##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-K [X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended: March 27, 2004
 OR [   ]
    
    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 PSF Group Holdings, Inc.  Delaware
    
    43-1818535(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 805 Pennsylvania Avenue, Suite 200, Kansas City, Missouri
    
    64105(Address of principal executive office)
    
    (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 [X] No [   ] 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. [X] Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [   ] No [X] There is currently no established public trading market for the common
equity of the Registrant held by non-affiliates. As of April 30, 2004, there
were 100,000 shares of the Registrants Class A Common Stock outstanding and
113,301 shares of the Registrants Class B Common Stock outstanding.




---



##### 



EXPLANATORY NOTES In this report on Form 10-K, the terms we, us and our refer
collectively to PSF Group Holdings, Inc., Premium Standard Farms, Inc. and
their subsidiaries. Premium Standard Farms, Inc. is a wholly-owned subsidiary
of PSF Group Holdings, Inc. Market and Industry Data and Forecasts Market data and certain industry forecasts used throughout this report on
Form 10-K were obtained from internal surveys, market research, consultant
surveys, publicly available information and industry publications and surveys.
Reports prepared or published by Sparks Companies, Inc., the National Pork
Producers Council, Agrimetrics Associates Inc. and the United States Department
of Agriculture (USDA) 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. TABLE OF CONTENTS PART I
    
    
    3Item 1. Business
    
    
    3Item 2. Properties
    
    
    13Item 3. Legal Proceedings
    
    
    14Item 4. Submission of Matters to a Vote of Security Holders
    
    
    15PART II
    
    
    15Item 5. Market for Registrants Common Equity and Related Stockholder Matters
    
    
    15Item 6. Selected Financial Data
    
    
    15Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 8. Financial Statements and Supplementary Data
    
    
    26Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    26Item 9A. Controls and Procedures
    
    
    26PART III
    
    
    27Item 10. Directors and Executive Officers of Registrant
    
    
    27Item 11. Executive Compensation
    
    
    29Item 12. Security Ownership of Certain Beneficial Owners and Management
    
    
    34Item 13. Certain Relationships and Related Transactions
    
    
    36Item 14. Principal Accounting Firm Fees
    
    
    36PART IV
    
    
    37Item 15. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
    
    
    37SIGNATURES
    
    
    40
 2




---



##### 



PART I 
 Item 1. Business Overview We are a leading vertically integrated provider of pork products to the
wholesale and retail, food service and institutional markets in the United
States. By combining modern, efficient production and processing facilities,
sophisticated genetics, and strict control over the variables of health, diet
and environment, we produce value-added premium pork products. We are the
second largest owner of sows in North America, controlling over 255,000 sows,
of which approximately 212,000 are owned, producing approximately 4.5 million
hogs per year in production operations located on over 100,000 acres in
Missouri, Texas and North Carolina. We are also the sixth largest pork
processor in the United States, with two plants capable of processing
approximately 4.5 million hogs per year. Competitive Strengths We believe the following competitive strengths position us to enhance our
growth and profitability:  
    
    Vertically Integrated Production and Processing.We have
achieved a substantial degree of vertical integration of our hog
production and processing operations. We measure our level of
vertical integration in terms of the percentage of hogs processed at
our plants that are owned by us and raised according to our
controlled programs. In fiscal 2004, 99% of the hogs used by our
Milan, Missouri processing plant were sourced from our Missouri hog
production operation. During the same period, approximately 73% of
hogs used by our Clinton, North Carolina processing plant were
supplied by our North Carolina hog production operations, with the
remaining 27% supplied through 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 is in contrast to non-integrated or less
integrated processors who acquire hogs from a large number of
suppliers with varying production standards and therefore find it
difficult to ensure a consistent and high quality product. This is a
powerful advantage for competing effectively in the rapidly
consolidating pork industry because it allows us to:  
    
    Produce Premium and Specialty Products.By
regulating the variables of genetics, environment, health and
diet, we can produce a controlled supply of high quality,
consistent pork products along with specialty products, such
as antibiotic free pork and Premium 97 pork (certified as 97%
fat-free by the American Heart Association), as well as
KenKo-Ton healthy pork and Mugi Buta barley-fed pork for
the Japanese market. Our products typically command higher
prices than commodity pork products.
    
    Target Premium Customers.We are able to tailor
our production process to meet the exacting specifications of
discriminating customers in our target markets. These
customers are willing to pay premium prices for higher quality
products and for the assurance that their standards are met
throughout a traceable production process. Vertical
integration provides the product consistency necessary to
satisfy these customers.
    
    Reduce Our Production Costs and Maximize Value.
Vertical integration allows us to significantly reduce our hog
procurement costs and to streamline our logistics,
transportation and production schedules, thus optimizing asset
utilization and reducing our cost structure. We are also able
to capture more of the value of our hogs through our own
processing rather than passing this value on to other
processors.  
    
    Strong Market Position with Large Scale Operations.Our
large-scale integrated operations, geographic dispersal and strong
market position allow us to serve a broad range of customers in our
target market, while maintaining economies of scale and marketing
leverage. 3




---



##### 




    
    Efficient, Modern Facilities and Operations.Our Missouri
and North Carolina processing plants are two of the most modern and
technically advanced facilities of their kind. Our hog production
operations, most of which were built in the past fifteen years,
incorporate advanced breeding, farrowing and finishing methods.
    
    Experienced Management Team.Most of our senior and
operational management personnel have been involved in farm
production and/or the fresh meat industry for most of their business
careers. Senior and operational management members, on average, have
over fifteen years of experience in those areas. Business Strategy We are pursuing a strategy designed to increase our sales margins and
returns on invested capital. Key elements of our strategy include:  
    
    Further Develop Vertical Integration.We believe our
integrated model will be the proven approach to competing
effectively in the rapidly consolidating pork industry. We have
achieved nearly 100% integration of our Missouri hog production and
processing operations and have achieved substantial integration in
our North Carolina operations. In North Carolina, we have renovated
our processing plant, upgraded the genetics of our breed stock,
rationalized feed manufacturing, increased supervision of contract
growers and achieved a USDA Process Verified program similar to the
program that is in place for our Missouri operations.
    
    Focus on High Quality and Value-Added Products.Our
value-added objectives are to move more of our products up the value
chain to improve sales margins, develop a stronger brand, form
stronger relationships with key customers, and drive new product
development. We intend to continue to focus on producing high
quality and value-added products for discriminating customers in the
retail, food service, export and further processing markets, and to
further differentiate ourselves from commodity-oriented competitors.
As part of these efforts, we are marketing premium products from
our North Carolina plant similar to those produced by our Missouri
plant, as well as smoked and processed pork products.
    
    Expand Production and Processing Capacity.In fiscal 2002,
we completed construction of a new 10,000 sow and wean-to-finish
operation in Texas. Our Texas production facilities are located on
approximately 54,000 acres with adequate space and all environmental
and land use permits required for further expansion in a manner that
could replicate our Missouri hog production facilities. Due to the
difficulty in obtaining such permits in the current regulatory
environment, we believe our existing permits in Texas could provide
us a competitive advantage if we expand these operations. In fiscal
2003, through modernization and efficiency efforts, we completed
expansion of processing capacity at our North Carolina plant from
6,500 hogs per day to up to 10,000 hogs per day on a ten-hour shift
on a seasonal basis.
    
    Acquisition Strategies.As an important part of our growth
strategy, we evaluate on an ongoing basis potential industry-related
acquisitions and joint ventures. We will continue to evaluate those
opportunities that fit strategically with our objective of producing
high quality, value added products.
    
    Maintain Position as a Low Cost Producer.We strive to
produce high-quality pork products at low cost by combining
state-of-the-art hog production with modern and efficient pork
processing. We measure our production and processing activities
continually in an effort to increase our hog production
efficiencies, lower our break-even costs, improve our processing
yields and develop new value-added products.
    
    Continue Expansion into International Markets.We believe
that international markets offer significant growth opportunities
and intend to continue our efforts to develop sales outside the
United States. Over the past eight years, we have established
relationships with trading partners in Japan, China, South Korea,
Canada, Mexico, Russia and Taiwan, and have exported product over
that time 4




---



##### 



period to more than twenty countries. We also 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, as this
market ascribes significant value to premium, process-controlled,
traceable products. We also intend to actively expand sales in other
Asian and Mexican markets.
    
    Manage Market Risks.We will continue to draw upon the
strength of our risk management team, which collectively has over
twenty years experience in the area. We will continue to monitor
daily opportunities to lock in favorable margins and manage market
risk by hedging both feed and energy costs as well as fresh meat
sales.
    
    Environmental Stewardship.We will continue to be a leader
in the pork industry in researching, developing and implementing new
waste handling and environmental technologies and solutions. Those
technologies and solutions include source reduction, risk reduction,
improved manure treatment, beneficial reuse of waste products
(creating value-added products), energy generation and water reuse. Our History The hog production business of Premium Standard Farms was originally
founded in 1988. In 1994, we completed construction of our Missouri processing
plant. Due primarily to start-up costs and the low level of initial production
at that plant, as well as the rapid expansion of our Missouri and Texas
operations, the corporation that previously ran our Missouri and Texas
operations filed Chapter 11 bankruptcy on July 2, 1996. In September 1996, the
reorganization became effective and our business emerged from Chapter 11.
Premium Standard Farms in its current corporate form resulted from this
restructuring. 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 Companies, Inc. (ContiGroup, formerly
known as Continental Grain Company). In these transactions, ContiGroup
purchased a 51.0% ownership interest in PSF Group Holdings for $182.3 million.
In exchange, we purchased the North Missouri Farms hog production operations
then owned by ContiGroup for $75.0 million. The financial data in this report
relates to operations since the ContiGroup transaction in May, 1998. In fiscal 2001, we expanded our operations through two acquisitions in
North Carolina. We acquired The Lundy Packing Company and its subsidiaries
(Lundy), which consisted of hog production and pork processing operations, on
August 25, 2000. On September 22, 2000, we acquired Premium Standard Farms of
North Carolina (PSFNC) from ContiGroup. In the latter transaction, ContiGroup
received cash and additional shares of PSF Group Holdings stock, bringing its
overall ownership of PSF Group Holdings outstanding common stock to 53.1%. PSF Group Holdings is a Delaware company formed in 1998. Premium Standard
Farms is a Delaware company formed in 1996. Our principal executive offices are
located at 805 Pennsylvania Avenue, Suite 200, Kansas City, Missouri and our
telephone number is (816) 472-7675. Industry Overview 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 approximately 89% of total federally inspected industry
capacity, and the industry is highly competitive. Although customers in the
retail, institutional, further processing and export markets have different
product specifications and service requirements, processors generally compete
on the basis of the price and quality of their product. 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 high degree of fragmentation of the hog 5




---



##### 



production industry, processing operations 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 highly
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. In addition, the effects of temperature and
climate on breeding and farrowing encourage hog producers to breed hogs in the
spring and fall. This results in seasonal production, which may result in lower
prices when these producers bring their hogs to market. According to the USDA, the number of U.S. hog producers has declined by
more than 85% over the last twenty years. 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. Products, Marketing and Customers We market our pork products to a variety of customers in wholesale,
retail, food service and further processing 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 wholesalersin the form
of chilled boxed bone-in and boneless loins, tenderloins, hams,
picnics, butts, ribs, marinated, case-ready, bacon, smoked hams and
sausage;
    
    To further processorsin the form of chilled bulk bone-in and
boneless hams, picnics and butts, bellies, trimmings, variety meats
and other products which are used by these customers to make
processed pork products;
    
    To food service customersin the form of chilled and frozen
boxed bone-in and boneless loins, ribs, picnics, butts and further
processed smoked meats; and
    
    To export customersin the form of chilled boneless loins,
tenderloins, frozen hams, shoulders, bellies, as well as frozen
offal items. Our vertical integration and control also allows us to produce specialty
products. These include our antibiotic free pork and Premium 97 pork (certified
as 97% fat-free by the American Heart Association), as well as KenKo-Ton
healthy pork and Mugi Buta barley-fed pork for the Japanese market. Our marketing strategy seeks to capitalize on the quality of the pork
produced by 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 take advantage of a differentiated
product, we have been certified to use the USDA Process Verified seal in
connection with our Missouri and North Carolina operations. 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 fiscal 2004, our 6




---



##### 



sales to Japanese customers represented about 5% of our total sales. We
are using our success in Japan to explore other opportunities in the export
markets in Asia, Europe, Mexico and Canada. Sales to international markets
other than Japan accounted for approximately 3% of our total sales in fiscal
2004. Though our sales and marketing efforts are primarily focused on sales of
pork products, we are to a lesser extent involved in the related markets for
live hogs, processed meat products and pork by-products. The excess live hogs
of our production facilities are sold to other pork processors. In this
respect, we have long-term 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. With respect to processed meats, our North Carolina plant
includes further-processing facilities that produce products such as cured
hams, bacon and sausage. Finally, all of our facilities sell the by-products of
our processing activities to the variety meat, feed processing and pet food
industries. Production and Processing Operations Overview Our production and processing operations are organized as three separate
pods located in Missouri, Texas and North Carolina. Our Missouri and North
Carolina pods each combine hog production farms and processing plants. 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. To further
reduce the risk of disease and maximize the scheduling and process coordination
that our integrated approach provides, our pods incorporate transportation
facilities served by our own truck fleet for hauling feed and hogs. Please
read note 11 to our consolidated financial statements for financial information
relating to our operating segments. Hog Production Our sow production facilities house herds 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 must receive
adequate nutrition and careful attention to health and disease control in order
to maximize 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,
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 a modified grow/finish site,
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 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 7




---



##### 



sanitation. Hogs generally remain at the grow/finish complexes for 18 to
19 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, where possible we have established
our own feed mills. Our Missouri and Texas pods are located in areas with
access to substantial corn and other feed grain production in excess of local
demand. As a result, 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 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. We have
five company-owned feed mills in operation aggregating approximately 1.4
million tons of annual capacity. 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, 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 layover
period is required. Feed purity and truck cleanliness are 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. The impact of disease is also controlled through the selection of healthy,
disease-resistant sows and through breeding procedures that help pass along
antibodies to the sows offspring. When disease is found, treatment is
implemented to lessen its impact on the health-challenged hogs and to prevent
its spread to other facilities. Pork Processing We maintain pork processing facilities in Missouri and North Carolina.
Ninety-nine percent of the hogs used in fiscal 2004 by our Missouri processing
plant came from our Missouri and Texas hog production operations. During fiscal
2004, approximately 73% of hogs used by our North Carolina processing plant
were supplied by our North Carolina hog production operations, with the
remaining 27% supplied through contracts with independent producers. To 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 November of 1998, 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
only 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. Process Verified is based on 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 comprehensive
process points throughout our process to represent our program. These quality
management points are summarized as follows: 8




---



##### 




    
    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
    
    Personnel are trained to handle all 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
    
    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 capture more value from our hogs through further
processing rather than passing this value on to other processors
    
    We streamline logistics, transportation and production
schedules to enhance asset utilization and reduce our cost structure
because of the proximity and integrated management of production and
processing operations
    
    We improve the realizable value of our hogs through our
control over the key factors (genetics, nutrition and environment)
that affect the leanness and meat quality of each hog
    
    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 has been used to build
two of the highest quality facilities in the industry
    
    The facilities are designed to emphasize worker safety to
ensure compliance with all regulations and to reduce worker injury
and turnover
    
    The facilities are designed to produce a product that is
appealing to further processors and consumers and will be brandable.
They employ identification and tracking technology to ensure quality
control for the final pork product
    
    The facilities are designed to reduce waste products and
emissions and dispose of waste in accordance with applicable
environmental standards Missouri Our Missouri pod has both production and processing operations. The
Missouri production operation, based at Princeton, employs approximately 1,200
people. An 111,000-sow herd produces approximately 2.1 million market hogs per
year. Eighty-two sow units, five nursery units and ninety-one finishing units
are located on farms 9




---



##### 



in five counties in Northwest Missouri. We also have grower relationships
with ContiGroup. See Certain Relationships and Related Transactions. The Missouri processing facility is located at Milan and employs
approximately 1,000 people with the capacity to process 7,100 hogs daily (on an
eight hour shift) or about 1.9 million hogs per year. To ensure the safety and
quality of our products, the processing facility incorporates several
innovative systems, including a carbon dioxide anesthetizing system, which we
believe was the first carbon dioxide system of its kind in use in the United
States. This facility also has a large hog holding area that provides at least
four hours of rest to hogs upon arrival. The result is a less stressful
environment for the hogs, which results in better meat quality. North Carolina Our North Carolina pod has both production and processing operations. The
North Carolina production operation, based at Clinton, employs approximately
300 people. A 68,000-sow herd produces approximately 1.3 million market hogs
per year. Contractual arrangements for purchasing weaned pigs produce an
additional 500,000 market 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
contract grower agreements with local farmers who provide the land, space and
labor needed. These grower arrangements are managed by our hog production
field supervisors. The hogs themselves 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 and shipped, we consider them to be a part of our
integrated operations notwithstanding the fact that we do not own the farms
themselves. The North Carolina processing facility is located at Clinton and employs
approximately 1,200 people processing up to 10,000 hogs daily, depending on
seasonality and market conditions, or up to 2.6 million hogs per year. Now
that construction and renovation are complete at this facility, we believe the
plant is one of the most advanced facilities of its kind. To obtain the
estimated 700,000 hogs annually used by the facility that are not supplied by
our production operations, we have established supply arrangements with several
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 employ approximately 300 people. A
33,000-sow herd is designed to produce approximately 600,000 market 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 long-term contracts with major processors. In fiscal 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 54,000 acres with adequate space and
all environmental and land use permits required for further expansion. Research and Development We use an applied research strategy which allows rapid and early
implementation of technologies in production, nutrition and processing. This
effort is driven by our technical team, many of whom have advanced degrees in
nutrition, meat science, and health assurance. This group also uses an
extensive network of outside scientists and other contacts to enable us to use
the latest technology. We constantly 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 largest hog
genetics firms, which employ extensive research efforts in molecular genetics,
biosecurity, food safety and meat quality. We also have internal multiplier
herds, which are continually improved through the purchase of enhanced genetics
and provide an internal source of a majority of our sows at a substantially
reduced cost, and with greater control. 10




---



##### 



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. These
operations are conducted at our Missouri, Texas and North Carolina genetic
improvement facilities. We also have been a leader in the implementation of new technologies at
our processing facilities. For example, we believe that we were the first U.S.
company to introduce the use of European-designed carbon dioxide anesthesia
systems in pork processing to reduce livestock agitation and increase meat
quality. 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 extreme chilling technologies to
improve product quality traits like color, texture and moisture retention. We also have spent approximately $13 million on improved technology to
control wastewater, and to reduce air and odor emissions from our Missouri
farms. 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 plan to build a fertilizer plant in northern Missouri
that will convert solid waste into useable commercial grade fertilizer. 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. Some of
our competitors are larger, have correspondingly 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 names Premium Farms, Natural Excellence,
Premium Standard Farms, Premium Standard Certified, Fresh from the Farm
Taste, Carolinian, Lundys, Tomahawk Farms, Signature Cuisine 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 protection, we attempt to
protect our unregistered marks and other proprietary information under trade
secret laws, employee and third-party non-disclosure agreements and other laws
and methods of protection. We have been issued a patent with the United States
Patent and Trademark Office for an animal waste management system designed for
some of our production facilities. Employees We have approximately 4,100 employees, of which approximately 2,100 are in
processing, approximately 1,800 are in production and approximately 200 are 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 Various federal, state and local laws and regulations apply to our
operations, particularly in the health and environmental areas administered by
the Occupational Safety and Health Administration (OSHA), the USDA, the Food
and Drug Administration (FDA), the federal Environmental Protection Agency
(EPA) and corresponding state agencies such as the Missouri Department of
Natural Resources (MDNR), the Texas Natural Resource Conservation Commission
and the North Carolina Department of Environment and Natural Resources. We
anticipate increased regulation by these agencies, including the USDA
concerning food safety and the FDA regarding the use of medication in feed. 11




---



##### 



Current environmental regulations impose standards and limitations on,
among other things, our waste treatment lagoons, water treatment facilities and
new construction projects. Animal waste from our hog production facilities is
anaerobically digested and the resulting fluids are then applied to surrounding
farm land. This process uses lagoons in Missouri and North Carolina and a
combination of digesters, lagoons, solid separators and aeration tanks in
Texas. In North Carolina, the use of waste treatment lagoons and spray fields for
the disposal of swine waste continues to be controversial. Certain areas of
that state are prone to flooding, as well as exposed to hurricanes from time to
time. Due in part to damage caused to waste lagoons by recent hurricanes, the
state has extended a moratorium on construction of new hog lagoons and spray
fields until 2007. It is anticipated that this moratorium will be extended
until such time as more effective technologies are developed to protect the
environment. On September 29, 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 has 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. In addition, under the
agreement, we 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. See also Legal Proceedings. The Country of Origin Labeling (COOL) 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. The EPA has also issued its
Concentrated Animal Feeding Operation (CAFO) effluent guideline rules in
December 2002. Our facilities and related operating procedures meet or exceed
most of the rules, and we do not anticipate any material problems complying
with these rules. Based on information currently available, we believe that the cost of
achieving and maintaining compliance with these health and environmental laws
and regulations will not have a material adverse effect on our business or
financial position. However, future events, such as changes in existing laws
and regulations or enforcement policies, could give rise to additional
compliance costs which could have a material adverse effect on our financial
condition. In February 2002, the United States Senate initially passed a Farm Bill
that included a provision (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 United States
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 that 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. If a provision like the
Johnson Amendment became law, it could have a material adverse effect on us. On December 23, 2003, a case of BSE (bovine spongiform encephalopathy) was
confirmed in a dairy cow in the State of Washington. World markets reacted to
this event and a number of nations banned the import of beef products from the
U.S, 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 12




---



##### 



has reacted by considering potential legislation that includes banning
downer livestock from the food chain, re-assessing country-of-origin
labeling, mandatory animal identification and traceability requirements, and
potential changes in the current practice of feeding animal by-products. It is
uncertain what impact these events may have on the pork industry. 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. 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. 
 Item 2. Properties (a) Hog Production. We have a combination of owned and leased hog production facilities which
support approximately 212,000 sows and their respective offspring. As detailed
below, there are three geographic areas where our pork production operations
are located. The Missouri production operation has an 111,000-sow herd which produces
approximately 2.1 million market hogs per year. The production facilities are
located on approximately 45,000 acres and are supported by three owned
feedmills with a combined annual capacity of 960,000 tons per year. Of these
45,000 acres, approximately 7,200 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 33,000-sow herd which is designed to
produce approximately 600,000 market hogs per year. The production facilities
are located on approximately 54,000 acres and are supported by one owned
feedmill with an annual capacity of 180,000 tons per year. The North Carolina production operation has a 68,000-sow herd which
produces approximately 1.3 million market hogs per year. Most of the production
operations in North Carolina are conducted on farms that are not owned by us.
The hogs themselves, however, are owned by us. In addition, one nursing unit
and one finishing unit involved in our North Carolina production operations are
capital lease facilities. Our North Carolina production operations are
supported by one owned feedmill with an annual capacity of 224,000 tons per
year and through an arrangement with a large feedmill operator for the rest of
our feed requirements. (b) Pork Processing. We own two pork processing facilities located in Missouri and North
Carolina. Combined, these two facilities have the capacity to process
approximately 4.5 million market hogs per year. The Missouri facility has a processing capacity of 7,100 market hogs per
day and is one of the most modern and technically advanced facilities of its
kind. Substantially all of the market hogs processed at this plant are
produced by our Missouri pork production operation. In fiscal 2003, we completed a major renovation to our North Carolina
processing facility which increased its processing capacity. The facility is
now capable of processing up to 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 13




---



##### 



facilities of its kind in the United States. The majority of the market
hogs processed at the facility are provided by our North Carolina pork
production operations with the remainder being sourced from outside suppliers. 
 Item 3. Legal Proceedings In prior years we settled two citizens action suits which sought to
enforce alleged violations of the Clean Air Act, Clean Water Act and CERCLA
against us and ContiGroup Companies, Inc. (ContiGroup). The U.S.
Environmental Protection Agency (the E.P.A.) had intervened in this action
and filed a separate notice of violation against us under the Clean Air Act.
This settlement, in the form of a consent decree (EPA Consent Decree),
resolved all outstanding issues of ContiGroup and us with the citizens group
and the E.P.A. In 1998, we engaged in a series of transactions with ContiGroup
pursuant to which we purchased from ContiGroup its North Missouri Farms hog
production operations and ContiGroup purchased a 51.0% ownership interest in us
(the 1998 ContiGroup transaction). To the extent that ContiGroup incurred
any liability in this litigation, we assumed that liability pursuant to the
terms of the 1998 ContiGroup transaction. The EPA Consent Decree, built upon
the 1999 consent decree with the State of Missouri referenced below, requires
us and ContiGroup to meet certain performance standards, such as a 50%
reduction in nitrogen concentration of the effluent applied to area fields over
a prescribed time period. The counsel for the citizen plaintiffs has submitted
a petition for recovery of attorneys fees in connection with the lawsuits
against both us and ContiGroup. On September 10, 2003, the Court issued an
order denying the majority of fees sought by counsel for the citizen plaintiffs
which order was appealed by plaintiffs counsel in March, 2004. We have
settled with the plaintiffs and have paid their counsel on the balance of the
fees prior to March 27, 2004. In 1999, we settled a suit filed by the Attorney General of the State of
Missouri against us and ContiGroup. As referenced above, we assumed
ContiGroups liability in this action in connection with the 1998 ContiGroup
transaction. The settlement required us and ContiGroup to enter into a consent
judgment (Missouri Consent Decree) pursuant to which we were obligated to
invest $25 million on or before May 19, 2004, for researching, installing and
operating improved technology to control wastewater, air and odor emissions
from our Missouri farms. All such investments were subject to the approval of
a panel of independent university experts (Expert Panel). In June 2002, the
State of Missouri filed a lawsuit against us seeking penalties and injunctive
relief for additional alleged violations of air and water regulations. We
settled in February, 2004 with the State, and paid an additional fine of
$333,000 prior to March 27, 2004. The settlement also extends the
implementation schedule under the Missouri Consent Decree from 2004 until 2010.
In addition, and in lieu of the $25 million investment commitment and deadline
referenced above, we have committed to install improved wastewater, air and
odor technology at all of our finisher farms in northern Missouri, subject to
the approval of the Expert Panel. We estimate we may spend approximately $31
million on this technology by the 2010 deadline. Two nuisance suits 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 additional 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). There are multiple plaintiffs in each suit,
who claim to live near swine farms owned or under contract with us. Plaintiffs
allege that odors from these farms interfered with the plaintiffs right to use
and have quiet enjoyment of their respective properties. We have filed
appropriate motions to strike in the Torrey case and will soon file an answer
in the Bounds case. We believe we have good defenses to these actions and
intend to vigorously defend these suits. On May 18, 2004 the same lawyer who filed the Adwell, Bounds and Torrey
lawsuits has 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. On May 14, 2004 an action
entitled Vernon Hanes et al. v. Premium Standard Farms, Inc. et al. was filed
in Daviess County Circuit Court, Gallatin, Missouri, which contains several
counts, but is primarily a nuisance action. We believe we have good defenses
to these actions and intend to vigorously defend these suits. 14




---



##### 



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 such 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. 
 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 the common stock of PSF Group Holdings. (b) Holders. As of April 30, 2004, there were approximately 150 record
holders of the Class A Common Stock of PSF Group Holdings and one record holder
of the Class B Common Stock of PSF Group Holdings. (c) Dividends. PSF Group Holdings has not declared or paid any dividends
on its common stock since its issuance. Our current credit facility and the
Indenture related to our 9 1/4% Notes effectively limit our ability to
declare and pay dividends to shareholders. For more detailed information on
our current credit facility, the 9 1/4% Notes and the related Indenture, see
Managements Discussion and Analysis of Financial Condition and Results of
Operation  Liquidity and Capital Resources and Notes to our 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 27, 2004: A
    
    B
    
    CNumber of Securities RemainingNumber of Securities
    
    
    
    
    
    Available for Futureto be Issued Upon
    
    Weighted Average
    
    Issuance Under EquityExercise of Outstanding
    
    Exercise Price of Outstanding
    
    Compensation PlansPlan Category
    
    Options, Warrants and Rights
    
    Options, Warrants and Rights
    
    (Excluding Those in Column A)Equity compensation plans
approved by security holders
    
    
    
    
    
    
    
    
    
    
    Equity compensation plans
not approved by security holders
    
    
    7,714
    
    
    $
    1,666.48
    
    
    
    7,286Total
    
    
    7,714
    
    
    $
    1,666.48
    
    
    
    7,286
 For a description of our 1999 Equity Incentive Plan, see Executive
Compensation below. 
 Item 6. Selected Financial Data The following table sets forth selected historical consolidated financial
information for PSF Group Holdings for the fiscal years ended March 25, 2000,
March 31, 2001, and March 30, 2002, which was derived from our consolidated
financial statements, which have been audited by Arthur Andersen LLP,
independent public accountants, which has ceased operations. The financial
information presented for the fiscal years ended March 29, 2003 and March 27,
2004, was derived from our consolidated financial statements, which have been
audited by Deloitte & Touche LLP, independent public accountants. The financial information presented for the years ended March 31, 2001,
March 30, 2002, March 29, 2003, and March 27, 2004, 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. This
data should be read in conjunction with Managements 15




---



##### 



Discussion and Analysis of Financial Condition and Results of Operations
and the financial statements and the notes thereto. Fiscal years endedMarch 25,
    
    March 31,
    
    March 30,
    
    March 29,
    
    March 27,2000
    
    2001
    
    2002
    
    2003
    
    2004($ in 000s)STATEMENT OF OPERATIONS DATA:Net Sales
    
    $
    306,266
    
    
    $
    540,576
    
    
    $
    674,946
    
    
    $
    608,414
    
    
    $
    730,737Operating income (loss)
    
    
    14,514
    
    
    
    61,333
    
    
    
    64,770
    
    
    
    (39,430
    )
    
    
    17,186Goodwill amortization
    
    
    2,040
    
    
    
    2,436
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    
    (5,287
    )
    
    
    22,014
    
    
    
    25,365
    
    
    
    (38,600
    )
    
    
    (4,591
    )OTHER FINANCIAL DATA:Capital expenditures
    
    
    23,669
    
    
    
    43,224
    
    
    
    96,232
    
    
    
    35,505
    
    
    
    41,884Pounds of pork sales (millions)
    
    
    345.84
    
    
    
    603.88
    
    
    
    675.02
    
    
    
    737.95
    
    
    
    786.22Total hogs processed (million)
    
    
    1.92
    
    
    
    3.02
    
    
    
    3.66
    
    
    
    4.07
    
    
    
    4.28BALANCE SHEET DATA (AT PERIOD END):Working capital
    
    $
    51,698
    
    
    $
    119,764
    
    
    $
    120,097
    
    
    $
    139,523
    
    
    $
    164,750Total assets
    
    
    584,498
    
    
    
    773,440
    
    
    
    807,639
    
    
    
    779,062
    
    
    
    760,014Total long-term debt and capital leases
(including
current portion)
    
    
    175,997
    
    
    
    267,216
    
    
    
    272,782
    
    
    
    305,184
    
    
    
    287,084
 
 Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations The following discussion should be read in conjunction with the financial
statements, including the notes thereto, and the other financial information
appearing elsewhere in this report onForm 10-K. Overview As a vertically integrated provider of pork products, we operate in both
pork industry segments: hog production and pork processing. In fiscal 2001, we
made two strategic acquisitions to strengthen our position in the food
production industry. On August 25, 2000, we acquired The Lundy Packing Company
(Lundy) and its affiliated companies, which owned a processing plant in North
Carolina capable of processing 1.8 million hogs per year and owned
approximately 41,000 sows. On September 22, 2000, we acquired, from ContiGroup,
Premium Standard Farms of North Carolina (PSFNC), which owned approximately
24,000 sows. As a result of these acquisitions and further enhancements to our
operations, we are the second largest owner of sows in North America,
controlling over 255,000 sows, of which approximately 212,000 are owned,
producing approximately 4.5 million hogs per year. We are also the sixth
largest pork processor in the United States, with two plants capable of
processing approximately 4.5 million hogs per year. In our fiscal year ending March 27, 2004, the USDA reported that the U.S.
pork industry produced 20.2 billion pounds compared to 19.8 billion pounds for
the same period the previous year. In spite of this increased supply, average
lean hog prices were 24.5% higher for the period than in the comparable periods
of the prior year. Also, the USDA pork cutout (the composite wholesale meat
price of a market hog after processing) was 16.9% higher for the period as
compared to the same period last year. Strong demand for pork products was the
primary driver in these increased prices. Generally, our overall revenues follow market prices for wholesale pork
and lean hog prices, while our costs are impacted by commodity grain prices,
primarily corn and soybean meal. On March 26, 2004, the USDA issued a Hog and
Pig report that indicated the likelihood of increased pork production in 2004.
Despite this bearish report, continued strong demand has trended cash prices
higher. Ongoing strength in hog prices is contingent on increased demand for
pork products or a reduced supply of hogs in the future. In the April 21, 2004
cold storage report, the USDA reported that freezer stocks of pork were down
14% from the previous year, providing further 16




---



##### 



evidence of strong demand for pork products in recent periods. On January
12, 2004, the USDA issued its Crop Production Annual Summary, downwardly
revising the 2003/2004 crop carryout estimates for both corn and soybeans.
This reduced supply estimate has resulted in an increase of the near-term
prices of corn and soybean meal, the primary ingredients in our feed rations.
Future prices on these ingredients will depend on adjusting demand for these
products until the new crop harvest is available in the fall of 2004. We have been experiencing health issues in our Texas operations due to
Porcine Reproductive and Respiratory Syndrome (PRRS), which is common in swine
herds in the United States. PRRS has had a negative effect on reproduction in
our Texas operations, which has decreased production volume and increased
costs. We have had success in eliminating PRRS in some of our facilities
through depopulation of the facility and repopulation with PRRS negative
breeding stock, however, we implemented a depopulation/repopulation program in
Texas in fiscal year 2004 without success. Our new plan is to operate a herd
health program and production flow that stabilizes a PRRS positive herd and
reduces the impact of PRRS in the system. On December 23, 2003, a case of BSE (bovine spongiform encephalopathy) was
confirmed in a dairy cow in the State of Washington. It is uncertain what
impact this may have on the U.S. pork industry. As an important part of our growth strategy, we evaluate on an ongoing
basis potential industry-related acquisitions and joint ventures. Other than a
joint venture in a small sow processing operation in early fiscal year 2004, we
have not at the present time entered into any definitive agreements
contemplating such acquisitions or joint ventures. Further, there can be no
assurance as to whether or when any negotiations will ultimately culminate in
definitive agreements or, if any definitive agreement is reached, whether any
acquisition or joint venture will ultimately be consummated. To complete any
acquisition or joint venture, we may use our revolving credit facility or other
financing alternatives available at the time. Our fiscal year is the 52 or 53-week period, which ends on the last
Saturday in March. Our financial statements include activity from the fiscal
years ended March 27, 2004 (52 weeks), March 29, 2003 (52 weeks), and March 30,
2002 (52 weeks). Net Sales Our net sales are generated from the sale of pork products to retailers,
food service suppliers, further processors, export buyers, and to a lesser
extent the sale of market hogs to other pork processors. In fiscal 2004, sales
of pork products accounted for approximately 90% of our net sales, with the
remaining 10% coming from sales of market hogs. Pork product sales are of primal cuts, such as hams, loins, bellies,
butts, picnics and ribs, and to a lesser extent of other by-products. Primal
products are also converted further into boneless items or, in our North
Carolina operations, further processed into items such as smoked hams, cured
hams, and sliced 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 27, 2004, March 29, 2003 and
March 30, 2002, we processed 4.3 million, 4.1 million and 3.7 million hogs,
respectively. Our Missouri processing plant is currently capable of processing
7,100 hogs per day and our North Carolina processing plant is currently capable
of processing up to 10,000 hogs per day, depending on seasonality and market
conditions. The value that 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-driven
competitors. See Market Risk. Historically, live hog prices have experienced cyclical and seasonal
supply and demand fluctuations. Revenue from the sale of market 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 market hogs are sold to third party processors. 17




---



##### 



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 market hogs) are labor,
packaging, utilities, and facility expenses. Given the high fixed costs
required to build, maintain and operate a processing plant, unit costs are
impacted somewhat by processing volumes. For fiscal 2004, the costs associated
with our North Carolina pork processing facility reflected the fact that
approximately 27% of the hogs processed at that facility were purchased at
market price from independent local farmers under 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 market 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. See 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 Sales and marketing expenses consist primarily of salaries 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. Seasonality 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. 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. Live hog and wholesale pork prices are similarly affected by seasonal
factors. It generally takes approximately 11 months from conception for a hog
to reach market weight, and because sows are generally less productive in
summer months as a result of seasonal conditions, there are generally fewer
hogs available in the months of April, May and June. This decrease in supply
of live hogs generally causes live hog and wholesale pork prices to be higher
on average during these months, and our revenues tend to increase accordingly.
Conversely, there are generally more hogs available in the months of October,
November and December, which generally causes live hog and wholesale pork
prices to be lower on average during these months and adversely affects our
revenues. Results of Operations The following table presents selected historical financial information for
our production and processing segments for the fiscal years ended March 27,
2004, March 29, 2003 and March 30, 2002. Net sales, gross profit and operating
income by segment are also presented as a percentage of their respective
totals. The columns under year-to-year change show the dollar and percentage
change from the respective years ended. Intersegment sales are based on market
prices. 18




---



##### 



Fiscal Year Ended
    
    Year to Year ChangeMarch 27,
    
    
    
    
    
    March 29,
    
    
    
    
    
    March 30,
    
    
    
    
    
    2004 to
    
    
    
    
    
    2003 to2004
    
    %
    
    2003
    
    %
    
    2002
    
    %
    
    2003
    
    %
    
    2002
    
    %(in millions except percentages)Net SalesProduction
    
    $
    453.6
    
    
    
    62.1
    %
    
    $
    357.2
    
    
    
    58.7
    %
    
    $
    440.8
    
    
    
    65.3
    %
    
    $
    96.4
    
    
    
    27.0
    %
    
    $
    (83.6
    )
    
    
    (19.0
    )%Processing
    
    
    663.5
    
    
    
    90.8
    %
    
    
    553.5
    
    
    
    91.0
    %
    
    
    597.3
    
    
    
    88.5
    %
    
    
    110.0
    
    
    
    19.9
    %
    
    
    (43.8
    )
    
    
    (7.3
    )%Intersegment
    
    
    (386.4
    )
    
    
    (52.9
    )%
    
    
    (302.3
    )
    
    
    (49.7
    )%
    
    
    (363.1
    )
    
    
    (53.8
    )%
    
    
    (84.1
    )
    
    
    (27.8
    )%
    
    
    60.8
    
    
    
    16.7
    %Total Net Sales
    
    $
    730.7
    
    
    
    100.0
    %
    
    $
    608.4
    
    
    
    100.0
    %
    
    $
    675.0
    
    
    
    100.0
    %
    
    $
    122.3
    
    
    
    20.1
    %
    
    $
    (66.6
    )
    
    
    (9.9
    )%Gross ProfitProduction
    
    $
    (4.2
    )
    
    
    (12.4
    )%
    
    $
    (63.3
    )
    
    
    269.4
    %
    
    $
    59.8
    
    
    
    69.7
    %
    
    $
    59.1
    
    
    
    93.4
    %
    
    $
    (123.1
    )
    
    
    (205.9
    )%Processing
    
    
    38.2
    
    
    
    112.4
    %
    
    
    39.8
    
    
    
    (169.4
    )%
    
    
    26.0
    
    
    
    30.3
    %
    
    
    (1.6
    )
    
    
    (4.0
    )%
    
    
    13.8
    
    
    
    53.1
    %Total Gross Profit
    
    $
    34.0
    
    
    
    100.0
    %
    
    $
    (23.5
    )
    
    
    100.0
    %
    
    $
    85.8
    
    
    
    100.0
    %
    
    $
    57.5
    
    
    
    244.7
    %
    
    $
    (109.3
    )
    
    
    (127.4
    )%Operating Income (Loss)Production
    
    $
    (4.2
    )
    
    
    (24.4
    )%
    
    $
    (63.1
    )
    
    
    160.2
    %
    
    $
    59.5
    
    
    
    91.8
    %
    
    $
    58.9
    
    
    
    93.3
    %
    
    $
    (122.6
    )
    
    
    (206.1
    )%Processing
    
    
    34.7
    
    
    
    201.7
    %
    
    
    34.4
    
    
    
    (87.3
    )%
    
    
    23.0
    
    
    
    35.5
    %
    
    
    0.3
    
    
    
    0.9
    %
    
    
    11.4
    
    
    
    49.6
    %Corporate
    
    
    (13.3
    )
    
    
    (77.3
    )%
    
    
    (10.7
    )
    
    
    27.1
    %
    
    
    (17.7
    )
    
    
    (27.3
    )%
    
    
    (2.6
    )
    
    
    (24.3
    )%
    
    
    7.0
    
    
    
    39.5
    %Total Operating Income
(Loss)
    
    $
    17.2
    
    
    
    100.0
    %
    
    $
    (39.4
    )
    
    
    100.0
    %
    
    $
    64.8
    
    
    
    100.0
    %
    
    $
    56.6
    
    
    
    143.7
    %
    
    $
    (104.2
    )
    
    
    (160.8
    )%
 Fiscal year Ended March 27, 2004 Compared to the Fiscal Year Ended March 29,
2003 Consolidated 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 lean hog futures contracts, combined
with an increase in volume of $17.0 million. Overall, live 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 by 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% from (3.9)%. 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 as a percentage of net sales to 2.4% in
fiscal year 2004 from 3.0% in fiscal year 2003. In dollar terms, 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. 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 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 Expense. Our effective tax rate was 38.9% in the fiscal years 2004
and 2003. 19




---



##### 



Segment Analysis Hog Production. Net sales increased by $96.4 million, or 27.0%, to $453.6
million in fiscal year 2004 from $357.2 million in fiscal year 2003. The
increase primarily resulted from a 22.9% increase in market 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 lean 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 (Loss) Income. 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 market 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 income increased by $58.9 million to an operating loss of $4.2
million fiscal year 2004 from an operating loss of $63.1 million in fiscal year
2003. The increase is attributed to the factors mentioned above. Pork Processing. Net sales increased $110.0 million, or 19.9%, to $663.5
million in fiscal year 2004 from $553.5 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.
The increase in volume was primarily attributable to increased capacity
utilization at the Clinton processing plant. Gross profit decreased by $1.6 million 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 market hog
costs from internal transfers and external purchases, 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 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. Fiscal year Ended March 29, 2003 Compared to the Fiscal Year Ended March 30,
2002 Consolidated Net Sales. Net sales decreased by $66.6 million, or 9.9%, to $608.4 million in
fiscal year 2003 from $675.0 million in fiscal year 2002. The decrease was
attributed to a decrease of prices of $91.6 million, which includes a $9.7
million increase in gains recorded for lean hog futures contracts, which was
offset by an increase in volume of $25.0 million. Wholesale pork prices were
severely impacted by several factors, including, an increased supply of pork
industry wide, compounded by an increased supply of all meat proteins. Much of
the increase in meat proteins was attributed to the Russian ban on poultry
imports from the United States, which was lifted in fiscal year 2003, but was
subject to ongoing negotiations regarding import requirements. Although the
ban has been lifted, the effects of it as well as the increase in pork
production industry-wide for the year continued to have a negative impact on
market hog and wholesale pork prices during fiscal year 2003. See Segment
Analysis below for comments on changes in sales by business segment. Gross Profit. Gross profit decreased by $109.3 million, or 127.4%, to a loss
of $23.5 million in fiscal year 2003 from a profit of $85.8 million in fiscal
year 2002. As a percentage of net sales, gross profit decreased to (3.9)% from
12.7%. This decrease was due to the decrease in sales prices mentioned above
coupled with a 3.4% 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 as a percentage of net sales to 3.0% in
fiscal year 2003 from 3.2% in fiscal year 2002. In dollar terms, selling,
general 20




---



##### 



and administrative expenses decreased by $3.2 million, or 14.9%, to $18.3
million in fiscal year 2003 from $21.5 million in fiscal year 2002. The
majority of the decrease was attributable to decreased bonus and long-term
incentive plan accruals for fiscal year 2003. Operating (Loss) Income. Operating income decreased by $104.2 million, or
160.8%, to an operating loss of $39.4 million in fiscal year 2003 from an
operating income of $64.8 million in fiscal year 2002. The decrease was
attributable to the factors mentioned above. Interest Expense, net. Interest expense, net, increased by $3.3 million, or
16.2%, to $23.7 million in fiscal year 2003 from $20.4 million in fiscal year
2002. 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 Expense. Our effective tax rate was 38.9% in the fiscal year 2003
compared to an effective rate of 39.9% in fiscal year 2002. The difference was
primarily attributable to the utilization of state income tax credits. Segment Analysis Hog Production. Net sales decreased by $83.6 million, or 19.0%, to $357.2
million in fiscal year 2003 from $440.8 million in fiscal year 2002. The
decrease primarily resulted from a 22.0% decrease in net market hog sales
prices, partially offset by a 3.9% increase in volume attributable to the
effects of our Texas sow herd expansion and additional contract production. As
mentioned above, gains recorded for lean hog futures contracts had a $9.7
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 (Loss) Income. Gross profit decreased by $123.1 million, or 205.9%, to a loss of $63.3
million in fiscal year 2003 from a gross profit of $59.8 million in fiscal year
2002. The decrease was a combination of the decrease in net market hog sales
prices mentioned above, coupled with an increase in costs of $39.5 million,
$14.7 million of which related to increased volume and $24.8 million of which
related to increased costs. Overall, hog production costs were 6.2% higher on
a per hundred weight basis in fiscal year 2003 compared to fiscal year 2002,
with the majority of the increase caused by higher feed costs, lower values on
culled animals and a lower weight per animal marketed. Operating income decreased by $122.6 million, or 206.1%, to an operating
loss of $63.1 million fiscal year 2003 from an operating income of $59.5
million in fiscal year 2002. The decrease was attributed to the factors
mentioned above. Pork Processing. Net sales decreased $43.8 million, or 7.3%, to $553.5 million
in fiscal year 2003 from $597.3 million in fiscal year 2002. The decrease
resulted from a 16.2% decrease in pork product sales prices, partially offset
by an 11.1% increase in volume processed compared to the same period last year.
The increase in volume was primarily attributable to the expansion at the
North Carolina plant completed in late fiscal year 2002, which increased
capacity from 6,500 hogs per day to 10,000 hogs per day. Gross profit increased by $13.8 million, or 53.1%, to $39.8 million in
fiscal year 2003 from $26.0 million in fiscal year 2002. The increase
primarily resulted from higher margins on pork products due to lower market hog
prices coupled with higher volume through the plants. Processing costs
increased 1.2% during fiscal year 2003 compared to fiscal year 2002, primarily
the result of increased depreciation expense related to the North Carolina
processing plant expansion and added emphasis on higher cost value-added
products. Operating income increased by $11.4 million, or 49.6%, to $34.4 million in
fiscal year 2003 from $23.0 million in fiscal year 2002. The increase was
attributed to the factors mentioned above. Liquidity and Capital Resources Our primary source of financing has been cash flow from operations and
bank borrowings. Our ongoing operations will require the availability of funds
to service debt, fund working capital and make capital expenditures 21




---



##### 



on our facilities. We expect to finance these activities through cash
flow from operations and from amounts available under our revolving credit
facility. Net cash flow provided by and (used in) operating activities was $41.7
million, ($17.4) million and $80.5 million in fiscal years 2004, 2003 and 2002,
respectively. The increase in fiscal year 2004 was attributed to a decrease in
net loss over fiscal year 2003, the change in deferred taxes 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 $23.5 million, $25.9
million and $81.3 million in fiscal years 2004, 2003 and 2002, respectively.
In fiscal year 2004, net cash used in investing activities was spent as
follows:  
    
    Approximately $10 million was spent for continuing
improvements of our pork processing facilities;  
    
    Approximately $5 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 2004, 2003 and 2002, we received proceeds from disposal of
property, plant, equipment and breeding stock of $18.4 million, $11.7 million
and $14.9 million, respectively. During fiscal years 2004, 2003 and 2002,
disposal of property, plant, equipment and breeding stock consisted primarily
of culled breeding stock. Net cash flow (used in) and provided by financing activities was ($18.2)
million, $36.1 million and ($0.6) million in fiscal years 2004, 2003 and 2002,
respectively. During fiscal year 2004, excess cash generated was used to pay
down outstanding debt. During fiscal year 2003, we borrowed money to fund
working capital needs and capital expenditures. In the first quarter of fiscal
year 2002, Premium Standard Farms issued $175 million of 9-1/4% senior
unsecured notes due 2011 (9-1/4% Notes), which were used to retire $137.9
million of 11% senior secured payment-in-kind notes (PIK Notes) on July 7,
2001. An associated 1% prepayment penalty on these PIK Notes was also paid on
July 7, 2001. With the remaining proceeds, we also prepaid $25 million of bank
term debt, made a $6.3 million quarterly payment on bank term debt and paid
down $4.0 million on our revolving credit facility. The 9-1/4% Notes contain
customary covenants and are redeemable by Premium Standard Farms under certain
circumstances. Borrowings for working capital needs were provided under a credit
agreement that provided for up to $150 million of revolving credit (with actual
credit limit determined monthly by reference to a borrowing base formula),
including up to $15 million of letters of credit, and a term loan facility with
$43.8 million outstanding at March 27, 2004. On April 9, 2004, we entered into an amended and restated loan and
security agreement (Credit Agreement) with our bank group. The Credit
Agreement is a $175 million revolving line of credit. The balance of the
previous line of credit as well as the outstanding term debt at the date of
closing, became the opening balance outstanding under the Credit Agreement.
Obligations under the Credit Agreement are secured by liens on substantially
all of our assets. In addition to customary financial covenants, the Credit
Agreement contains restrictions on, among other things, encumbrance or disposal
of assets, acquisitions, additional indebtedness, capital investment, payment
of subordinated debt and payment of dividends. In addition to fees payable
under credit facilities of this type, amounts borrowed under the Credit
Agreement bear interest at fluctuating rates selected by us. These rates are
based on the agent banks prime rate (the Federal Funds Rate plus one half of
one percent) or LIBOR plus, in each case, an applicable margin, currently
ranging from 1.5% and 2.875%, respectively, determined by our leverage ratio.
All borrowings under the revolving credit facility mature on April 9, 2009.
The entire amount of debt under the Credit Agreement has been classified as
long-term on the consolidated balance sheets as of March 27, 2004. Total indebtedness at March 27, 2004 was $287.1 million, as compared to
$305.2 million at March 29, 2003. At March 27, 2004, we had $65.0 million
outstanding under our revolving credit facility, $11.2 million in letters of
credit and $73.8 million available for borrowing under our revolving credit
facility. 22




---



##### 



In fiscal 2005, we expect to spend approximately $28 million on net
capital expenditures, as follows:  
    
    Approximately $6 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 $8 million in net breedstock purchases. We believe that available borrowings under our credit facility, available
cash 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 our revolving credit facility in an amount sufficient to enable
us to pay our indebtedness, including the 9-1/4% Notes, 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. The following table represents a summary of our contractual cash
obligations as of March 27, 2004. Payments due by periodContractual Cash Obligations
    
    Total
    
    Current
    
    1-3 years
    
    4-5 years
    
    Thereafter(in thousands)Long Term Debt
    
    $
    283,750
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    283,750Capital Lease Obligations
    
    
    3,334
    
    
    
    833
    
    
    
    1,957
    
    
    
    536
    
    
    
    8Operating Leases
    
    
    23,746
    
    
    
    6,083
    
    
    
    9,117
    
    
    
    4,995
    
    
    
    3,551Unconditional Purchase
Obligations (1)
    
    
    7,597
    
    
    
    7,597
    
    
    
    
    
    
    
    
    
    
    
    Total Contractual Cash
Obligations
    
    $
    318,427
    
    
    $
    14,513
    
    
    $
    11,074
    
    
    $
    5,531
    
    
    $
    287,309
 (1) Includes only forward grain purchase contracts Amounts 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
percent of our hog production segments cost of goods sold for fiscal year
2004. All of these contracts are cancelable by us if the producer fails to
perform to an acceptable level. At our North Carolina pork processing facility, we have contracts with
producers to provide us with market hogs for the amount we dont produce at our
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 1,730,000 market 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 EPA we estimate we
may spend approximately $31 million on additional 23




---



##### 



investments in environmental research, development, and implementation,
based on known technology, on or before July 31, 2010. 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 plan to
build a fertilizer plant in northern Missouri that will convert solid waste
into useable commercial grade fertilizer. 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 livestock is 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 when required. 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
provided for when the loss is probable and the amount is reasonably estimable.
Actual costs may vary from estimates we made. Management believes the
estimates are reasonable based on current information. Derivative instruments are 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
sales for lean hog contracts or cost of sales 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 stock are 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 assets is 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. 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 market
hog and wholesale pork sales prices. The cost and supply of feed components and
market 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 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 secure margins and to reduce
the risk of market fluctuations. To secure margins and minimize earnings
volatility in our pork processing segment, we utilize lean 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 minimize earnings volatility and secure future margins. 24




---



##### 



For the fiscal years ended March 27, 2004, and March 29, 2003 we
recognized income under SFAS 133 of $5.3 million and $1.4 million,
respectively, in net sales for gains related to lean hog futures and gains of
$6.1 million and losses of $0.9 million, respectively, in costs of goods sold
relating to the hedging of feed components. 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 27, 2004, the potential change in fair value of
exchange-traded contracts, assuming a 10% change in the underlying commodity
price, was $4.2 million. We are exposed to changes in interest rates. Our revolving credit facility
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 an
approximately $0.9 million impact on interest expense. 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 a portion of the variable base interest
rate of our bank debt to a fixed rate of 3.0125% plus the agent banks
applicable margin (currently 2.875% at March 27, 2004). The swap is accounted
for as a cash flow hedge under SFAS 133. During fiscal 2004, we recognized a
$0.3 million gain, net of tax, into Accumulated Other Comprehensive Loss for
the change in the market value of the swap. The 9-1⁄4% Notes had a fair value of approximately $176.8 million as of
March 27, 2004 based on inter-dealer prices, as compared to the book value of
$175.0 million as of March 27, 2004. Forward-Looking Statements This report on Form 10-K contains forward-looking statements within the
meaning of Section 17A 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 results to be materially different from those
projected. These factors, risks and uncertainties include, among others, the
following:  
    
    economic conditions generally and in our principal markets;  
    
    competitive practices in the pork production and processing industries;  
    
    the impact of consolidation in the pork production and processing industries;  
    
    the impact of current and future laws, governmental
regulations and fiscal policies affecting our industry and
operations, including environmental laws and regulations, food
safety, trade embargoes and tariffs;  
    
    domestic and international transportation disruptions;  
    
    food safety;  
    
    the availability of additional capital to fund future
commitments and expansion and the cost and terms of financing;  
    
    outbreaks of disease in our herds;  
    
    feed ingredient costs;  
    
    fluctuations in live hog prices and the price of pork products;  
    
    customer demands and preferences; and 25




---



##### 




    
    the occurrence of natural disasters and other occurrences beyond our control. 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-4 filed on August 10, 2001 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 The information required by this item is incorporated by reference to the
section entitled Market Risk in Item 7 to this Annual Report on Form 10-K. 
 Item 8. Financial Statements and Supplementary Data Our consolidated financial statements are filed under this Item, beginning
on page F-1 of this Report. Our financial statement schedule is filed under
Exhibits, Financial Statements Schedules and Reports on Form 8-K. 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 On May 31, 2002, our Board of Directors appointed Deloitte & Touche LLP as
our independent public accountants. For additional information, refer to our
current report on Form 8-K, filed on June 3, 2002. 
 Item 9A. Controls & 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
significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to the date of their
evaluation. 26




---



##### 



PART III 
 Item 10. Directors and Executive Officers of Registrant The following table sets forth certain information concerning the
directors and executive officers of PSF Group Holdings and Premium Standard
Farms: Name
    
    Age
    
    Position(s)John M. Meyer
    
    
    42
    
    
    Chief Executive Officer and Director of PSF Group Holdings
and Premium Standard FarmsRobert W. Manly
    
    
    51
    
    
    President of PSF Group Holdings and Premium Standard FarmsStephen A. Lightstone
    
    
    58
    
    
    Executive Vice President, Chief Financial Officer and
Treasurer of PSF Group Holdings and Premium Standard FarmsGerard J. Schulte
    
    
    54
    
    
    General Counsel and Secretary of PSF Group Holdings and
Premium Standard FarmsDennis D. Rippe
    
    
    50
    
    
    Vice President, Controller and Assistant Secretary of
PSF Group Holdings and Premium Standard Farms,Michael J. Zimmerman
    
    
    53
    
    
    Chairman of the Board and Director of and PSF Group
Holdings and Premium Standard FarmsRonald E. Justice
    
    
    59
    
    
    Director of PSF Group Holdings and Premium Standard FarmsDean Mefford
    
    
    63
    
    
    Director of PSF Group Holdings and Premium Standard FarmsMaurice L. McGill
    
    
    67
    
    
    Director of PSF Group Holdings and Premium Standard FarmsMichael A. Petrick
    
    
    42
    
    
    Director of PSF Group Holdings and Premium Standard FarmsPaul J. Fribourg
    
    
    50
    
    
    Director of PSF Group Holdings and Premium Standard FarmsVart K. Adjemian
    
    
    61
    
    

    Director of PSF Group Holdings and Premium Standard Farms
 John M. Meyerhas been a Director and the Chief Executive Officer of PSF
Group Holdings and Premium Standard Farms since May 1998. Prior to May 1998,
he spent 15 years with ContiGroup Companies, 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 President of Premium Standard Farms since October
1996. He has been President of PSF Group Holdings since May 1998. From April
1986 to October 1996, Mr. Manly served as Executive Vice President of
Smithfield Foods, Inc. He also served as President and Chief Operating Officer
of the Smithfield Packing Company subsidiary from June 1994 to June 1995. Mr.
Manly held the position of Assistant to the President of IBP, Inc. from January
1981 to April 1986. Stephen A. Lightstonehas been Executive Vice President, Chief Financial
Officer and Treasurer of PSF Group Holdings and Premium Standard Farms 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 General Counsel and Secretary of PSF Group
Holdings and Premium Standard Farms since July 1998. Mr. Schulte has been Vice
President and Assistant General Counsel of ContiGroup Companies 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 Vice President, Controller and Assistant
Secretary of Premium Standard Farms since January 1999. Prior to that date, Mr.
Rippe had been Vice President Finance and Administration-Operations (Missouri)
of Premium Standard Farms since February 1997. Michael J. Zimmermanhas been Chairman of the Board of Directors of PSF
Group Holdings and Premium Standard Farms since May 1998. Mr. Zimmerman has
been Executive Vice President and Chief Financial Officer of ContiGroup
Companies since 1999. From 1996 to 1999, he served as Senior Vice President 
Investments and Strategy of ContiGroup Companies and President of its
ContiInvestments subsidiary. Prior to joining ContiGroup in 1996, he was a
Managing Director of Salomon Brothers. 27




---



##### 



Ronald E. Justicehas been a Director of Premium Standard Farms since
September 1996. He has been a Director of PSF Group Holdings since May 1998.
Mr. Justice has been an Adjunct Professor in Business Studies at Brookhaven
College since April 2001. He served as Executive Vice President of Operations
of Consolidated Container Company from September 1998 to April 2000. Mr.
Justice was the Senior Vice President of Operations of Scotts Co. from July
1995 to September 1998. Dean Meffordhas been a Director of Premium Standard Farms since September
1996. He has been a Director of PSF Group Holdings since May 1998. From January
1999 to February 2001, he served as Chairman of the Board of Doubletime
Corporation and from October 1999 to May 2000 he served as the Interim
President of Ocean Spray Corp. Mr. Mefford served as President and Chief
Executive Officer of Viskase Corporation, a manufacturer of flexible packaging
and meat casings, from 1994 to 1998. Maurice L. McGillhas been a Director of Premium Standard Farms since
September 1996. He has been a Director of PSF Group Holdings since May 1998.
Mr. McGill has served as the President of Wirmac Corp. since 1986 and as a
general partner of McGill Partners since 1989. Michael A. Petrickhas been a Director of PSF Group Holdings and Premium
Standard Farms since May 1998. He is a Managing Director of Morgan Stanley &
Co. Incorporated, and has been with Morgan Stanley since 1989. Mr. Petrick also
serves as a Director of Sunbeam Corporation, DigitalGlobe Inc, V2 Music and TVN
Entertainment Corporation. Paul J. Fribourghas been a Director of PSF Group Holdings and Premium
Standard Farms since May 1998. He has served as Chairman, President and Chief
Executive Officer of ContiGroup Companies since 1999. From 1997 to 1999, he
served as Chairman, President and Chief Executive Officer of Continental Grain
and, from 1996 to 1997, he served as Chief Operating Officer of Continental
Grain. Vart K. Adjemianhas been a Director of PSF Group Holdings and Premium
Standard Farms since September 1999. Mr. Adjemian has been Executive Vice
President and Chief Operating Officer of ContiGroup Companies since February
2001. From 1999 to February 2001 he served as Executive Vice President of
ContiGroup and as Chief Executive Officer of the ContiIndustries, an operating
group of ContiGroup Companies. From 1998 to 1999, he was Senior Vice President
of ContiGroup Companies, and from 1996 to 1998, he was President of the
Commodity Marketing Group of ContiGroup Companies. Committees of the Board of Directors The Board of Directors of PSF Group Holdings has not established any
committees. The Board of Directors of Premium Standard Farms has established
two committees: a Compensation Committee and an Audit Committee. Each such
committee has three or more members, who serve at the pleasure of the Board of
Directors. The Compensation Committee is responsible for reviewing and making
recommendations to the Board of Directors with respect to compensation of
executive officers, other compensation matters and awards under the Equity
Incentive Plan. Currently, Messrs. Zimmerman, Fribourg and Mefford serve on the
Compensation Committee. Mr. Zimmerman is chairman of the committee. The Audit Committee is responsible for reviewing our financial statements,
audit reports, internal financial controls and the services performed by
Premium Standard Farms independent public accountants, and for making
recommendations with respect to those matters to the Board of Directors.
Currently, Messrs. McGill, Adjemian and Justice serve on the Audit Committee.
The board has determined that Mr. McGill, the current chairman of the
committee, qualifies as an audit committee financial expert within the
meaning of the regulations of the SEC. 28




---



##### 



Terms of Directors and Officers Directors of Premium Standard Farms are elected annually by PSF Group
Holdings, as sole stockholder, to hold office for one-year terms and until
their successors are duly elected and qualified. The officers of PSF Group Holdings and Premium Standard Farms are
appointed by the respective Boards of Directors and serve at the pleasure of
such Boards. Directors of PSF Group Holdings are nominated and placed for election at
the annual meeting of stockholders to hold office for a one-year term and until
their successors are duly elected and qualified. There are two classes of
Directors. Four Class A Directors are elected by holders of Class A Common
Stock voting as a separate class. Messrs. Justice, McGill, Mefford and Petrick
are the current Class A Directors. Five Class B Directors are elected by
holders of Class B Common Stock voting as a separate class. Messrs. Fribourg,
Meyer, Adjemian and Zimmerman are the current Class B Directors, with one
vacancy currently unfilled among the Class B Directors. Code of Ethics PSF Group Holdings and Premium Standard Farms each have adopted a code of
professional ethics for it Chief Executive Officer, Chief Financial Officer,
Controller, Director of Corporate Accounting and Finance, and other employees
of the finance organization. A copy of this code of professional ethics is
attached as Exhibit 14.1 to this Report on Form 10-K. 
 Item 11. Executive Compensation Compensation of Directors Premium Standard Farms has agreed to pay each person who is a member of
its Board of Directors $1,000 per meeting, plus reimbursement of reasonable
out-of-pocket expenses incurred in connection with the performance of duties as
a Director. In addition, each director who is not affiliated with ContiGroup
Companies or Morgan Stanley receives $20,000 per year in exchange for his or
her services. Members of the Audit and Compensation Committees of Premium
Standard Farms receive an additional $1,000 per meeting. Directors of PSF Group Holdings receive no separate compensation for
service on the Board of Directors. PSF Group Holdings has adopted an Equity Incentive Plan that permits
options, stock appreciation rights, restricted stock, performance units and
performance shares to be granted to the employees, non-employee directors and
consultants of PSF Group Holdings and its affiliates (including Premium
Standard Farms). As of the date of this report, there have been no grants to
non-employee directors of Premium Standard Farms or its affiliates under the
Equity Incentive Plan. Executive Compensation The following summary compensation table summarizes compensation
information with respect to our Chief Executive Officer and our four other most
highly compensated executive officers for our three most recent fiscal years. 29




---



##### 



Summary Compensation Table Annual
    
    Long-Term CompensationCompensation
    
    Number of
Securities
    
    Long-TermFiscal
    
    
    
    
    
    
    
    
    
    Underlying
    
    Incentive
    
    All OtherName and Principal Position
    
    Year
    
    Salary($)
    
    Bonus($)
    
    Options(1)
    
    Payouts($)
    
    Compensation($)(2)John M. Meyer
    
    
    2004
    
    
    $
    315,000
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    8,000Chief Executive Officer
    
    
    2003
    
    
    
    315,082
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,5622002
    
    
    
    308,846
    
    
    
    314,000
    
    
    
    
    
    
    
    
    
    
    
    6,903Robert W. Manly
    
    
    2004
    
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,690President
    
    
    2003
    
    
    
    300,336
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,4002002
    
    
    
    293,846
    
    
    
    265,170
    
    
    
    
    
    
    
    
    
    
    
    6,954Stephen A. Lightstone
    
    
    2004
    
    
    
    260,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,084Executive Vice President,
    
    
    2004
    
    
    
    260,639
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,969Chief Financial Officer and
    
    
    2002
    
    
    
    256,923
    
    
    
    212,139
    
    
    
    
    
    
    
    
    
    
    
    7,154TreasurerJere Null (3)
    
    
    2004
    
    
    
    210,000
    
    
    
    35,000
    
    
    
    
    
    
    
    
    
    
    
    9,578Vice President, Processing
    
    
    2003
    
    
    
    209,136
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,692Operations
    
    
    2002
    
    
    
    204,231
    
    
    
    74,995
    
    
    
    
    
    
    
    
    
    
    
    106,540David H. James (4)
    
    
    2004
    
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,000Vice President,
    
    
    2003
    
    
    
    199,019
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,323Production Operations
    
    
    2002
    
    
    
    195,000
    
    
    
    81,423
    
    
    
    
    
    
    
    
    
    
    
    6,974
   (1)
    
    Options to acquire shares of Class B Common Stock of PSF Group Holdings.(2)
    
    Consists of employer contributions to the 401(k) plan and premiums for
group-term life and accidental death and dismemberment insurance. In the
case of Mr. Null only, the amounts listed also include $100,000 in fiscal
year 2002 related to a non-recurring payment which was payable in
recognition of benefits forfeited from a former employer.(3)
    
    Mr. Null resigned from the Company in April, 2004.(4)
    
    Mr. James resigned from the Company in April, 2004. No options or stock appreciation rights were granted to, or exercised by,
the named executive officers during fiscal year 2004. The following table sets
forth information regarding exercisable and unexercisable options held as of
March 27, 2004, by each of the named executive officers: Aggregated Option Exercises in Last Fiscal Year and Year-End Option Values Number of SecuritiesUnderlying UnexercisedOptions at March 27, 2004(1)Name
    
    Exercisable
    
    UnexercisableJohn M. Meyer
    
    
    2,142.86
    
    
    
    Robert W. Manly
    
    
    1,714.29
    
    
    
    Stephen A. Lightstone
    
    
    1,571.43
    
    
    
    Jere Null
    
    
    571.43
    
    
    
    David H. James
    
    
    571.43
    
    
    
    
   (1)
    
    All options are options to acquire shares of Class B Common Stock of PSF
Group Holdings. 30




---



##### 



PSF Group Holdings adopted its 1999 Equity Incentive Plan in April 2000.
The plan was established to attract, motivate and retain employees of that
company and its affiliates, including Premium Standard Farms, and to further
the growth and financial success of that company and its affiliates by aligning
the interests of participants with the interests of the companys stockholders. The plan is administered by a committee of non-employee directors
appointed by the Board. The plan provides for awards in the form of stock
options, stock appreciation rights, restricted stock, performance units and
performance shares, as determined by the committee. All employees and
non-employee directors, as well as certain non-employee advisors and
consultants, are eligible to receive awards under the plan. A total of 15,000
shares of PSF Group Holdings Class A or Class B Common Stock may be issued
pursuant to the plan. Awards vest upon a change in control of PSF Group
Holdings, as defined in the plan. Options granted under the 1999 Equity Incentive Plan may be either
incentive stock options or nonqualified stock options, as determined by the
committee. No participant can be granted options with respect to more than
3,000 shares in any fiscal year. The terms of any option will be determined by
the committee, but no stock option may be exercised later than 10 years after
the date of grant. The award agreement may provide that PSF Group Holdings has
the right to repurchase the stock if the grantee terminates employment. The committee may also grant stock appreciation rights, restricted stock,
performance units, or performance shares to eligible individuals, from time to
time, in amounts as it may determine. Each stock appreciation right or
performance share relates to one share of PSF Group Holdings Class A or Class B
Common Stock. No participant can be granted stock appreciation rights covering
more than 3,000 shares in any fiscal year, and no participant can be awarded
more than 3,000 performance shares or restricted shares, or performance units
with an initial value of more than $500,000 in any fiscal year. The value of a
performance unit will be at the discretion of the committee. Long-Term Incentive Plan For the three year period commencing April 1, 2003, we have established a
long-term incentive plan. The plan is a rolling three year plan based on three
years of performance. Those generally eligible for the plan are senior
managers with responsibility for leadership and accountability for long-term
growth and earnings as determined by the Compensation Committee. The plan
establishes both a formula-based incentive pool and a discretionary awards
pool. Incentive pool awards, constituting two-thirds of the plan awards, were
determined at the plans inception, and discretionary pool awards, constituting
one-third of the plan awards, will be determined at the end of the performance
period. At the beginning of each three-year period, each participant is
assigned a percentage of such participants base salary payable during the
applicable three year period. Each participants awards under the plan are
calculated based upon this assigned percentage of the participants three
years base salary. Awards will be payable in cash. Participants will have the
option to defer awards into the Deferred Compensation Plan discussed below. The
plan will be administered by the Compensation Committee. The following table sets forth information regarding long term incentive
plan awards made during the last fiscal year to each of the named executive
officers: Long-Term Incentive Plans  Awards in Last Fiscal Year Estimated Future Payouts Under Non-StockPerformance or Other
    
    Price-Based PlansNumber of Shares,
    
    Period UntilUnits or
    
    Maturation or
    
    Threshold
    
    Target
    
    MaximumName
    
    Other Rights (#)(1)
    
    Payout(2)
    
    ($ or #)(3)
    
    ($ or #)(3)
    
    ($ or #)(4)John M. Meyer
    
    75% of salary
    
    March 31, 2006
    
    $
    177,200
    
    
    $
    708,750
    
    
    
    N/ARobert W. Manly
    
    70% of salary
    
    March 31, 2006
    
    
    157,500
    
    
    
    630,000
    
    
    
    N/AStephen A. Lightstone
    
    60% of salary
    
    March 31, 2006
    
    
    117,000
    
    
    
    468,000
    
    
    
    N/AJere Null
    
    55% of salary
    
    March 31, 2006
    
    
    86,625
    
    
    
    346,500
    
    
    
    N/ADavid H. James
    
    55% of salary
    
    March 31, 2006
    
    
    82,500
    
    
    
    330,000
    
    
    
    N/A
 31




---



##### 



(1)
    
    The amount of the pool is determined by our Return On Net Assets
(RONA). At the minimum threshold RONA, the pool for those eligible is
$1,300,000. At the target RONA, the pool for those eligible is
$5,200,000. Two-thirds of the pool is nondiscretionary and up to
one-third of the pool is discretionary. The table reflects awards
assuming the executive receives the maximum discretionary payment.  (2)
    
    The formula based incentive pool, which is nondiscretionary, vests
one-third on March 31, 2004, one-third on March 31, 2005 and one-third on
March 31, 2006. There is no vesting schedule associated with the
discretionary portion of the incentive pool and payments to participants
from this pool are conditioned under the continued employment of the
participant with the company other than termination due to death,
disability, normal retirement or transfer to certain affiliates of the
company.  (3)
    
    Calculation based on fiscal year 2004 salary levels.  (4)
    
    There is no maximum amount. Deferred Compensation Plan The Deferred Compensation Plan for executives was adopted by our Board of
Directors in January 2001. Participation in the plan is restricted to a select
group of management employees. Under this plan, participating executives are
allowed to defer payment of compensation awarded as long-term incentive plan
compensation until a date elected by the executive 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. A.G.
Edwards Trust Company acts as trustee for the plan, which is administered by
the Compensation Committee. 401(k) Plan We have established a 401(k) plan covering substantially all employees
meeting certain minimum service requirements. The plan allows all qualifying
employees to contribute up to 60% of employee compensation limited to the tax
deferred contribution allowable by the Internal Revenue Code. We match 100%
of the employees contribution up to 3% of employee compensation and 50% of the
employees next 2% of employee compensation, for a maximum company match of 4%
of employee compensation. Effective January 1, 2000, the 401(k) plan was
amended from a three-year cliff-vesting period to a 100% immediate vesting. Severance Plan We have established an Executive Level Severance Pay Plan covering our
executive employees, which can be terminated by our Board at any time. The
purpose of the Plan is to provide eligible employees with base severance pay,
supplemental severance pay and supplemental severance benefits for a specified
period of time in the event that their employment is involuntarily terminated
other than for good reason. Under the Plan dated December
1, 1999, those persons serving as Chief Executive Officer, President and
Chief Financial Officer are entitled to receive the following benefits upon
termination of the employment:  
    
    Base severance pay equal to two weeks pay  
    
    Supplemental severance pay equal to fifty weeks of pay  
    
    Continuation of health benefits coverage for fifty-two weeks following
termination. Severance pay under the Plan is generally payable in a lump sum following
the date of termination. Supplemental severance pay and continuation of health
benefits, however, are conditioned upon the employees execution of a general
waiver and release agreement, and supplemental severance pay will be paid only
after execution of that agreement. 32




---



##### 



Special Executive Retirement Plan We have adopted a nonqualified, unfunded special executive retirement
plan, which was amended in March 2004. The following table shows the
approximate annual retirement benefits that participating executive officers
are expected to receive under the plan based on their pay and years of credited
service. The March 2004 amendment to the plan reduced the annual participation
percentage for all executive officers to 1.5%, from 4.0% for Messrs. Meyer,
Manly and Lightstone and 2.0% for all other executive officers. The amendment
provided that an executive officers accumulated participation percentage will
not be reduced as a result of the amendment, but also will not increase
annually until after such time as the executive officers accumulated
participation percentage determined utilizing the 1.5% level and the executive
officers number of years of credited service equals the accumulated
participation percentage immediately prior to the effectiveness of the
amendment. Special Executive Retirement Plan Table Years of ServiceRemuneration
    
    15
    
    20
    
    25
    
    30
    
    35$125,000
    
    $
    28,125
    
    
    $
    37,500
    
    
    $
    46,875
    
    
    $
    56,250
    
    
    $
    65,625150,000
    
    
    33,750
    
    
    
    45,000
    
    
    
    56,250
    
    
    
    67,500
    
    
    
    78,750175,000
    
    
    39,375
    
    
    
    52,500
    
    
    
    65,625
    
    
    
    78,750
    
    
    
    91,875200,000
    
    
    45,000
    
    
    
    60,000
    
    
    
    75,000
    
    
    
    90,000
    
    
    
    105,000225,000
    
    
    50,625
    
    
    
    67,500
    
    
    
    84,375
    
    
    
    101,250
    
    
    
    118,125250,000
    
    
    56,250
    
    
    
    75,000
    
    
    
    93,750
    
    
    
    112,500
    
    
    
    131,250300,000
    
    
    67,500
    
    
    
    90,000
    
    
    
    112,500
    
    
    
    135,000
    
    
    
    157,500400,000
    
    
    90,000
    
    
    
    120,000
    
    
    
    150,000
    
    
    
    180,000
    
    
    
    210,000
 The benefits in the above table are annual amounts payable in monthly
installments as single life annuities starting at age 62, the plans normal
retirement age. Benefits are payable as an annuity or a lump sum. Benefits are
based on the executives final three calendar years base salary, including
amounts deferred to the 401(k) plan or cafeteria plan. An executive must
complete five years of service after January 1, 2000, to be entitled to a
benefit. Benefits shown above are offset by one-half of the Social Security
benefits paid or payable at age 62 attributable to years of service with us and
by any retirement benefits paid or payable under any ContiGroup qualified
defined benefit pension plan. Credited service for benefit determination purposes as of March 27, 2004,
is shown below for each of the executive officers named in the summary
compensation table above: AccumulatedYears of
    
    Participation PercentageName
    
    Service
    
    Prior to AmendmentJohn M. Meyer
    
    
    5
    
    
    
    20
    %Robert W. Manly
    
    
    7
    
    
    
    28
    %Stephen A. Lightstone
    
    
    5
    
    
    
    20
    %David H. James (1)
    
    
    5
    
    
    
    Jere Null (1)
    
    
    3
    
    
    
    
  (1)
    
    Messrs. James and Null each resigned prior to satisfying the
requirement to complete five years of service after January 1, 2000,
and therefore are not entitled to receive benefits under the plan. 33




---



##### 



Item 12. Security Ownership of Certain Beneficial Owners and Management All of the issued and outstanding capital stock of Premium Standard Farms
is owned by PSF Group Holdings. The following table sets forth certain information regarding ownership of
the common stock of PSF Group Holdings as of April 30, 2004 by (i) each person
who is known by us to own beneficially more than 5% of the outstanding shares
of each class of stock, (ii) each of our directors, (iii) each of the executive
officers set forth in the Summary Compensation table above and (iv) all of our
directors and named executive officers as a group. Shares Beneficially Owned(3)Percent
    
    PercentTitle of Class(1)
    
    Name and Address of Beneficial Owner(2)
    
    Number
    
    of Class
    
    of TotalClass B Common
    
    ContiGroup Companies, Inc.
    
    
    113,300.64
    
    
    
    100.0
    
    
    
    53.1277 Park AvenueNew York, NY 10172Class A Common
    
    Putnam Investments
    
    
    37,741.5389
    (4)
    
    
    37.7
    
    
    
    17.7One Post Office SquareBoston, MA  02109Class A Common
    
    Morgan Stanley Dean Witter & Co.
    
    
    40,341.2161
    (5)
    
    
    34.8
    
    
    
    17.61221 Avenue of the AmericasNew York, NY 10020Class A Common
    
    Oaktree Capital Management, LLC
    
    
    16,491.49
    (6)
    
    
    16.4
    
    
    
    7.7550 South Hope Street, 22nd FloorLos Angeles, CA 90071Class A Common
    
    Prudential Funds
    
    
    10,016.66
    (7)
    
    
    10.0
    
    
    
    4.7c/o State Street Bank & Trust1 Heritage DriveQuincy, MA 02171Class A Common
    
    Continental Assurance CompanyInvestment Fund
    
    
    7,422.47
    
    
    
    7.4
    
    
    
    3.5CNA Plaza, 235Chicago, IL 60685Class B Common
    
    John M. Meyer
    
    
    2,142.86
    (8)
    
    
    2.1
    
    
    
    *Class B Common
    
    Robert W. Manly
    
    
    1,714.29
    (8)
    
    
    1.7
    
    
    
    *Class B Common
    
    Stephen A. Lightstone
    
    
    1,571.43
    (8)
    
    
    1.5
    
    
    
    *Class B Common
    
    David H. James
    
    
    571.43
    (8)
    
    
    *
    
    
    
    *Class B Common
    
    Jere Null
    
    
    571.43
    (8)
    
    
    *
    
    
    
    *Michael J. Zimmerman
    
    
    0
    
    
    
    *
    
    
    
    *Ronald E. Justice
    
    
    0
    
    
    
    *
    
    
    
    *Dean Mefford
    
    
    0
    
    
    
    *
    
    
    
    *Maurice L. McGill
    
    
    0
    
    
    
    *
    
    
    
    *Michael A. Petrick
    
    
    0
    
    
    
    *
    
    
    
    *Paul J. Fribourg
    
    
    0
    (9)
    
    
    *
    
    
    
    *Vart K. Adjemian
    
    
    0
    
    
    
    *
    
    
    
    *All directors and executive officers asa group (15 persons)
    
    
    6,571.44
    (9)
    
    
    6.0
    
    
    
    2.9
   *
    
    Signifies less than 1%.(1)
    
    PSF Group Holdings is authorized by its certificate of incorporation to
issue 250,000 shares of Class A Common Stock, 300,000 shares of Class B
Common Stock and 10,000 shares of preferred stock. Each class of stock has
a par value of $0.01 per share. As of the date of this report on Form
10-K, PSF Group Holdings has issued 100,000 shares of Class A Common
Stock, 113,300.64 shares of Class B Common Stock and no shares of
preferred stock. Holders of Class A Common Stock and Class B Common Stock
participate equally in all distributions. With the exception of electing
Directors, holders of Class A Common Stock and Class B 34




---



##### 



Common Stock vote
together as a single class on all matters presented for a stockholder
vote. The holders of Class A Common Stock vote as a separate class to
elect four of the nine members of the Board of Directors of PSF Group
Holdings. The holders of Class B Common Stock vote as a separate class to
elect five of the nine members of the Board of Directors. PSF Group
Holdings cannot take a number of actions without the approval of a
supermajority of the Board. A supermajority is defined as a majority
that includes at least one Director elected by holders of Class A Common
Stock and one Director elected by holders of Class B Common Stock.(2)
    
    Unless otherwise indicated, the business address of the persons named in
the above table is care of Premium Standard Farms, Inc., 805 Pennsylvania
Avenue, Suite 200, Kansas City, Missouri 64105.(3)
    
    Unless otherwise indicated, each person has sole investment and voting
power with respect to the shares listed in the table, subject to
applicable community property laws. For purposes of this table, a person
or group of persons is deemed to have beneficial ownership of any shares
which such person has the right to acquire within 60 days. For purposes of
computing the percentage of outstanding shares held by each person or
group of persons named above, any security which such person or group of
persons has the right to acquire within 60 days is deemed to be
outstanding for the purpose of computing the percentage ownership for such
person or persons, but is not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person. As a result, the
denominator used in calculating the beneficial ownership among our
shareholders may differ.(4)
    
    Consists of Class A Common Stock beneficially owned by the following
Putnam funds and trusts: (a) by Cargolamp & Co., Nominee for the Asset
Allocation Funds  Balanced Portfolio (128.85), Asset Allocation Funds 
Growth Portfolio (33.05), Asset Allocation Funds  Conservative Portfolio
(41.86); (b) by Chafingeight & Co., Nominee for the Diversified Income
Portfolio/Smith Barney/ Travelers Series Fund (22.03); (c) by High Yield
Managed Trust (305.29), (d) by Gerlach & Co., as Nominee for Capital
Management Trust  PCM Diversified Income Fund (528.10), Equity Income
Fund (11.01), Premier Income Trust (2,502.48), Convertible Opportunities
and Income Trust (220.25), High Income Convertible and Bond Fund (334.30),
Master Intermediate Income Trust (715.33), The George Fund of Boston
(220.25), Managed High Yield Trust (575.79), Master Income Trust
(1,003.86), Capital Management Trust  PCM High Yield Fund (1,578.53),
High Yield Trust (11,857.08), Balanced Retirement Fund (110.13), and High
Yield Managed Trust (49.00), (e) by Bost & Co., Nominee for the High Yield
Fixed Income Trust (77.6489) and Ameritech Pension Trust (1.38); and (f)
by Neon Capital Limited, Nominee for the High Yield Advantage Fund
(7,071.86), Global Governmental Income Trust (113.27), Diversified Income
Trust (9,799.68), and Income Fund (440.51).(5)
    
    Consists of 24,260.6961 shares of Class A Common Stock and 16,080.52
shares of Class A Common Stock issuable upon exercise of presently
exercisable warrants. The shares of Class A Common Stock are held by:
Morgan Stanley Dean Witter & Co. (21,126.64), Morgan Stanley & Co., Inc.
(778.73), the Morgan Stanley Leveraged Equity Fund II, L.P. (1,056.8054),
Morgan Stanley Capital Investors, L.P. (44.4981), Morgan Stanley Capital
Partners III, L.P. (1,113.1667), MSCP III 892 Investors, L.P. (140.8559).
The warrants are held by Morgan Stanley Leveraged Equity Funds and Morgan
Stanley Capital III Partners.(6)
    
    Consists of shares of Class A Common Stock held by OCM Opportunities
Fund, L.P. (11,210.87), Hare & Co. (4,697.52), Columbia/HCA Master
Retirement Trust (467.10) and Jefco (116.00).(7)
    
    Consists of shares of Class A Common Stock held by Gimlet & Co.
(9,517.17), Deerway & Co. (279.24) and IFTCO (220.25).(8)
    
    Consists of shares of Class B Common Stock issuable upon exercise of
presently exercisable options.(9)
    
    Excludes shares owned by ContiGroup Companies, Inc. For information concerning securities authorized for issuance under our
equity compensation plans, see Market for Registrants Common Equity and
Related Stockholder Matters and Executive Compensation. 35




---



##### 



Item 13. Certain Relationships and Related Transactions In connection with our acquisition of The Lundy Packing Company, we lease
farm land and hog production buildings from Goshen Ridge Farms, LLC, a company
owned by Annabelle Lundy Fetterman, who was one of our directors until she
resigned in September 2003, and members of her family, under a capital lease
agreement. The capital lease obligation as of March 27, 2004 was $1.7 million. We have entered into a contract grower agreement with ContiGroup related
to approximately 7,200 acres of farms used in our Missouri operations. Under
that agreement, ContiGroup owns the real property at the farms.
ContiGroup serves as an independent contractor in breeding and growing our
hogs to market weight. In exchange, we pay to ContiGroup a fee for labor and
services incurred by ContiGroup in performing its obligations under the
agreement. During the fiscal year ended March 27, 2004, the amount paid for
obligations under this agreement was approximately $4.4 million. The agreement
will generally continue in effect so long as ContiGroup continues to own an
equity interest in our company. Upon termination of the agreement, we have an
option to acquire the real property at the farms from ContiGroup, which can be
assigned to third parties. We receive the services of Mr. Schulte and other personnel through an
agreement with ContiGroup. Mr. Schulte, as well as other personnel, are
employees of ContiGroup but provide services to us as well as other affiliates
of ContiGroup. Other services from ContiGroup include the assistance of
purchasing and risk management staff, environmental consulting, treasury and
strategic planning. We pay ContiGroup a monthly fee for these services. We
negotiate the fee annually. In addition, we reimburse ContiGroup for a portion
of Mr. Schultes annual bonus and long-term incentive payment. For the fiscal
year ended March 27, 2004, the amount paid for all services was $1.0 million.
We also provide Mr. Schulte with the use of a rental car, and since July 2000,
we provide him with an annual allowance of approximately $15,000 for travel and
housing. 
 Item 14. Principal Accounting Firm Fees Aggregate fees billed to the Company for the fiscal years ended March 27,
2004, and March 29, 2003 by the Companys principal accounting firm, Deloitte &
Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective
affiliates (collectively, Deloitte & Touche) were as follows: Fiscal year endedMarch 27,
    
    March 29,2004
    
    2003Audit Fees
    
    $
    275,000
    
    
    $
    235,000Audit-Related Fees (a)
    
    
    10,750
    
    
    
    10,250Total audit and audit-related fees
    
    
    285,750
    
    
    
    245,250Tax Fees
    
    
    105,285
    
    
    
    1,906All Other Fees
    
    
    
    
    
    
    Total Fees (b)
    
    $
    391,035
    
    
    $
    247,156
  (a)
    
    Includes fees for annual audit of the Companys 401(k) plan(b)
    
    Audit committee approved all fees and engagements associated with the
principal accounting firm 36




---



##### 



PART IV 
 Item 15. Exhibits, Financial Statements Schedules, and Reports on Form 8-K.  (a)
    
    Financial Statements and Schedules  (1)
    
    The following financial statements are filed as a
part of this Report on Form 10-K:Reports of Independent Public AccountantsConsolidated Balance Sheets as of March 27, 2004 and March
29, 2003Consolidated Statements of Operations and Comprehensive
(Loss) Income for the three years ended March 27, 2004,
March 29, 2003 and March 30, 2002Consolidated Statements of Shareholders Equity for the three
years ended March 27, 2004, March 29, 2003 and March 30,
2002Consolidated Statements of Cash Flows for the three years
ended March 27, 2004, March 29, 2003 and March 30, 2002Notes 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 at
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at end ofDescription
    
    
    
    
    
    beginning of year
    
    Charged to earnings
    
    Other
    
    Less: Deduction
    
    yearAllowance for Losses
on Accounts Receivable:2004
    
    
    $
    540.3
    
    
    $
    146.2
    
    
    $
    
    
    
    $
    10.9
    
    
    $
    675.62003
    
    
    
    680.5
    
    
    
    137.2
    
    
    
    
    
    
    
    277.4
    
    
    
    540.32002
    
    
    
    663.6
    
    
    
    129.3
    
    
    
    
    
    
    
    112.4
    
    
    
    680.5
  (b)
    
    Reports on Form 8-KA Current Report on Form 8-K was filed with the SEC on
February 13, 2004, to report, under Item 7, our third quarter
earnings. The earnings release, including the registrants
Unaudited Condensed Consolidated Statements of Operations for
the 13 and 39 weeks ended December 27, 2003 and December 28,
2002, was filed as Exhibit 99.1 to the Current Report on Form
8-K.(c)
    
    ExhibitsThe following exhibits are filed as a part of this Report on
Form 10-K or incorporated herein by reference as indicated
below: 37




---



##### 



ExhibitNumber
    
    Description of Exhibit2.1
    
    Articles of Merger of PSF Acquisition Corp. into The Lundy
Packing Company, filed August 25, 2000. (1)2.2
    
    Stock Purchase Agreement, dated September 22, 2000, by and among
Premium Standard Farms, Inc., PSF Group Holdings, Inc. and
ContiGroup Companies, Inc. (1)3.1(a)
    
    Certificate of Incorporation of PSF Group Holdings, Inc., filed
May 8, 1998. (1)3.1(b)
    
    Certificate of Amendment of Certificate of Incorporation of PSF
Group Holdings, Inc., filed September 16, 1994. (1)3.2
    
    Amended and Restated By-laws of PSF Group Holdings, Inc. (1)4.1(a)
    
    Indenture, dated as of June 4, 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. (1)4.1(b)
    
    Specimen certificate of 9 -1/4% Senior Notes due 2011. (1)4.1(c)
    
    First Supplemental Indenture dated as of March 31, 2002. (2)4.2
    
    Registration Rights Agreement, dated June 4, 2001, among PSF
Group Holdings, Inc., Premium Standard Farms, Inc., The Lundy
Packing Company, Lundy International, Inc., Premium Standard
Farms of North Carolina, Inc., Morgan Stanley & Co. Incorporated
and J.P. Morgan Securities Inc. (1)4.3
    
    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.10.1*
    
    PSF Group Holdings, Inc. 1999 Equity Incentive Plan, dated
December 1, 1999. (1)10.2*
    
    Premium Standard Farms, Inc. Long-Term Incentive Plan, effective
April 1, 2003.10.3*
    
    Premium Standard Farms, Inc. Executive Level Severance Plan,
dated December 1, 1999. (1)10.4*
    
    Premium Standard Farms, Inc. Vice President Level Severance Plan,
dated December 1, 1999. (1)10.5*
    
    Premium Standard Farms, Inc. Special Executive Retirement Plan,
dated January 1, 2000. (1)10.6(a)*
    
    Premium Standard Farms, Inc. Deferred Compensation Plan, dated
December 29, 2000. (1)10.6(b)*
    
    Amendment No. 1 to the Deferred Compensation Plan, dated June 8,
2001. (1)
 38




---



##### 



ExhibitNumber
    
    Description of Exhibit10.7*
    
    Services Agreement, dated October, 1998, by and between Premium
Standard Farms, Inc. and Continental Grain Company. (1)10.8
    
    Consulting Agreement, dated December 9, 1999, by and between
ContiGroup Companies, Inc. and Premium Standard Farms, Inc. (1)10.9
    
    Market Hog Contract Grower Agreement, dated May 3, 1998, by and
between Continental Grain Company and CGC Asset Acquisition Corp.
(1)10.10
    
    State of Missouri Consent Decree with Premium Standard Farms,
Inc. and ContiGroup Companies, Inc.14.1
    
    PSF Group Holdings, Inc. and Premium Standard Farms, Inc., Code
of Professional Ethics for Chief Executive and Senior Financial
Officers.21.1
    
    Subsidiaries of the Registrant. (3)24.1
    
    Power of Attorney (see signature page).31.1
    
    Certification of John M. Meyer, Chief Executive Officer, pursuant
to Rule 13a-15(e)/15d-15(e).31.2
    
    Certification of Stephen A. Lightstone, Chief Financial Officer,
pursuant to Rule 13a-15(e)/15d-15(e).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.(1)
    
    Incorporated by reference to the Registration Statement on
Form S-4 (Commission File No. 333-64180), filed by the Registrant
with the SEC on June 29, 2001.(2)
    
    Incorporated by reference to the Form 10-K for the year ended
March 30, 2002 filed by the Registrant with the SEC on May 14, 2002.(3)
    
    Incorporated by reference to the Form 10-K for the year ended
March 29, 2003 filed by the Registrant with the SEC on June 4, 2003. 39




---



##### 



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. PSF GROUP HOLDINGS, INC.June 1, 2004
    
    /s/ John M. MeyerDate
    
    John M. Meyer,Chief Executive Officer(Principal Executive Officer)
 40




---



##### 



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 PSF Group Holdings, Inc., a Delaware
corporation (the Company), the Companys Annual Report on Form 10-K for the
fiscal year ended March 27, 2004 (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(Principal Executive Officer)
    
    June 1, 2004John M. Meyer/s/ Stephen A. Lightstone
    
    Chief Financial Officer(Principal Financial Officer)
    
    June 1, 2004Stephen A. Lightstone/s/ Michael J. Zimmerman
    
    Director
    
    June 1, 2004Michael J. Zimmerman/s/ Ronald E. Justice
    
    Director
    
    June 1, 2004Ronald E. Justice/s/ Dean Mefford
    
    Director
    
    June 1, 2004Dean Mefford/s/ Vart K. Adjemian
    
    Director
    
    June 1, 2004Vart K. Adjemian/s/ Maurice L. McGill
    
    Director
    
    June 1, 2004Maurice L. McGill/s/ Michael A. Petrick
    
    Director
    
    June 1, 2004Michael A. Petrick/s/ Paul J. Fribourg
    
    Director
    
    June 1, 2004Paul J. Fribourg
 41




---



##### 



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReports of Independent Public Accountants
    
    
    F-2Consolidated Balance Sheets as of March 27, 2004 and March 29, 2003
    
    
    F-4Consolidated Statements of Operations and Comprehensive (Loss) Income for the three years ended
March 27, 2004, March 29, 2003 and March 30, 2002
    
    
    F-6Consolidated Statements of Shareholders Equity for the three years ended March 27, 2004,
March 29, 2003 and March 30, 2002
    
    
    F-7Consolidated Statements of Cash Flows for the three years ended March 27, 2004, March 29, 2003
and March 30, 2002
    
    
    F-8Notes to the Consolidated Financial Statements
    
    
    F-9
 F-1




---



##### 



Report of independent public accountants REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of
PSF Group Holdings, Inc.
Kansas City, Missouri We have audited the accompanying consolidated balance sheets of PSF Group
Holdings, Inc. and subsidiaries (the Company) as of March 27, 2004 and March
29, 2003, and the related statements of operations and comprehensive (loss)
income, shareholders equity, and cash flows for the years then ended. Our
audits also included the financial statement schedule, as of and for the years
ended March 27, 2004 and March 29, 2003, listed at Item 15. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The consolidated financial statements and the
financial statement schedule of the Company for the year ended March 30, 2002
before the inclusion of the reclassifications discussed in Note 1 to the
consolidated financial statements, were audited by other auditors who have
ceased operations. Those auditors expressed an unqualified opinion on those
financial statements and stated that such March 30, 2002 financial statement
schedule, when considered in relation to the March 30, 2002 basic consolidated
financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein, in their report dated May 3, 2002
which included an explanatory paragraph for the change in method of accounting
for derivative financial instruments and goodwill. 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
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of March 27, 2004
and March 29, 2003, and the results of their operations and their cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the March 27,
2004 and March 29, 2003 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. As discussed above, the consolidated financial statements of the Company
for the year ended March 30, 2002 were audited by other auditors who have
ceased operations. As described in Note 1, the financial statements for the
year ended March 30, 2002 have been reclassified to give effect to Statement of
Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
(SFAS 145), which was adopted by the Company on March 29, 2003. We audited
the adjustments described in Note 1 that were applied to conform the March 30,
2002 financial statements to the presentation required by SFAS 145. Our audit
procedures with respect to the March 30, 2002 disclosures in Note 1 included
(1) comparing the amounts shown as loss on early extinguishment of debt, net of
tax in the Companys consolidated statements of operations to the Companys
underlying accounting analysis obtained from management, (2) comparing the
amounts comprising the loss on early extinguishment of debt and related income
tax benefit to independent supporting documentation obtained from management,
and (3) testing the mathematical accuracy of the underlying analysis. In our
opinion, such reclassifications have been properly applied. However, we were
not engaged to audit, review, or apply any procedures to the March 30, 2002
financial statements of the Company other than with respect to such
reclassifications and, accordingly, we do not express an opinion or any form of
assurance on the March 30, 2002 financial statements taken as a whole. DELOITTE & TOUCHE LLP
Kansas City, Missouri
May 26, 2004 F-2




---



##### 



Report of independent public accountants To the Shareholders of
PSF Group Holdings, Inc.: We have audited the accompanying consolidated balance sheets of PSF Group
Holdings, Inc. (a Delaware corporation) and Subsidiaries (the Company), as of
March 30, 2002 and March 31, 2001, and the related consolidated statements of
operations and comprehensive income, shareholders equity and cash flows for
each of the three years in the period ended March 30, 2002. These financial
statements and schedule referred to below are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the 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. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PSF Group Holdings, Inc. and
Subsidiaries, as of March 30, 2002, and March 31, 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended March 30, 2002, in conformity with accounting principles generally
accepted in the United States. As explained in Note 13 to the financial statements, effective April 1, 2001,
the Company changed its methods of accounting for derivatives and goodwill. Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of valuation and qualifying accounts
included in Item 14 is presented for purposes of complying with the Securities
and Exchange Commissions rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP(1) Kansas City, Missouri,
May 3, 2002 (1) This report is a copy of the previously issued report covering fiscal
years 2002, 2001 and 2000. The predecessor auditors have not reissued their
report.  F-3




---



##### 



PSF Group Holdings, Inc. and Subsidiaries Consolidated balance sheets
March 27, 2004, and March 29, 2003
(in thousands, except share information) 2004
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    
    
    
    $
    Accounts receivable, less allowance of $676 and $540 in
2004 and 2003, respectively
    
    
    28,456
    
    
    
    21,907Inventories
    
    
    167,819
    
    
    
    158,402Federal income tax receivable
    
    
    
    
    
    
    4,525Deferred income taxes
    
    
    16,030
    
    
    
    13,064Prepaid expenses and other
    
    
    3,874
    
    
    
    2,341Total current assets
    
    
    216,179
    
    
    
    200,239PROPERTY, PLANT, EQUIPMENT AND BREEDING STOCK:Land and improvements
    
    
    100,754
    
    
    
    100,510Buildings
    
    
    295,402
    
    
    
    293,538Machinery and equipment
    
    
    278,860
    
    
    
    266,268Breeding stock
    
    
    38,322
    
    
    
    36,672Construction in progress
    
    
    2,173
    
    
    
    4,287715,511
    
    
    
    701,275Less- Accumulated depreciation
    
    
    260,699
    
    
    
    213,314Total property, plant, equipment and breeding stock
    
    
    454,812
    
    
    
    487,961GOODWILL
    
    
    75,998
    
    
    
    75,998OTHER LONG-TERM ASSETS:Deferred financing costs, net
    
    
    5,383
    
    
    
    7,085Other
    
    
    7,642
    
    
    
    7,779Total other long-term assets
    
    
    13,025
    
    
    
    14,864Total assets
    
    $
    760,014
    
    
    $
    779,062
 (continued) F-4




---



##### 



PSF Group Holdings, Inc. and Subsidiaries Consolidated balance sheets
March 27, 2004, and March 29, 2003
(in thousands, except share information)
(continued) 2004
    
    2003LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Checks issued against future deposits
    
    $
    5,115
    
    
    $
    5,129Accounts payable
    
    
    6,332
    
    
    
    6,581Accrued expenses
    
    
    33,168
    
    
    
    28,576Due to related party
    
    
    56
    
    
    
    979Federal income tax payable
    
    
    37
    
    
    
    Accrued interest
    
    
    5,888
    
    
    
    6,178Current maturities of long-term debt and capital leases
    
    
    833
    
    
    
    13,273Total current liabilities
    
    
    51,429
    
    
    
    60,716LONG-TERM LIABILITIES:Long-term debt and capital leases, less current maturities
    
    
    286,251
    
    
    
    291,911Other long-term liabilities
    
    
    6,509
    
    
    
    6,345Due to related party
    
    
    
    
    
    
    Deferred income taxes
    
    
    75,813
    
    
    
    75,795Total long-term liabilities
    
    
    368,573
    
    
    
    374,051Total liabilities
    
    
    420,002
    
    
    
    434,767SHAREHOLDERS EQUITY:Preferred stock, $.01 par value, 10,000 shares authorized,
no shares issued or outstanding
    
    
    
    
    
    
    Class A common stock, $.01 par value; 250,000 shares authorized, 100,000
shares issued and outstanding
    
    
    1
    
    
    
    1Class B common stock, $.01 par value; 300,000 shares authorized, 113,301
shares issued and outstanding
    
    
    1
    
    
    
    1Additional paid-in capital
    
    
    373,708
    
    
    
    373,693Accumulated other comprehensive loss, net of tax
    
    
    (54
    )
    
    
    (347
    )Accumulated deficit
    
    
    (33,644
    )
    
    
    (29,053
    )Total shareholders equity
    
    
    340,012
    
    
    
    344,295Total liabilities and shareholders equity
    
    $
    760,014
    
    
    $
    779,062
 The accompanying notes are an integral part of these consolidated financial statements. F-5




---



##### 



PSF Group Holdings, Inc. and Subsidiaries Consolidated statements of operations and comprehensive (loss) income
For the fiscal years ended
March 27, 2004, March 29, 2003 and March 30, 2002
(in thousands) 2004
    
    2003
    
    2002NET SALES
    
    $
    730,737
    
    
    $
    608,414
    
    
    $
    674,946COST OF GOODS SOLD
    
    
    696,751
    
    
    
    631,870
    
    
    
    589,183Gross profit
    
    
    33,986
    
    
    
    (23,456
    )
    
    
    85,763OPERATING EXPENSES:Selling, general and administrative expenses
    
    
    17,397
    
    
    
    18,267
    
    
    
    21,551Other income, net
    
    
    (597
    )
    
    
    (2,293
    )
    
    
    (558
    )Total operating expenses
    
    
    16,800
    
    
    
    15,974
    
    
    
    20,993Operating income (loss)
    
    
    17,186
    
    
    
    (39,430
    )
    
    
    64,770OTHER (EXPENSE) INCOME:Interest expense
    

    
    (24,822
    )
    
    
    (24,000
    )
    
    
    (20,835
    )Interest income
    
    
    122
    
    
    
    255
    
    
    
    431Loss on early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    (2,192
    )Other expense, net
    
    
    (24,700
    )
    
    
    (23,745
    )
    
    
    (22,596
    )(Loss) income before income taxes
    
    
    (7,514
    )
    
    
    (63,175
    )
    
    
    42,174INCOME TAX BENEFIT (EXPENSE):Current tax provision
    
    
    (212
    )
    
    
    5,411
    
    
    
    (4,965
    )Deferred tax provision
    
    
    3,135
    
    
    
    19,164
    
    
    
    (11,844
    )Income tax benefit (expense)
    
    
    2,923
    
    
    
    24,575
    
    
    
    (16,809
    )NET (LOSS) INCOME
    
    $
    (4,591
    )
    
    $
    (38,600
    )
    
    $
    25,365Unrealized gain (loss) on interest rate swap, net of tax
    
    
    293
    
    
    
    (692
    )
    
    
    345COMPREHENSIVE (LOSS) INCOME
    
    $
    (4,298
    )
    
    $
    (39,292
    )
    
    $
    25,710
 The accompanying notes are an integral part of these consolidated financial statements. F-6




---



##### 



PSF Group Holdings, Inc. and Subsidiaries Consolidated statements of shareholders equity
For the fiscal years ended
March 27, 2004, March 29, 2003 and March 30, 2002
(in thousands) AccumulatedAdditional
    
    Other
    
    RetainedCommon
    
    Paid-In
    
    Comprehensive
    
    EarningsStock
    
    Capital
    
    Income (Loss)
    
    (Deficit)
    
    TotalBALANCE, March 31, 2001
    
    $
    2
    
    
    $
    373,653
    
    
    $
    
    
    
    $
    (15,818
    )
    
    $
    357,837Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,365
    
    
    
    25,365Unrealized gain on interest rate swap
    
    
    
    
    
    
    
    
    
    
    345
    
    
    
    
    
    
    
    345Other
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    20BALANCE, March 30, 2002
    
    $
    2
    
    
    $
    373,673
    
    
    $
    345
    
    
    $
    9,547
    
    
    $
    383,567Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,600
    )
    
    
    (38,600
    )Unrealized loss on interest rate swap
    
    
    
    
    
    
    
    
    
    
    (692
    )
    
    
    
    
    
    
    (692
    )Other
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    20BALANCE, March 29, 2003
    
    $
    2
    
    
    $
    373,693
    
    
    $
    (347
    )
    
    $
    (29,053
    )
    
    $
    344,295Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,591
    )
    
    
    (4,591
    )Unrealized gain on interest rate swap
    
    
    
    
    
    
    
    
    
    
    293
    
    
    
    
    
    
    
    293Other
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    15BALANCE, March 27, 2004
    
    $
    2
    
    
    $
    373,708
    
    
    $
    (54
    )
    
    $
    (33,644
    )
    
    $
    340,012
 The accompanying notes are an integral part of these consolidated financial statements.  F-7




---



##### 



PSF Group Holdings, Inc. and Subsidiaries Consolidated statements of cash flows
For the fiscal years ended
March 27, 2004, March 29, 2003 and March 30, 2002
(in thousands) 2004
    
    2003
    
    2002OPERATING ACTIVITIES:Net (loss) income
    
    $
    (4,591
    )
    
    $
    (38,600
    )
    
    $
    25,365Adjustments to reconcile net (loss) income to net cash
provided by operating activities-Depreciation and amortization
    
    
    61,306
    
    
    
    61,508
    
    
    
    56,054Amortization of deferred financing costs
    
    
    1,752
    
    
    
    1,546
    
    
    
    1,209Deferred income taxes
    
    
    (2,948
    )
    
    
    (19,164
    )
    
    
    9,946Net (gain) loss on sale of fixed assets
    
    
    (4,651
    )
    
    
    1,298
    
    
    
    (4,950
    )Changes in operating assets and liabilities, net-Accounts receivable
    
    
    (6,548
    )
    
    
    (575
    )
    
    
    4,417Inventories
    
    
    (9,417
    )
    
    
    (17,237
    )
    
    
    (13,337
    )Prepaid expenses and other assets
    
    
    3,421
    
    
    
    (1,559
    )
    
    
    10,066Accounts payable, accrued expenses and other liabilities
    
    
    3,347
    
    
    
    (4,597
    )
    
    
    (8,255
    )Net cash provided by (used in) operating activities
    
    
    41,671
    
    
    
    (17,380
    )
    
    
    80,515INVESTING ACTIVITIES:Investment in joint venture
    
    
    
    
    
    
    (2,184
    )
    
    
    Purchases of property, plant, equipment and breeding stock
    
    
    (41,884
    )
    
    
    (35,505
    )
    
    
    (96,232
    )Proceeds from disposal of property, plant, equipment and breeding stock
    
    
    18,378
    
    
    
    11,745
    
    
    
    14,931Net cash used in investing activities
    
    
    (23,506
    )
    
    
    (25,944
    )
    
    
    (81,301
    )FINANCING ACTIVITIES:Checks issued against future deposits
    
    
    (14
    )
    
    
    5,129
    
    
    
    Proceeds from long-term debt
    
    
    
    
    
    
    
    
    
    
    173,591(Payments on) proceeds from revolving debt, net
    
    
    (4,799
    )
    
    
    46,530
    
    
    
    13,269Payments for deferred financing costs
    
    
    (50
    )
    
    
    (1,390
    )
    
    
    (4,749
    )Repayments on long-term debt
    
    
    (13,302
    )
    
    
    (14,127
    )
    
    
    (182,703
    )Net cash (used in) provided by financing activities
    
    
    (18,165
    )
    
    
    36,142
    
    
    
    (592
    )Net decrease in cash and
cash equivalents
    
    
    
    
    
    
    (7,182
    )
    
    
    (1,378
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    
    
    
    
    7,182
    
    
    
    8,560CASH AND CASH EQUIVALENTS, end of period
    
    $
    
    
    
    $
    
    
    
    $
    7,182SUPPLEMENTAL DISCLOSURES:Interest paid
    
    $
    23,014
    
    
    $
    20,055
    
    
    $
    20,462Income tax (received) paid
    
    
    (4,350
    )
    
    
    (4,205
    )
    
    
    7,890
 The accompanying notes are an integral part of these consolidated financial statements. F-8




---



##### 



PSF Group Holdings, Inc. and Subsidiaries Notes to consolidated financial statements
March 27, 2004, March 29, 2003 and March 30, 2002 1. Summary of significant accounting policies: Nature of operations PSF Group Holdings, Inc. (Group) is a Delaware company formed in 1998 and is
currently 53% owned by ContiGroup Companies, Inc. Group has a wholly-owned
subsidiary, Premium Standard Farms, Inc. (PSF, Inc.). PSF, Inc., and its
subsidiaries are an integrated business engaged principally in the business of
hog production and pork processing and selling to domestic and international
markets. Group and PSF, Inc., collectively referred to as 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 30, 2003, through March 27, 2004 (52
weeks), March 31, 2002, through March 29, 2003 (52 weeks), and the period April
1, 2001, through March 30, 2002 (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-9




---



##### 



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 at March 27 and March 29 (in thousands): 2004
    
    2003Hogs
    
    $
    153,340
    
    
    $
    142,675Processed pork products
    
    
    8,383
    
    
    
    9,568Packaging and supplies
    
    
    1,779
    
    
    
    2,822Grain, feed additives and other
    
    
    4,317
    
    
    
    3,337$
    167,819
    
    
    $
    158,402
 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 $61,306,000, $61,508,000 and
$56,054,000 for fiscal years ended March 27, 2004, March 29, 2003, and March
30, 2002, respectively. Capitalized interest relating to the Companys additions of property, plant,
equipment and breeding stock amounted to $147,000 and $365,000 for fiscal years
ended March 27, 2004 and March 29, 2003, 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 F-10




---



##### 



market and included in revenue or cost of goods sold in the consolidated
statements of operations and comprehensive (loss) income. The Company has entered into an interest rate swap agreement. The swap has
been designated as a cash flow hedge and qualifies 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
29, 2003, the fair value of the Companys debt was $288,833,000 and
$285,934,000, respectively, with a carrying value of $287,084,000 and
$305,184,000, 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 29, 2003. 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 29, 2003 was $5,823,000 and $4,071,000, respectively. 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 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. Effective as of April 1, 2001, these contracts
were marked to market through earnings. On April 1, 2001, the Company recorded
a transition adjustment reflecting an unrealized loss on commodity contracts of
approximately $7,271,000 as a liability and a decrease to accumulated other
comprehensive income of $4,380,000, net of $2,920,000 in deferred taxes. For
the fiscal year ended March 30, 2002, the Company recorded $7,271,000 of this
liability as a reduction to gross profit as F-11




---



##### 



the related commodity contracts expired during this period. Changes in the
fair value of the existing commodity contracts and those commodity contracts
entered into subsequent to April 1, 2001, are recorded in the period in which
they occur. For the fiscal years ended March 27, 2004, March 29, 2003, and
March 30, 2002, gains (losses) marked to market on commodity contracts
recognized in revenue for lean hog futures were $5,344,000, $1,392,000, and
($8,331,000), respectively. Gains (losses) recognized in cost of goods sold
relating to the hedging of feed components were $6,067,000, ($868,000), and
($5,293,000) respectively. The Company has recorded the fair value of its open
exchange traded commodity contracts of $4,918,000 and $1,509,000 in Prepaid
Expenses and Other in the consolidated balance sheets at March 27, 2004 and
March 29, 2003, 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 Company has
designated the interest rate swap as a cash flow hedge and for the fiscal years
ended March 27, 2004, and March 29, 2003, recorded ($88,000) and ($567,000),
respectively, in the consolidated balance sheets relating to the fair value of
the swap. 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 29, 2002, decreased accumulated
other comprehensive income by ($692,000), net of $440,000 in deferred taxes.
The interest rate swap will mature on September 30, 2004. 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 6,857 shares of Class B common stock at an
exercise price of $1,666.48 per share. In January 2004, the Companys board of
directors granted an additional 857 options at the same exercise price as the
previous option grants. All of the options are fully exercisable at March 27,
2004, except for 571, which are exercisable December 31, 2006. At December 31,
2005, 6,429 shares expire, at December 31, 2007, 714 shares expire and at
December 31, 2009, 571 shares expire. No options have been exercised as of
March 27, 2004. The Company records stock compensation in accordance with Accounting Principles
Board Opinion No. 25 (APB 25). For fiscal years ending March 27, 2004, March
29, 2003 and March 30, 2002, the Company recorded compensation expense of
$15,000, $20,000 and $20,000, 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 30, 2002, 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. New accounting pronouncements On June 30, 2001 the Financial Accounting Standards Board (FASB) issued its
Statement of Financial Accounting Standards No. 143 (SFAS 143), Accounting for
Asset Retirement Obligations. SFAS 143 applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development, and the normal operation of long-lived
assets. This statement requires that the fair value of a liability for an
asset retirement obligation be recognized 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. This statement is effective for financial statements issued
for fiscal years beginning after June 15, 2002 and was adopted by the Company
March 30, 2003. 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 condensed consolidated
financial statements. However, should laws, assumptions or F-12




---



##### 



other circumstances change which require lagoon closure before the periods
assumed in the present value calculations, the costs could have a material
impact on the consolidated financial statements in the period the change
occurs. In April 2002, the FASB issued SFAS No. 145 (SFAS 145), Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS Nos. 4 and 64 required gains and losses from extinguishment
of debt to be classified as extraordinary items. SFAS 145 rescinds this
requirement and stipulates that gains or losses on extinguishment of debt would
have to meet the criteria of APB Opinion No. 30 to be classified as an
extraordinary item. In addition, any extraordinary gains or losses on
extinguishment of debt in prior periods presented would require
reclassification. The Company adopted SFAS 145 during the fourth quarter of
fiscal 2002 and as a result, classified the $1,315,000 (net of a related tax
benefit of $877,000) loss from the extinguishment of debt in the fiscal year
2002 consolidated statements of earnings to other expense. In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 applies to entities if
its total equity at risk is not sufficient to permit the entity to finance its
activities without additional subordinated support or if the equity investors
lack certain characteristics of a controlling financial interest. If an entity
is determined to meet those certain characteristics, FIN 46 requires a test to
identify the primary beneficiary based on expected losses and expected returns
associated with the variable interest. The primary beneficiary is then
required to consolidate the entity. The consolidation requirements apply to
all variable interest entities (VIEs) created after January 31, 2003. For VIEs
created prior to February 1, 2003, the FASB issued FASB Interpretation No. 46
(revised December 2003) which extends the effective date of FIN 46 to the first
reporting period ending after March 15, 2004. Management has concluded that we
have not created or obtained any VIEs subsequent to January 31, 2003 that would
require consolidation. The adoption of FIN 46 did not have a material impact
on the Companys consolidated financial statements. In May 2003, the FASB issued SFAS No. 150 (SFAS 150), Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
SFAS 150 provides guidance on how an entity classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
SFAS 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except that certain provisions have been
deferred pursuant to FASB Staff Position 150-3. The adoption of SFAS 150 did
not have a material impact on our consolidated financial statements. In January 2003, the FASB issued SFAS 132(revised 2003), Employers
Disclosures about Pensions and Other Postretirement Benefits which retains all
of the disclosures that are required by SFAS 132 and includes several
additional disclosures. It also amends APB Opinion 28 Interim Financial
Reporting to require certain disclosures about pension and other
postretirement benefit plans in interim financial statements. The provisions
of SFAS 132(revised 2003) are effective for fiscal years ending after December
15, 2003. The adoption of SFAS 132(revised 2003) did not have a material
impact on the consolidated financial statements. Reclassifications Certain reclassifications were made to the 2003 financial statements to conform
to the 2004 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. F-13




---



##### 



2. Shareholders equity Common stock There are two classes of common stock which Group can issue. 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 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
20,481.92 shares of Class A common stock at an exercise price of $2,205 per
share. As of March 27, 2004, 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. 3. Accrued expenses Accrued expenses are comprised of the following at March 27 and March 29 (in
thousands): 2004
    
    2003Salaries and benefits payable
    
    $
    10,367
    
    
    $
    8,304Workers compensation payable
    
    
    5,087
    
    
    
    4,133Grain and feed
    
    
    1,626
    
    
    
    816Claims reserves
    
    
    3,541
    
    
    
    4,271Accrued payables and other
    
    
    12,547
    
    
    
    11,052$
    33,168
    
    
    $
    28,576
 F-14




---



##### 



4. Long-term debt and capital leases Long-term debt consists of the following at March 27 and March 29 (in
thousands): 2004
    
    2003Senior unsecured notes, due on June 15, 2011,
interest at 9.25%, 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
    
    
    
    69,799Term 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
    
    
    
    56,250Capital leases
    
    
    3,334
    
    
    
    4,135Total debt and capital leases
    
    
    287,084
    
    
    
    305,184Less- Current portion
    
    
    833
    
    
    
    13,273Long-term debt and capital leases
    
    $
    286,251
    
    
    $
    291,911
 Future maturities of long-term debt and capital leases, reflecting the
refinancing discussed below, are as follows (in thousands): Fiscal Year2005
    
    $
    8332006
    
    
    9072007
    
    
    1,0502008
    
    
    4492009
    
    
    87Thereafter
    
    
    283,758$
    287,084
 The indenture associated with the $175,000,000 senior 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. The senior 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 notes may be redeemed at a price
of 109.25 percent of principal plus accrued interest, using proceeds from the
sale of capital stock. The Company had a bank credit agreement that included a term loan and revolving
loan. Effective June 28, 2002, the Company and its bank group amended the
credit agreement to extend the revolving credit facility one year, increase the
letter of credit commitment from $10,000,000 to $15,000,000, and amend certain
financial covenants and pricing terms. Effective September 27, 2002, the Company and its bank group amended the credit
agreement to increase the Companys revolving credit facility by $50,000,000 to
$150,000,000 in total availability subject to a borrowing base calculation,
among other things. The amendment also deferred quarterly principal payments
on the Companys term debt for a one year period and amended certain financial
covenants. Amounts borrowed under the credit agreement bear interest at
fluctuating rates selected by the Company. These rates are based on the agent
banks base rate (the greater of the agent banks prime rate or the federal
funds rate plus one half of one percent) or LIBOR plus, in each F-15




---



##### 



case, an applicable margin, currently ranging from 1.5% to 2.875%, determined
by the Companys leverage ratio. All borrowings under the revolving credit
facility were to mature on August 21, 2004 and the term debt was to mature on
August 21, 2005. The revolving loans are not to exceed $150,000,000 of total borrowings,
including up to $15,000,000 in letters of credit. Fees of 1.75 percent per
annum are paid quarterly only on outstanding letter-of-credit amounts. At
March 27, 2004, and March 29, 2003, the Company had $11,159,000 and $10,034,000
of outstanding letters of credit, respectively. The amount available under the revolving credit facility is determined by a
borrowing base formula derived from the sum of eligible accounts receivable and
a formula value for inventory based on current book value. The borrowing base
at March 27, 2004, was approximately $150,000,000 and at March 29, 2003, it was
approximately $144,675,000, and accordingly, unused available borrowings were
$73,841,000 and $64,841,000, respectively (net of outstanding letters of credit
and revolving loans). As of March 27, 2004, the Company was in compliance with
all covenants relating to the bank credit agreement. On April 9, 2004, the Company entered into an amended and restated loan and
security agreement (Credit Agreement) with its bank group. The Credit
Agreement is a $175,000,000 revolving line of credit. The balance of the
previous line of credit as well as the outstanding term debt, at the date of
closing, became the opening balance outstanding under the Credit Agreement.
Obligations under the Credit Agreement are secured by liens on substantially
all of the Companys assets. In addition to customary financial covenants, the
Credit Agreement contains restrictions on, among other things, encumbrance or
disposal of assets, acquisitions, additional indebtedness, capital investment,
payment of subordinated debt and payment of dividends. In addition to fees
payable under credit facilities of this type, amounts borrowed under the Credit
Agreement bear interest at fluctuating rates selected by the Company. These
rates are based on the agent banks base rate (the greater of the agent bank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 Companys leverage ratio. All borrowings under the revolving credit
facility mature on April 9, 2009. Financing costs associated with the
amendment will be capitalized and amortized over the life of the Credit
Agreement. In accordance with FASB Statement No. 6 (SFAS 6), Classification
of Short-Term Obligations Expected to be Refinanced, the Company has
classified the credit agreement existing at March 27, 2004 (consisting of the
term loan and revolving loan) totaling $108,750,000 as long-term in the
consolidated balance sheets. The line of credit is not to exceed $175,000,000 of total borrowings, including
up to $15,000,000 in letters of credit. Letter-of-credit fees are based on the
applicable margin and are paid quarterly only on outstanding letter-of-credit
amounts. 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 value for inventory based on current book
value. The agreement also contains covenants, among others, regarding 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, except for the first through third quarters of fiscal year 2005,
which are based on the most recent five through seven quarters. EBITDA, as
defined in the bank credit agreement, cannot be less than $50,000,000 as of the
end of each quarter in fiscal year 2005, increasing to $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 quarter 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. During November 2001, the Company entered into an interest rate swap agreement
to convert the variable base interest rate of its bank term debt to a fixed
rate of 3.0125 percent plus the agent banks applicable margin (currently 2.875
percent at March 27, 2004). The swap has a lower notional amount and matures
more quickly than the term debt. F-16




---



##### 



5. Income taxes A reconciliation of statutory federal income tax and income tax expense is
shown below (in thousands): 2004
    
    2003
    
    2002Current income tax (expense) benefit-Amount based on federal statutory rate
    
    $
    (190
    )
    
    $
    5,419
    
    
    $
    (4,215
    )State income taxes, net of federal
    
    
    (22
    )
    
    
    (8
    )
    
    
    (750
    )Current income tax (expense) benefit
    
    
    (212
    )
    
    
    5,411
    
    
    
    (4,965
    )Deferred income tax benefit (expense)-Amount based on federal statutory rate
    
    
    2,662
    
    
    
    15,365
    
    
    
    (10,547
    )State income taxes, net of federal
    
    
    473
    
    
    
    3,799
    
    
    
    (1,297
    )Deferred income tax benefit (expense)
    
    
    3,135
    
    
    
    19,164
    
    
    
    (11,844
    )Total income tax benefit (expense)
    
    $
    2,923
    
    
    $
    24,575
    
    
    $
    (16,809
    )
 Components of the net deferred tax balances at March 27 and March 29, are as follows (in thousands): 2004
    
    2003Net current deferred tax assets-Goodwill
    
    $
    208
    
    
    $
    221Inventory
    
    
    1,654
    
    
    
    1,454Other accruals and reserves
    
    
    7,568
    
    
    
    7,034Net operating loss carryforwards
    
    
    6,600
    
    
    
    4,355Net current deferred tax assets
    
    $
    16,030
    
    
    $
    13,064Net long-term deferred tax liabilities-Fixed assets
    
    $
    (90,730
    )
    
    $
    (99,652
    )Net operating loss carryforwards
    
    
    13,100
    
    
    
    21,479Goodwill
    
    
    864
    
    
    
    1,072Other
    
    
    953
    
    
    
    1,306Net long-term deferred tax liability
    
    $
    (75,813
    )
    
    $
    (75,795
    )
 At March 27, 2004, the Company has operating loss carryforwards of $49,251,000
available to offset future taxable income. The operating loss carryforwards of
$49,251,000 will expire through 2024. The Company believes that its future
taxable income will be sufficient for full realization of the deferred tax
assets. 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 29, 2003, the investment in the L&H Farms partnership was $1,184,000 and
$893,000, respectively, and is included in other long-term assets in the
consolidated balance sheets. The Companys share of the partnerships earnings
(losses) was $291,000 for fiscal year ended March 27, 2004, ($240,000) for
fiscal year ended March 29, 2003, and $732,000 for fiscal year ended March 30,
2002. These amounts are included in other expense (income) in the consolidated
statements of operations and comprehensive income. In addition, the Company has a 60 percent ownership in L&S Farms, LLC, a
limited liability company, in the business of breeding and raising hogs in
rural North Carolina. The Company consolidates this operation for financial
reporting purposes. Minority interest of $166,000 for fiscal year ended March
27, 2004, $113,000 for fiscal year ended March 29, 2003, and $394,000 for
fiscal year ended March 30, 2002, was charged to other expense (income) in the
consolidated statements of operations and comprehensive income. As of March
27, 2004, and March 29, 2003, the minority interest obligation was $515,000 and
$629,000, respectively, recorded in other long-term liabilities in the
consolidated balance sheets. F-17




---



##### 



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 29, 2003, the investment in Oldhams was $2,308,000 and $2,184,000,
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 for
fiscal year ended March 27, 2004. This amount is included in other expense
(income) in the consolidated statements of operations and comprehensive income. The Company has a 50 percent ownership interest in Crystal Peak Technologies,
LLC, a Delaware limited liability company, 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, but this entity remains dormant and has not actively
engaged in any business. 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 27, 2004, March 29, 2003, and March 30,
2002, the total amount of these expenses and other related-party expenses with
CGC were $5,389,000, $5,331,000, and $6,788,000, respectively. At March 27,
2004, and March 29, 2003, the Company recorded amounts due to related party for
these items of $56,000 and $58,000, respectively, included in the consolidated
balance sheets. The Company provided ContiGroup management and human resources services with
respect to ContiGroups prior pork operations, hog and feed production services
and environmental and other business consulting services. The total billings
for the fiscal year ended March 30, 2002, amounted to $112,000. 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 which was a board member of PSF, Inc. until they 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 29,
2003 was $1,729,000 and $2,031,000, 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 29, 2003, 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
27, 2004 are as follows (in thousands except wtd.-avg. price/unit): F-18




---



##### 



Trading: Contract
    
    Volumes
    
    Wtd.-avg.
    
    FairQuantity
    
    Units
    
    Price/Unit
    
    ValueFutures ContractsCorn
purchases - long
    
    
    230
    
    
    bushels
    
    $
    3.10
    
    
    $
    (9
    )Soybean meal
purchases - long
    
    
    61
    
    
    tons
    
    
    234.81
    
    
    
    4,142Soybean meal
sales - short
    
    
    5
    
    
    tons
    
    
    176.50
    
    
    
    (330
    )Lean hog
sales - short
    
    
    17,920
    
    
    pounds
    
    
    0.66
    
    
    
    (616
    )Lean hog
purchases - long
    
    
    8,880
    
    
    pounds
    
    
    0.66
    
    
    
    62Wheat sales - short
    
    
    180
    
    
    bushels
    
    
    3.80
    
    
    
    (65
    )Option ContractsCorn puts - short
    
    
    9,500
    
    
    bushels
    
    $
    2.73
    
    
    $
    (395
    )Corn calls - long
    
    
    6,000
    
    
    bushels
    
    
    3.00
    
    
    
    1,349Meal calls - long
    
    
    10
    
    
    tons
    
    
    250.00
    
    
    
    608Meal puts - short
    
    
    15
    
    
    tons
    
    
    206.67
    
    
    
    (9
    )Lean hog
calls - long
    
    
    7,000
    
    
    pounds
    
    
    0.67
    
    
    
    274Lean hog
puts - short
    
    
    7,000
    
    
    pounds
    
    
    0.60
    
    
    
    (45
    )Lean hog
calls - short
    
    
    2,000
    
    
    pounds
    
    
    0.65
    
    
    
    (50
    )
 Contract
    
    Volumes
    
    Wtd.-avg.
    
    NotionalQuantity
    
    Units
    
    Price/Unit
    
    AmountForward ContractsCorn
    
    
    
    
    1,565
    
    
    bushels
    
    $
    3.00
    
    
    $
    4,698Meal
    
    
    
    

    8
    
    
    tons
    
    
    285.53
    
    
    
    2,352Milo
    
    
    
    
    174
    
    
    
    
    
    
    
    3.14
    
    
    
    547
 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
$7,335,000, $6,861,000 and $5,435,000 in the fiscal years ended March 27, 2004,
March 29, 2003, and March 30, 2002, respectively. Future minimum rental
commitments at March 27, 2004, are as follows (in thousands): 2005
    
    $
    6,0832006
    
    
    5,2972007
    
    
    3,8202008
    
    
    2,7152009
    
    
    2,280Thereafter
    
    
    3,551$
    23,746
 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 cant 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 1,750,000 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 $1,878,000,
$1,870,000 and $1,816,000 for the fiscal years ended March 27, 2004, March 29,
2003, and March 30, 2002, respectively. F-19




---



##### 



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 and March 29, 2003, the Company had no liability
recorded for the long-term incentive plan. At March 30, 2002, the Company had
a liability recorded of $1,507,000 in other long-term liabilities toward the
long-term incentive plan. The Company expensed $1,500,000, in the fiscal year
ended March 30, 2002. In fiscal year ended March 29, 2003, the Company
credited the amount 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 29, 2003, the plan had $1,501,000 and $1,432,000,
respectively, of investments held by an independent trustee. The investments
are classified as trading and are reflected in other long-term assets with a
corresponding liability included in other long-term liabilities in the
consolidated balance sheets. The Company has a nonqualified, unfunded special executive retirement plan for
certain key executives. Benefits generally accrue based on pay and years of
credited service. Specific data related to the plan is as follows ($ in
thousands): March 27,
    
    March 29,2004
    
    2003Accumulated benefit obligation
    
    $
    1,831
    
    
    $
    1,344Change in benefit obligation during yearProjected benefit obligation, beginning of fiscal year
    
    $
    2,378
    
    
    $
    1,573Service cost
    
    
    468
    
    
    
    359Interest cost
    
    
    155
    
    
    
    114Actuarial (gain)/loss (including assumption changes)
    
    
    (371
    )
    
    
    332Projected benefit obligation, end of fiscal year
    
    $
    2,630
    
    
    $
    2,378Reconciliation of funded status as end of fiscal yearFunded status, beginning of fiscal year
    
    $
    (2,630
    )
    
    $
    (2,378
    )Unrecognized prior service cost
    
    
    508
    
    
    
    554Unrecognized net loss
    
    
    75
    
    
    
    470Accrued cost, end of fiscal year
    
    $
    (2,047
    )
    
    $
    (1,354
    )Components of net periodic pension costService cost
    
    $
    468
    
    
    $
    359Interest cost
    
    
    155
    
    
    
    114Amortization of prior service cost
    
    
    46
    
    
    
    47Amortization of unrecognized loss
    
    
    24
    
    
    
    Pension cost
    
    $
    693
    
    
    $
    520Weighted average assumption used to determine benefit obligationDiscount rate
    
    
    6.00
    %
    
    
    6.25
    %Salary increases
    
    
    3.50
    %
    
    
    4.50
    %Weighted average assumptions used to determine net periodic
pension costDiscount rate
    
    
    6.25
    %
    
    
    7.25
    %Salary increases
    
    
    4.50
    %
    
    
    4.50
    %Measurement date
    
    March 30
    
    March 31Fiscal period
    
    to March 27
    
    to March 29
 F-20




---



##### 



10. Litigation Environmental matters The Company in prior years settled two citizens action suits which sought to
enforce alleged violations of the Clean Air Act, Clean Water Act and CERCLA
against the Company and ContiGroup Companies, Inc. (ContiGroup). The U.S.
Environmental Protection Agency (the E.P.A.) had intervened in this action
and filed a separate notice of violation against the Company under the Clean
Air Act. This settlement, in the form of a consent decree (EPA Consent
Decree), resolved all outstanding issues of ContiGroup and the Company with
the citizens group and the E.P.A. 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 incurred any liability in this litigation, the Company
assumed that liability pursuant to the terms of the 1998 ContiGroup
transaction. The EPA Consent Decree, built upon the 1999 consent decree with
the State of Missouri referenced below, requires the Company and ContiGroup to
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. The counsel for the citizen plaintiffs has submitted a petition for
recovery of attorneys fees in connection with the lawsuits against both the
Company and ContiGroup. On September 10, 2003, the Court issued an order
denying the majority of fees sought by counsel for the citizen plaintiffs which
order was appealed by plaintiffs counsel in March, 2004. The Company has
settled with the plaintiffs and has paid their counsel on the balance of the
fees prior to March 27, 2004. In 1999, the Company settled a suit filed by the Attorney General of the State
of Missouri against the Company and ContiGroup. As referenced above, the
Company assumed ContiGroups liability in this action in connection with the
1998 ContiGroup transaction. The settlement required the Company and ContiGroup
to enter into a consent judgment (Missouri Consent Decree) pursuant to which
the Company was obligated to invest $25 million on or before May 19, 2004, for
researching, installing and operating improved technology to control
wastewater, air and odor emissions from its Missouri farms. All such
investments were subject to the approval of a panel of independent university
experts (Expert Panel). In June 2002, the State of Missouri filed a lawsuit
against the Company seeking penalties and injunctive relief for additional
alleged violations of air and water regulations. The Company settled in
February, 2004 with the State, and paid an additional fine of $333,000 prior to
March 27, 2004. The settlement also extends the implementation schedule under
the Missouri Consent Decree from 2004 until 2010. In addition, and in lieu of
the $25 million investment commitment and deadline referenced above, the
Company has committed to install improved wastewater, air and odor technology
at all of its finisher farms in northern Missouri, subject to the approval of
the Expert Panel. The Company estimates it may spend approximately $31 million
on this technology by the 2010 deadline. 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 additional 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). 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 has filed appropriate motions to strike in the Torrey
case and will soon file an answer in the Bounds case. 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 has 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. On May 14, 2004 an
action entitled Vernon Hanes et al. v. Premium Standard Farms, Inc. et al. was
filed in Daviess County Circuit Court, Gallatin, Missouri, which contains
several counts, but is primarily a nuisance action. The Company believes it
has good defenses to these actions and intends to vigorously defend these
suits. F-21




---



##### 



Other legal matters 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 such proceedings currently pending 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 operating
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 2004-Net sales
    
    $
    663,530
    
    
    $
    453,585
    
    
    $
    (386,378
    )
    
    $
    730,737Intersegment sales
    
    
    (2,936
    )
    
    
    (383,442
    )
    
    
    
    
    
    
    Operating income
    
    
    34,695
    
    
    
    (4,249
    )
    
    
    (13,260
    )
    
    
    17,186Assets
    
    
    195,366
    
    
    
    534,724
    
    
    
    29,924
    
    
    
    760,014Goodwill
    
    
    25,020
    
    
    
    50,978
    
    
    
    
    
    
    
    75,998Depreciation and
amortization
    
    
    15,718
    
    
    
    44,793
    
    
    
    795
    
    
    
    61,306Capital expenditures
    
    
    9,911
    
    
    
    31,101
    
    
    
    872
    
    
    
    41,884Fiscal 2003-Net sales
    
    $
    553,566
    
    
    $
    357,154
    
    
    $
    (302,306
    )
    
    $
    608,414Intersegment sales
    
    
    (3,213
    )
    
    
    (299,093
    )
    
    
    
    
    
    
    Operating income
    
    
    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 2002-Net sales
    
    $
    597,300
    
    
    $
    440,825
    
    
    $
    (363,179
    )
    
    $
    674,946Intersegment sales
    
    
    (1,740
    )
    
    
    (361,439
    )
    
    
    
    
    
    
    Operating income
    
    
    23,011
    
    
    
    59,440
    
    
    
    (17,681
    )
    
    
    64,770Assets
    
    
    210,476
    
    
    
    559,344
    
    
    
    37,819
    
    
    
    807,639Goodwill
    
    
    25,020
    
    
    
    50,978
    
    
    
    
    
    
    
    75,998Depreciation and
amortization
    
    
    11,787
    
    
    
    43,462
    
    
    
    805
    
    
    
    56,054Capital expenditures
    
    
    37,806
    
    
    
    57,671
    
    
    
    755
    
    
    
    96,232
 F-22




---



##### 



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): 2004
    
    2003
    
    2002United States
    
    $
    675,745
    
    
    $
    557,764
    
    
    $
    626,245Far East
    
    
    35,389
    
    
    
    37,013
    
    
    
    35,913Europe and Russia
    
    
    357
    
    
    
    139
    
    
    
    1,474Canada
    
    
    9,075
    
    
    
    8,544
    
    
    
    9,366Mexico and South America
    
    
    10,171
    
    
    
    4,954
    
    
    
    1,948Totals
    
    $
    730,737
    
    
    $
    608,414
    
    
    $
    674,946
 All of the Companys assets are located within the United States. 12. Quarterly results of operations (unaudited in thousands): The following represents the unaudited quarterly results of operations for
fiscal years 2004 and 2003. All amounts are expressed in thousands. 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
    )Fiscal 2003-Net sales
    
    $
    149,049
    
    
    $
    145,735
    
    
    $
    154,090
    
    
    $
    159,540Gross profit
    
    
    2,900
    
    
    
    (7,541
    )
    
    
    (9,303
    )
    
    
    (9,512
    )Net (loss)
    
    
    (4,274
    )
    
    
    (10,492
    )
    
    
    (12,253
    )
    
    
    (11,581
    )
 F-23