.
Please read Note 11 to our audited consolidated financial statements for financial information
relating to our operating segments. Pork Processing We maintain pork processing facilities in Missouri and North Carolina. In fiscal year 2005,
99% of the hogs processed by our Missouri processing plant came from our Missouri hog production
operations. During fiscal year 2005, approximately 75% of hogs used by our North Carolina
processing plant were supplied by our North Carolina hog production operations, with the remaining
25% supplied through contracts with independent producers, which produce hogs in accordance with
our genetic, feed and other production specifications. To help ensure the safety and quality of
our products, we use the USDAs Hazard Analysis of Critical Control Points methodology to identify
food safety hazards in our operations. This approach uses a team of technically trained
individuals who are familiar with the processes to be evaluated. Each separate point in the
process is identified and any hazards associated with them are assessed. Methods for monitoring
the quality and safety of products as they move through these points are then developed and
implemented. The quality management points listed below provide the basis for our Process Verified program.
In December of 1998, we believe we became the first company in the pork industry to receive
approval for this program from the USDA-Agricultural Marketing Service. This approval gave
accreditation to the first Process Verified program which extends from live animal production
through processing. While other pork companies have since received approval of their own Process
Verified programs, we believe ours is the most comprehensive, encompassing live animal production
through processing. The Process Verified program is modeled after ISO-9000 requirements that are adapted for the
livestock industry, and is administered by the USDA Agricultural Marketing Service, Livestock and
Seed Division. We have designated six process points throughout our process to represent our
program. These quality management points are summarized as follows:  
    Every order is traceable to source farms;
    Every phase of production is managed using a food safety based control system;
    Production and processing systems are designed to continuously assess the effect of farm and
plant processes on meat quality traits, including extensive genetic research; 10




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
    Personnel are trained to handle livestock according to proper animal handling guidelines;
    We are committed to environmental stewardship with the goal to protect the quality of the
environment by evaluating and improving the waste management systems; and
    All antibiotic free products are derived from market animals that have never received
antibiotics through feed, water, or via injection. Our automated processing operations have been designed to achieve the benefits of vertical
integration that are not available to non-integrated hog producing or pork processing competitors.
Some of these benefits are as follows:  
    We streamline logistics, transportation and production schedules to
enhance asset utilization and reduce our cost structure because of
the proximity of our processing facilities to our production
operations;
    We improve the realizable value of our hogs through our control over
the key factors (genetics, nutrition and environment) that affect
leanness and meat quality; and
    We believe we provide a higher level of quality and safety assurance
to our customers because of our control of both production and
processing. We believe that by controlling our own high quality, consistent hog supply, we can be among
the more efficient processors in the industry and produce a consistent high-quality product whose
value will be recognized in the market. The design of our Missouri and North Carolina processing facilities reflect four key
objectives:  
    Modern equipment and proven technology have been used to build two
of the most modern and technically advanced facilities in the
industry;
    The facilities are designed to emphasize worker safety to help
ensure compliance with all regulations and to reduce worker injury
and turnover;
    The facilities are designed to enhance animal welfare and produce a
product that is appealing to further processors and consumers
(employing identification and tracking technology to help ensure
quality control for the final pork product); and
    The facilities are designed to reduce waste products and emissions
and dispose of waste in accordance with applicable environmental
standards. Hog Production Our sow production facilities house herds generally ranging from 1,100 to 3,300 sows per unit.
On average, a staff of five people is required for 1,100 sows. A typical sow production unit
consists of four connected buildings, each with a specialized function breeding, gestation,
farrowing and nursery. The production process begins in the breeding barn, where sows are artificially inseminated.
Artificial insemination maximizes breeding efficiency and productivity and allows us to utilize
genetic stock that maximizes our overall productivity and quality. After four weeks, conception is
verified using ultrasound technology. From the breeding barn, sows are moved to the gestation barn
where they are vaccinated and placed on a special diet. The gestation period is 114-days. During
this period, the sows receive a specialized diet and careful attention to health and disease
control in order to improve the size and health of their litters. In our gestation buildings, sows
are carefully monitored and individually fed according to body weight. A few days prior to
delivery, sows are moved to the farrowing barn where they give birth to an average litter of
approximately 10 offspring. Sows nurse their offspring for three weeks before they are returned to
the breeding barn. At approximately 12 to 15 pounds, the offspring are moved to the nursery for a
six-to-seven week period. This step requires high levels of nutrition, 11




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environmental control and
minimization of disease and health risks. An increasing portion of our operations use the
wean-to-finish production method where nursery pigs are transported directly to modified grow/
finish sites, skipping the traditional time spent in a nursery. In the next phase of production, offspring are transferred from the nursery in our sanitized
trailers to our grow/finish complexes or contract growers for growth from approximately 50 pounds
to a target market weight of 260 pounds. Our grow/finish complexes are comprised of
temperature-controlled barns, each generally housing 950 to 1,200 hogs. A manager in charge of the
complex is responsible for monitoring hog welfare and health, as well as equipment. Efficiency in
finishing operations is affected by the health and environment of the hogs and the formulation of
the feed. These factors, as well as the genetics of the hog, can have a substantial impact on
 the feed-to-gain conversion ratio (the pounds of feed required to add a pound of weight) and the
average daily gain. Specialized crews support the complex managers by assisting with loading and
unloading hogs, health care, and sanitation. Hogs generally remain at the grow/ finish complexes
for approximately 17 weeks, gaining an average of approximately 1.7 pounds per day, until they
reach market weight and are transported to a processing facility. Because diet is a critical factor in the efficient production of hogs and affects the quality
of the final products, we
have established five of our own feed mills. We can typically access feed grains on a
cost-effective basis and manufacture and deliver feed to our facilities at a lower cost than we can
buy it from commercial feed mills. In North Carolina, where we rely to some extent on commercial
feed mills, we have established cost-effective toll milling arrangements with select mills. Due to
excess milling capacity in North Carolina, we are generally able to purchase feed from these
vendors on terms that help us remain a low cost producer. Our Missouri production facilities
generally have our lowest feed costs because they are located close to the larger grain producing
areas. Our feed costs are relatively higher in our North Carolina and Texas facilities due to
higher transportation costs. Our feed mills and toll milling arrangements allow us to optimize
production of our customized diets to a greater degree than would typical arrangements with
third-party feed mills, which operate on a cost plus basis and provide feeds for many types of
customers and animals. We achieve this through least cost formulations based on available feed
ingredients. For example, while corn is the primary ingredient in hog feed, a large number of
other grains, proteins, fats and supplements may be added, and the content and mix of feed
ingredients can be managed to improve nutrition, feed-to-gain ratios and meat quality. The
combined annual capacity of our five company-owned feed mills is approximately 1.4 million tons.
These mills provided approximately 73% of the total feed/components used in our production
operations (measured in tons) during our fiscal year 2005. Biosecurity We seek to reduce the risk of disease transmission through a number of methods, including
geographic separation of, and restricted access to, production facilities, strict sanitation
procedures (including thermal sanitation of livestock trailers), high health genetic stock and
constant monitoring and response. All units are restricted access, shower in/ shower out
facilities. If it is necessary for a manager or worker to enter a unit other than their designated
unit, a mandatory 24 to 96-hour waiting period is required. Feed purity and truck cleanliness are
continually inspected and monitored. Operating procedures within the facilities are designed to
stop the spread and lessen the viability of infection agents during all phases of the production
process. We also attempt to control the risk of disease through the selection of high-health breeding
stock. When disease is found, treatment is implemented to lessen its impact on performance and to
prevent its spread to other facilities. Missouri Our Missouri pod has both processing and production operations. The Missouri processing
facility is located at Milan, Missouri and employed approximately 1,000 people as of March 26,
2005, with the capacity to process 7,400 hogs daily (on an eight hour shift) or about 2.0 million
hogs per year. To help ensure the safety and quality of our products, the processing facility
incorporates several innovative systems, including a new dual carbon dioxide anesthetizing system,
which we believe provides improved animal handling and enhanced meat quality. We are exploring a possible 2-stage expansion of the Missouri facility. The first stage would
involve improvements to increase the daily capacity of the facility to process approximately 10,000
hogs daily. The second phase would entail construction of facilities to support two shifts of
processing. Engineering work on this potential 12




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expansion is proceeding, but we have not yet
committed to this expansion proposal. Management believes that the additional hogs required for
this expansion could be sourced from existing independent hog producers, who would adopt our
Process Verified requirements. The Missouri production operation, based at Princeton, employed approximately 1,200 people as
of March 26, 2005. A 116,000-sow herd produces approximately 2.1 million hogs per year.
Eighty-two sow units, five nursery units and ninety-one finishing units are located on farms in
five counties in Northwest Missouri. We also have grower relationships with ContiGroup and other
independent growers who raise our livestock under long-term contracts that require them to follow
our Process Verified requirements. North Carolina Our North Carolina pod has both processing and production operations. The North Carolina
processing facility is located at Clinton and employed approximately 1,200 people at March 26,
2005, processing up to approximately 10,000 hogs daily, depending on seasonality, or up to 2.6
million hogs per year. In fiscal year 2003, we completed a major renovation which increased
processing capacity and included the installation of a new dual carbon dioxide
anesthetizing system. As a result, we believe the plant is one of the most advanced facilities of
its kind in the United States. The North Carolina production operation, based at Clinton, employed approximately 300 people
as of March 26, 2005. A 76,000-sow herd as of March 26, 2005 produces approximately 1.4 million
hogs per year. Contractual arrangements for purchasing weaned pigs produce an additional 500,000
hogs per year. There are nine sow units, three nursery units and four finishing units located on
farms we own in various counties throughout the state. Most of the production operations in North
Carolina are conducted on farms that are not owned by us. Instead, we have long-term contract
grower agreements with local farmers who provide the land, buildings and labor needed. These
grower arrangements are managed by our hog production field supervisors. The hogs are owned by us,
are raised according to our specifications using our genetics, feed and supplies, and are delivered
to our North Carolina processing facility. Since these arrangements allow us to control the
process, from a hogs initial genetic makeup to the pork product ultimately produced, we consider
them to be a part of our integrated operations notwithstanding the fact that we do not own the
farms. In addition to the production operations discussed above, we purchase approximately 500,000
hogs annually for our North Carolina processing operations that are not supplied by our production
operations. These hogs are obtained pursuant to long-term supply arrangements with a limited
number of external hog suppliers who have agreed to follow our Process Verified requirements. Texas Our Texas pod has only production operations. These operations are headquartered at Dalhart,
Texas and employed approximately 300 people as of March 26, 2005. A 34,000-sow herd is designed to
produce approximately 600,000 hogs per year. Twenty-three sow units, six nursery units and eight
finishing units are located on farms in Dallam and Hartley counties. Substantially all the hogs
produced are sold under two contracts with major processors. In fiscal year 2003, we completed the addition of a new 10,000 sow and wean-to-finish
operation at our Texas facilities. Our Texas production facilities are located on approximately
53,000 acres with adequate space and all environmental and land use permits required for further
expansion. We have been experiencing health issues in our Texas hog production operations in recent
periods due to PRRS, which is common in swine herds in the United States. PRRS has had a negative
effect on reproduction and general herd health in these operations, which has decreased production
volume and increased costs. We are currently operating a health-improvement program intended to
stabilize the impact of PRRS in the system. This program has increased pigs born alive per sow and
improved health performance in recent quarters. There can be no assurance these measures will
continue to be successful. 13




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Research and Development We use an applied research strategy designed to allow rapid and early implementation of
technologies in production, nutrition and processing. This effort is driven by our technical team,
some of whom have advanced
 degrees in nutrition, veterinary science, meat science, health assurance and animal welfare. This
team also uses an extensive network of outside scientists and other contacts to enable us to access
the latest technology. We continually seek to improve the genetics of our production herds and to produce hogs that
are the highest quality commercially available. Our female and male breeding stock are purchased
from several of the worlds leading hog genetics suppliers, which employ extensive research efforts
in molecular genetics, biosecurity, food safety and meat quality to help ensure strong genetic
lineage. We routinely evaluate alternate genotypes to validate and compare them to existing products.
In addition, we conduct intense research trials to further develop existing genotypes to meet
economic and customer demands for composition and quality. These arrangements enhance the quality
of our genetics and diversify our genetic sources. We also incorporate careful computer-based
monitoring of the breeding performance of all our breedstock to
improve breeding patterns and remove sub-optimal parents from the herd. We have a proprietary sire line genetics improvement program with Sygen (PIC), the largest hog
genetics firm. This program focuses on quality characteristics of the meat and improved
performance traits. We also have been a leader in the implementation of new technologies at our processing
facilities. For example, we believe we were the first U.S. company to introduce the use of
European-designed carbon dioxide anesthesia systems in pork processing to reduce livestock stress
and increase meat quality and yields. Today, both of our processing facilities employ this
technology. Specially designed trucks and holding areas also enhance the welfare and handling of
our hogs. In addition, we use rapid chilling technologies to improve product quality traits like
color, texture and moisture retention. We continue to explore additional ways to utilize robotics
and ergonomic enhancements in our processing operations. We are committed to install improved wastewater, air and odor technology at all of our
finisher farms in northern Missouri by 2010. See Business Regulation. Included in this
commitment is the soon to be completed fertilizer plant in northern Missouri that will convert
waste at one of our production facilities into useable commercial grade fertilizer. We believe
that this facility, which is scheduled to begin operations in the summer of 2005, will be the first
plant to commercially produce an odorless, dried pellet fertilizer at a livestock production
facility. Competition The pork industry is highly competitive and we compete with many other pork processors and hog
producers of varying sizes. Our products also compete with a large number of other protein
sources, including beef, chicken, turkey and seafood. However, our principal competition comes
from other large pork processors. We believe that the principal areas of competition in the pork
industry are price, quality, product distribution, and brand loyalty. We believe that we are the
sixth largest hog processor in the United States with a number of competitors, including Smithfield
Foods (the largest pork processor) being substantially larger than we are. We believe that we are
the second largest producer of hogs in the United States, but are substantially smaller than the
leader, Smithfield Foods. Some of our competitors are larger than us, have greater financial and
other resources and enjoy wider recognition for their branded products. Intellectual Property We hold several trademark and other intellectual property rights. For example, we have
registered the trademarks Premium Farms, Natural Excellence, Premium Standard Farms, Premium
Standard Certified, Fresh from the Farm Taste, Carolinian, Lundys, Tomahawk Farms, Fresh
& Tender and Gold Banner with the United States Patent and Trademark Office. We have also
registered Premium Standard Farms in some of the foreign countries to which we sell our products.
In addition to trademark registrations, we attempt to protect our unregistered marks under common
law trademark laws and other proprietary information under trade secret laws, employee and
third-party non-disclosure agreements and other laws and methods of protection. 14




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Employees We had approximately 4,100 employees as of March 26, 2005, of which approximately 2,200 were
in processing, approximately 1,600 were in production and approximately 300 were in administration.
None of our employees are subject to collective bargaining arrangements, although there can be no
assurance that employees will not enter into such agreements in the future. We generally consider
our employee relations to be good. Regulation Environmental, Health and Safety Our operations are subject to federal, state, and local environmental, health, and safety laws
and regulations, including those governing air emissions and wastewater discharges and, in some
jurisdictions, odor. Among other things, these laws and regulations impose standards and
limitations on our waste treatment lagoons, water treatment facilities and new construction
projects and regulate the management of animal waste from our hog production
facilities. We also have been and are subject to lawsuits from neighboring property owners in
Missouri based on the law of nuisance. We are committed to promoting environmental stewardship, and we strive to comply with
environmental, health and safety requirements and to improve our environmental performance on a
continuing basis. We cannot assure you, however, that we will at all times operate in compliance
with environmental requirements, and if we fail to comply with such requirements, we could incur
material penalties, fines and damages, and negative publicity. Environmental, health, and safety laws and regulations are subject to amendment, to the
imposition of new or additional requirements and to changing interpretations by governmental
agencies or courts. In particular, environmental laws and regulations may become more stringent
for our industry. Additionally, various citizen and advocacy groups have been advocating changes
in animal handling and environmental practices in the industry. Although we believe we are a
leader in installing advanced environmental controls, more stringent requirements could result in
changes in industry practices that could increase our costs and reduce margins. In 2003, the Environmental Protection Agency (EPA) issued Effluent Limitation Guidelines for
Concentrated Animal Feeding Operations (CAFOs). These regulations require animal feeding
operations to obtain wastewater permits and implement nutrient management plans. A U.S. Court of
Appeals recently invalidated certain provisions of these regulations. In any event, our facilities
and related operating procedures already comply with or exceed most of these requirements, and we
do not anticipate any material costs in complying with these rules. The State of Missouri promulgated a rule that came into effect on January 1, 2002 to regulate
odor emissions from large animal feeding operations such as ours. This rule required us to develop
plans to reduce odor emissions and to submit such plans to state authorities, which we have done.
This rule also required us to make certain changes to reduce odors at the property line to certain
established levels. The Company does not anticipate material costs to comply with the rule as
promulgated. Environmental Consent Decrees and Agreements In order to settle enforcement actions and citizen suits, and to ensure that we, the
regulatory agencies, and independent experts all agree that we are implementing appropriate
advanced technology, we have entered into consent decrees with the State of Missouri, and with the
federal government and a citizens group, and signed a voluntary agreement with the State of North
Carolina. The decrees have generally required that we pay penalties to settle past alleged
regulatory violations, and the decrees and the voluntary agreement require that we research,
develop, and implement new technologies for environmental controls at our Missouri and North
Carolina operations. In 1999, we entered into a consent decree to settle a suit filed by the State of Missouri.
The settlement required us to invest $25 million in capital expenditures on what was characterized
in the decree as Next Generation Technology for researching, installing and operating improved
technology to control wastewater, air and odor emissions from our Missouri farms. Our proposed
technologies were to be approved by a panel of independent 15




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university experts and were to be
completed by 2004. In 2002, the State of Missouri filed a suit against us for alleged new
violations of air and water regulations. We settled that matter by entering into a second consent
decree in 2004. The 2004 consent decree required us to pay a civil penalty of $333,000. It also
modified the 1999 consent decree by (i) removing the $25 million spending requirement, instead
specifying that Next Generation Technology be installed on the 11 largest farms and (ii) extending
the schedule to implement Next Generation Technology from 2004 until 2010, in each case to ensure
that the technology we install will be effective in reducing impacts to the environment. As a
result of the 2004 consent decree, we now estimate that we will invest approximately $33 million in
Next Generation Technology by the 2010 deadline, of which $8.4 million has been spent as of March
26, 2005. In 2001, we entered into a consent decree with a citizens group and the United States to
resolve alleged violations of the Clean Air Act, Clean Water Act and the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA). This consent decree was built
upon the 1999 consent decree with the State of Missouri referenced above and requires that the Next
Generation Technology we employ meet certain performance standards, such as a 50 percent reduction
in nitrogen concentration of the effluent applied to area fields over a prescribed time period. We
paid a civil penalty in the amount of $350,000 in connection with this settlement. In 2000, we voluntarily entered into an agreement with the Attorney General of North Carolina.
Under this agreement, we committed to implement Environmentally Superior Technologies for the
management of swine waste at our company-owned farms after an independent panel determined that
such technologies are both effective and economically feasible to construct and operate.
Environmentally Superior Technologies are generally identified as waste treatment technologies that
meet certain performance standards with respect to release of materials into the environment. We
also paid $2.5 million to a fund for the development of such technologies, for environmental
enhancement activities and for the defrayal of costs incurred by the state related thereto. We
have met all of our commitments to date under this agreement and continue to work closely with the
states designated representative at North Carolina State University in the development of
Environmentally Superior Technologies. On January 21, 2005, the EPA announced the opportunity for animal feeding operations to enter
into an agreement regarding air emissions from animal feeding operations. The agreement is known
as the Air Quality Compliance Agreement. The purpose of the agreement is to allow EPA to monitor
the operations and gather data for future regulations. Participating parties would pay a civil
penalty. In exchange for this, the parties will receive a limited conditional release and covenant
not to sue for any past violations and future violations of applicable environmental air emission
laws until such time as EPA establishes emission methodologies enabling Animal Feeding Operations
(AFOs) to certify compliance. EPAs proposal is not yet final, and we are evaluating whether we
will participate in this program. Our Missouri operations would not be eligible because they are
subject to the consent decrees described above. As proposed by EPA, the amount of the civil
penalty that would be assessed in order for our North Carolina and Texas operations to participate
would not be expected to exceed $100,000. If we decide to participate in the program, we do not
anticipate that the penalty and required compliance actions will have a material adverse effect on
us. Environmental Capital Expenditures We have incurred, and will continue to incur, significant capital and operating expenditures
to comply with environmental requirements and our obligations under the consent decrees. We expect
to spend about $4.0 million in fiscal year 2006, and roughly $4.0 million in fiscal year 2007. The
fiscal year 2005 expenditures were primarily for the construction of Next Generation Technology in
the form of a fertilizer plant in northern Missouri that will convert hog waste into commercial
grade fertilizer. Our fiscal year 2006 and fiscal year 2007 expenditures will be primarily for
Next Generation upgrades at certain additional farm locations. North Carolina Moratorium In 1997, North Carolina enacted a moratorium on the construction of farms with more than 250
hogs or the expansion of existing large farms in North Carolina. In 2003, the moratorium was
extended until 2007. North Carolina is concerned about the use of waste treatment lagoons and
spray fields for the disposal of swine waste, especially in areas of that state that are prone to
flooding or hurricanes. It is anticipated that this moratorium will be extended until more
effective technologies are developed to protect the environment. Currently, we do not expect that
the North Carolina moratorium will have a material adverse effect on us. 16




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2003 BSE Case On December 23, 2003, a case of BSE was confirmed in a dairy cow in the State of Washington.
On December 30, 2003, the USDA announced additional safeguards to further minimize the risk for
human exposure to BSE in the United States. World markets reacted to this event and several
countries banned the import of beef products from the United States, pending further investigation
and action by the U.S. beef industry. For the most part, these bans continue today and have caused
a moderation of beef prices in the U.S. since the discovery. The U.S. Congress has reacted by
considering potential legislation that includes banning downer livestock from the food chain,
re-assessing country-of-origin labeling, implementing mandatory animal identification and
traceability requirements, and requiring potential changes in the current practice of feeding
animal by-products. At this time, it is uncertain what impact these events may have on the pork
industry. Nuisance Lawsuits We are defendants in several lawsuits based on the law of nuisance in Missouri, including one
class action
lawsuit. We believe we have good defenses to these actions and intend to vigorously defend them.
These lawsuits are described in more detail in Legal Proceedings. ContiGroup Indemnity The Company indemnified its majority shareholder, ContiGroup, Inc., against any liabilities,
including environmental liabilities, relating to the Missouri operations at the time that
ContiGroup sold its Missouri hog production facilities to the Company and made its initial
investment in 1998. This indemnification obligation currently extends to the Companys obligations
under the State of Missouri consent decree and the pending nuisance suits, as well as any potential
future claims regarding our Missouri operations. Other Regulatory Matters In February 2002, the U.S. Senate initially passed a Farm Bill that included a provision known
as the Johnson Amendment, which would have prohibited meat packers, like us, from owning or
controlling livestock intended for slaughter for more than fourteen days prior to slaughter. The
U.S. House of Representatives passed a different version of the Farm Bill that did not contain any
provision similar to the Johnson Amendment. A Conference Committee was convened for the Farm Bill,
composed of members of both the House and the Senate. This Conference Committee rejected the
Johnson Amendment and approved a uniform Farm Bill without the Johnson Amendment or any similar
provision. If the Johnson Amendment had become law, it may have had a material adverse effect on our
vertically integrated business. It may have caused us to consider a restructuring of our
operations. We, along with industry groups, succeeded in educating lawmakers as to the adverse
effects and unintended consequences of the Johnson Amendment, leading to its subsequent rejection
by the Conference Committee. We and others in the industry will continue efforts to educate
lawmakers, but the parties advocating passage of the Johnson Amendment continue to propose similar
legislation. Legislation of this type was recently introduced in the U.S. Senate. If this or a
provision like the Johnson Amendment becomes law, it could have a material adverse effect on us. The Country of Origin Labeling requirements became law pursuant to the Farm Security and Rural
Investment Act of 2002, but implementation of the labeling requirements has been delayed. Due to
our vertical integration, we do not anticipate any material compliance problems. Several states have enacted corporate farming laws that restrict the ability of corporations
to engage in farming activities. Missouri is among these states, but Texas and North Carolina
currently are not. Missouris corporate farming law in many cases bars corporations from owning
agricultural land and engaging in farming activities. Our operations have been structured to
comply with the Missouri corporate farming law and its existing exemptions. The Missouri laws,
however, could be subject to challenge or amendment by Missouri governmental bodies in the future.
Further, even with the exemptions, the corporate farming laws restrict our ability to expand beyond
the counties in which we currently operate. 17




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At the time of ContiGroups acquisition of its interest in us in 1998, ContiGroup submitted
the proposed ownership structure to the Office of the Attorney General of the State of Missouri for
its review. At that time, the Office of the Attorney General indicated that it had no objection to
our current structure under the corporate farming laws. There can be no assurance, however, that
this position will be maintained in the future as our operations continue and develop. In addition to Missouris corporate farming law, Missouri law prohibits a person who is not
a citizen or resident of the United States from holding a controlling interest in a business that
owns land used for farming. A controlling interest in us is not currently held by a foreign person
or entity in violation of this law. Our certificate of incorporation includes provisions intended
to prevent foreign ownership in violation of this law. 
 Executive Officers of the
Registrant The names, ages and positions of our executive officers as of May 6, 2005, are set forth
below: Name
    
    Age
    
    Position(s)John M. Meyer
    
    
    43
    
    
    Chief Executive Officer and DirectorRobert W. Manly
    
    
    52
    
    
    PresidentStephen A. Lightstone
    
    
    59
    
    
    Executive Vice President, Chief Financial Officer and TreasurerGerard J. Schulte
    
    
    55
    
    
    General Counsel and SecretaryDennis D. Rippe
    
    
    51
    
    
    Vice President, Controller and Assistant SecretaryCalvin R. Held
    
    
    49
    
    
    Vice President Processing OperationsRichard L. Morris
    
    
    54
    
    
    Vice President Sales and Marketing
 Set forth below is a description of the backgrounds of each of our executive officers. John M. Meyerhas been a Director and our Chief Executive Officer since May 1998. Prior to
May 1998, he spent 15 years with ContiGroup, most recently as Vice President and General Manager of
ContiGroups pork division. While with ContiGroup, Mr. Meyer served in the sales, credit and
financial services functions. Robert W. Manlyhas been our President since October 1996. From April 1986 to October 1996,
Mr. Manly served as Executive Vice President of Smithfield Foods, Inc., a meat producer and
processor. He also served as President and Chief Operating Officer of the Smithfield Packing
Company, a subsidiary of Smithfield Foods from June 1994 to June 1995. Mr. Manly held the position
of Assistant to the President of IBP, Inc., a meat producer and processor from January 1981 to
April 1986. Stephen A. Lightstonehas been our Executive Vice President, Chief Financial Officer and
Treasurer since August 1998. From 1983 to 1998, Mr. Lightstone was with Payless Cashways, Inc., a
building materials retailer, most recently serving as Senior Vice President, Chief Financial
Officer and Treasurer. Gerard J. Schultehas been our General Counsel and Secretary since July 1998. Mr. Schulte has
been Vice President and Assistant General Counsel of ContiGroup Companies, the majority shareholder
of the Company, since February 2001, and previously served as Vice President and General Counsel of
ContiIndustries, an operating group of ContiGroup Companies, since 1990. Dennis D. Rippehas been our Vice President, Controller and Assistant Secretary since January
1999. Prior to that date, Mr. Rippe had been our Vice President Finance and
Administration-Operations (Missouri) since February 1997. Calvin R. Heldhas been our Vice President of Processing Operations since April 2004. Prior
to that date, Mr. Held was the Companys Vice President of Milan, Missouri Processing Operations
from December 1994 to April 2004 and was Controller of Farm Production and the Milan, Missouri
Plant from August 1992 to December 1994. From 1978 to 1992, Mr. Held was with Jimmy Dean Foods, a
division of the Sara Lee Corporation, a manufacturer and marketer of consumer products. Richard L. Morrishas been our Vice President of Sales and Marketing since November 2003.
Prior to joining the Company, Mr. Morris was a consultant with Morris Group, a consulting company,
from September 2002 to November 2003, and prior to that spent 22 years with Sara Lee Corporation, a
manufacturer and marketer of consumer products, and affiliates
from February 1980 to August 2002, most recently as Vice President of
Distributor Sales-Meat and Bakery with Sara Lee Foodservice. 18




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Available Information Additional information regarding the company can be found at our Internet address
(http://www.psfarms.com), provided that none of the information contained on our website is
incorporated by reference into this report on Form
10-K. We file annual, quarterly and current reports with the SEC. These reports, and any
amendments to these reports, filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 are made available by us free of charge on our Internet website as
soon as reasonably practicable after we electronically file or furnish such material with the SEC. 
 Item 2. Properties Pork Processing We own two pork processing facilities located in Missouri and North Carolina. Combined, these
two facilities have the capacity to process approximately 4.6 million hogs per year. The Missouri facility has a processing capacity of 7,400 hogs per day and is one of the most
modern and technically advanced facilities of its kind. Substantially all of the hogs processed at
this plant are produced by our Missouri hog production operation. In fiscal year 2003, we completed a major renovation of our North Carolina processing facility
which increased its processing capacity. The facility is now capable of processing up to
approximately 10,000 hogs daily, depending on seasonality and market conditions, and we believe it
is now, along with our Missouri processing plant, one of the most advanced facilities of its kind
in the United States. The majority of the hogs processed at the facility are provided by our North
Carolina hog production operations with the remainder being sourced from outside suppliers. Hog Production We have a combination of owned, contracted and leased hog production facilities which support
approximately 270,000 sows and their respective offspring. As detailed below, there are three
geographic areas where our hog production operations are located. The Missouri production operation has a 116,000-sow herd which produces approximately 2.1
million hogs per year. The production facilities are located on approximately 44,000 acres and are
supported by three owned feedmills with a combined annual capacity of 840,000 tons per year. Of
these 44,000 acres, approximately 6,200 acres are owned by ContiGroup but the facilities located
thereon are owned by us. See Certain Relationships and Related Transactions. The Texas production operation has a 34,000-sow herd which is designed to produce
approximately 600,000 hogs per year. The production facilities are located on approximately 53,000
acres and are supported by one owned feedmill with an annual capacity of 220,000 tons per year. The North Carolina production operation has a 76,000-sow herd which produces approximately 1.4
million hogs per year. Most of the production operations in North Carolina are conducted on farms
that are not owned by us. The hogs, however, are owned by us. Our North Carolina production
operations are supported by one owned feedmill with an annual capacity of 380,000 tons per year and
through an arrangement with a large feedmill operator for the rest of our feed requirements. 19




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Headquarters Our corporate office is located in Kansas City, Missouri, and consists of approximately 18,000
square feet of leased space. This lease has an initial term expiring in July 2013. All of our Missouri production and processing facilities, as well as substantially all of our
inventory, breeding stock and receivables, are subject to liens under our credit agreement. 
 Item 3. Legal Proceedings Two suits based on the law of nuisance were filed against ContiGroup and us during the second
quarter of fiscal year 2003 in the Circuit Court of Jackson County, Kansas City, Missouri (Steven
Adwell, et al. vs. PSF, et al., and
Michael Adwell, et al. vs. PSF, et al.). Two other suits based on the law of nuisance were filed
in March of 2004 by the same attorney (Fred Torrey, et al. vs. PSF, et al., and, Doyle Bounds, et
al. vs. PSF, et al.). Two additional suits were filed in May 2004 in Daviess County Circuit Court,
Gallatin, Missouri entitled Vernon Hanes et al. v. Premium Standard Farms, Inc. et al., and Steve
Hanes et al. v. Premium Standard Farms, Inc., et al. There are multiple plaintiffs in each suit,
who claim to live near swine farms owned or under contract with us. The plaintiffs allege that
odors from these farms interfered with their right to use and have quiet enjoyment of their
respective properties and are seeking unspecified damages. We believe we have good defenses to
these actions and intend to vigorously defend these suits. In May 2004, the same lawyer who filed the Adwell, Bounds and Torrey lawsuits filed a class
action lawsuit (Daniel Herrold, et al. and Others Similarly Situated v. ContiGroup Companies, Inc,
Premium Standard Farms, Inc., and PSF Group Holdings, Inc.) in the Circuit Court of Jackson County,
Kansas City, Missouri. The action seeks to create a class of plaintiffs living within 10 miles of
our farms in northern Missouri, including contract grower farms, who are alleged to have suffered
interference with their right to use and have quiet enjoyment of their respective properties and
are seeking unspecified damages. We have removed this case to the U.S. District Court in Kansas
City, Missouri. We believe we have good defenses to this action and intend to vigorously defend
this suit. On November 30, 2004, International Casings Group (ICG) filed an action against us in the
Federal Court in Kansas City, Missouri (International Casings Group, Inc. vs. Premium Standard
Farms, Inc.) seeking a preliminary injunction and specific performance of a contract by which we
sold product from our Clinton and Milan plants to ICG. We believed we had properly terminated our
contractual relations with ICG, but the Court has granted ICG a preliminary injunction. We believe
we have good defenses to this action and intend to vigorously defend this suit. In addition, we are involved from time to time in routine litigation incidental to our
business. Although no assurance can be given as to the outcome or expense associated with any of
these routine proceedings, we believe that none of the proceedings currently pending should,
individually or in the aggregate, have a material adverse effect on our financial statements. 
 Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders during the last quarter of the fiscal
year covered by this report. 20




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##### Table of Contents



PART II 
 Item 5. Market for Registrants Common Equity and Related Stockholder Matters (a) Market Information. There is no established public trading market for our common stock. (b) Holders. As of March 26, 2005, there were approximately 150 record holders of the Class
A Common Stock and one record holder of the Class B Common Stock. (c) Dividends. On May 6, 2005, the board of directors declared a 145-for-1 stock split in
the form of a stock dividend on account of its common stock. Except for this stock
dividend, the Company, and its predecessor, PSF Group Holdings, Inc., has not declared or paid any
dividends on its common stock since its
issuance. Our credit agreement limits the amount of cash dividends the Company may pay to $15
million annually. For more detailed information on our current credit facility, see Item 7
Managements Discussion and Analysis of Financial Condition and Results of Operation  Liquidity
and Capital Resources and Notes to our audited Consolidated Financial Statements. (d) Securities Authorized for Issuance Under Equity Compensation Plans. The following table
sets forth information regarding our equity compensation plans as of March 26, 2005 (giving effect
to the 145-for-1 stock split discussed above): A
    
    
    B
    
    
    CNumber of SecuritiesRemaining Available forNumber of Securities
    
    
    
    
    
    Futureto be Issued Upon
    
    
    Weighted Average
    
    
    Issuance Under EquityExercise of Outstanding
    
    
    Exercise Price of
    
    
    Compensation PlansOptions, Warrants and
    
    
    Outstanding Options,
    
    
    (Excluding Those inPlan Category
    
    Rights
    
    
    Warrants and Rights
    
    
    Column A)Equity compensation plans
approved by security holders
    
    
    
    
    
    
    
    
    
    
    Equity compensation plans
not approved by security
holders
    
    
    952,859
    
    
    $
    11.49
    
    
    
    1,222,141Total
    
    
    952,859
    
    
    $
    11.49
    
    
    
    1,222,141
 21




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##### Table of Contents



Item 6. Selected Financial Data The following table sets forth our selected historical consolidated financial information and
other data for the periods presented. The consolidated financial information for the fiscal years
ended March 31, 2001, and March 30, 2002, was derived from our consolidated financial statements,
which were audited by Arthur Andersen LLP, independent public accountants, which has ceased
operations. The consolidated financial information presented for the fiscal years ended March 29,
2003, March 27, 2004, and March 26, 2005, was derived from our consolidated financial statements,
which have been audited by Deloitte & Touche LLP, independent registered public accounting firm.
This data should be read in conjunction with Item 7 Managements Discussion and Analysis of
Financial Condition and Results of Operations and our audited consolidated financial statements
and related notes thereto. Fiscal Year Ended(1)(2)March 31,
    
    
    March 30,
    
    
    March 29,
    
    
    March 27,
    
    
    March 26,2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005(dollars in thousands, except per share data)Statement of Operations Data:Net sales
    
    $
    540,576
    
    
    $
    674,946
    
    
    $
    608,414
    
    
    $
    730,737
    
    
    $
    927,571Cost of goods sold
    
    
    456,184
    
    
    
    589,183
    
    
    
    631,870
    
    
    
    696,751
    
    
    
    774,512Gross Profit
    
    
    84,392
    
    
    
    85,763
    
    
    
    (23,456
    )
    
    
    33,986
    
    
    
    153,059Selling, general and administrative expenses
    
    
    19,413
    
    
    
    21,551
    
    
    
    18,267
    
    
    
    17,397
    
    
    
    26,068Goodwill amortization (3)
    
    
    2,436
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other (income) expense, net
    
    
    1,210
    
    
    
    (558
    )
    
    
    (2,293
    )
    
    
    (597
    )
    
    
    (826
    )Operating income (loss)
    
    
    61,333
    
    
    
    64,770
    
    
    
    (39,430
    )
    
    
    17,186
    
    
    
    127,817Interest expense, net
    
    
    23,952
    
    
    
    20,404
    
    
    
    23,745
    
    
    
    24,700
    
    
    
    20,155Loss on early extinguishment of debt
    
    
    
    
    
    
    2,192
    
    
    
    
    
    
    
    
    
    
    
    Income tax expense (benefit)
    
    
    15,367
    
    
    
    16,809
    
    
    
    (24,575
    )
    
    
    (2,923
    )
    
    
    40,004Net income (loss)
    
    $
    22,014
    
    
    $
    25,365
    
    
    $
    (38,600
    )
    
    $
    (4,591
    )
    
    $
    67,658Earnings (loss) per share(4):Basic
    
    $
    0.73
    
    
    $
    0.82
    
    
    $
    (1.25
    )
    
    $
    (0.15
    )
    
    $
    2.19Diluted
    
    
    0.73
    
    
    
    0.82
    
    
    
    (1.25
    )
    
    
    (0.15
    )
    
    
    2.18Shares used to calculate earning (loss) per share(5):Basic
    
    
    30,260,215
    
    
    
    30,928,593
    
    
    
    30,928,593
    
    
    
    30,928,593
    
    
    
    30,928,593Diluted
    
    
    30,276,933
    
    
    
    30,952,196
    
    
    
    30,928,593
    
    
    
    30,928,593
    
    
    
    31,015,665Other Data:Capital expenditures
    
    $
    43,224
    
    
    $
    96,232
    
    
    $
    35,505
    
    
    $
    41,884
    
    
    $
    44,298Pounds of pork sales (millions)
    
    
    603.88
    
    
    
    675.02
    
    
    
    737.95
    
    
    
    786.22
    
    
    
    844.24Total hogs processed (millions)
    
    
    3.02
    
    
    
    3.66
    
    
    
    4.07
    
    
    
    4.28
    
    
    
    4.46Balance Sheet Data (At Period End):Working capital
    
    $
    119,764
    
    
    $
    120,097
    
    
    $
    139,523
    
    
    $
    164,750
    
    
    $
    159,962Total assets
    
    
    773,440
    
    
    
    806,268
    
    
    
    777,780
    
    
    
    758,832
    
    
    
    736,966Total long-term debt and capital
leases (including current portion)
    
    
    267,216
    
    
    
    271,411
    
    
    
    303,902
    
    
    
    285,902
    
    
    
    176,088Shareholders equity
    
    
    357,837
    
    
    
    383,567
    
    
    
    344,295
    
    
    
    340,012
    
    
    
    407,724
   (1)
    
    The financial information presented for the years ended March 31,
2001, March 30, 2002, March 29, 2003, March 27, 2004, and March 26,
2005, reflect our acquisition of The Lundy Packing Company on August
25, 2000 and our acquisition of Premium Standard Farms of North
Carolina, Inc. on September 22, 2000, both of which were accounted for
in accordance with the purchase method of accounting. See Item 1
Business Our History. 22




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(2)
    
    Our fiscal year is the 52 or 53-week period ending on the last
Saturday in March. Fiscal year 2001 consisted of 53 weeks, whereas
each of fiscal years 2002, 2003, 2004 and 2005 consisted of 52 weeks.(3)
    
    In accordance with Statements of Financial Accounting Standards No.
142 (SFAS 142), Goodwill and Intangible Assets, we discontinued
amortizing goodwill over the estimated useful life beginning in fiscal
year 2002.(4)
    
    Basic earnings (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding
during the period. Diluted earnings (loss) per share is computed
giving effect to all dilutive potential common shares that were
outstanding during the period. The effect of stock options and
warrants represents the only difference between the weighted average
shares used for the basic earnings (loss) per share computation
compared to the diluted earnings (loss) per share computation.(5)
    
    On May 6, 2005, the board of directors declared a 145-for-1 stock
split in the form of a stock dividend on account of its common stock. This stock dividend has been retroactively applied
to the shares outstanding for each year shown. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of financial condition, results of operations,
liquidity and capital resources should be read in conjunction with our audited consolidated
financial statements, including the notes thereto, and the other financial information appearing
elsewhere in this report onForm 10-K. This discussion contains forward-looking statements that
involve risks and uncertainties, including information with respect to our plans, intentions and
strategies for our business. See Forward-Looking Statements. Our actual results may differ
materially from those estimated or projected in any of these forward-looking statements. Overview Historically, the United States pork industry has been highly cyclical in nature due to the
natural inverse relationship of prices and production and the tendency of independent hog producers
to increase production levels in response to higher hog prices. A typical cycle begins with higher
hog prices, which leads to incremental production. This, in turn, leads to overproduction, which
drives market prices lower. Eventually, lower market prices will generally cause production to
moderate or decline which generally leads to higher market prices. Because of the length of the
production cycle, there is relatively little ability of hog producers to adjust their production in
the short-term, although some changes in supply may occur through net increases or decreases of
pork products held in freezers. We operate in two business segments pork processing and hog production. The costs of pork
processors are highly dependent on the cost of hogs, and net sales are determined in large part by
the prices they receive (cut-out prices) for pork products. Conversely, cost of goods sold from
hog production is determined in large part by the costs of feed, primarily corn and soybean meal,
and net sales from hog production are highly dependent on the prices the producer receives for
hogs. Sales of hogs from our production segment are transferred to our processing segment at daily
market prices. High feed prices can negatively impact production results since these increases can
raise the costs to the producer. Given the volatility of prices of these commodities, the results
of both our segments can vary substantially. The prices for all of these commodities are volatile and the spreads between these prices vary
substantially. High prices for hogs normally hurt the profitability of processing operations
unless pork prices increase sufficiently to offset these cost increases. On the other hand, hog
producers tend to record better results when prices for hogs are high, especially in relation to
grain prices. As a result of changes in the hog and pork prices, results of our pork processing
segment in certain periods may be better or worse than results for our production segment. The following graphs set forth various hog, pork and grain price data for recent periods and
illustrate the volatility in market prices. 23




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##### Table of Contents



Pork and Hog Prices (April 2002-March 2005) (LINE GRAPH)   (1)
    
    Average monthly price based on the market price of lean hogs, as
published by the Chicago Mercantile Exchange.(2)
    
    Average monthly price based on the 185# cutout pricing method, a
standard measure for determining current market prices of pork primal
cuts that is published by the USDA. Corn $/Bushel (April 2002-March 2005) (LINE GRAPH)   (1)
    
    Based on the monthly average of daily close prices of the Nearby Corn
Futures quoted by the Chicago Board of Trade. 24




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##### Table of Contents



Soybean Meal $/Ton (April 2002-March 2005) (LINE GRAPH)   (1)
    
    Based on the monthly average of daily close prices of the Nearby
Soybean Futures quoted by the Chicago Board of Trade. On March 24, 2005, the USDA issued its Hogs and Pigs Inventory Report that indicated a 0.3%
decrease in the breeding herd and current hog inventories just fractionally above the 2004 level.
Continued strong demand has kept hog prices at relatively high levels for the fiscal year ended
March 26, 2005. Ongoing strength in hog prices is contingent on continued or increased demand for
pork products or a reduced supply of hogs in the future. On January 12, 2005, the USDA issued a crop production report, showing a record corn crop of
11.8 billion bushels, up 1.7 billion bushels from the prior year. In the same report, the USDA
reported a record 3.2 billion bushel soybean crop, which is 700 million bushels greater than the
previous year. Both of these estimates of production have moderated the near-term price increases
of corn and soybean meal, the primary ingredients in our feed rations. Components of Revenue and Expenses Net Sales Our net sales are generated from the sale of pork products to retailers, wholesalers,
foodservice suppliers, further processors, export buyers, and to a lesser extent the sale of hogs
to other pork processors. Sales of hogs from our production segment are transferred to our
processing segment at daily market prices. In fiscal year 2005, sales of pork products accounted
for approximately 91% of our net sales, with the remaining 9% coming from sales of hogs to outside
processors. Pork product sales are of primal cuts, such as hams, loins, bellies, butts, picnics and ribs,
and to a lesser extent cooked pork, further processed pork and pork by-products. Primal cuts are
also converted further into boneless items or, in our North Carolina operations, further processed
into items such as smoked hams, sliced bacon and microwave cooked bacon. Our processing revenues
are primarily driven by the operating rate of our facilities and the value that we extract from the
hogs that we process. For our fiscal years ended March 29, 2003, March 27, 2004 and March 26,
2005, we processed 4.1 million, 4.3 million and 4.5 million hogs, respectively. Our Missouri
processing plant is currently capable of processing 7,400 hogs per day and our North Carolina
processing plant is currently capable of processing up to approximately 10,000 hogs per day,
depending on seasonality. The value that 25




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##### Table of Contents



we extract from hogs processed is primarily driven by
pork prices, processing yields and to a lesser extent, by product mix, as premium products,
boneless and further processed products generate higher prices and operating margins. Wholesale pork prices fluctuate seasonally and cyclically due to changes in supply and demand
for pork. We believe that our vertical integration allows us to obtain higher prices for our
products than our more commodity-oriented competitors. We utilize hog futures to hedge future pork product sales. While this may tend to limit our
ability to participate in gains from favorable commodity price fluctuation, it also tends to reduce
earnings volatility and secure future margins. Our hedging contracts relating to hogs are marked
to market monthly. Consequently, any gains or losses on these instruments are reflected in net
sales. See Item 7A Quantitative and Qualitative Disclosures About Market
Risk. Historically, hog prices have experienced cyclical and seasonal supply and demand
fluctuations. Revenue from the sale of hogs is driven by the number of hogs sold (in excess of
what our processing facilities require), the average weight, and the current market price
(including any quality premiums). Our excess hogs are sold to other processors. Cost of Goods Sold Our cost of goods sold is driven primarily by several key factors. For our pork processing
operations, the main costs (excluding hogs) are labor, packaging, utilities, facility and freight
expenses. Given the high fixed costs required to build, maintain and operate a processing plant,
unit costs are impacted by processing volumes. The costs associated with our North Carolina pork
processing facility reflect the fact that approximately one-quarter of the hogs processed at this
facility are purchased at market prices from independent local farmers under long-term supply
contracts. For our hog production operations, the main costs are feed, labor, utilities, and facility
expenses which include maintenance, depreciation and contract grower fees. The costs associated
with feed generally represent 50% to 60% of the total cost to raise a hog depending on the price of
corn and soybean meal, which constantly fluctuates. Increases in the price of these commodities
result in increases in our feed costs, while decreases reduce our feed costs. The relative impact
of price changes in these commodities varies based on the percentage that each makes up in our feed
composition. Our hedging contracts relating to grains are marked to market monthly. Consequently,
any gains or losses on these instruments are reflected in cost of goods sold. See Item 7A
Quantitative and Qualitative Disclosures About Market Risk. We are proactive in recognizing
opportunities to improve our cost structure and strive to be one of the lowest cost producers in
the industry. Selling, General and Administrative Expenses Selling expenses consist primarily of compensation and benefits for company-employed sales
people as well as trade promotions, advertising, commissions and other marketing costs. General
and administrative costs consist primarily of general management, accounting, information
technology and legal expenses. Interest expense, net Interest expense, net consists of (i) interest expense (primarily on our bank indebtedness and
9 1/4% senior notes), including any amortization of deferred financing costs, less (ii)
interest income. Other income (expense) Other income (expense) primarily includes income (expense) from our 50% ownership interest in
L&H Farms, a hog production facility in North Carolina, Oldhams LLC, a sow processing facility in
Kansas, and Crystal Peak Technologies, LLC, an animal waste technology company. It also includes
the minority interest of a partner in our majority-owned subsidiary, L&S Farms, a hog production
facility in North Carolina, and, in fiscal year 2003, the proceeds paid to us from a favorable
settlement of litigation. For additional information on our joint ventures, see 26




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Note 6 to our
audited consolidated financial statements in this report on Form 10-K. Results of Operations Fiscal Year Ended March 26, 2005 Compared to the Fiscal Year Ended March 27, 2004 The following table presents selected historical financial information for our processing and
production segments for the fiscal years ended March 27, 2004 and March 26, 2005. The columns
under year-to-year change show the dollar and percentage change from the respective fiscal years
ended March 27, 2004 and March 26, 2005. Intersegment sales are based on daily market prices. Fiscal Year Ended
    
    
    Year-to-Year ChangePercentageMarch 27, 2004
    
    
    March 26, 2005
    
    
    2004 to 2005
    
    
    Change(1)(in millions, except percentages)Net SalesProcessing
    
    $
    663.5
    
    
    $
    850.8
    
    
    $
    187.3
    
    
    
    28.2
    %Production
    
    
    452.3
    
    
    
    628.9
    
    
    
    176.6
    
    
    
    39.0
    %Intersegment
    
    
    (385.1
    )
    
    
    (552.1
    )
    
    
    (167.0
    )
    
    
    (43.4
    )%Total Net Sales
    
    $
    730.7
    
    
    $
    927.6
    
    
    $
    196.9
    
    
    
    26.9
    %Gross ProfitProcessing
    
    $
    38.2
    
    
    $
    29.8
    
    
    $
    (8.4
    )
    
    
    (22.0
    )%Production
    
    
    (4.2
    )
    
    
    123.3
    
    
    
    127.5
    
    
    NMTotal Gross Profit
    
    $
    34.0
    
    
    $
    153.1
    
    
    $
    119.1
    
    
    
    350.3
    %Operating Income (loss)Processing
    
    $
    34.7
    
    
    $
    24.7
    
    
    $
    (10.0
    )
    
    
    (28.8
    )%Production
    
    
    (4.2
    )
    
    
    123.4
    
    
    
    127.6
    
    
    NMCorporate
    
    
    (13.3
    )
    
    
    (20.3
    )
    
    
    (7.0
    )
    
    
    (52.6
    )%Total Operating Income
    
    $
    17.2
    
    
    $
    127.8
    
    
    $
    110.6
    
    
    
    643.0
    %
 (1) NM-not meaningful Consolidated Net Sales.Net sales increased by $196.9 million, or 26.9%, to $927.6 million in fiscal year
2005 from $730.7 million in fiscal year 2004. The increase was attributed to an increase in prices
of $164.9 million, combined with an increase in volume of $43.2 million, partially offset by a
$11.2 million charge recorded in net sales for hog futures contracts. Overall, hog and wholesale
pork prices increased compared to the prior period despite larger than expected supplies of pork
industry wide. Solid domestic and export demand have been influenced by several factors including
a decrease in production of beef, the continuing effect of the first case of BSE in a cow in the
United States, the avian influenza virus affecting the poultry industry and diet trends among
Americans kept demand for pork products strong. See Segment Analysis below for comments on
changes in sales by business segment. Gross Profit.Gross profit increased by $119.1 million, or 350.3%, to $153.1 million in the
fiscal year 2005 from $34.0 million in fiscal year 2004. As a percentage of net sales, gross
profit increased to 16.5% in fiscal year 2005 from 4.7% in fiscal year 2004. The current year
gross profit increase is primarily the result of higher hog and wholesale pork prices as mentioned
above, partially offset by a 5.0% increase in costs to produce our products during fiscal year 2005
compared to fiscal year 2004. Selling, General and Administrative Expenses.Selling, general and administrative expenses
increased by $8.7 million, or 49.8%, to $26.1 million in fiscal year 2005 from $17.4 million in
fiscal year 2004. Selling, general and administrative expenses as a percentage of net sales were
2.8% in fiscal year 2005 compared to 2.4% in fiscal year 2004. The dollar increase is primarily
attributable to accruals relating to bonuses and incentive plans, which 27




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reflect our improved profitability during fiscal year 2005. Operating Income.Operating income increased by $110.6 million, or 643.0%, to $127.8 million
in fiscal year 2005 from $17.2 million in fiscal year 2004. The increase is attributable to the
factors mentioned above. Interest Expense, net.Interest expense, net, decreased by $4.5 million, or 18.2%, to $20.2
million in fiscal year 2005 from $24.7 million in fiscal year 2004. The decrease is attributed to
less average total debt outstanding during fiscal year 2005 compared to the same period in the
prior year. See Liquidity and Capital Resources below for more information. Income Tax Expense (Benefit).Our effective tax rate was 37.2% in fiscal year 2005 and 38.9%
in fiscal year 2004. The decrease was the result of a change in estimate of the deferred tax rate. Segment Analysis Pork Processing Net Sales.Net sales increased $187.3 million, or 28.2%, to $850.8 million in fiscal year 2005
from $663.5 million in fiscal year 2004. The increase resulted from a 22.9% increase in pork
product sales prices, combined with a 4.3% increase in volume processed compared to last year.
Export sales increased 73% primarily representing increased sales to Japan and Mexico. The
increase in volume was primarily attributable to an increase in Saturdays worked at both of our
processing facilities, the need for which resulted from an increase in the number of hogs available
for processing as a result of improved productivity at our production facilities. Gross Profit.Gross profit decreased by $8.4 million, or 22.0%, to $29.8 million in fiscal
year 2005 from $38.2 million in fiscal year 2004. While overall sales prices increased 22.9%, our
cost to purchase hogs increased by 34.5%. In absolute dollars, the sale price increase of the pork
products outpaced the cost increase of hogs by $3.9 million compared to last year. However, other
processing costs, primarily labor and freight, increased $12.3 million, or 2.8% on a per head
basis, compared to the prior year. The increase in labor is related to increases in management
bonus accruals, benefits, and overtime pay for increased Saturdays worked. The increase in freight
is related to increase in fuel prices and product volumes shipped. Operating Income.Operating income decreased by $10.0 million, or 28.8%, to $24.7 million in
fiscal year 2005 from $34.7 million in fiscal year 2004. The decrease was attributed to the
factors mentioned above coupled with increased sales and marketing bonuses accrued and increased
marketing expenses associated with value added products. Hog Production Net Sales.Net sales increased by $176.6 million, or 39.0%, to $628.9 million in fiscal year
2005 from $452.3 million in fiscal year 2004. The increase primarily resulted from a 31.9%
increase in hog sales prices, coupled with a 7.8% increase in volume attributable to increases in
production, primarily in Missouri and North Carolina. As mentioned above, losses recorded for hog
futures contracts had an $11.2 million negative impact on the change in net sales. Intersegment
sales to our pork processing segment transferred at market prices are eliminated in the
Consolidated Statements of Operations and Comprehensive Income (Loss). Gross Profit.Gross profit increased by $127.5 million to $123.3 million in fiscal year 2005
from a loss of $4.2 million in fiscal year 2004. The increase was primarily the result of higher
hog sales prices as mentioned above, partially offset by an 2.9% increase in hog production costs
on a per hundred weight basis compared to the prior year. The majority of the increase in hog
production cost was due to higher feed input costs compared to fiscal year 2004. Feed input costs
were 50.7% of cost of goods sold in fiscal year 2005, compared to 50.3% for fiscal year 2004. Operating Income.Operating income increased by $127.6 million to $123.4 million in fiscal
year 2005 from a loss of $4.2 million in fiscal year 2004. The increase is attributed to the
factors mentioned above. 28




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Fiscal Year Ended March 27, 2004 Compared to the Fiscal Year Ended March 29, 2003 The following table represents selected historical financial information for our processing
and production segments for the fiscal years ended March 29, 2003 and March 27, 2004. The columns
under year-to-year change show the dollar and percentage change from the respective fiscal years
ended March 29, 2003 and March 27, 2004. Intersegment sales are based on market prices. Fiscal Year Ended
    
    
    Year-to-Year ChangePercentageMarch 29, 2003
    
    
    March 27, 2004
    
    
    2003 to 2004
    
    
    Change(1)(in millions, except percentages)Net SalesProcessing
    
    $
    553.6
    
    
    $
    663.5
    
    
    $
    109.9
    
    
    
    19.9
    %Production
    
    
    355.6
    
    
    
    452.3
    
    
    
    96.7
    
    
    
    27.2
    %Intersegment
    
    
    (300.8
    )
    
    
    (385.1
    )
    
    
    (84.3
    )
    
    
    (28.0
    )%Total Net Sales
    
    $
    608.4
    
    
    $
    730.7
    
    
    $
    122.3
    
    
    
    20.1
    %Gross ProfitProcessing
    
    $
    39.8
    
    
    $
    38.2
    
    
    $
    (1.6
    )
    
    
    (4.0
    )%Production
    
    
    (63.3
    )
    
    
    (4.2
    )
    
    
    59.1
    
    
    
    93.4
    %Total Gross Profit
    
    $
    (23.5
    )
    
    $
    34.0
    
    
    $
    57.5
    
    
    NMOperating Income (loss)Processing
    
    $
    34.4
    
    
    $
    34.7
    
    
    $
    0.3
    
    
    
    0.9
    %Production
    
    
    (63.1
    )
    
    
    (4.2
    )
    
    
    58.9
    
    
    
    93.3
    %Corporate
    
    
    (10.7
    )
    
    
    (13.3
    )
    
    
    (2.6
    )
    
    
    (24.3
    )%Total Operating Income (loss)
    
    $
    (39.4
    )
    
    $
    17.2
    
    
    $
    56.6
    
    
    NM
 (1) NM-not meaningful Consolidated Results Net Sales.Net sales increased by $122.3 million, or 20.1%, to $730.7 million in fiscal year
2004 from $608.4 million in fiscal year 2003. The increase was attributed to an increase of prices
of $105.3 million, which includes a $3.9 million increase in gains recorded for hog futures
contracts, combined with an increase in volume of $17.0 million. Overall, hog and wholesale pork
prices increased compared to the prior period despite an increase in pork produced compared to the
prior year. Demand for pork products has been very high due to a decrease in production of
competing proteins, the discovery of the first case of BSE in a cow in the United States, the Avian
Influenza virus affecting the poultry industry, and trends in diet among Americans in general. See
Segment Analysis below for comments on changes in sales by business segment. Gross Profit.Gross profit increased by $57.5 million to $34.0 million in fiscal year 2004
from a loss of $23.5 million in fiscal year 2003. As a percentage of net sales, gross profit
increased to 4.7% in fiscal year 2004 from (3.9)% in fiscal year 2003. This increase was due to
the increase in sales prices mentioned above, offset with a 7.3% increase in costs to produce our
products. See Segment Analysis below for comments on changes in gross profit by business
segment. Selling, General and Administrative Expenses.Selling, general and administrative expenses
decreased by $0.9 million, or 4.9%, to $17.4 million in fiscal year 2004 from $18.3 million in
fiscal year 2003. This change was primarily attributable to decreased legal fees. Selling,
general and administrative expenses decreased as a percentage of net sales to 2.4% in fiscal year
2004 from 3.0% in fiscal year 2003. Operating Income (Loss).Operating income increased by $56.6 million to $17.2 million in
fiscal year 2004 from an operating loss of $39.4 million in fiscal year 2003. The increase was
attributable to the factors mentioned above. Interest Expense, net.Interest expense, net, increased by $1.0 million, or 4.0%, to $24.7
million in fiscal year 29




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2004 from $23.7 million in fiscal year 2003. The increase was attributed to
an increase in total interest-bearing debt outstanding and increased amortization of deferred
financing costs which are charged to interest expense related to recent bank credit amendments,
offset slightly by lower interest rates on our variable rate debt. See Liquidity and Capital
Resources below for more information. Income Tax Benefit.Our effective tax rate was 38.9% in the fiscal years 2004 and 2003. Segment Analysis Pork Processing Net Sales.Net sales increased $109.9 million, or 19.9%, to $663.5 million in fiscal year 2004
from $553.6 million in fiscal year 2003. The increase resulted from a 14.0% increase in pork
product sales prices, combined with a 5.1% increase in volume processed compared to the same period
last year. Substantially all of the increase in volume was attributable to increased capacity
utilization at our Clinton, North Carolina processing plant. Gross Profit.Gross profit decreased by $1.6 million, or 4%, to $38.2 million in fiscal year
2004 from $39.8 million in fiscal year 2003. The decrease primarily resulted from lower margins on
pork products resulting from 21.7% higher hog costs from internal transfers and external purchases,
partially offset with higher volume through the plants. Freight costs increased by $4.1 million,
or 15.5%, as a result of higher volume shipped and higher charges incurred to transport the
product. Processing costs on a per unit basis were comparable for fiscal years 2004 and 2003. Operating Income.Operating income increased by $0.3 million to $34.7 million in fiscal year
2004 from $34.4 million in fiscal year 2003. The increase was attributed to the factors mentioned
above. Hog Production Net Sales.Net sales increased by $96.7 million, or 27.2%, to $452.3 million in fiscal year
2004 from $355.6 million in fiscal year 2003. The increase primarily resulted from a 22.9%
increase in hog sales prices, combined with a 2.4% increase in volume attributable primarily to the
effects of increased contract production in North Carolina. As mentioned above, gains recorded for
hog futures contracts had a $3.9 million positive impact on the change in net sales. Intersegment
sales to our pork processing segment transferred at market prices are eliminated in the
Consolidated Statements of Operations and Comprehensive Income (Loss). Gross Profit.Gross profit increased by $59.1 million to a loss of $4.2 million in fiscal year
2004 from a loss of $63.3 million in fiscal year 2003. The increase was primarily the result of a
higher volume of hogs produced and higher hog sales price mentioned above. Hog production costs
per hundredweight were 6.1% higher during fiscal year 2004 compared to fiscal year 2003. The
majority of the increase in hog production costs was due to higher feed input costs compared to the
same period last year and, to a lesser extent, production deficiencies in Texas due to the impact
of health issues. Operating Loss.Operating loss improved by $58.9 million to an operating loss of $4.2 million
in fiscal year 2004 from an operating loss of $63.1 million in fiscal year 2003. The increase is
attributed to the factors mentioned above. Seasonality The following represents the unaudited quarterly results of operations for our last eight
completed fiscal quarters. All amounts are expressed in thousands. 30




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Fiscal Year 2004
    
    
    
    
    
    
    
    
    
    
    Fiscal Year 2005First
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthNet sales
    
    $
    171,132
    
    
    $
    178,310
    
    
    $
    199,766
    
    
    $
    181,529
    
    
    $
    212,136
    
    
    $
    218,831
    
    
    $
    246,759
    
    
    $
    249,845Gross profit
    
    
    7,532
    
    
    
    12,632
    
    
    
    9,043
    
    
    
    4,779
    
    
    
    24,277
    
    
    
    29,980
    
    
    
    48,600
    
    
    
    50,202Net income (loss)
    
    
    (1,741
    )
    
    
    1,417
    
    
    
    (751
    )
    
    
    (3,516
    )
    
    
    9,389
    
    
    
    11,894
    
    
    
    22,996
    
    
    
    23,379
 Our quarterly operating results are influenced by seasonal fluctuations in the price of our
primary feed components, corn and soybean meal, and by seasonal fluctuations in wholesale pork
prices and hog prices. The prices we pay for our feed components are generally lowest in August,
September and October, which corresponds with the corn and soybean harvests. Generally, the prices
for these commodities will increase over the following months leading up to the next harvest due to
the increased storage costs. As a result, our costs in the production side
of our business tend to increase during this period. Hog and wholesale pork prices are similarly affected by seasonal factors. It takes
approximately 11 months from conception for a hog to reach market weight, and because sows are less
productive in summer months as a result of seasonal conditions, there are generally fewer hogs
available in the following summer months. This decrease in supply of hogs typically causes hog and
wholesale pork prices to be higher on average during these months. Conversely, there are generally
more hogs available in the months of October, November and December, which generally causes hog and
wholesale pork prices to be lower on average during these months. As a result of these seasonal and quarterly fluctuations, we believe that comparisons of our
sales and operating margins between quarters within a single fiscal year are not necessarily as
meaningful as longer term comparisons and cannot be relied upon as indicators of our future
performance. Liquidity and Capital Resources Our primary sources of financing have been cash flow from operations, bank borrowings and a
senior note offering that was completed in fiscal year 2002. Our ongoing operations will require
the availability of funds to service debt, fund working capital and make capital expenditures on
our facilities. We expect to finance these activities through cash flow from operations and from
amounts available under our credit agreement. Net cash flow provided by (used in) operating activities was $149.9 million, $41.7 million and
($17.4) million for fiscal years 2005, 2004 and 2003, respectively. The improvement in fiscal year
2005 compared to fiscal year 2004 was primarily due to an increase in net income, the use of our
remaining net operating loss carryforwards to reduce cash tax payments and a decrease in working
capital requirements partially offset by an increase in non-cash gains on the sales of fixed
assets. Net cash flow used in investing activities was $23.6 million, $23.5 million and $25.9 million
in fiscal years 2005, 2004 and 2003, respectively. In fiscal year 2005, net cash used in investing
activities was spent as follows:  
    Approximately $9 million was spent for continuing improvements of our pork processing facilities;
    Approximately $11 million was spent for continuing improvements of our hog production facilities,
and investments to develop and implement new technologies for improved waste handling; and
    The remainder was spent for purchases of breedstock. In fiscal year 2005, 2004 and 2003, we received proceeds from disposal of property, plant,
equipment and breeding stock of $20.7 million, $18.4 million and $11.7 million, respectively.
During fiscal years 2005, 2004 and 2003, disposal of property, plant, equipment and breeding stock
consisted primarily of culled breeding stock. The increase in proceeds is directly related to the
increase in hog sales prices which help determine the cull sow sale prices. Net cash flow (used in) provided by financing activities was ($116.3) million, ($18.2) million
and $36.1 million in fiscal years 2005, 2004 and 2003, respectively. During fiscal years 2005 and
2004, excess cash generated was 31




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used to pay down outstanding debt. During fiscal year 2003, we
borrowed money to fund working capital needs and capital expenditures. On April 9, 2004, we entered into an amended and restated loan and security agreement (the
credit agreement) with U.S. Bank National Association as
a lender and agent for the other lenders,
which provided for a $175.0 million revolving credit facility. The amount available under the
revolving credit facility is determined by a borrowing base formula derived from the sum of
eligible accounts receivable, a fixed asset component and a formula for inventory based on the
lower of cost or market valuation. At March 26, 2005, we had no borrowings outstanding under the
credit agreement, $11.2 million in letters of credit and $163.8 million available for borrowing.
All borrowings under the revolving credit facility mature on April 9, 2009. On April 20, 2005, we amended the credit agreement to reduce the applicable margin and to
permit:  
    the contemplated initial public offering of our shares of common stock by certain holders thereof,
    the merger of PSF Group Holdings, Inc., our parent, with and into us, and
    the Tender Offer for our 9 1/4% Notes. As of May 9, 2005, the credit agreement was amended to provide for extension of credit not to
exceed $220.0 million from the previous limit of $175.0 million. Our borrowings under the credit agreement are secured by a first priority security interest
in, and mortgages on, substantially all of our inventory, breeding stock and receivables, as well
as our production and processing facilities. Amounts borrowed under the credit agreement bear interest at fluctuating rates. These rates
are based on the agents base rate (the greater of the agents prime rate or the federal funds rate
plus one half of one percent) or LIBOR plus, in each case, an applicable margin, ranging from 0.0%
to 3.0% determined by our leverage ratio. Letter-of-credit fees are based on the applicable margin and are paid quarterly only on
outstanding letter-of-credit amounts. In addition, the revolving credit facility provides for an
annual administration fee to be paid to the agent, and a quarterly non-use fee payable to the
lenders calculated on the average daily unused amount under the revolving credit facility. The credit agreement contains both negative and affirmative covenants. The credit agreement
contains the following affirmative covenants, among others: delivery of financial and other
information to the agent, notice to the agent upon the occurrence of certain material events, and
maintenance of earnings before interest, taxes, depreciation and amortization (EBITDA) and a
maximum leverage ratio. Both the EBITDA and maximum leverage ratio covenants are based on a four
quarter minimum rolling EBITDA average during the most recent eight quarters. We are required
under the credit agreement to maintain EBITDA, as defined in the credit agreement, of at least
$55,000,000 as of the end of each quarter in fiscal year 2006 and $60,000,000 as of the end of each
fiscal quarter thereafter. The maximum leverage ratio (based on the EBITDA calculation) as of the
end of each fiscal year cannot be greater than 6.0-to-1.0 as of the end of each quarter through
fiscal year 2006, 5.0-to-1.0 as of the end of each quarter in fiscal year 2007 and 4.0-to-1.0 as of
the end of each fiscal quarter thereafter. At March 26, 2005, we were in compliance with all
covenants under the credit agreement. In addition, the credit agreement contains the following negative covenants, among others:
limitations on encumbrances, disposal of assets, acquisitions, additional indebtedness, capital
investment and pre-payment of subordinated debt. The credit agreement limits also the amount of
cash dividends we may pay to $15.0 million annually. The credit agreement specifies certain events of default, including, among others: failure to
pay principal, interest or other amounts, violation of covenants, inaccuracy of representations and
warranties, default with respect to other material indebtedness, certain bankruptcy and insolvency
events and certain undischarged judgments. Total indebtedness at March 26, 2005 was $177.2 million, as compared to $287.1 million at
March 27, 2004, excluding unamortized discount on our 9 1/4% Notes of $1.1 million and $1.2 million,
respectively. 32




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On May 9, 2005, we completed the Tender Offer with respect to the 9 1/4% Notes pursuant to which
we purchased $173,000,000 principal amount of the aggregate $175,000,000 of the 9 1/4% Notes
previously outstanding and eliminated substantially all of the restrictive covenants relating to
the remaining 9 1/4% Notes. The purchase price and related consent payment was $197.2 million based
on a price determined generally by discounting the redemption price of the 9 1/4% Notes when they may
be first called on June 15, 2006 (i.e., $1,046.25 per $1,000 9 1/4% Note) to present value
using the market yield of a comparable U.S. treasury note as of April 19, 2005 plus 0.50%,
including accrued interest of $6.4 million. The Tender Offer was
financed through borrowings under the existing
bank credit agreement and available cash and will result in a charge of approximately $21.8 million
to be recognized in the first quarter of fiscal year 2006. Giving effect to the completion of the
Tender Offer, we had as of May 9, 2005 outstanding borrowings under our credit agreement (as amended through May 9,
2005) of approximately $156.9 million and outstanding letters of credit of approximately $11.2
million, and approximately $51.9 million available for borrowing. We have signed a term sheet with our agent bank to create a new bank term credit facility,
under which we would borrow $125.0 million for ten years with
the majority of this loan being due
at the end of this ten-year period. We do not have a commitment for this facility at this time.
We and our agent bank have started the syndication process with the intent to procure commitments
and close the new term loan within approximately 60 days. This new term loan will be secured,
along with the loan under our existing credit agreement, by liens on substantially all of our
assets. We have entered into a ten-year $125.0 million swap agreement as of May 9, 2005 which will
convert the interest on this loan to an effective fixed interest rate of approximately 5.9%. We
would contemplate that the proceeds of the term loan would be used to reduce borrowings under the
existing credit agreement and, in such event, that the aggregate commitment under the existing
credit facility would be reduced back to $175.0 million from $220.0 million. In fiscal year 2006, we expect to spend approximately $41 million on net capital expenditures
as follows:  
    Approximately $17 million in upgrades and improvements in our processing operations;
    Approximately $14 million in upgrades and improvements in our production operations,
and investments to develop and implement new technologies for improved waste
handling; and
    Approximately $10 million in net breedstock purchases. We believe that available borrowings under our credit agreement and internally generated funds
will be sufficient to support our working capital, capital expenditures and debt service
requirements for the foreseeable future. Our ability to generate cash, however, is subject to a
certain extent to general economic, financial, competitive, legislative, regulatory and other
factors beyond our control. We cannot assure you that our business will generate sufficient cash
flow from operations or that future borrowings will be available under the credit agreement in an
amount sufficient to enable us to pay our existing indebtedness, or to fund our other liquidity
needs. If we consummate any material acquisitions or expand our operations, we may need to seek
additional sources of funding, which might potentially come from the issuance of additional equity,
debt or the pursuit of joint ventures to the extent that such options are available. Acquisitions
or further expansion of our operations could cause our leverage to increase. To finance any
acquisition or joint venture, we may use availability under the credit agreement, equity financing
or other financing alternatives available at the time. Contractual Cash Obligations The following table represents a summary of our contractual cash obligations as of March 26,
2005, as adjusted for the Tender Offer and related transactions. 33




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##### Table of Contents



Payments due by period1-3
    
    
    4-5
    
    
    More thanContractual Cash Obligations
    
    Total
    
    
    Current
    
    
    Years
    
    
    Years
    
    
    5 YearsCredit agreement and senior notes(1)
    
    $
    175,000
    
    
    $

    
    
    
    $
    
    
    
    $
    173,000
    
    
    $
    2,000Interest on 9 1/4% senior notes
    
    
    7,648
    
    
    
    6,630
    
    
    
    370
    
    
    
    370
    
    
    
    278Capital lease obligations
    
    
    2,158
    
    
    
    801
    
    
    
    1,263
    
    
    
    94
    
    
    
    Operating leases
    
    
    18,749
    
    
    
    5,498
    
    
    
    7,172
    
    
    
    3,914
    
    
    
    2,165Unconditional purchase obligations(2)
    
    
    10,389
    
    
    
    10,389
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    213,944
    
    
    $
    23,318
    
    
    $
    8,805
    
    
    $
    177,378
    
    
    $
    4,443
   (1)
    
    Amounts do not include interest under the credit agreement because amounts borrowed under
the credit agreement bear interest at fluctuating rates.(2)
    
    Represents forward grain purchase contracts. The following amounts are not included in above table: Most of our hog production is raised in company-owned facilities. Some of the production,
however, is raised under farrowing, nursery, or finishing contracts with individual farmers. In
these relationships, we typically own the livestock and provide the necessary feed, genetics, and
veterinary supplies, while the contract producer provides the land, facilities, labor, utilities,
and other costs of production. These contracts vary from terms of less than one year to up to
twelve years. Payments under these agreements are included in cost of goods sold. These payments
represented approximately 11% of our hog production segments cost of goods sold for fiscal year
2005. All of these contracts are cancelable by us if the producer fails to perform in accordance
with our performance standards. At our North Carolina pork processing facility, we have contracts with producers to provide us
with hogs for the amount we do not produce at our owned or contracted hog production facilities in
order to meet our processing needs. These contracts vary in length but are all based on a market
price and grade and yield formula. Over the next 5 years we are contracted to purchase
approximately 1,260,000 hogs under these contracts. Under the 2004 Missouri Consent Decree with the Attorney General and the amended 2002 Federal
Consent Decree with the United States Environmental Protection Agency (EPA) we are committed to
install improved wastewater, air and odor technology at all of our finisher farms in northern
Missouri by 2010. Included in this commitment is the soon to be completed fertilizer plant in
northern Missouri that will convert solid waste into useable commercial grade fertilizer. We
currently estimate, based on known technology, that we may spend approximately $33 million to
satisfy this commitment, of which $8.4 million had been spent as of March 26, 2005. Critical Accounting Policies In preparing the consolidated financial statements in accordance with generally accepted
accounting principles, we are required to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the
consolidated financial statements and during the reporting period. Actual results may differ from
those estimates due to the complexity and subjectivity of those estimates. Management has
identified the accounting policies it believes to be the most important as inventory valuation of
livestock, estimated liabilities, accounting for derivative instruments, estimated useful lives of
property, plant, equipment and breeding stock, and impairment of long-lived assets. Inventory valuation of livestockis calculated based on a standard cost model for each
geographic hog production region. This model is based on the current years budgeted costs and
inventory projections at each age and phase of the production cycle, adjusted to actual costs and
reduced to the lower of actual cost or market monthly. Management believes this method for valuing
livestock most accurately represents actual inventory costs. Estimated liabilities,such as self-insured workers compensation and health insurance,
bonuses, and legal obligations are based on information received from third parties and management
estimates. These obligations are 34




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provided for when a liability has been incurred or a loss is
probable and the amount is reasonably estimable. Actual costs may vary from estimates we make.
Management believes the estimates are reasonable based on current information. Derivative instrumentsare accounted for in accordance with Financial Standards Board
Statement No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities.
Because of the complexity involved in qualifying for hedge treatment for our commodity contracts,
we mark these exchange-traded contracts to market with the resulting gain or loss recorded in net
sales for hog contracts or cost of goods sold for all other commodity contracts. This may result
in large fluctuations in our earnings depending on the volume of commodity contracts and their
corresponding volatility. Property, plant, equipment and breeding stockare depreciated on a straight-line basis over
the estimated useful lives of the assets. The useful lives of the assets are based upon
managements expectations. We periodically review the assets for changes in circumstances which
may impact their useful lives. Impairment of long-lived assetsis periodically reviewed using historical cash flows as well
as current estimates
of future cash flows and/or appraisals. This assessment process requires the use of estimates and
assumptions which are subject to a significant degree of judgment. In addition, we periodically
assess the recoverability of goodwill and other intangible assets, which requires us to make
assumptions regarding the future cash flows and other factors to determine the fair value of the
assets. If these assumptions change in the future, we may be required to record impairment charges
for these assets. New Accounting Pronouncements In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 151 (SFAS 151), Inventory Costs an Amendment of ARB No. 43
Chapter 4. SFAS 151 requires that items such as idle facility expense, excessive spoilage, double
freight, and rehandling be recognized as current-period charges rather than being included in
inventory regardless of whether the costs meet the criterion of abnormal as defined in ARB 43.
SFAS 151 is applicable for inventory costs incurred during fiscal years beginning after June 15,
2005. The Company will adopt this standard beginning the first quarter of fiscal year 2006 and
does not believe the adoption will have a material impact on its financial statements as such costs
have historically been expensed as incurred. In December 2004, FASB issued SFAS No. 153 (SFAS 153), Exchanges of Nonmonetary Assets an
amendment of APB Opinion No. 29 which addresses the measurement of exchanges of nonmonetary assets
and eliminates the exception from fair value accounting for nonmonetary exchanges of similar
productive assets and replaces it with an exception for exchanges that do not have commercial
substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future
cash flows of an entity are expected to change significantly as a result of the exchange. This
statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005 and is not expected to have a significant impact on the Companys financial
statements. In December 2004, FASB issued SFAS No. 123 (revised 2004) (SFAS 123R), Share-Based
Payment. SFAS 123R sets accounting requirements for share-based compensation to employees,
requires companies to recognize in the income statement the grant-date fair value of stock options
and other equity-based compensation issued to employees and disallows the use of the intrinsic
value method of accounting for stock compensation. SFAS 123R, as recently amended, is applicable
for all fiscal years beginning after June 15, 2005. This statement is effective for the Company
beginning fiscal year 2007 and is not expected to have a significant impact on its financial
statements with respect to currently issued stock options, but could have a significant impact with
respect to options issued in the future. In December 2004, FASB issued FASB Staff Position 109-1 (FSP 109-1) Application of FASB
Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004. FSP 109-1 specifies that a
qualified production activities deduction should be accounted for as a special deduction in
accordance with SFAS 109. FSP 109-1 was effective upon issuance. The 35




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Company is currently
evaluating the impact this deduction will have on its results of operations or financial position
for subsequent years. In March 2005, FASB issued FASB Interpretation No. 47 (FIN 47) Accounting for Conditional
Asset Retirement Obligations. FIN 47 provides guidance relating to the identification of and
financial reporting for legal obligations to perform an asset retirement activity. The
Interpretation requires recognition of a liability for the fair value of a conditional asset
retirement obligation when incurred if the liabilitys fair value can be reasonably estimated. FIN
47 is effective no later than the end of fiscal years ending after December 15, 2005. We do not
expect adoption of FIN 47 will have a material effect on our results of operations or financial
position. Risk Factors The risks described below are not the only ones facing our Company. Additional risks and
uncertainties not presently known to us or that we currently believe to be immaterial may also
materially and adversely affect our business, financial condition or results of operations. Any of
the following risks could materially and adversely affect our business, financial condition or
results of operations. Risk Factors Related To Our Business Cyclicality in the pork industry could adversely affect our results of operations and financial
condition. Our revenues are primarily derived from the sale of pork and pork products. Historically, the
United States pork industry has been highly cyclical due to the natural inverse relationship of hog
prices and production levels and the tendency of independent hog producers to increase production
in response to higher hog prices. A typical cycle begins with higher hog prices, which leads to
incremental production. This, in turn, leads to overproduction, which drives market prices lower.
Eventually, lower prices will generally cause production levels to moderate or decline which
generally leads to higher market prices. From 1995 through 2004, the USDA 185# pork cutout price,
which is a standard measure for determining current market prices of pork primal cuts, ranged from
a monthly low of $37.97 per hundred weight to a monthly high of $84.49 per hundred weight, and
averaged $63.53 per hundred weight. From November 1995 through 2004, the price for hogs ranged from
a monthly low of $22.31 per hundred weight to a monthly high of $83.78 per hundred weight, and
averaged $59.28 per hundred weight, in each case based on the lean hog prices consistent with the
Chicago Mercantile Exchange, or CME, pricing method. The cyclical nature of the pork industry is
likely to continue and as a result, we may experience periods of overcapacity, declining prices and
operating losses at times in the future. Our results for fiscal year ended March 26, 2005 reflect
favorable industry conditions, with the USDA 185# pork cutout price averaging $75.21 per hundred
weight and hog prices, based on prices published by the CME, averaging $74.28 per hundred weight
during that period. Fiscal year 2005 results reflected historically
high pork and hog prices. The Company
believes it is unlikely that the current favorable price environment will be sustained over time.
Consequently, the Company believes that its net sales and net income for fiscal year 2006 will
be substantially lower than in fiscal year 2005. A significant portion of the products we sell are commodities and the most important factor
that impacts the selling prices for these products is the relative balance between the supply and
demand for pork and other meat products, particularly beef and poultry. Because of the length of
the production cycle, there is relatively little ability of hog producers to adjust their
production levels in the short-term. Because market conditions beyond our control determine the
prices for our commodity products, the price for these products may fall below our cash production
costs. We cannot assure you that future fluctuations in the supply and demand for pork products
will not have a material adverse effect on our results of operations and financial condition. See
Managements Discussion and Analysis of Financial Condition and Results of OperationsOverview. Increases in the costs of our feed components could adversely affect our costs and operating
margins. Our business can be negatively affected by increased costs of our feed components, which
consist primarily of corn and soybean meal. In fiscal year 2005, our purchases of feed components
comprised approximately 33.2% of our total cost of goods sold. The cost and supply of feed
components are determined by constantly changing market forces of supply and demand, which are
driven by matters over which we have no control, including weather, current and projected worldwide
grain stocks and prices, grain export prices and supports and governmental 36




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agricultural policies.
From 1995 through 2004, the price of corn ranged from a low of $1.78 per bushel to a high of $4.81
per bushel, and averaged $2.51, based on the monthly average of daily close prices of the Nearby
Corn Futures quoted by the Chicago Board of Trade, or CBOT. During the same period, the price of
soybean meal ranged from a low of $128.80 per ton to a high of $315.38 per ton, and averaged
$190.59 per ton, as measured by the monthly average of daily close prices of the Nearby Soybean
Futures quoted by the CBOT. Increases in the prices of our feed components would likely adversely
affect our operating margins. See Managements Discussion and Analysis of Financial Condition and
Results of OperationsOverview and Components of Revenue and ExpensesCost of Goods Sold. Changes in consumer preference could adversely affect our business. The food industry in general is subject to changing consumer trends, demands and preferences.
Recent favorable price levels may reflect in part the interest of many consumers in high protein,
low carbohydrate diets. It appears that consumer interest in these diets is decreasing, which could
adversely affect our pork product and hog prices and, consequently, our results of operations. Our
products compete with other protein sources, such as beef and poultry, and other foods. Trends
within the food industry change often and failure to identify and react to changes in these trends
could lead to, among other things, reduced demand and price reductions for our products, and could
have a
material adverse effect on our results of operations and financial condition. In addition, we
do not have any other material lines of business or other sources of revenue to rely upon if we are
unable to efficiently process and sell pork products or if the market for pork declines. This lack
of diversification means that we may not be able to adapt to changing market conditions or
withstand any significant decline in the pork industry. The consolidation of our retail, further processor and foodservice customers may put pressures on
our operating margins. In recent years, the trend among our retail, further processor and foodservice customers, such
as supermarkets, pork processors, warehouse clubs and foodservice distributors, has been towards
consolidation. Consolidation, along with the entry of mass merchants into the grocery industry,
have resulted in customers with increasing negotiating strength who tend to exert pressure on us
with respect to pricing terms, product quality and new products. As our customer base continues to
consolidate, competition for the business of fewer customers is expected to intensify. If we do not
negotiate favorable arrangements with our customers and implement appropriate pricing to respond to
these trends, or if we lose existing large customers, our profitability could decrease. Our history of operations includes periods of operating and net losses, and we may incur operating
and net losses in the future. We experienced operating and net losses of approximately $39.4 million and $38.6 million,
respectively, in fiscal year 2003 and a net loss of $4.6 million in fiscal year 2004. The fiscal
year 2003 net losses were due primarily to low pork prices resulting from an increased supply of
pork and other meat proteins in the North American market, primarily resulting from the Russian ban
on U.S. poultry imports. The fiscal year 2004 net loss was due primarily to the continuation of
these trends, higher grain costs and an increased hog supply. There can be no assurance as to our
ability to generate positive cash flow or net income in future periods. If we are unable to
generate positive cash flow in the future, we may not be able to make required payments on our debt
obligations. On July 2, 1996, we filed a plan of reorganization under Chapter 11 of the United States
Bankruptcy Code, due primarily to start-up costs and the low level of initial production at our
Milan, Missouri processing plant, combined with a decline in hog prices at the same time feed
prices increased. The reorganization became effective on September 17, 1996, and our business
emerged from Chapter 11. Our hedging activities may hurt our operating results. We enter into futures, forward and option contracts with respect to such commodities as hogs
and grains as part of our price-risk management techniques. These contracts do not qualify as
hedges for financial reporting purposes. Consequently, these instruments are marked to market and
included in net sales (in the case of hog contracts) or cost of goods sold (in the case of grain
contracts) on a monthly basis. Therefore, losses on these contracts adversely affect our reported
operating results. 37




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We utilize hog futures to hedge future pork product sales. These contracts may result in
market risk due to fluctuations in hog prices. Our hedging transactions tend to limit our ability
to participate in gains from favorable commodity price fluctuations. We purchase a portion of our feed ingredient requirements in advance at fixed prices in order
to hedge our short-term exposure to future price fluctuations. We use futures, forward and options
contracts, to help establish adequate supplies of future grain requirements and to reduce the risk
of market fluctuations. These contracts may result in market risk due to fluctuations in the grain
markets. In periods of declining commodity prices, our advance purchases and hedging transactions
could result in our paying more for feed components than our competitors. Thus, the use of such
instruments may limit our ability to participate in cost savings from declining feed prices.
 For further discussion of the risks associated with commodity prices, see Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operations and Item 7A Quantitative
and Qualitative Disclosures About Market Risk. Our profitability may suffer as a result of competition in our markets. We operate in a highly competitive environment and face significant competition in all of our
markets. Some of our competitors, such as Smithfield Foods, which is the largest pork producer and
processor, possess significantly greater financial, technical and other resources than we do. Some
of our larger competitors may be able to decrease pricing of pork products in the markets in which
we operate. The hog processing and production industries are rapidly consolidating, and the
consolidation process may lead to more vertically integrated pork producers. We could experience
increased price competition for our pork products and lose existing customers if other vertically
integrated hog and pork processing companies gain market share. When hog prices are lower than our
hog production costs, our non-integrated pork processing competitors may have a cost advantage
because those competitors could purchase less expensive hogs from third-party suppliers, while we
would have to continue to use hogs produced by our own hog production operations. We cannot assure
you that we will have sufficient resources to compete effectively in our industry. See Item 1
BusinessCompetition. The loss of one or more of our largest customers could significantly and adversely affect our cash
flow, market share and profits. Our largest customer accounted for approximately 5% of our total revenues for fiscal year
2005. During the same period, our ten largest customers accounted for approximately 31% of our
total revenues. We expect that these customers will continue to account for a substantial portion
of our revenues for the foreseeable future. We generally do not have long-term contracts with most
of our major customers and, as a result, such customers could significantly decrease or cease their
business with us with limited or no notice. If we lose major customers, or if there is a decline in
the amount of pork products or hogs they purchase from us, our cash flow, market share and profits
would be adversely affected. A number of our customers are also competitors and could choose to
terminate or alter their purchases from us for competitive or other reasons. In addition, our export sales are predominately focused on Japan, and our sales to Japanese
customers represented approximately 6% of our total revenues during fiscal year 2005. A majority of
our Japanese exports were sold through a relationship with a Japanese trading partner, to whom we
sell exclusively certain chilled pork products produced at our Milan, Missouri plant that are
destined for the Japanese market. The contract with this trading partner comes up for renewal in
December 2005. If we lose our relationship with this Japanese trading partner, our results of
operations could be adversely affected. International markets expose us to political and economic risks in foreign countries, as well as to
risks related to currency values and import/export policies. Export sales have become increasingly important to us in recent years, especially to Japan,
and we intend to continue to expand our international sales. In fiscal year 2005, exports accounted
for approximately 10% of our total revenues. The markets for our products in countries outside of
the United States vary in several material respects from markets in the United States. These
variances include differences in pork consumption levels and marketing and distribution practices.
Our exports to Japan have benefited from the Japanese ban on the import of U.S. beef. 38




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The Japanese
government is currently considering lifting the ban on the
importation of beef from cattle under 21
months old. Any change in this policy resulting in substantial U.S. beef exports to Japan could
adversely affect the volume and pricing of our export sales to Japan. In fiscal year 2003, the
Russian ban on the importation of poultry products from the United States resulted in an increased
supply of poultry in the United States markets, causing beef and pork prices to decline
substantially in 2003, which hurt our fiscal year 2003 results. In addition, the Mexican government
instituted an anti- dumping investigation in 2004 with respect to the U.S. pork industrys export
of hams to Mexico. This investigation is ongoing and its results cannot be predicted. An adverse
determination in this matter could substantially harm our exports to Mexico. Our international activities also pose other risks not faced by companies that limit
themselves to United States markets. These risks include:  
    changes in foreign currency exchange rates;
    exchange controls;
    changes in a specific countrys or regions political or economic conditions,
particularly in emerging markets;
    hyperinflation;
    tariffs, quotas, trade barriers, other trade protection measures and import or export licensing requirements;
    increased costs, disruptions in shipping or reduced availability of freight transportation;
    enforcement of remedies in foreign jurisdictions and compliance with applicable foreign laws;
    potentially negative consequences from changes in tax laws; and
    different regulatory structures and unexpected changes in regulatory requirements. We cannot assure you that we will be successful in identifying international expansion
opportunities or that we will be able to further penetrate and compete effectively in international
markets. Our results depend on our sow herd productivity, mortality and feed efficiency. Changes in herd
productivity and feed efficiency can adversely affect our profitability and margins. Sow herd productivity and feed efficiency are important measures by which we evaluate the
performance of our production operations. Sow productivity is commonly calculated as the number of
offspring per sow per year that reach 45 to 50 pounds and measures the performance of our breeding,
gestation, farrowing and nursery operations. Changes in sow productivity can have a material effect
on profitability and margins because a substantial portion of the costs of operating a sow unit are
either fixed or related to the number of sows. Sows generally have approximately six litters during
their reproductive lives, and are most productive on average during the third and fourth litters.
Rapid expansion of our sow herd could adversely affect our sow herd productivity because the
additional sows will be less productive in their earlier litters. Sow productivity also can be
influenced by a number of other factors, including the number and quality of our employees, the
health condition of our herds and their mortality rate, genetics and environment. Feed efficiency is commonly measured in terms of feed conversion ratios. A feed conversion
ratio is calculated by the number of pounds of feed, which consists primarily of corn and soybean
meal, consumed to produce a pound of live weight in hogs in our finishing units. It is a measure of
the performance of our hog-finishing operations. Changes in feed efficiency affect per head feed
consumption. As a result, they affect the aggregate cost of feed, which is the primary cost
component in our hog-production operations. A number of factors influence feed efficiency,
including, the capacity and use of our finishing facilities, the number and quality of our
employees, the health condition of our animals, genetics, and the nutrient value of available feed
ingredients. 39




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Because of the many factors involved, we cannot assure you that existing herd productivity and
feed efficiency levels will be maintained in the future. We also cannot assure you that any decline
in those levels will not have a material adverse effect on our costs, operating margins or ability
to compete with other hog producers. Outbreaks of disease can adversely affect our revenues and operating margins and the recent results
of our Texas facility have been adversely affected by Porcine Reproductive and Respiratory
Syndrome. The outbreak of disease and other events could significantly restrict our ability to conduct
our operations. The productivity and profitability of any hog operation depends, to a great extent,
on the ability to maintain animal health and control disease. Disease can reduce the number of
offspring weaned per sow and hamper the growth of hogs to finished size. Diseases can be spread
from other infected hogs, in feed, in trucks, by rodents or birds, by people visiting the farms or
through the air. We experience outbreaks of certain diseases, including Transmittable
Gastroenteritis (TGE), and Porcine Reproductive and Respiratory Syndrome (PRRS), a respiratory
disease commonly affecting swine herds, in our facilities, and may experience additional severe
outbreaks in the future. Any such outbreaks could have a material adverse effect on our business,
financial condition and results of operations. Our recent operating results have been adversely affected by PRRS issues in our Texas
facility. See Item 1 BusinessProcessing and Production OperationsTexas. We also face the risk of outbreaks of other diseases that have not affected our herds
previously, including foot-and-mouth disease, which is a highly contagious viral disease affecting
swine, cattle, sheep and goat herds. Until the outbreaks of the disease previously reported in
Europe, which have led to the destruction of thousands of animals, foot-and-mouth disease had been
primarily limited to Africa, the Middle East, Asia and South America. Although foot-and-mouth
disease is generally not lethal in adult pigs, mortality is common when younger pigs are infected.
If we experience an outbreak of foot-and-mouth disease, we will likely be required to destroy all
of our herd that has the potential of being infected. If this occurs, our business, financial
condition and results of operations would be adversely affected. In addition, an outbreak of disease could result in governmental restrictions on the import
and export of our pork products to or from our suppliers, facilities or customers even if our herds
were not infected with such disease. This could result in the cancellation of orders by our
customers and create adverse publicity that may have a material adverse effect on our business,
financial condition and results of operations. Furthermore, any outbreak of livestock disease in
the United States may result in a loss of consumer confidence in the protein products affected by
the particular disease, adverse publicity and the imposition of export restrictions. For example,
in December 2003, a single case of BSE, a disease affecting cattle but not hogs, was discovered in
the State of Washington. As a result, beef imports from the United States have been banned by many
foreign countries, including Japan, the largest importer of U.S. beef. This incidence of BSE
continues to have a material negative effect on the beef industry. Outbreaks of livestock disease in foreign countries may also affect the market for protein
products in the United States. For example, in May 2003, a BSE outbreak in Canada resulted in a
U.S. import restriction on live cattle from Canada. The resulting drop in the live cattle supply in
the United States led to increased prices for live cattle and has placed continuing pressure on
margins in the beef industry. Similar events could occur in the pork industry. Our operations are subject to numerous laws and regulations. Non-compliance with these laws and
regulations, or the enactment of more stringent laws or regulations, could adversely affect our
business. Our operations are subject to various federal, state, local and foreign environmental, health,
safety and other laws and regulations, including those governing air emissions and wastewater
discharges and, in some jurisdictions, odor. Among other things, these laws and regulations impose
standards and limitations on our waste treatment lagoons, water treatment facilities and new
construction projects and regulate the management of animal waste from our hog production
facilities. We cannot assure you, however, that we will at all times operate in compliance with
environmental requirements, and if we fail to comply with such requirements, we could incur
material penalties, fines and damages, and negative publicity. Environmental, health, and safety laws and regulations are subject to amendment, to the
imposition of new or additional requirements and to changing interpretations by governmental
agencies or courts. In particular, environmental laws and regulations may become more stringent for
our industry. Additionally, various citizen and 40




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advocacy groups have been advocating changes in
animal handling and environmental practices in the industry. We anticipate increased regulation by
various governmental agencies and continued advocacy and enforcement by citizen groups concerning
food safety, the use of medication in feed formulations, the disposal of animal by-products, air
and wastewater discharges and the compliance status of our contract growers. More stringent
requirements could result in changes in industry practices that could increase our costs and reduce
margins. We are operating under environmental consent decrees that require us to spend approximately $33
million on environmental controls by 2010. In order to settle enforcement actions and citizen suits, we entered into consent decrees with
the State of Missouri, and with the federal government, and a citizens group, and a voluntary
agreement with the State of North Carolina. The decrees required us to pay penalties to settle past
alleged regulatory violations, and require us to research, develop, and implement new technologies
for environmental controls at our Missouri operations. As a result of these decrees, we will be
required to invest approximately $33 million in environmental controls by 2010 deadline, of which
we have spent $8.4 million as of March 26, 2005. We expect to spend approximately $4.0 million
in fiscal year 2006, and roughly $4.0 million in fiscal year 2007. If we fail to make the
required investments, we may incur material penalties, fines and damages, and negative publicity.
We may also be required to make additional investments at our North Carolina operations under the
voluntary agreement. We are subject to North Carolinas moratorium on expansion of hog operations. North Carolina enacted a moratorium on the construction of farms with more than 250 hogs or
the expansion of existing large farms in North Carolina. In 2003, the moratorium was extended until
2007. North Carolina is concerned about the use of waste treatment lagoons and spray fields for the
disposal of swine waste, especially in areas of that state are prone to flooding or hurricanes. It
is anticipated that this moratorium will be extended until more effective technologies are
developed to protect the environment. The moratorium limits us from expanding our North Carolina
production operations. It is possible that lagoons and spray fields could be banned in North
Carolina in the future, leading to increased competition for growers and disruption to our North
Carolina operations. The nature of our operations exposes us to the risk of environmental claims, including nuisance
claims by neighboring property owners. We are a defendant in several nuisance lawsuits. If these
lawsuits are adversely determined, they could harm our business. Because of the nature of our operations, we are subject to the risk of environmental claims,
including nuisance claims by neighboring property owners. We face the risk of nuisance lawsuits
even if we are operating in compliance with applicable regulations. We are currently a defendant in
several suits, including one class action suit, based on the law of nuisance relating to our hog
production facilities in Missouri. We believe we have defenses to these actions and intend to
vigorously defend them, although we cannot assure you that our defenses in these matters will be
successful, or that additional nuisance claims will not arise in the future. See Item 1 Business 
Legal Proceedings. The occurrence of unanticipated natural disasters could adversely affect our business. The occurrence of unanticipated natural disasters could adversely affect our business in many
ways, including the following:  
    our production and processing operations materially depend on the availability of large
supplies of fresh water, and our animals health and our ability to operate our processing
facilities at full capacity could be adversely affected if we experience a shortage of
fresh water due to floods, droughts, depletion of underground aquifers or other causes
beyond our control;
    one of our principal costs in the production side of our business is feed costs, and
our feed costs may increase if crop supplies are reduced as a result of droughts, floods,
hail storms, crop diseases or other causes beyond our control; 41




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
    our production and processing facilities and our hog herds could be materially damaged
by floods, hurricanes and tornadoes; and
    natural disasters, such as flooding, can cause the discharge of effluents or other
waste into the environment, potentially resulting in our being subject to further liability
claims and governmental regulation. Product liability claims or product recalls could result in significant claims, adversely affect
our business reputation and expose us to increased scrutiny by federal and state regulators. The packaging, marketing and distribution of food products entails an inherent risk of product
liability and product recall and the resultant adverse publicity. Pork products may be subject to
contamination by disease producing organisms or pathogens, such as Listeria monocytogenes or
Salmonella species. These pathogens are generally found in the environment and as a result, there
is a risk that they, as a result of food processing, could be present in our processed pork
products. These risks may not be eliminated by adherence to good manufacturing practices and
finished product testing. We may be subject to significant liability if the consumption of any of
our products causes injury, illness or death. We could be required to recall certain of our
products in the event of
contamination, adverse test results or damage to the products. In addition to the risks of
product liability or product recall due to deficiencies caused by our processing and production
operations, we may encounter the same risks if any third party tampers with our products. We may be
required to perform product recalls, and product liability claims may be asserted against us in the
future. We have little, if any, control over proper handling procedures once our products have been
shipped for distribution. As a result, these pathogens can also be introduced to our products as a
result of improper handling or temperature controls at the further processor, foodservice or
consumer level. Even if a product is not contaminated when it leaves our facility, illness and
death may result if the pathogens are not eliminated or are introduced at such further processor,
foodservice or consumer level. Any claims that may be made may create adverse publicity that would
have a material adverse effect on our ability to market our products successfully. Even an
inadvertent shipment of contaminated products is a violation of law and may lead to increased risk
of exposure to product liability claims, product recalls and increased scrutiny by federal and
state regulatory agencies and may have a material adverse effect on our business, reputation,
prospects, results of operations and financial condition. Our product liability insurance coverage may not adequately protect us from all of the
liabilities and expenses that we incur in connection with such events. If we were to suffer a loss
that is not adequately covered by insurance, our results of operations and financial condition
would be adversely affected. Governmental authorities may take action prohibiting meat packers from owning livestock, which
could adversely affect our business and threaten the efficiency of our vertically integrated
operations. In February 2002, the U.S. Senate initially passed a Farm Bill that included a provision known
as the Johnson Amendment, which would have prohibited meat packers, like us, from owning or
controlling livestock intended for slaughter for more than fourteen days prior to slaughter. The
U.S. House of Representatives passed a different version of the Farm Bill that did not contain any
provision similar to the Johnson Amendment. Legislation of this type was recently reintroduced into
the U.S. Senate. This and similar legislation affecting our operations might be adopted at the
federal or state levels in the future. Such legislation, if adopted and applicable to our current
operations, would have a material adverse impact on our business, financial condition and results
of operations. See Item 1 BusinessRegulation. Changes in corporate farming laws and other laws and regulations in some of the states where we
operate, or a finding that we are not in compliance with existing laws and regulations could
adversely affect our business. Several states have enacted corporate farming laws that restrict the ability of corporations
to engage in farming activities. Missouri is among these states, but Texas and North Carolina
currently are not. Missouris corporate farming law in many cases bars corporations from owning
agricultural land and engaging in farming activities. At the time of ContiGroup Companies, Inc.s
(ContiGroup) acquisition of its interest in us in 1998, ContiGroup submitted the proposed
ownership structure to the Office of the Attorney General of the State of Missouri for its review.
At that time, the Office of the Attorney General indicated that it had no objection to our current
structure 42




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under the corporate farming laws. There can be no assurance, however, that this position
will be maintained in the future as our operations continue and develop. While we believe our
operations currently comply with the Missouri corporate farming law and its existing exemptions,
the Missouri laws could be subject to challenge or amendment by Missouri governmental bodies in the
future, which could have a material adverse effect on our business, financial conditions and
results of operations. Further, even with the exemptions, the corporate farming laws of many
states, including Missouri, restrict our ability to expand beyond the counties in which we
currently operate. In addition to Missouris corporate farming law, Missouri law also prohibits a person who is
not a citizen or resident of the United States from holding a controlling interest in a business
that owns land used for farming. A controlling interest in us is not currently, and we anticipate
will not be immediately after this offering, held by a foreign person or entity in violation of
this law. Our certificate of incorporation includes provisions intended to prevent foreign
ownership in violation of this law. These provisions, however, may not effectively prevent a
foreign person or entity from acquiring a controlling interest in us. See Item 1
BusinessRegulation. If a foreign person or entity acquires a controlling interest in us, it
could have a material adverse effect on our business and the rights of such foreign person with
respect to its investment in our common stock. The price or availability of water, energy and freight costs could increase our expenses, reduce
our profitability and hamper our operations. We require a substantial amount, and as we continue to expand our business we will require
additional amounts, of water, electricity and natural gas to produce and process our products. The
prices of water, electricity and natural gas fluctuate significantly over time, due to supply and
other factors, and impact our cost structure. We may not be able to pass on increased costs of
production to our customers. As a result, increases in the cost of water, electricity or natural
gas would substantially harm our business, financial condition and results of operations. In
addition, the unavailability of these resources could hamper our operations. Our transportation costs are a material portion of the cost of our products. We primarily ship
our products and receive our inputs via truck and rail. Exports to Japan and certain other
countries involve ocean freight as well. The costs associated with the transportation of our
products and inputs fluctuate with the price of fuel and the capacity of our transportation
sources. Increases in costs of transportation would negatively affect our profitability. Our level of indebtedness and the terms of our indebtedness could adversely affect our business and
liquidity position. As of March 26, 2005, our outstanding indebtedness was $176.1 million. We expect that our
indebtedness, including borrowings under our credit agreement, may increase from time to time in
the future for various reasons, including fluctuations in operating results, capital expenditures
and possible acquisitions. Our consolidated indebtedness level could materially affect our
business because:  
    a substantial portion of our cash flow from operations must be dedicated to interest
payments on our indebtedness and is not available for other purposes, which amount would
increase if prevailing interest rates rise;
    it may materially limit or impair our ability to obtain financing in the future;
    it may reduce our flexibility to respond to changing business and economic conditions
or to take advantage of business opportunities that may arise; and
    it restricts our ability to pay dividends. In addition, our credit agreement requires us to meet specified financial ratios and limits
our ability to enter into various transactions. If we default on any of our indebtedness, or if we
are unable to obtain necessary liquidity, our indebtedness would be due and payable immediately and
our business could be adversely affected. 43




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Our performance depends on favorable labor relations with our employees and our ability to retain
them. Any deterioration of those relations, increase in labor costs or inability to attract and
retain employees could adversely affect our business. Our employees are not represented by any labor union. However, there have been efforts to
unionize our work force in the past and there could be attempts to do so in the future. In
addition, we have experienced high turnover in our Missouri production and processing employees in
the past, and our location in rural Missouri limits our ability to find replacement workers for
those operations. Our Missouri operations are currently located in five sparsely populated counties
in which we employed approximately 2,200 people at March 26, 2005. As a result, we have a limited
pool of potential replacement workers for those operations. Any significant deterioration of employee relations, increase in labor costs, slowdowns or
work stoppages, or shortages of labor at any of our locations, whether due to union activities,
employee turnover or otherwise, could have a material adverse effect on our business, financial
condition and results of operations. See Item 1 BusinessEmployees. The loss of key members of our management may adversely affect our business. We believe our continued success depends on the collective abilities and efforts of our senior
management. We do not maintain key person life insurance policies on any of our employees. The loss
of one or more key personnel, such as our executive officers, could have a material adverse effect
on our results of operations. Additionally, if we are unable to find, hire and retain needed key
personnel in the future, our results of operations could be materially and adversely affected. We are subject to risks associated with future acquisitions. An important element of our growth strategy is the acquisition and integration of
complementary businesses in order to broaden product offerings, capture market share and improve
profitability. We will not be able to acquire other businesses if we cannot identify suitable
acquisition opportunities, obtain financing on acceptable terms or reach mutually agreeable terms
with acquisition candidates. The negotiation of potential acquisitions, as well as the integration
of an acquired business, could require us to incur significant costs and cause diversion of our
managements time and resources. Future acquisitions by us could result in:  
    dilutive issuances of equity securities;
    reductions in our operating results;
    incurrence of debt and contingent liabilities;
    future impairment of goodwill and other intangibles; and
    other acquisition-related expenses. Some or all of these items could have a material adverse effect on our business. The
businesses we acquire in the future may not achieve sales and profitability that justify our
investment. In addition, to the extent that consolidation becomes more prevalent in our industry,
the prices for suitable acquisition candidates may increase to unacceptable levels and limit our
growth. Forward-Looking Statements This report on Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. When
used in this report, the words anticipates, believes, expects, intends, may, will and
similar expressions identify such forward-looking statements. Although we believe that such
statements are based on reasonable assumptions, these forward-looking statements are subject to
numerous factors, risks and uncertainties that could cause actual outcomes and 44




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results to be
materially different from those projected. These factors, risks and uncertainties include, among
others, the following:  
    the impact of cyclicality in the pork industry;
    the effect on results of operation of an inability to control feed costs;
    the impact of changes in consumer preferences;
    the consolidation of our retail, further processor and foodservice customers;
    our history of operations include net losses in some periods;
    our hedging activities;
    competition in the hog production and pork processing industries;
    our ability to manage relationships with large customers that comprise a significant
percentage of our total revenues;
    the effect of economic, political and regulatory risks associated with international operations;
    our ability to maintain herd productivity and feed efficiency;
    the outbreak of disease in our herds;
    the impact of environmental laws and other legal requirements, including compliance
costs and adverse outcomes of pending, threatened or future litigation;
    the effect of North Carolinas moratorium on expansion of hog operations;
    the occurrence of unanticipated natural disasters;
    the impact of product liability claims and product recalls;
    the enactment of laws prohibiting meat packers from owning livestock;
    the impact of corporate farming laws and foreign ownership restrictions, including
changes to current laws or a finding of non compliance with existing laws;
    our ability to cope with increased water, energy and freight costs or their unavailability;
    our ability to maintain favorable labor relations with and retain our employees;
    the loss of key members of our management;
    the impact of future acquisitions on our business and financial condition; and
    the ability of our majority shareholder to direct our business and affairs. Our actual results, performance or achievements could differ materially from those expressed
in, or implied by, the forward-looking statements. We can give no assurances that any of the
events anticipated by the forward-looking statements will occur or, if any of them do, what impact
they will have on our results of operations and financial condition. Please review our
Registration Statement on Form S-1 as amended from time to time for other important factors that
could cause results to differ materially from those in any such forward-looking statements.
Information in these archived materials may not be current and may be superceded by more recent
information published by us. 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk Our operating results are influenced by fluctuations in the price of our primary feed
components, corn and soybean meal, and by fluctuations in hog and wholesale pork sales prices. The
cost and supply of feed components and hog and wholesale pork sales prices are determined by
constantly changing market forces of supply and demand, which are driven by matters over which we
have no control, including weather, current and projected worldwide grain stocks and prices, grain
export prices and supports, hog production, consumer demand and governmental agricultural policies.
In our hog production segment we use forward contracts, as well as futures and options contracts,
to establish adequate supplies of future grain requirements, to help secure margins and to help
reduce the risk of market fluctuations. To help secure margins and minimize earnings volatility in
our pork processing segment, we utilize hog futures to hedge future pork product sales. While this
may tend to limit our ability to participate in gains from favorable commodity price fluctuation,
it also tends to reduce earnings volatility and secure future margins. For the fiscal years ended March 26, 2005, and March 27, 2004 we recognized losses under SFAS
133 of $5.9 million and income of $5.3 million, respectively, in net sales for losses and gains
related to hog futures and losses of $3.3 million and gains of $6.1 million, respectively, in costs
of goods sold relating to the hedging of feed 45




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##### Table of Contents



components and outside hog purchases at processing
facilities. For open futures contracts, we use a sensitivity analysis technique to evaluate the
effect that changes in the market value of commodities will have on these commodity derivative
instruments. As of March 26, 2005, the potential change in fair value of exchange-traded
contracts, assuming a 10% change in the underlying commodity price, would be $13.7 million. The table below sets forth fair values of futures and options, and gross contract or notional
amounts of forward contracts, in place as of March 26, 2005 (all amounts in thousands except
contract quantity and wtd.-avg. price/unit): Contract
    
    
    Volumes
    
    Wtd.-avg.
    
    
    FairQuantity
    
    
    Units
    
    Price/Unit
    
    
    ValueFutures ContractsCorn purchases  long
    
    
    3,555
    
    
    bushels
    
    
    2.15
    
    
    $
    (159
    )Corn sales  short
    
    
    205
    
    
    bushels
    
    
    2.36
    
    
    
    (3
    )Soybean meal purchases  long
    
    
    3
    
    
    tons
    
    
    192.32
    
    
    
    (13
    )Lean hog sales  short
    
    
    158,280
    
    
    pounds
    
    
    0.77
    
    
    
    1,796Lean hog purchases  long
    
    
    8,280
    
    
    pounds
    
    
    0.68
    
    
    
    667Wheat sales  short
    
    
    130
    
    
    bushels
    
    
    3.51
    
    
    
    8Pork belly purchases  long
    
    
    200
    
    
    pounds
    
    
    0.92
    
    
    
    (5
    )Option ContractsCorn puts  short
    
    
    1,500
    
    
    bushels
    
    $
    2.15
    
    
    $
    (133
    )Corn calls  short
    
    
    800
    
    
    bushels
    
    
    2.80
    
    
    
    (10
    )Corn calls  long
    
    
    2,425
    
    
    bushels
    
    
    2.32
    
    
    
    67Meal calls  long
    
    
    9
    
    
    tons
    
    
    197.22
    
    
    
    31Meal puts  short
    
    
    9
    
    
    tons
    
    
    214.44
    
    
    
    (9
    )Lean hog calls  short
    
    
    18,200
    
    
    pounds
    
    
    0.77
    
    
    
    (405
    )Lean hog puts  short
    
    
    2,400
    
    
    pounds
    
    
    0.70
    
    
    
    (25
    )Lean hog puts  long
    
    
    21,080
    
    
    pounds
    
    
    0.70
    
    
    
    370
 Contract
    
    
    Volumes
    
    Wtd.-avg.
    
    
    NotionalQuantity
    
    
    Units
    
    Price/Unit
    
    
    AmountForward ContractsCorn
    
    
    3,660
    
    
    bushels
    
    $
    2.35
    
    
    $
    8,602Meal
    
    
    9
    
    
    tons
    
    
    202.67
    
    
    
    1,787
 We also are exposed to changes in interest rates. The credit agreement has variable interest
rates. Interest rate changes therefore generally do not affect the market value of such debt but
do impact the amount of our interest payments and, therefore, our future earnings and cash flows.
Assuming other factors are held constant, a 1% change in interest rates would have no impact on
interest expense due because there was no variable rate debt outstanding as of March 26, 2005.
Conversely, for fixed rate debt, interest rate changes do not impact future cash flows and
earnings, but do impact the fair market value of such debt, assuming other factors are held
constant. During the fiscal year ended March 30, 2002, we entered into an interest rate swap
agreement to convert the variable base interest rate of our bank term debt to a fixed rate of
3.0125% plus the agent banks applicable margin (2.0% at maturity). The swap matured on September
30, 2004. The swap was accounted for as a cash flow hedge under SFAS 133. During the fiscal year
ended March 26, 2005, we recognized a $0.1 million gain, net of tax, into Accumulated Other
Comprehensive Loss, Net of Tax for the market value of the swap. The 9 1/4% senior notes had a fair value of approximately $190.8 million as of March 26, 2005
based on inter-dealer prices, as compared to the book value of $175.0 million as of March 26, 2005.
On May 9, 2005 as discussed earlier, we purchased $173.0 million of the 9 1/4% senior notes in the
Tender Offer for a price of $190.8 million. 46




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data Our audited consolidated financial statements are filed under this Item, beginning on page F-1
of this Report. Our financial statement schedule is filed under Item 15 Exhibits and Financial
Statement Schedules. Selected quarterly financial data required under this Item is included in Note 12 to the
consolidated financial statements. 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 
 Item 9A. Controls and Procedures As of the end of the period covered by this report, we have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures under the supervision and with the
participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO). Based on
this evaluation, our management, including the CEO and CFO, concluded that our disclosure controls
and procedures were effective. There have been no changes in our internal controls over financial
reporting that occurred during the fourth quarter of fiscal 2005 that has materially affected, or
is reasonably likely to materially affect, our internal controls over financial reporting. 
 Item 9B. Other Information None. 
 PART III 
 Item 10. Directors and Executive Officers of Registrant Except for the information required by this item with respect to our executive officers and
the information provided below, the information required by this item is incorporated herein by
reference to the 2005 Proxy Statement. Pursuant to
Item 401(b) of Regulation S-K, the information required by this item with respect to our executive
officers is set forth in Item 1 of Part I of this Report
under the caption Executive Officers of the Registrant. Code of Ethics We have adopted a code of professional ethics for all employees of the Company. The company
intends to satisfy its disclosure requirements regarding any amendment to, or waiver from, a
provision of its code of ethics that applies to its principal executive officer, principal
financial officer, principal accounting officer or controller, or persons performing similar
functions and that relates to any element of our code of ethics by posting such information for a
period of at least 12 months on our Internet website (http://www.psfarms.com) beginning within four
business days following the date of the amendment or waiver. 
 Item 11. Executive Compensation The information required by this item is incorporated herein by reference to the 2005 Proxy
Statement. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is incorporated herein by reference to the 2005 Proxy
Statement. 47




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##### Table of Contents



Item 13. Certain Relationships and Related Transactions The information required by this item is incorporated herein by reference to the 2005 Proxy
Statement. 
 Item 14. Principal Accounting Firm Fees and Services The information required by this item is incorporated herein by reference to the 2005 Proxy
Statement. 
 PART IV 
 Item 15. Exhibits and Financial Statement Schedules. (a) Financial Statements and Schedules (1) The following financial statements are filed as a part of this
Report on Form 10-K: Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of March 26, 2005 and March 27, 2004Consolidated Statements of Operations and Comprehensive (Loss) Income for
the three years ended March 26, 2005, March 27, 2004 and March 29, 2003Consolidated Statements of Shareholders Equity for the three years ended
March 26, 2005, March 27, 2004 and March 29, 2003Consolidated Statements of Cash Flows for the three years ended March 26,
2005, March 27, 2004 and March 29, 2003Notes to the Consolidated Financial Statements
 (2) The following financial statement schedule is filed as a part
of this Report on Form 10-K: Schedule II
Valuation and Qualifying Accounts
(Dollars in thousands) Balance atbeginning of
    
    
    Charged to
    
    
    
    
    
    
    Less:
    
    
    Balance at endDescription
    
    
    
    
    
    year
    
    
    earnings
    
    
    Other
    
    
    Deduction
    
    
    of yearAllowance for Losses
on Accounts Receivable:2005
    
    
    $
    675.6
    
    
    $
    189.3
    
    
    $
    
    
    
    $
    32.6
    
    
    $
    832.32004
    
    
    
    540.3
    
    
    
    146.2
    
    
    
    
    
    
    
    10.9
    
    
    
    675.62003
    
    
    
    680.5
    
    
    
    137.2
    
    
    
    
    
    
    
    277.4
    
    
    
    540.3
 48




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##### Table of Contents



(b)
    ExhibitsThe following documents are filed as a part of this Report onForm 10-Kor incorporated
herein by reference as indicated below: ExhibitNumber
    
    Description of Exhibit2.1
    
    Articles of Merger of PSF Acquisition Corp. into The Lundy Packing Company, filed August 25,
2000 (incorporated by reference to Exhibit 2.1 of the Registrants Registration Statement on
Form S-4 filed on June 29, 2001, Commission File No. 333-64180).2.2
    
    Stock Purchase Agreement, dated September 22, 2000, by and among Premium Standard Farms,
Inc., PSF Group Holdings, Inc. and ContiGroup Companies, Inc. (incorporated by reference to
Exhibit 2.2 of the Registrants Registration Statement on Form S-4 filed on June 29, 2001,
Commission File No. 333-64180).2.3
    
    Certificate of Ownership and Merger Merging PSF Group Holdings, Inc. into Premium Standard
Farms, Inc., filed May 2, 2005 (incorporated by reference to Exhibit 2.1 of the Registrants
Current Report on Form 8-K dated May 2, 2005, Commission File No. 333-64180).2.4
    
    Certificate of Ownership and Merger Merging Premium Standard Farms of North Carolina, Inc.
into Premium Standard Farms, Inc., filed May 10, 2005.3.1
    
    Certificate of Incorporation of PSF Group Holdings, Inc., filed May 8, 1998 (incorporated by
reference to Exhibit 3.1(a) of the Registrants Registration Statement on Form S-4 filed on
June 29, 2001, Commission File No. 333-64180).3.2
    
    Certificate of Amendment of Certificate of Incorporation of PSF Group Holdings, Inc., filed
September 16, 1994 (incorporated by reference to Exhibit 3.1(b) of the Registrants
Registration Statement on Form S-4 filed on June 29, 2001, Commission File No. 333-64180).3.4
    
    Amended and Restated By-laws of PSF Group Holdings, Inc. (incorporated by reference to
Exhibit 3.6 of the Registrants Registration Statement on Form S-4 filed on June 29, 2001,
Commission File No. 333-64180).4.1
    
    Indenture, dated as of June 7, 2001, among Premium Standard Farms, Inc., PSF Group Holdings,
Inc., The Lundy Packing Company, Lundy International, Inc., Premium Standard Farms of North
Carolina, Inc., and Wilmington Trust Company (incorporated by reference to Exhibit 4.1(a) of
the Registrants Registration Statement on Form S-4 filed on June 29, 2001, Commission File
No. 333-64180).4.2
    
    Specimen certificate of 9 1/4% Senior Notes due 2011 (incorporated by reference to Exhibit
4.1(b) of the Registrants Registration Statement on Form S-4 filed on June 29, 2001,
Commission File No. 333-64180).4.3
    
    First Supplemental Indenture dated as of March 31, 2002 (incorporated by reference to Exhibit
4.1(c) of the Registrants Annual Report on Form 10-K for the year ended March 30, 2002,
Commission File No. 333-64180).4.4
    
    Amended and Restated Loan and Security Agreement, dated April 9, 2004, by and between Premium
Standard Farms, Inc. and U.S. Bank National Association, as an Agent for Itself and Certain
Other Lenders (incorporated by reference to Exhibit 4.3 of the Registrants Annual Report on
Form 10-K for the year ended March 27, 2004, Commission File No. 333-64180).4.5
    
    First Amendment to Amended and Restated Loan and Security Agreement, dated April 20, 2005, by
 49




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibitand among Premium Standard Farms, Inc., Premium Standard Farms of North Carolina, Inc., Lundy
International, Inc., LPC Transport, Inc. and U.S. Bank National Association (incorporated by
reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K dated April 20,
2005, Commission File No. 333-64180).4.6
    
    Second Amendment to Amended and Restated Loan and Security Agreement, dated May 4, 2005 by
and among Premium Standard Farms, Inc., Premium Standard Farms of North Carolina, Inc., Lundy
International, Inc., LPC Transport, Inc. and U.S. Bank National Association (incorporated by
reference to Exhibit 10.1 of the Registrants Current Report on Form 8-K dated May 4, 2005,
Commission File No. 333-64180).4.7
    
    Third Amendment to Amended and Restated Loan and Security Agreement, dated May 5, 2005 by and
among Premium Standard Farms, Inc., Premium Standard Farms of North Carolina, Inc., Lundy
International, Inc., LPC Transport, Inc. and U.S. Bank National Association (incorporated by
reference to Exhibit 10.2 of the Registrants Current Report on Form 8-K dated May 4, 2005,
Commission File No. 333-64180).4.8
    
    Warrant Agreement between PSF Holdings, L.L.C. and Fleet National Bank, dated September 17,
1996 (incorporated by reference to Exhibit 4.1 of PSF Holdings, L.L.C.s Registration
Statement on Form S-1 filed on April 30, 1997, Commission File No. 333-26239).10.1*
    
    PSF Group Holdings, Inc. 1999 Equity Incentive Plan, dated December 1, 1999 (incorporated by
reference to Exhibit 10.1 of the Registrants Registration Statement on Form S-4 filed on
June 29, 2001, Commission File No. 333-64180).10.2*
    
    Premium Standard Farms, Inc. Long-Term Incentive Plan, effective April 1, 2003 (incorporated
by reference to Exhibit 10.2 of the Registrants Annual Report on Form 10-K for the year
ended March 27, 2004, Commission File No. 333-64180).10.3*
    
    Premium Standard Farms, Inc. Long-Term Incentive Plan, effective April 1, 2004 (incorporated
by reference to Exhibit 10.3 of the Registrants Registration Statement on Form S-1 filed on
March 11, 2005, Commission File No. 333-123260).10.4*
    
    Premium Standard Farms, Inc. Executive Level Severance Plan, effective February 1, 2003
(incorporated by reference to Exhibit 10.4 of the Registrants Registration Statement on Form
S-1 filed on March 11, 2005, Commission File No. 333-123260).10.5*
    
    Premium Standard Farms, Inc. Vice President Level Severance Plan, effective February 1, 2003
(incorporated by reference to Exhibit 10.5 of the Registrants Registration Statement on Form
S-1 filed on March 11, 2005, Commission File No. 333-123260).10.6*
    
    Premium Standard Farms, Inc. Special Executive Retirement Plan, dated October 1, 2004
(incorporated by reference to Exhibit 10.6 of the Registrants Registration Statement on Form
S-1 filed on March 11, 2005, Commission File No. 333-123260).10.7*
    
    Premium Standard Farms, Inc. Deferred Compensation Plan, dated December 29, 2000
(incorporated by reference to Exhibit 10.6(a) of the Registrants Registration Statement on
Form S-4 filed on June 29, 2001, Commission File No. 333-64180).10.8*
    
    Amendment No. 1 to the Deferred Compensation Plan, dated June 8, 2001 (incorporated by
reference to Exhibit 10.6(b) of the Registrants Registration Statement on Form S-4 filed on
June 29, 2001, Commission File No. 333-64180).10.9
    
    Services Agreement, dated October, 1998, by and between Premium Standard Farms, Inc. and
Continental Grain Company (incorporated by reference to Exhibit 10.8 of the Registrants
Registration Statement on Form S-4 filed on June 29, 2001, Commission File No. 333-64180).10.10
    
    Market Hog Contract Grower Agreement, dated May 3, 1998, by and between Continental Grain
 50




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##### Table of Contents



ExhibitNumber
    
    Description of ExhibitCompany and CGC Asset Acquisition Corp. (incorporated by reference to Exhibit 10.11 of the
Registrants Registration Statement on Form S-4 filed on June 29, 2001, Commission File No.
333-64180).10.11
    
    State of Missouri Consent Decree with Premium Standard Farms, Inc. and ContiGroup Companies,
Inc. (incorporated by reference to Exhibit 10.10 of the Registrants Annual Report on Form
10-K for the year ended March 27, 2004, Commission File No. 333-64180).10.12*
    
    Employment Severance Agreement, dated as of November 17, 2003, between Premium Standard Farms
and Richard Morris (incorporated by reference to Exhibit 10.12 of the Registrants
Registration Statement on Form S-1 filed on March 11, 2005, Commission File No. 333-123260).10.13*
    
    Letter Agreement dated November 7, 2003, between Premium Standard Farms, Inc. and Richard
Morris ((incorporated by reference to Exhibit 10.13 of the Registrants Registration
Statement on Form S-1 filed on March 11, 2005, Commission File No. 333-123260).14.1
    
    Premium Standard Farms Code of Professional Ethics for employees of Premium Standard Farms.21.1
    
    Subsidiaries of the Registrant.24.1
    
    Powers of Attorney (see signature page).31.1
    
    Certification of John M. Meyer, Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a).31.2
    
    Certification of Stephen A. Lightstone, Chief Financial Officer, pursuant to Rule
13a-14(a)/15d-14(a).32.1
    
    Certification of John M. Meyer, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Stephen A. Lightstone, Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   *
    
    Indicates management or compensatory plan or contract 51




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. PREMIUM STANDARD FARMS, INC.May 10, 2005
    
    
    
    /s/ John M. MeyerDate
    
    
    
    John M. Meyer,Chief Executive Officer(Principal Executive Officer)
 52




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##### Table of Contents



Each individual whose signature appears below hereby designates and appoints John M. Meyer,
Stephen A. Lightstone and Gerard J. Schulte, and each of them, for him or her and in his or her
name, place and stead, in any and all capacities, to file on behalf of Premium Standard Farms,
Inc., a Delaware corporation (the Company), the Companys Annual Report on Form 10-K for the
fiscal year ended March 26, 2005 (the Annual Report), with the Securities and Exchange Commission
(the Commission), to sign any and all subsequent amendments to the Annual Report (the
Amendments), to file any and all such Amendments with the Commission, with all exhibits to the
Annual Report and such Amendments, together with any and all other documents in connection
therewith, and to appear before the Commission in connection with any matter relating to such
Annual Report and such Amendments, hereby granting to the attorneys-in-fact and agents, and each of
them, full power and authority to do and perform any and all acts and things requisite and
necessary to be done in and about the premises as fully and to all intents and purposes as he or
she might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact
and agents, or any of them, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Signature
    
    Title
    
    Date/s/ John M. Meyer
    
    Chief Executive Officer and Director
    
    May 10, 2005John M. Meyer
    
    (Principal Executive Officer)/s/ Stephen A. Lightstone
    
    Chief Financial Officer
    
    May 10, 2005Stephen A. Lightstone
    
    (Principal Financial Officer)/s/ Michael J. Zimmerman
    
    Director
    
    May 10, 2005Michael J. Zimmerman/s/ Ronald E. Justice
    
    Director
    
    May 10, 2005Ronald E. Justice/s/ Dean Mefford
    
    Director
    
    May 10, 2005Dean Mefford/s/ Vart K. Adjemian
    
    Director
    
    May 10, 2005Vart K. Adjemian/s/ Maurice L. McGill
    
    Director
    
    May 10, 2005Maurice L. McGill/s/ Michael A. Petrick
    
    Director
    
    May 10, 2005Michael A. Petrick/s/ Paul J. Fribourg
    
    Director
    
    May 10, 2005Paul J. Fribourg/s/ William R. Patterson
    
    Director
    
    May 10, 2005William R. Patterson




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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Premium Standard Farms, Inc. and Subsidiaries PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of March 26, 2005 and March 27, 2004
    
    
    F-3Consolidated Statements of Operations and Comprehensive Income (Loss) for the three years ended
March 26, 2005, March 27, 2004 and March 29, 2003
    
    
    F-4Consolidated Statements of Shareholders Equity for the three years ended March 26, 2005,
March 27, 2004 and March 29, 2003
    
    
    F-5Consolidated Statements of Cash Flows for the three years ended March 26, 2005, March 27, 2004
and March 29, 2003
    
    
    F-6Notes to the Consolidated Financial Statements
    
    
    F-7




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 
 We have audited the accompanying consolidated balance sheets of Premium Standard Farms, Inc. and
Subsidiaries (the Company) as of March 26, 2005 and March 27, 2004 and the related consolidated
statements of operations and comprehensive income (loss), shareholders equity, and cash flows for
each of the three fiscal years in the period ended March 26, 2005. Our audits also included the
financial statement schedule listed in the Index at Item 15(a)2. These financial statements and
the financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and the financial statement
schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of the Company as of March 26, 2005 and March 27, 2004, and the results of
their operations and their cash flows for each of the three fiscal years in the period ended March
26, 2005, in conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in all material
respects the information set forth therein. Deloitte & Touche LLP Kansas City, Missouri
May 10, 2005 F-2




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PREMIUM STANDARD FARMS, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except share and per share information)
 March 27,
    
    
    March 26,2004
    
    
    2005ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    
    
    
    $
    10,054Accounts receivable, less allowance of $676 and $832 in
2004 and 2005, respectively
    
    
    28,456
    
    
    
    33,871Inventories
    
    
    167,819
    
    
    
    165,363Deferred income taxes
    
    
    16,030
    
    
    
    8,116Prepaid expenses and other
    
    
    3,874
    
    
    
    5,270Total current assets
    
    
    216,179
    
    
    
    222,674PROPERTY, PLANT, EQUIPMENT AND BREEDING STOCK:Land and improvements
    
    
    100,754
    
    
    
    101,469Buildings
    
    
    295,402
    
    
    
    296,569Machinery and equipment
    
    
    278,860
    
    
    
    284,554Breeding stock
    
    
    38,322
    
    
    
    39,570Construction in progress
    
    
    2,173
    
    
    
    12,193715,511
    
    
    
    734,355Less- Accumulated depreciation
    
    
    260,699
    
    
    
    307,979Total property, plant, equipment and breeding stock
    
    
    454,812
    
    
    
    426,376GOODWILL
    
    
    75,998
    
    
    
    75,998OTHER LONG-TERM ASSETS:Deferred financing costs, net
    
    
    4,201
    
    
    
    4,542Other
    
    
    7,642
    
    
    
    7,376Total other long-term assets
    
    
    11,843
    
    
    
    11,918Total assets
    
    $
    758,832
    
    
    $
    736,966LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Checks issued against future deposits
    
    $
    5,115
    
    
    $
    Accounts payable
    
    
    6,332
    
    
    
    6,133Accrued expenses
    
    
    33,168
    
    
    
    49,913Due to related party
    
    
    56
    
    
    
    29Income tax payable
    
    
    37
    
    
    
    975Accrued interest
    
    
    5,888
    
    
    
    4,861Current maturities of long-term debt and capital leases
    
    
    833
    
    
    
    801Total current liabilities
    
    
    51,429
    
    
    
    62,712LONG-TERM LIABILITIES:Long-term debt and capital leases, less current maturities
    
    
    285,069
    
    
    
    175,287Other long-term liabilities
    
    
    6,509
    
    
    
    8,151Deferred income taxes
    
    
    75,813
    
    
    
    83,092Total long-term liabilities
    
    
    367,391
    
    
    
    266,530Total liabilities
    
    
    418,820
    
    
    
    329,242SHAREHOLDERS EQUITY:Preferred stock, $.01 par value, 10,000,000 shares authorized, no shares outstanding
    
    
    
    
    
    
    Class A common stock, $.01 par value; 50,000,000 shares authorized, 14,500,000 shares issued
    
    
    145
    
    
    
    145Class B common stock, $.01 par value; 50,000,000 shares authorized, 16,428,593 shares issued
    
    
    164
    
    
    
    164Additional paid-in capital
    
    
    373,401
    
    
    
    373,401Accumulated other comprehensive loss, net of tax
    
    
    (54
    )
    
    
    Retained earnings (deficit)
    
    
    (33,644
    )
    
    
    34,014Total shareholders equity
    
    
    340,012
    
    
    
    407,724Total liabilities and shareholders equity
    
    $
    758,832
    
    
    $
    736,966
 The accompanying notes are an integral part of these consolidated financial statements. F-3




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PREMIUM STANDARD FARMS, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
 in thousands, except share and per share information
 Fiscal Year EndedMarch,
    
    
    March,
    
    
    March,29, 2003
    
    
    27, 2004
    
    
    26, 2005NET SALES
    
    $
    608,414
    
    
    $
    730,737
    
    
    $
    927,571COST OF GOODS SOLD
    
    
    631,870
    
    
    
    696,751
    
    
    
    774,512Gross profit
    
    
    (23,456
    )
    
    
    33,986
    
    
    
    153,059OPERATING EXPENSES:Selling, general and administrative expenses
    
    
    18,267
    
    
    
    17,397
    
    
    
    26,068Other income, net
    
    
    (2,293
    )
    
    
    (597
    )
    
    
    (826
    )Total operating expenses
    
    
    15,974
    
    
    
    16,800
    
    
    
    25,242Operating income (loss)
    
    
    (39,430
    )
    
    
    17,186
    
    
    
    127,817OTHER (EXPENSE) INCOME:Interest expense
    
    
    (24,000
    )
    
    
    (24,822
    )
    
    
    (20,314
    )Interest income
    
    
    255
    
    
    
    122
    
    
    
    159Other expense, net
    
    
    (23,745
    )
    
    
    (24,700
    )
    
    
    (20,155
    )Income (loss) before income taxes
    
    
    (63,175
    )
    
    
    (7,514
    )
    
    
    107,662INCOME TAX (EXPENSE) BENEFITCurrent tax provision
    
    
    5,411
    
    
    
    (212
    )
    
    
    (24,845
    )Deferred tax provision
    
    
    19,164
    
    
    
    3,135
    
    
    
    (15,159
    )Income tax (expense) benefit
    
    
    24,575
    
    
    
    2,923
    
    
    
    (40,004
    )NET INCOME (LOSS)
    
    $
    (38,600
    )
    
    $
    (4,591
    )
    
    $
    67,658Unrealized gain (loss) on interest rate swap, net of tax
    
    
    (692
    )
    
    
    293
    
    
    
    54COMPREHENSIVE INCOME (LOSS)
    
    $
    (39,292
    )
    
    $
    (4,298
    )
    
    $
    67,712Earnings (loss) per share:Basic
    
    $
    (1.25
    )
    
    $
    (0.15
    )
    
    $
    2.19Diluted
    
    $
    (1.25
    )
    
    $
    (0.15
    )
    
    $
    2.18Weighted average number of common shares outstanding:Basic
    
    
    30,928,593
    
    
    
    30,928,593
    
    
    
    30,928,593Diluted
    
    
    30,928,593
    
    
    
    30,928,593
    
    
    
    31,015,665
 The accompanying notes are an integral part of these consolidated financial statements. F-4




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PREMIUM STANDARD FARMS, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 in thousands, except share information
 AccumulatedAdditional
    
    
    Other
    
    
    RetainedCommon
    
    
    Paid-In
    
    
    Comprehensive
    
    
    EarningsStock
    
    
    Capital
    
    
    Income (Loss)
    
    
    (Deficit)
    
    
    TotalBALANCE, March 30, 2002
    
    $
    309
    
    
    $
    373,366
    
    
    $
    345
    
    
    $
    9,547
    
    
    $
    383,567Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,600
    )
    
    
    (38,600
    )Unrealized loss on interest rate swap
    
    
    
    
    
    
    
    
    
    
    (692
    )
    
    
    
    
    
    
    (692
    )Other
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    20BALANCE, March 29, 2003
    
    $
    309
    
    
    $
    373,386
    
    
    $
    (347
    )
    
    $
    (29,053
    )
    
    $
    344,295Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,591
    )
    
    
    (4,591
    )Unrealized gain on interest rate swap
    
    
    
    
    
    
    
    
    
    
    293
    
    
    
    
    
    
    
    293Other
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    15BALANCE, March 27, 2004
    
    $
    309
    
    
    $
    373,401
    
    
    $
    (54
    )
    
    $
    (33,644
    )
    
    $
    340,012Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,658
    
    
    
    67,658Unrealized gain on interest rate swap
    
    
    
    
    
    
    
    
    
    
    54
    
    
    
    
    
    
    
    54BALANCE, March 26, 2005
    
    $
    309
    
    
    $
    373,401
    
    
    $
    
    
    
    $
    34,014
    
    
    $
    407,724
 The accompanying notes are an integral part of these consolidated financial statements. F-5




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PREMIUM STANDARD FARMS, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOW
 (in thousands)
 March
    
    
    March
    
    
    March29, 2003
    
    
    27, 2004
    
    
    26, 2005OPERATING ACTIVITIES:Net income (loss)
    
    $
    (38,600
    )
    
    $
    (4,591
    )
    
    $
    67,658Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-Depreciation and amortization
    
    
    61,508
    
    
    
    61,306
    
    
    
    60,645Amortization of deferred financing costs
    
    
    1,546
    
    
    
    1,752
    
    
    
    1,042Deferred income taxes
    
    
    (19,164
    )
    
    
    (2,948
    )
    
    
    15,194Net (gain) loss on sale of property, plant, equipment and breeding stock
    
    
    1,298
    
    
    
    (4,651
    )
    
    
    (8,640
    )Changes in operating assets and liabilities, net-Accounts receivable
    
    
    (575
    )
    
    
    (6,548
    )
    
    
    (5,415
    )Inventories
    
    
    (17,237
    )
    
    
    (9,417
    )
    
    
    2,455Prepaid expenses and other assets
    
    
    (1,647
    )
    
    
    3,320
    
    
    
    (1,077
    )Accounts payable, accrued expenses and other liabilities
    
    
    (4,509
    )
    
    
    3,448
    
    
    
    18,072Net cash provided by (used in) operating activities
    
    
    (17,380
    )
    
    
    41,671
    
    
    
    149,934INVESTING ACTIVITIES:Investment in joint venture
    
    
    (2,184
    )
    
    
    
    
    
    
    Purchases of property, plant, equipment and breeding stock
    
    
    (35,505
    )
    
    
    (41,884
    )
    
    
    (44,298
    )Proceeds from disposal of property, plant, equipment and breeding stock
    
    
    11,745
    
    
    
    18,378
    
    
    
    20,730Net cash used in investing activities
    
    
    (25,944
    )
    
    
    (23,506
    )
    
    
    (23,568
    )FINANCING ACTIVITIES:Checks issued against future deposits
    
    
    5,129
    
    
    
    (14
    )
    
    
    (5,115
    )Proceeds from (payments on) revolving debt, net
    
    
    46,530
    
    
    
    (4,799
    )
    
    
    (102,500
    )Payments for deferred financing costs
    
    
    (1,390
    )
    
    
    (50
    )
    
    
    (1,272
    )Repayments on long-term debt
    
    
    (14,127
    )
    
    
    (13,302
    )
    
    
    (7,425
    )Net cash (used in) provided by financing activities
    
    
    36,142
    
    
    
    (18,165
    )
    
    
    (116,312
    )Net increase (decrease) in cash and
cash equivalents
    
    
    (7,182
    )
    
    
    
    
    
    
    10,054CASH AND CASH EQUIVALENTS, beginning of period
    
    
    7,182
    
    
    
    
    
    
    
    CASH AND CASH EQUIVALENTS, end of period
    
    $
    
    
    
    $
    
    
    
    $
    10,054SUPPLEMENTAL DISCLOSURES:Interest paid
    
    $
    20,055
    
    
    $
    23,014
    
    
    $
    20,571Income tax paid (received)
    
    
    (4,205
    )
    
    
    (4,350
    )
    
    
    23,028
 The accompanying notes are an integral part of these consolidated financial statements. F-6




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PREMIUM STANDARD FARMS, INC. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1.Summary of significant accounting policies: Nature of operations On May 2, 2005, PSF Group Holdings, Inc. merged with and into its wholly owned subsidiary, Premium
Standard Farms, Inc., with Premium Standard Farms, Inc. being the surviving corporation. Premium Standard Farms, Inc. (PSF) is a Delaware company formed in 1996 and is currently 53% owned
by ContiGroup Companies, Inc. (CGC). PSF and its subsidiaries, collectively referred to as the
Company, are an integrated business engaged principally in the business of hog production and pork
processing and selling to domestic and international markets. The Company succeeded the
Continental Grain Company North Missouri Pork Operations and PSF Holdings L.L.C. (Holdings) on May
13, 1998, pursuant to a stock purchase transaction. Fiscal year The Companys fiscal year is the 52 or 53-week period, which ends on the last Saturday in March.
The accompanying consolidated statements of operations and comprehensive (loss) income, statements
of shareholders equity and cash flows include activity from the period of March 31, 2002, through
March 29, 2003 (52 weeks), the period of March 30, 2003, through March 27, 2004 (52 weeks), and the
period of March 28, 2004, through March 26, 2005 (52 weeks). Principles of consolidation The consolidated financial statements include the accounts of the Company and its majority-owned
subsidiaries. Entities in which the Company has ownership of 20 percent to 50 percent and does not
control are accounted for using the equity method. All significant intercompany balances and
transactions have been eliminated in consolidation. Use of estimates The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates. Revenue recognition Revenues from product sales are recorded when title to the goods and risks of ownership has
transferred to the customer, generally upon shipment. Net sales reflect units shipped at selling
prices reduced by certain sales allowances. Cash and cash equivalents The Company considers all highly liquid investments with an original maturity of three months or
less to be cash equivalents. The carrying value of cash equivalents approximates market value. F-7




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Inventories Inventories are valued at the lower of cost, determined on a first-in, first-out (FIFO) basis, or
market. Inventories consist of the following (in thousands): March 27,
    
    
    March 26,2004
    
    
    2005Hogs
    
    $
    153,340
    
    
    $
    147,080Processed pork products
    
    
    8,383
    
    
    
    13,458Packaging and supplies
    
    
    1,779
    
    
    
    1,755Grain, feed additives and other
    
    
    4,317
    
    
    
    3,070$
    167,819
    
    
    $
    165,363
 Property, plant, equipment and breeding stock Depreciation of property, plant, equipment and breeding stock is computed using the straight-line
method over the estimated useful lives of the assets as follows: YearsLand improvements
    
    
    15 to 20Buildings
    
    
    20 to 40Machinery and equipment
    
    
    3 to 10Breeding stock
    
    
    3
 Assets held under capital leases are classified as property, plant, equipment and breeding stock
and amortized over the lease terms. Lease amortization is included in depreciation expense. Maintenance, repairs and minor renewals are charged to operations while major renewals and
improvements are capitalized. Depreciation and amortization expense relating to the Companys property, plant, equipment and
breeding stock amounted to $61,508,000, $61,306,000 and $60,645,000 for fiscal years ended March
29, 2003, March 27, 2004, and March 26, 2005, respectively. Capitalized interest relating to the Companys additions of property, plant, equipment and breeding
stock amounted to $365,000, $147,000 and $295,000 for fiscal years ended March 29, 2003, March 27,
2004 and March 26, 2005, respectively. These amounts were capitalized with the related project in
property, plant, equipment and breeding stock on the consolidated balance sheets. Impairment of long-lived assets Long-lived assets, primarily property, plant and equipment, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying value of
the asset to future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the amount by which the
carrying value of the assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying value or fair value less costs to sell. Market-risk management instruments The Company uses price-risk management techniques to enhance sales and reduce the effect of adverse
price changes on the Companys profitability. The Companys price-risk management and hedging
activities currently are utilized in the areas of forward grain sales and hog production margin
management. The Companys currently held commodity contracts do not qualify as hedges for
financial reporting purposes. These instruments are marked to market and included in revenue or
cost of goods sold in the consolidated statements of operations and comprehensive income (loss). F-8




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The Company held an interest rate swap agreement, which matured on September 30, 2004, in order to
effectively convert the base interest rate on the bank term note from variable to a fixed rate.
The swap had been designated as a cash flow hedge and qualified for hedge accounting with the
changes in fair value recorded in other comprehensive income. See Derivative instruments and
hedging activities below. Self-insurance programs The Company is self-insured for certain levels of general and vehicle liability, workers
compensation and health care coverage. The cost of these self-insurance programs is accrued based
upon estimated settlements for known and anticipated claims incurred through the balance sheet
date. Any resulting adjustments to previously recorded reserves are reflected in current operating
results. Income taxes The Company uses the liability method of accounting for income taxes. Under this method, deferred
income tax assets and liabilities are determined based on the difference between financial
reporting and income tax basis of assets and liabilities using the enacted tax rates. The deferred
income tax provision or benefit is based on changes in the asset or liability from period to
period. Fair value of financial instruments The fair value of long-term debt and capital lease obligations is determined using quoted market
prices from interdealers. At March 27, 2004, and March 26, 2005, the fair value of the Companys
debt was $288,833,000 and $192,908,000, respectively, with a carrying value of $287,084,000 and
$177,158,000, respectively. Accounts receivable, accounts payable and cash equivalents are carried at historical cost, which
approximates fair value. Goodwill The Company follows Statements of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and
Intangible Assets, which established reporting and accounting standards for goodwill and
intangible assets. Under SFAS 142, companies no longer amortize goodwill over the estimated useful
life. Goodwill is assessed each year during the second quarter for impairment by applying a fair
value based test. No impairment was recorded during the fiscal years ended March 27, 2004 and
March 26, 2005. Deferred financing costs Costs associated with debt issuance and amendments of debt facilities are capitalized and amortized
using the interest method over the related debt facility life. Accumulated amortization on
deferred financing costs at March 27, 2004 and March 26, 2005 was $5,594,000 and $2,280,000,
respectively. Asset retirement obligations The Company accrues for an asset retirement obligation in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. The Company has determined
that it has a legal obligation to close lagoons in the future should the Company ever cease
operations or plan to close lagoons voluntarily in accordance with a changed operating plan. Based
on estimates and assumptions as to the cost and timing of any potential lagoon closure, the Company
has determined and recorded the present value of the projected costs which are not considered
material to the consolidated financial statements. Derivative instruments and hedging activities The Company follows Financial Accounting Standards Board Statement No. 133 (SFAS 133), Accounting
for Derivative Instruments and Hedging Activities which requires every derivative instrument be
recorded in the F-9




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balance sheet as either an asset or liability at its fair value, and changes in a derivatives fair
value be recognized in current earnings or other comprehensive income. The Company believes that its exchange traded commodity contracts serve as economic hedges,
however, management has elected not to designate and account for these contracts as hedges.
Accordingly, these contracts are marked to market through earnings in the period in which they
occur. For the fiscal years ended March 29, 2003, March 27, 2004, and March 26, 2005, gains
(losses) marked to market on commodity contracts recognized in revenue for lean hog futures were
$1,392,000, $5,344,000, and ($5,909,000), respectively. Gains (losses) recognized in cost of goods
sold relating to the hedging of feed components were ($868,000), $6,067,000, and ($3,305,000),
respectively. The Company has recorded the fair value of its open exchange traded commodity
contracts of $4,918,000 and $2,175,000 in Prepaid Expenses and Other in the consolidated balance
sheets at March 27, 2004 and March 26, 2005, respectively. During the fiscal year ended March 30, 2002, the Company entered into an interest rate swap
agreement in order to effectively convert the base interest rate on the bank term note from
variable to a fixed rate. The interest rate swap matured on September 30, 2004. The Company had
designated the interest rate swap as a cash flow hedge and had recorded ($88,000) in the
consolidated balance sheets relating to the fair value of the swap for fiscal year ended March 27,
2004. For the fiscal year ended March 29, 2003, the Company decreased accumulated other
comprehensive income by $692,000, net of $440,000 of deferred taxes. For the fiscal year ended
March 27, 2004, the Company increased accumulated other comprehensive income by $293,000, net of
$186,000 in deferred taxes, and for the fiscal year ended March 26, 2005, the Company increased
accumulated other comprehensive income by $54,000, net of $34,000 in deferred taxes. Stock-based compensation The Company follows the disclosure provisions of Statement of Financial Accounting Standards No.
148 (SFAS 148), Accounting for Stock-Based Compensation  Transition and Disclosure, and amendment
of FASB Statement No. 123. SFAS 148 requires prominent disclosures in both annual and interim
financial statements regarding the method of accounting for stock-based employee compensation and
the effect of the method used on report results. In the fiscal year ended March 31, 2001, the Companys board of directors authorized an equity
incentive plan whereby options have been granted to senior management for the purchase of 994,287
shares of Class B common stock at an exercise price of $11.49 per share. In January 2004, the
Companys board of directors granted an additional 124,287 options at the same exercise price as
the previous option grants. In April 2004, 165,715 options were terminated in accordance with the
option agreements due to departures of individuals in the plan. All of the outstanding options are
fully exercisable at March 26, 2005, except for 55,515, which are exercisable December 31, 2006.
At December 31, 2005, 870,002 shares expire, and at December 31, 2010, 82,857 shares expire. No
options have been exercised as of March 26, 2005. The Company records stock compensation in accordance with Accounting Principles Board Opinion No.
25 (APB 25). For fiscal years ending March 29, 2003, March 27, 2004 and March 26, 2005, the
Company recorded compensation expense of $20,000, $15,000 and $0, respectively, in accordance with
APB 25. The fair value of stock options granted was calculated using the minimum value method as
defined in the Statement of Financial Accounting Standards No. 123 (SFAS 123). Under SFAS 123, the
pro forma net income is disclosed as if it reflected the estimated fair value of options as
compensation at the date of grant or issue over the vesting period. For the fiscal years ended
March 29, 2003, and March 26, 2005, there was no pro forma expense as the effect of option grants
are recorded in the year of grant. For the fiscal year ended March 27, 2004, on a pro forma basis,
net income would not have been impacted by the options granted. Earnings per share Basic earnings per common share (EPS) are computed by dividing net earnings available to
common shareholders by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that would occur if securities or other contracts to
issue common stock were exercised or converted into common stock. In fiscal years ended March 29,
2003, March 27, 2004, and March 26, 2005, there were 20,482 warrants, with the right to acquire
2,969,878 shares, that were considered antidilutive. In fiscal years ended March 29, 2003, and
March 27, 2004, there were 1,077,144 and 1,034,565 options, respectively (based on F-10




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##### Table of Contents



weighted-average number outstanding during the year), that were considered antidilutive. The
following schedule shows computation of net earnings (loss) per share for the last three fiscal
years (dollars in thousands, except share and per share information). March 29,
    
    
    March 27,
    
    
    March 26,2003
    
    
    2004
    
    
    2005Basic Computation:Net income (loss)
    
    $
    (38,600
    )
    
    $
    (4,591
    )
    
    $
    67,658Weighted average common
shares outstanding
    
    
    30,928,593
    
    
    
    30,928,593
    
    
    
    30,928,593Basic earnings (loss) per share
    
    $
    (1.25
    )
    
    $
    (0.15
    )
    
    $
    2.19Diluted Computation:Net income (loss)
    
    $
    (38,600
    )
    
    $
    (4,591
    )
    
    $
    67,658Weighted average common
shares outstanding
    
    
    30,928,593
    
    
    
    30,928,593
    
    
    
    30,928,593Net effect of dilutive stock
options based on the treasury
stock method
    
    
    
    
    
    
    
    
    
    
    87,072Outstanding shares for diluted
earnings (loss) per share
    
    
    30,928,593
    
    
    
    30,928,593
    
    
    
    31,015,665Diluted earnings (loss) per share
    
    $
    (1.25
    )
    
    $
    (0.15
    )
    
    $
    2.18
 New accounting pronouncements In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 151 (SFAS 151), Inventory Costs  an Amendment of ARB No. 43 Chapter 4.
SFAS 151 requires that items such as idle facility expense, excessive spoilage, double freight, and
rehandling be recognized as current-period charges rather than being included in inventory
regardless of whether the costs meet the criterion of abnormal as defined in ARB 43. SFAS 151 is
applicable for inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company will adopt this standard beginning the first quarter of fiscal year 2006 and does not
believe the adoption will have a material impact on its financial statements as such costs have
historically been expensed as incurred. In December 2004, FASB issued SFAS No. 153 (SFAS 153), Exchanges of Nonmonetary Assets  an
amendment of APB Opinion No. 29 which addresses the measurement of exchanges of nonmonetary assets
and eliminates the exception from fair value accounting for nonmonetary exchanges of similar
productive assets and replaces it with an exception for exchanges that do not have commercial
substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future
cash flows of an entity are expected to change significantly as a result of the exchange. This
statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005 and is not expected to have a significant impact on the Companys financial
statements. In December 2004, FASB issued SFAS No. 123 (revised 2004) (SFAS 123R), Share-Based Payment. SFAS
123R sets accounting requirements for share-based compensation to employees, requires companies
to recognize in the income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees and disallows the use of the intrinsic value method
of accounting for stock compensation. SFAS 123R, as recently amended, is applicable for all fiscal
years beginning after June 15, 2005. This statement is effective for the Company beginning fiscal
year 2007 and is not expected to have a significant impact on its financial statements F-11




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with respect to currently issued stock options, but could have a significant impact with respect to
options issued in the future. In December 2004, FASB issued FASB Staff Position 109-1 (FSP 109-1) Application of FASB Statement
No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004. FSP 109-1 specifies that a qualified
production activities deduction should be accounted for as a special deduction in accordance with
SFAS 109. FSP 109-1 was effective upon issuance. The Company is currently evaluating the impact
this deduction will have on its results of operations or financial position for subsequent years. In March 2005, FASB issued FASB Interpretation No. 47 (FIN 47) Accounting for Conditional Asset
Retirement Obligations. FIN 47 provides guidance relating to the identification of and financial
reporting for legal obligations to perform an asset retirement activity. The Interpretation
requires recognition of a liability for the fair value of a conditional asset retirement obligation
when incurred if the liabilitys fair value can be reasonably estimated. FIN 47 is effective no
later than the end of fiscal years ending after December 15, 2005. The Company does not expect
adoption of FIN 47 to have a material effect on its results of operations or financial position. Reclassifications Certain reclassifications were made to the prior years financial statements to conform to the 2005
presentation. Risk factors There are certain risk factors that can materially impact the Companys business, financial
condition and results of operations. These risks include sensitivity to pork and hog prices,
sensitivity to grain commodity prices, environmental factors and legislation, changes in herd
productivity and feed efficiency, impact of disease, international market risks, competition,
restrictions under corporate farming laws, dependence on favorable labor relations, pork product
contamination and product liability claims, distribution channels and consumer preferences. 2.Shareholders equity Common stock There are two classes of common stock which may be issued. Class A common stock was issued to the
holders of the outstanding units of Holdings. Class B common stock was issued to CGC. Class A
holders have the sole right to vote in the election or for removal, without cause, of four Class A
directors. Class B holders have the sole right to vote in the election or for removal, without
cause, of five Class B directors. All distributions, dividends and liquidation preferences are
equal between the two classes of stock. Preferred stock The Company has authorized 10,000,000 shares at $.01 par value of preferred stock. No shares have
been issued or are outstanding. Terms of the preferred stock including voting rights, dividend
preference and other limitations or restrictions have yet to be assigned. Stockholder warrants The Company has warrants outstanding entitling the holders to purchase 2,969,878 shares of Class A
common stock at an exercise price of $15.21 per share. As of March 26, 2005, all warrants were
exercisable and none have been exercised. All unexercised warrants expire on September 17, 2006.
Warrant holders are entitled to certain registration rights associated with their ownership. F-12




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3.Accrued expenses Accrued expenses are comprised of the following (in thousands): March 27,
    
    
    March 26,2004
    
    
    2005Salaries and benefits payable
    
    $
    10,367
    
    
    $
    21,373Workers compensation payable
    
    
    5,087
    
    
    

    5,397Grain and feed
    
    
    1,626
    
    
    
    1,431Claims reserves
    
    
    3,541
    
    
    
    4,211Accrued payables and other
    
    
    12,547
    
    
    
    17,501$
    33,168
    
    
    $
    49,913
 4.Long-term debt and capital leases Long-term debt and capital leases consists of the following (in thousands): March 27,
    
    
    March 26,2004
    
    
    2005Senior unsecured notes, due on June 15, 2011,
interest at 9.25% (9 1/4% Notes), interest payable
semiannually
    
    $
    175,000
    
    
    $
    175,000Revolving loan, due on August 21, 2004,
interest at variable rates (ranging from 3.875%
to 5.25% at March 27, 2004)
    
    
    65,000
    
    
    
    Term loan, due on August 21, 2005, interest based
on LIBOR rates plus 2.875% ($18,750 fixed with a
swap agreement for 5.8875%, $25,000 at 4.0625% at
March 27, 2004), payable in quarterly
installments of $6,250 beginning September 30,
2003
    
    
    43,750
    
    
    
    Capital leases
    
    
    3,334
    
    
    
    2,158Total debt and capital leases
    
    
    287,084
    
    
    
    177,158Less- Unamortized discount on senior notes
    
    
    1,182
    
    
    
    1,070Less- Current portion
    
    
    833
    
    
    
    801Long-term debt and capital leases
    
    $
    285,069
    
    
    $
    175,287
 Future maturities of long-term debt and capital leases are as follows (in thousands), as adjusted
for the Tender Offer discussed below: Fiscal Year2006
    
    $
    8012007
    
    
    8142008
    
    
    4492009
    
    
    862010
    
    
    173,008Thereafter
    
    
    2,000$
    177,158
 The indenture associated with the $175,000,000 9 1/4% Notes limits the Companys ability, among other
things, to incur additional debt, pay dividends, acquire shares of capital stock, make payments on
subordinated debt or make certain investments. In addition, the indenture places limitations on
the Companys ability to: make distributions from subsidiaries, issue or sell capital stock of
subsidiaries, issue guarantees, sell or exchange assets, enter into transactions with shareholders
and affiliates, create liens, and effect mergers. F-13




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The 9 1/4% Notes may be redeemed beginning on June 15, 2006, at an initial redemption price of
104.625 percent of their principal amount plus accrued interest, declining to 100 percent on and
after June 15, 2009. In addition, before June 15, 2004, up to 35 percent of the 9 1/4% Notes may be
redeemed at a price of 109.25 percent of principal plus accrued interest, using proceeds from the
sale of capital stock. Although the 9 1/4% Notes were issued by Premium Standard Farms, Inc., its parent, PSF Group
Holdings, Inc. (the registrant), and Premium Standard Farms, Inc.s wholly owned subsidiaries,
fully and unconditionally jointly and severally guarantee Premium Standard Farms, Inc.s obligation
to pay principal and interest on these notes. Supplemental consolidating financial information is
not presented as the parent company has no independent assets or operations and less than 3 percent
of the total assets exist in non-guarantor subsidiaries. On May 9, 2005, the Company completed a tender offer and consent solicitation (the Tender Offer)
with respect to the 9 1/4% Notes pursuant to which the Company purchased $173,000,000 principal
amount of the aggregate $175,000,000 of the 9 1/4% Notes previously outstanding and eliminated
substantially all of the restrictive covenants relating to the remaining 9 1/4% Notes. The purchase
price and related consent payment was $197.2 million based on a price determined generally by
discounting the redemption price of the 9 1/4% Notes when they may be first called on June 15, 2006
(i.e., $1,046.25 per $1,000 9 1/4% Note) to present value using the market yield of a
comparable U.S. treasury note as of April 19, 2005 plus 0.50%, including accrued interest of $6.4
million. The Tender Offer was financed through borrowings under the existing bank credit agreement and available
cash and will result in a charge of approximately $21.8 million to be recognized in the first
quarter of fiscal year 2006. The Company had a bank credit agreement that included a term loan and revolving loan. On April 9,
2004, the Company entered into an amended and restated loan and security agreement (the credit
agreement) with U.S. Bank National Association as a lender and agent for the other lenders which
provided for a $175.0 million revolving credit facility. The amount available under the revolving
credit facility is determined by a borrowing base formula derived from the sum of eligible accounts
receivable, a fixed asset component and a formula for inventory based on the lower of cost or
market valuation. At March 26, 2005, the Company had no borrowings outstanding under the credit
agreement, $11.2 million in letters of credit and $163.8 million available for borrowing. All
borrowings under the revolving credit facility mature on April 9, 2009. On April 20, 2005, the Company amended the credit agreement to reduce the applicable margin and to permit:  
    the contemplated initial public offering of shares of common stock by certain holders thereof,
    the merger of PSF Group Holdings, Inc., the parent, with and into the Company, and
    the Tender Offer for the 9 1/4% Notes. As of May 9, 2005, the credit agreement was amended to provide for extension of credit not to
exceed $220.0 million from the previous limit of
$175.0 million. Borrowings under the credit agreement are secured by a first priority security interest in, and
mortgages on, substantially all of inventory, breeding stock and receivables, as well as the
production and processing facilities. Amounts borrowed under the credit agreement bear interest at fluctuating rates. These rates are
based on the agents base rate (the greater of the agents prime rate or the federal funds rate
plus one half of one percent) or LIBOR plus, in each case, an applicable margin, ranging from 0.0%
to 3.0% determined by the leverage ratio. Letter-of-credit fees are based on the applicable margin and are paid quarterly only on outstanding
letter-of-credit amounts. In addition, the revolving credit facility provides for an annual
administration fee to be paid to the agent, and a quarterly non-use fee payable to the lenders
calculated on the average daily unused amount under the revolving credit facility. The credit agreement contains both negative and affirmative covenants. The credit agreement
contains the following affirmative covenants, among others: delivery of financial and other
information to the agent, notice to the agent upon the occurrence of certain material events, and
maintenance of earnings before interest, taxes, depreciation and amortization (EBITDA) and a
maximum leverage ratio. Both the EBITDA and maximum leverage ratio covenants are based on a four
quarter minimum rolling EBITDA average during the most recent eight F-14




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##### Table of Contents



quarters. The Company is required under the credit agreement to maintain EBITDA, as defined in the
credit agreement, of at least $55,000,000 as of the end of each quarter in fiscal year 2006 and
$60,000,000 as of the end of each fiscal quarter thereafter. The maximum leverage ratio (based on
the EBITDA calculation) as of the end of each fiscal year cannot be greater than 6.0-to-1.0 as of
the end of each quarter through fiscal year 2006, 5.0-to-1.0 as of the end of each quarter in
fiscal year 2007 and 4.0-to-1.0 as of the end of each fiscal quarter thereafter. At March 26,
2005, the Company was in compliance with all covenants under the credit agreement. In addition, the credit agreement contains the following negative covenants, among others:
limitations on encumbrances, disposal of assets, acquisitions, additional indebtedness, capital
investment and pre-payment of subordinated debt. The credit agreement limits also the amount of
cash dividends the Company may pay to $15.0 million annually. The credit agreement specifies certain events of default, including, among others: failure to pay
principal, interest or other amounts, violation of covenants, inaccuracy of representations and
warranties, default with respect to other material indebtedness, certain bankruptcy and insolvency
events and certain undischarged judgments. 5.Income taxes A reconciliation of statutory federal income tax and income tax expense is shown below (in
thousands): Fiscal Year EndedMarch 29,
    
    
    March 27,
    
    
    March 26,2003
    
    
    2004
    
    
    2005Current income tax (expense) benefit-Amount based on federal statutory rate
    
    $
    5,419
    
    
    $
    (190
    )
    
    $
    (22,715
    )State income taxes, net of federal
    
    
    (8
    )
    
    
    (22
    )
    
    
    (2,652
    )Other items
    
    
    
    
    
    
    
    
    
    
    522Current income tax (expense) benefit
    
    
    5,411
    
    
    
    (212
    )
    
    
    (24,845
    )Deferred income tax (expense) benefit-Amount based on federal statutory rate
    
    
    15,365
    
    
    
    2,662
    
    
    
    (14,967
    )State income taxes, net of federal
    
    
    3,799
    
    
    
    473
    
    
    
    (1,654
    )Change in estimated deferred tax rates
    
    
    
    
    
    
    
    
    
    
    1,462Deferred income tax (expense) benefit
    
    
    19,164
    
    
    
    3,135
    
    
    
    (15,159
    )Total income tax (expense) benefit
    
    $
    24,575
    
    
    $
    2,923
    
    
    $
    (40,004
    )
 Components of the net deferred tax balances are as follows (in thousands): March 27,
    
    
    March 26,2004
    
    
    2005Net current deferred tax assets-Goodwill
    
    $
    208
    
    
    $
    202Inventory
    
    
    1,654
    
    
    
    1,544Other accruals and reserves
    
    
    7,568
    
    
    
    6,151Net operating loss carryforwards
    
    
    6,600
    
    
    
    219Net current deferred tax assets
    
    $
    16,030
    
    
    $
    8,116Net long-term deferred tax liabilities-Fixed assets
    
    $
    (90,730
    )
    
    $
    (86,560
    )Net operating loss carryforwards
    
    
    13,100
    
    
    
    Goodwill
    
    
    864
    
    
    
    640Other
    
    
    953
    
    
    
    2,828Net long-term deferred tax liability
    
    $
    (75,813
    )
    
    $
    (83,092
    )
 At March 26, 2005, the Company has no federal operating loss carryforwards. F-15




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The amount of income taxes the Company pays is subject to ongoing audits by federal and state tax
authorities, which may result in proposed assessments. The Companys estimate for the potential
outcome for any uncertain tax issue is highly judgmental. The Company believes it has adequately
provided for any reasonable foreseeable outcome related to these matters. However, the Companys
future results may include favorable or unfavorable adjustments to estimated tax liabilities in the
period the assessments are made or resolved or when statutes of limitation on potential assessments
expire. Additionally, the jurisdictions in which the Companys earnings or deductions are realized
may differ from current estimates. 6.Investments in partnerships The Company has a 50 percent ownership interest in the L&H Farms partnership. L&H Farms
partnership is in the business of breeding and raising hogs in rural North Carolina. The Company
accounts for the earnings and losses of the partnership using the equity method of accounting. As
of March 27, 2004, and March 26, 2005, the investment in the L&H Farms partnership was $1,184,000
and $1,461,000, respectively, and is included in other long-term assets in the consolidated balance
sheets. The Companys share of the partnerships (losses) earnings was ($240,000) for fiscal year
ended March 29, 2003, $291,000 for fiscal year ended March 27, 2004, and $627,000 for fiscal year
ended March 26, 2005. These amounts are included in other income, net, in the consolidated
statements of operations and comprehensive income. In addition, the Company has a 60 percent ownership in L&S Farms, a general partnership, in the
business of breeding and raising hogs in rural North Carolina. The Company consolidates this
operation for financial reporting purposes. Minority interest of $113,000 for fiscal year ended
March 29, 2003, $166,000 for fiscal year ended March 27, 2004, and $289,000 for fiscal year ended
March 26, 2005, was charged to other income, net, in the consolidated statements of operations and
comprehensive income. As of March 27, 2004, and March 26, 2005, the minority interest obligation
was $515,000 and $671,000, respectively, recorded in other long-term liabilities in the
consolidated balance sheets. On March 28, 2003, the Company funded a 50 percent ownership interest in Oldhams LLC (Oldhams)
for $2,184,000, which subsequently was finalized on April 4, 2003. Oldhams is in the business of
processing sows and producing raw materials for sausage products. The Company accounts for the
earnings and losses of Oldhams using the equity method of accounting. As of March 27, 2004, and
March 26, 2005, the investment in Oldhams was $2,308,000 and $1,850,000, respectively, and is
included in other long-term assets in the consolidated balance sheets. The Companys share of
Oldhams earnings was $327,500 and $327,600 for fiscal years ended March 27, 2004 and March 26,
2005, respectively. These amounts are included in other income, net, in the consolidated
statements of operations and comprehensive income. The Company has a 50 percent ownership interest in Crystal Peak Technologies, LLC (CPT) formed by
the Company and Crystal Peak Farms, Inc to develop and market technologies for the processing of
animal waste. Both the Company and Crystal Peak Farms contributed patents and other technology to
this LLC. The Company accounts for the earnings and losses of CPT using the equity method of
accounting. As of March 27, 2004, and March 26, 2005, the investment in CPT was $0 and $46,500,
respectively, and is included in other long-term assets in the consolidated balance sheets. The
Companys share of the partnerships earnings was $46,500 for fiscal year ended March 26, 2005.
This amount is included in other income, net, in the consolidated statements of operations and
comprehensive income. 7.Related parties The Company has contracted with ContiGroup to provide certain services pursuant to an amended and
restated services agreement and a contract grower finish agreement. Under these agreements,
ContiGroup provides purchasing assistance, legal services, employee benefits, payroll and grow
finishing services to the Company. For fiscal years ended March 29, 2003, March 27, 2004, and
March 26, 2005, the total amount of these expenses and other related-party expenses with CGC were
$5,331,000, $5,389,000, and $4,868,000, respectively. At March 27, 2004, and March 26, 2005, the
Company recorded amounts due to related party for these items of $56,000 and $29,000, respectively,
included in the consolidated balance sheets. F-16




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##### Table of Contents



During fiscal year ended March 25, 2000, an agreement was entered into with CGC to pay $1,000,000
annually for five years, in consulting fees to CGC for work done in the settlement agreement with
the attorney general of Missouri (Note 10). The Company paid the final installment in fiscal 2004. The Company leases farmland and hog production buildings from the former owners of Lundy, one of
whom was a board member of PSF, Inc. until such member resigned in September 2003, under a capital
lease agreement that existed prior to the acquisition. The capital lease obligation as of March
27, 2004, and March 26, 2005 was $1,729,000 and $1,384,000, respectively, and is included in
long-term debt and capital leases in the consolidated balance sheets. 8.Commitments The Company enters into forward grain purchase contracts with market risk in the ordinary course of
business. In the opinion of management, settlement of such commitments, which were open at March
27, 2004 and March 26, 2005, will have no adverse impact on the financial position or results of
operations of the Company. The Company utilizes forward contracts, as well as exchange traded futures and options contracts,
to establish adequate supplies of future grain purchasing requirements and minimize the risk of
market fluctuations. These contracts are dependent on fluctuations in the grain, lean hog, and
natural gas commodity markets. Market risk resulting from a position in a particular contract may
be offset by other on or off-balance-sheet transactions. The Company continually monitors its
overall market position. Fair values of futures and options, and gross contract or notional
amounts of forward contracts, in place as of March 26, 2005 are as follows (in thousands except
wtd.-avg. price/unit): Contract
    
    
    Volumes
    
    Wtd.-avg.
    
    
    FairQuantity
    
    
    Units
    
    Price/Unit
    
    
    ValueFutures ContractsCorn purchases  long
    
    
    3,555
    
    
    bushels
    
    
    2.15
    
    
    $
    (159
    )Corn sales  short
    
    
    205
    
    
    bushels
    
    
    2.36
    
    
    
    (3
    )Soybean meal purchases  long
    
    
    3
    
    
    tons
    
    
    192.32
    
    
    
    (13
    )Lean hog sales  short
    
    
    158,280
    
    
    pounds
    
    
    0.77
    
    
    
    1,796Lean hog purchases  long
    
    
    8,280
    
    
    pounds
    
    
    0.68
    
    
    
    667Wheat sales  short
    
    
    130
    
    
    bushels
    
    
    3.51
    
    
    
    8Pork belly purchases  long
    
    
    200
    
    
    pounds
    
    
    0.92
    
    
    
    (5
    )Option ContractsCorn puts  short
    
    
    1,500
    
    
    bushels
    
    $
    2.15
    
    
    $
    (133
    )Corn calls  short
    
    
    800
    
    
    bushels
    
    
    2.80
    
    
    
    (10
    )Corn calls  long
    
    
    2,425
    
    
    bushels
    
    
    2.32
    
    
    
    67Meal calls  long
    
    
    9
    
    
    tons
    
    
    197.22
    
    
    
    31Meal puts  short
    
    
    9
    
    
    tons
    
    
    214.44
    
    
    
    (9
    )Lean hog calls  short
    
    
    18,200
    
    
    pounds
    
    
    0.77
    
    
    
    (405
    )Lean hog puts  short
    
    
    2,400
    
    
    pounds
    
    
    0.70
    
    
    
    (25
    )Lean hog puts  long
    
    
    21,080
    
    
    pounds
    
    
    0.70
    
    
    
    370
 Contract
    
    
    Volumes
    
    Wtd.-avg.
    
    
    NotionalQuantity
    
    
    Units
    
    Price/Unit
    
    
    AmountForward ContractsCorn
    
    
    3,660
    
    
    bushels
    
    $
    2.35
    
    
    $
    8,602Meal
    
    
    9
    
    
    tons
    
    
    202.67
    
    
    
    1,787
 Substantially all these contracts expire within one year. The Company leases rolling stock and certain equipment under noncancelable operating leases.
Rental expense under operating leases was approximately $6,861,000, $7,335,000 and, $6,453,000, in
the fiscal years ended F-17




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##### Table of Contents



March 29, 2003, March 27, 2004, and March 26, 2005, respectively. Future minimum rental
commitments at March 26, 2005, are as follows (in thousands): 2006
    
    $
    5,4982007
    
    
    4,0752008
    
    
    3,0982009
    
    
    2,2942010
    
    
    1,619Thereafter
    
    
    2,165$
    18,749
 At the Companys Clinton, North Carolina pork processing facility, the Company has contracts with
producers to provide this facility with market hogs for the amount the Companys hog production
operations cannot provide in order to meet this facilitys processing needs. These contracts vary
in length but are all based on a market price and grade and yield formula. Over the next 5 years
the Company is contracted to purchase approximately 1,260,000 market hogs under these contracts. The Company also has contracts with two large processors to sell the Companys hogs produced from
its Texas hog production operations in which the Company is to deliver approximately 500,000 hogs
annually. 9.Employee benefit plans The Company has a 401(k) plan covering substantially all employees meeting certain minimum service
requirements. The plan allows all qualifying employees to contribute up to 60 percent of employee
compensation limited to the tax deferred contribution allowable by the Internal Revenue Code. The
Company matches 100 percent of the employees contribution up to 3 percent of employee compensation
and 50 percent of the employees next 2 percent of employee compensation, for a maximum company
match of 4 percent of employee compensation. Effective January 1, 2000, the Company amended its
401(k) plan from a three-year cliff-vesting period to a 100 percent immediate vesting. Employer
contribution expense related to the plan was approximately $1,870,000, $1,878,000 and $2,001,000
for the fiscal years ended March 29, 2003, March 27, 2004, and March 26, 2005, respectively. The Company has a long-term incentive plan with performance thresholds tied to return on net assets
in place for key executives selected by the compensation committee. At March 27, 2004, the Company
had no liability recorded for the long-term incentive plan. At March 26, 2005, the Company had a
liability recorded of $2,020,000 in other long-term liabilities toward the long-term incentive
plan. The Company expensed $2,020,000, in the fiscal year ended March 26, 2005. In fiscal year
ended March 29, 2003, the Company credited the amount of $1,507,000 accrued for the year ended
March 30, 2002, due to the probability of the Company not meeting its minimum requirement for
payout because of its fiscal year 2003 performance. The Company has a deferred compensation plan which is restricted to a select group of management
employees. Under the plan, participating employees are allowed to defer payment of compensation
awarded under the long-term incentive plan until a date elected by the employee in accordance with
the plan. The plan generally allows payment in the form of a single lump sum or ten substantially
equal annual installments following the date of payment. At March 27, 2004 and March 26, 2005, the
plan had $1,501,000 and $759,000, respectively, of investments held by an independent trustee.
The investments are classified as trading and are reflected in other long-term assets with a
corresponding liability included in other long-term liabilities in the consolidated balance sheets. F-18




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The Company has a nonqualified, unfunded special executive retirement plan for certain key
executives. Benefits generally accrue based on pay and years of credited service. Specific data
related to the plan is as follows ($ in thousands): March 27,
    
    
    March 26,2004
    
    
    2005Accumulated benefit obligation
    
    $
    1,831
    
    
    $
    1,950Change in benefit obligation during yearProjected benefit obligation, beginning of fiscal year
    
    $
    2,378
    
    
    $
    2,630Service cost
    
    
    468
    
    
    
    278Interest cost
    
    
    155
    
    
    
    110Actuarial gain (including assumption changes)
    
    
    (371
    )
    
    
    (735
    )Plan amendment
    
    
    
    
    
    
    (295
    )Projected benefit obligation, end of fiscal year
    
    $
    2,630
    
    
    $
    1,988Reconciliation of funded status as end of fiscal yearFunded status, beginning of fiscal year
    
    $
    (2,630
    )
    
    $
    (1,988
    )Unrecognized prior service cost
    
    
    508
    
    
    
    182Unrecognized net (gain) loss
    
    
    75
    
    
    
    (620
    )Accrued cost, end of fiscal year
    
    $
    (2,047
    )
    
    $
    (2,426
    )Components of net periodic pension costService cost
    
    $
    468
    
    
    $
    278Interest cost
    
    
    155
    
    
    
    110Amortization of prior service cost
    
    
    46
    
    
    
    32Amortization of unrecognized (gain) loss
    
    
    24
    
    
    
    (40
    )Pension cost
    
    $
    693
    
    
    $
    380Weighted average assumption used to determine benefit obligationDiscount rate
    
    
    6.00
    %
    
    
    5.75
    %Salary increases
    
    
    3.50
    %
    
    
    3.50
    %Weighted average assumptions used to determine net periodic
pension costDiscount rate
    
    
    6.25
    %
    
    
    6.00
    %Salary increases
    
    
    4.50
    %
    
    
    3.50
    %Measurement date
    
    March 30
    
    March 30Fiscal period
    
    to March 27
    
    to March 26
 The following benefit payments, which reflect expected future service as appropriate, are expected
to be paid: Year
    
    Expected Benefit Payments2006
    
    $
    2007
    
    
    2008
    
    
    43,0002009
    
    
    43,0002010
    
    
    43,0002011-2015
    
    
    235,000
 F-19




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##### Table of Contents



10.Litigation Environmental matters In order to settle enforcement actions and citizens suits, and to ensure that the Company, the
regulatory agencies, and independent experts all agree that the Company is implementing appropriate
advanced technology, the Company has entered into consent decrees with the State of Missouri, and
with the federal government and a citizens group. The decrees have generally required that the
Company pay penalties to settle past alleged regulatory violations, and the decrees and the
voluntary agreement require that the Company research, develop, and implement new technologies for
environmental controls at the Missouri operations. In 1999, the Company entered into a consent decree to settle a suit filed by the State of Missouri.
The settlement required the Company to invest $25 million in capital expenditures on what was
characterized in the decree as Next Generation Technology for researching, installing and
operating improved technology to control wastewater, air and odor emissions from the Missouri
farms. The proposed technologies were to be approved by a panel of independent university experts
and were to be completed by 2004. In 2002, the State of Missouri filed a suit against the Company
for alleged new violation of air and water regulations. The Company settled that matter by
entering into a second consent decree in 2004.The 2004 consent decree required the Company to pay a
civil penalty of $333,000. It also modified the 1999 consent decree by (i) removing the $25
million spending requirement, instead specifying that Next Generation Technology be installed on
the 11 largest farms and (ii) extending the schedule to implement Next Generation Technology from
2004 until 2010, in each case to ensure that the technology the Company installs will be effective
in reducing impacts to the environment. As a result of the 2004 consent decree, the Company now
estimates that it will invest approximately $33 million in Next Generation Technology by the 2010
deadline, of which $8.4 million has been spent as of March 26, 2005. Included in this commitment
is a fertilizer plant in northern Missouri that will convert solid waste into commercial grade
fertilizer. The fertilizer plant construction should be complete within the first quarter of
fiscal year 2006, and the Company has spent $7.8 million to date of an estimated $9.6 million to
complete the plant. Two nuisance suits were filed against ContiGroup and the Company during the second quarter of
fiscal year 2003 in the Circuit Court of Jackson County, Kansas City, Missouri (Steven Adwell,
et al. vs. PSF, et al., and, Michael Adwell, et al. vs. PSF, et al.). Two other
nuisance lawsuits were filed in March of 2004 by the same attorney (Fred Torrey, et al. vs.
PSF, et al., and, Doyle Bounds, et al. vs. PSF, et al.). Two additional nuisance suits
were filed in May 2004 in Daviess County Circuit Court, Gallatin, Missouri entitled Vernon
Hanes et al. v. Premium Standard Farms, Inc. et al. and Steve Hanes et al. v. Premium
Standard Farms, Inc., et al. There are multiple plaintiffs in each suit, who claim to live
near swine farms owned or under contract with the Company. Plaintiffs allege that odors from these
farms interfered with the plaintiffs right to use and have quiet enjoyment of their respective
properties. The Company believes it has good defenses to these actions and intends to vigorously
defend these suits. On May 18, 2004 the same lawyer who filed the Adwell, Bounds and Torrey lawsuits filed a class
action lawsuit (Daniel Herrold, et al. and Others Similarly Situated v. ContiGroup Companies,
Inc, Premium Standard Farms, Inc., and PSF Group Holdings, Inc.) in the Circuit Court of
Jackson County, Kansas City, Missouri. The action seeks to create a class of plaintiffs living
within 10 miles of the Companys farms in northern Missouri, including contract grower farms, who
are alleged to have suffered interference with their right to use and have quiet enjoyment of their
respective properties. The Company has removed this case to the U.S. District Court in Kansas
City, Missouri. The Company believes it has good defenses to these actions and intends to
vigorously defend this suit. In 1998, the Company engaged in a series of transactions with ContiGroup pursuant to which it
purchased from ContiGroup its North Missouri Farms hog production operations and ContiGroup
purchased a 51.0% ownership interest in the Company (the 1998 ContiGroup transaction). To the
extent that ContiGroup incurs any liability in the above described nuisance litigation, the Company
assumed that liability pursuant to the terms of the 1998 ContiGroup transaction. Other legal matters On November 30, 2004, International Casings Group (ICG) filed an action against the Company in
the Federal Court in Kansas City, Missouri (International Casings Group, Inc. vs. Premium Standard
Farms, Inc.) seeking a preliminary injunction and specific performance of a contract by which the
Company sold product from its Clinton F-20




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##### Table of Contents



and Milan plants to ICG. The Company believed it had
terminated its contractual relations with ICG, but the Court has granted ICG a preliminary
injunction. The Company believes it has good defenses to this action and intends to vigorously
defend this suit. In addition, the Company is involved from time to time in routine litigation incidental to its
business. Although no assurance can be given as to the outcome or expense associated with any of
these routine proceedings, the Company believes that none of the currently pending proceedings
should, individually or in the aggregate, have a material adverse effect on its financial
statements. 11.Segment information The Company operates a vertically integrated business with two business segments, Pork Processing
and Hog Production. The Pork Processing segment sells fresh and value-added pork products to food
retailers, distributors, wholesalers, further processors, pharmaceutical and animal feed
manufacturers in both domestic and international markets. The Hog Production segment supplies a
majority of the live hogs used in the Pork Processing segment and sells the excess production to
other hog processing operations. Intersegment live hog sales are based on market prices. The
following tables present specific financial information about each segment as reviewed by the
Companys management. The Corporate and Other classification in the following tables represent
unallocated corporate expenses and assets, deferred and current taxes, interest expense and
intersegment elimination (in thousands): Pork
    
    
    Hog
    
    
    CorporateProcessing
    
    
    Production
    
    
    and Other
    
    
    TotalFiscal 2003:Net sales
    
    $
    553,566
    

    
    $
    355,620
    
    
    $
    (300,772
    )
    
    $
    608,414Intersegment sales
    
    
    (3,213
    )
    
    
    (297,559
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    34,444
    
    
    
    (63,134
    )
    
    
    (10,740
    )
    
    
    (39,430
    )Assets
    
    
    196,926
    
    
    
    549,529
    
    
    
    32,607
    
    
    
    779,062Goodwill
    
    
    25,020
    
    
    
    50,978
    
    
    
    
    
    
    
    75,998Depreciation and
amortization
    
    
    15,278
    
    
    
    45,270
    
    
    
    960
    
    
    
    61,508Capital expenditures
    
    
    5,076
    
    
    
    29,903
    
    
    
    526
    
    
    
    35,505Fiscal 2004:Net sales
    
    $
    663,530
    
    
    $
    452,321
    
    
    $
    (385,114
    )
    
    $
    730,737Intersegment sales
    
    
    (2,936
    )
    
    
    (382,178
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    34,695
    
    
    
    (4,249
    )
    
    
    (13,260
    )
    
    
    17,186Assets
    
    
    195,366
    
    
    
    534,724
    
    
    
    28,742
    
    
    
    758,832Goodwill
    
    
    25,020
    
    
    
    50,978
    
    
    
    
    
    
    
    75,998Depreciation and
amortization
    
    
    15,718
    
    
    
    44,793
    
    
    
    795
    
    
    
    61,306Capital expenditures
    
    
    9,911
    
    
    
    31,101
    
    
    
    872
    

    
    
    41,884Fiscal 2005:Net sales
    
    $
    850,764
    
    
    $
    628,938
    
    
    $
    (552,131
    )
    
    $
    927,571Intersegment sales
    
    
    (2,122
    )
    
    
    (550,009
    )
    
    
    
    
    
    
    Operating income
    
    
    24,715
    
    
    
    123,379
    
    
    
    (20,277
    )
    
    
    127,817Assets
    
    
    196,854
    
    
    
    507,516
    
    
    
    32,596
    
    
    
    736,966Goodwill
    
    
    25,020
    
    
    
    50,978
    
    
    
    
    
    
    
    75,998Depreciation and
amortization
    
    
    15,785
    
    
    
    44,021
    
    
    
    839
    
    
    
    60,645Capital expenditures
    
    
    8,366
    
    
    
    35,013
    
    
    
    919
    
    
    
    44,298
 F-21




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##### Table of Contents



Geographic information No individual foreign country or customer accounts for 10 percent or more of sales to external
customers. The following table provides a geographic summary of the Companys net sales based on
the location of product delivery (in thousands): 2003
    
    
    2004
    
    
    2005United States
    
    $
    557,764
    
    
    $
    675,745
    
    
    $
    832,191Far East
    
    
    37,013
    
    
    
    35,389
    
    
    
    56,826Europe and Russia
    
    
    139
    
    
    
    357
    
    
    
    449Canada
    
    
    8,544
    
    
    
    9,075
    
    
    
    14,575Mexico and South America
    
    
    4,954
    
    
    
    10,171
    
    
    
    23,530Totals
    
    $
    608,414
    
    
    $
    730,737
    
    
    $
    927,571
 All of the Companys assets are located within the United States. 12.Quarterly results of operations (unaudited in thousands, except share and per share
information): The following represents the unaudited quarterly results of operations for fiscal years 2004 and
2005. All amounts are expressed in thousands, except share and per share information. First
    
    
    Second
    
    
    Third
    
    
    FourthFiscal 2004-Net sales
    
    $
    171,132
    
    
    $
    178,310
    
    
    $
    199,766
    
    
    $
    181,529Gross profit
    
    
    7,532
    
    
    
    12,632
    
    
    
    9,043
    
    
    
    4,779Net (loss) income
    
    
    (1,741
    )
    
    
    1,417
    
    
    
    (751
    )
    
    
    (3,516
    )(Loss) earnings per share:Basic
    
    
    ($0.06
    )
    
    $
    0.05
    
    
    
    ($0.02
    )
    
    
    ($0.11
    )Diluted
    
    
    ($0.06
    )
    
    $
    0.05
    
    
    
    ($0.02
    )
    
    
    ($0.11
    )Weighted average number
of common shares outstanding:Basic
    
    
    30,928,593
    
    
    
    30,928,593
    
    
    
    30,928,593
    
    
    
    30,928,593Diluted
    
    
    30,928,593
    
    
    
    30,928,593
    
    
    
    30,928,593
    
    
    
    30,928,593Fiscal 2005-Net sales
    
    $
    212,136
    
    
    $
    218,831
    
    
    $
    246,759
    
    
    $
    249,845Gross profit
    
    
    24,277
    
    
    
    29,980
    
    
    
    48,600
    
    
    
    50,202Net income
    
    
    9,389
    
    
    
    11,894
    
    
    
    22,996
    
    
    
    23,379Earnings per share:Basic
    
    $
    0.30
    
    
    $
    0.38
    
    
    $
    0.74
    
    
    $
    0.76Diluted
    
    $
    0.30
    
    
    $
    0.38
    
    
    $
    0.74
    
    
    $
    0.75Weighted average number
of common shares outstanding:Basic
    
    
    30,928,593
    
    
    
    30,928,593
    
    
    
    30,928,593
    
    
    
    30,928,593Diluted
    
    
    30,979,418
    
    
    
    31,003,146
    
    
    
    31,026,775
    
    
    
    31,049,167
 13.Subsequent events On May 2, 2005, the former parent, PSF Group Holdings, merged with and into its wholly owned
subsidiary Premium Standard Farms, Inc., with Premium Standard Farms, Inc. being the surviving
corporation. In connection with the merger the Company adopted PSF Group Holdings Certificate of
Incorporation (the Certificate). Immediately prior to the merger, the Certificate was amended to
increase PSF Group Holdings authorized capital to F-22




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50,000,000 shares of Class A Common Stock,
50,000,000 shares of Class B Common Stock and 10,000,000 shares of Preferred Stock. On May 6, 2005, the board of directors of the Company authorized a 145-for-1 stock split effected
in the form of a stock dividend to shareholders of record at the close of business on May 6, 2005,
the record date. The Company issued approximately 30,715,000 shares of Class A and Class B common
stock as a result of the stock split. All references to the number of shares and per share amounts
of common stock have been restated to reflect the stock split. The Company reclassified an amount
equal to the par value of the number of shares issued to common stock from additional paid-in
capital. As discussed in Note 4, on April 20, 2005 and May 9, 2005, the Company amended its credit agreement
in connection with the Tender Offer and transactions described above and increased the availability
under the credit agreement to $220 million. The Company also on
May 9, 2005 entered into a ten-year $125
million swap agreement which will convert the interest on these loans to an effective fixed
interest rate of approximately 5.9%. On May 10, 2005, Premium Standard Farms of North Carolina, Inc., a wholly owned subsidiary, merged
with and into Premium Standard Farms, Inc., with Premium Standard Farms, Inc. being the surviving
corporation. The Company filed a S-1 registration statement with the Securities and Exchange Commission (SEC)
on March 11, 2005. The S-1 registration statement relates to a contemplated initial public
offering in which shares will be sold by certain shareholders of the Company. It is contemplated
that in connection with the initial public offering, the Companys charter will be amended to cause
all shares of common stock to be a single class with directors being elected by the vote of holders
of common stock generally. The Company anticipates the S-1 registration statement will become
effective subsequent to year end. F-23