##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: December 25, 2004
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from            to Commission file number: 333-64180 PSF Group Holdings, Inc.  Delaware
    
    43-1818535State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization805 Pennsylvania, Suite 200, Kansas City, Missouri
    
    64105(Address of principal executive office)
    
    (Zip Code)
 Registrants telephone number, including area code: (816) 472-7675 Not Applicable 
 (Former name, former address and former fiscal year, if
changed since last report) Indicate by check mark whether the Registrant has (1) filed all documents and reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). Yes o No þ As of December 25, 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.




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Qualitative and Quantitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II  OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Changes in SecuritiesItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURESEX-31.1: CERTIFICATIONEX-31.2 : CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION    Table of Contents  
 PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements PSF Group Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
December 25, 2004 and March 27, 2004
(in 000s)
(Unaudited) December 25,
    
    
    March 27,2004
    
    
    2004ASSETSCURRENT ASSETS:Accounts receivable, net
    
    $
    35,976
    
    
    $
    28,456Inventories
    
    
    172,919
    
    
    
    167,819Deferred income taxes
    
    
    9,430
    
    
    
    16,030Prepaid expenses and other
    
    
    4,055
    
    
    
    3,874Total current assets
    
    
    222,380
    
    
    
    216,179PROPERTY, PLANT, EQUIPMENT AND BREEDING STOCK:Land and improvements
    
    
    100,619
    
    
    
    100,754Buildings
    
    
    296,766
    
    
    
    295,402Machinery and equipment
    
    
    282,344
    
    
    
    278,860Breeding stock
    
    
    41,346
    
    
    
    38,322Construction in progress
    
    
    9,789
    
    
    
    2,173730,864
    
    
    
    715,511Less - accumulated depreciation
    
    
    296,693
    
    
    
    260,699Total property, plant, equipment and breeding stock
    
    
    434,171
    
    
    
    454,812GOODWILL
    
    
    75,998
    
    
    
    75,998OTHER LONG-TERM ASSETS:Deferred financing costs, net
    
    
    4,763
    
    
    
    4,201Other
    
    
    7,380
    
    
    
    7,642Total other long-term assets
    
    
    12,143
    
    
    
    11,843Total assets
    
    $
    744,692
    
    
    $
    758,832LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Checks issued against future deposits
    
    $
    10,238
    
    
    $
    5,115Accounts payable
    
    
    8,806
    
    
    
    6,332Accrued expenses
    
    
    40,464
    
    
    
    33,168Due to related party
    
    
    56
    
    
    
    56Federal income tax payable
    
    
    
    
    
    
    37Accrued interest
    
    
    1,055
    
    
    
    5,888Current maturities of long-term debt and capital leases
    
    
    888
    
    
    
    833Total current liabilities
    
    
    61,507
    
    
    
    51,429LONG-TERM LIABILITIES:Long-term debt and capital leases, less current maturities
    
    
    205,929
    
    
    
    285,069Other long-term liabilities
    
    
    7,187
    
    
    
    6,509Deferred income taxes
    
    
    85,726
    
    
    
    75,813Total long-term liabilities
    
    
    298,842
    
    
    
    367,391Total liabilities
    
    
    360,349
    
    
    
    418,820SHAREHOLDERS EQUITY:Common stock
    
    
    2
    
    
    
    2Additional paid-in capital
    
    
    373,708
    
    
    
    373,708Accumulated other comprehensive loss, net of tax
    
    
    
    
    
    
    (54
    )Retained earnings (accumulated deficit)
    
    
    10,633
    
    
    
    (33,644
    )Total shareholders equity
    
    
    384,343
    
    
    
    340,012Total liabilities and shareholders equity
    
    $
    744,692
    
    
    $
    758,832
 The accompanying notes are an integral part of the condensed consolidated financial
statements. 1




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PSF Group Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
13 and 39 weeks ended December 25, 2004 and December 27, 2003
(in 000s)
(Unaudited) 13 Weeks Ended
    
    
    39 Weeks EndedDecember 25,
    
    
    December 27,
    
    
    December 25,
    
    
    December 27,2004
    
    
    2003
    
    
    2004
    
    
    2003Net sales
    
    $
    246,759
    
    
    $
    199,766
    
    
    $
    677,725
    
    
    $
    549,207Cost of goods sold
    
    
    198,159
    
    
    
    190,723
    
    
    
    574,869
    
    
    
    520,002Gross profit
    
    
    48,600
    
    
    
    9,043
    
    
    
    102,856
    
    
    
    29,205Selling, general and administrative expenses
    
    
    6,324
    
    
    
    4,431
    
    
    
    15,436
    
    
    
    12,658Other income
    
    
    (213
    )
    
    
    (179
    )
    
    
    (875
    )
    
    
    (461
    )Operating income
    
    
    42,489
    
    
    
    4,791
    
    
    
    88,295
    
    
    
    17,008Interest expense (income):Interest expense
    
    
    4,889
    
    
    
    6,065
    
    
    
    15,908
    
    
    
    18,868Interest income
    
    
    (36
    )
    
    
    (45
    )
    
    
    (80
    )
    
    
    (100
    )Interest expense, net
    
    
    4,853
    
    
    
    6,020
    
    
    
    15,828
    
    
    
    18,768Income (loss) before income taxes
    
    
    37,636
    
    
    
    (1,229
    )
    
    
    72,467
    
    
    
    (1,760
    )Income tax expense (benefit)
    
    
    14,640
    
    
    
    (478
    )
    
    
    28,190
    
    
    
    (685
    )Net income (loss)
    
    $
    22,996
    
    
    $
    (751
    )
    
    $
    44,277
    
    
    $
    (1,075
    )Unrealized gain on interest rate swap, net of tax
    
    
    
    
    
    
    76
    
    
    
    54
    
    
    
    245Comprehensive income (loss)
    
    $
    22,996
    
    
    $
    (675
    )
    
    $
    44,331
    
    
    $
    (830
    )
 The accompanying notes are an integral part of the condensed
consolidated financial statements. 2




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PSF Group Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
39 Weeks ended December 25, 2004 and December 27, 2003
(in 000s)
(Unaudited) December 25,
    
    
    December 27,2004
    
    
    2003OPERATING ACTIVITIES:Net income (loss)
    
    $
    44,277
    
    
    $
    (1,075
    )Adjustments to reconcile net income (loss)
to net cash provided by operating activities:Depreciation
    
    
    45,507
    
    
    
    46,089Amortization of deferred financing costs
    
    
    791
    
    
    
    1,313Deferred income taxes
    
    
    16,513
    
    
    
    (528
    )Net gain on sale of property, plant, equipment and breeding stock
    
    
    (5,463
    )
    
    
    (3,085
    )Changes in operating assets and liabilities, net:Accounts receivable
    
    
    (7,520
    )
    
    
    (7,918
    )Inventories
    
    
    (5,100
    )
    
    
    (2,567
    )Prepaid expenses and other assets
    
    
    135
    
    
    
    3,728Accounts payable, accrued expenses and other liabilities
    
    
    5,578
    
    
    
    10,318Net cash provided by operating activities
    
    
    94,718
    
    
    
    46,275INVESTING ACTIVITIES:Purchases of property, plant, equipment and breeding stock
    
    
    (33,691
    )
    
    
    (33,474
    )Proceeds from disposal of property, plant, equipment and breeding stock
    
    
    14,288
    
    
    
    13,563Net cash used in investing activities
    
    
    (19,403
    )
    
    
    (19,911
    )FINANCING ACTIVITIES:Checks issued against future deposits
    
    
    5,123
    
    
    
    283Payments on revolving debt, net
    
    
    (72,272
    )
    
    
    (19,799
    )Payments for deferred financing costs
    
    
    (1,272
    )
    
    
    Repayments on long-term debt
    
    
    (6,894
    )
    
    
    (6,848
    )Net cash used in financing activities
    
    
    (75,315
    )
    
    
    (26,364
    )Net decrease in cash and cash equivalents
    
    
    
    
    
    
    CASH AND CASH EQUIVALENTS, beginning of period
    
    
    
    
    
    
    CASH AND CASH EQUIVALENTS, end of period
    
    $
    
    
    
    $
    SUPPLEMENTAL DISCLOSURES:Interest paid
    
    $
    19,999
    
    
    $
    21,724Income tax paid
    
    
    11,747
    
    
    
    2
 The accompanying notes are an integral part of the condensed
consolidated financial statements. 3




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PSF Group Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements Note 1  Basis of presentation The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with the accounting policies described in the consolidated financial statements and
related notes included in PSF Group Holdings, Inc. and Subsidiaries (the Company) consolidated
financial statements for the year ended March 27, 2004 filed with the Securities and Exchange
Commission on Form 10-K. It is suggested that this report be read in conjunction with those
consolidated statements. Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The year-end financial statements presented were derived from
the Companys audited financial statements. In the opinion of management, the accompanying
condensed consolidated financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial position of the Company
and the results of its operations. PSF Group Holdings, Inc. is a Delaware company formed in 1998 and is currently 53% owned by
ContiGroup Companies, Inc. Certain reclassifications have been made to the 2004 financial statements to conform to the current
presentation. Note 2  New accounting pronouncements In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 151 (SFAS 151), Inventory Costs  an Amendment of ARB No. 43 Chapter 4.
SFAS 151 requires that items such as idle facility expense, excessive spoilage, double freight, and
rehandling be recognized as current-period charges rather than being included in inventory
regardless of whether the costs meet the criterion of abnormal as defined in ARB 43. SFAS 151 is
applicable for inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company will adopt this standard beginning the first quarter of fiscal year 2006 and does not
believe the adoption will have a material impact on its financial statements as such costs have
historically been expensed as incurred. In December 2004, FASB issued SFAS No. 153 (SFAS 153), Exchanges of Nonmonetary Assets  an
amendment of APB Opinion No. 29 which addresses the measurement of exchanges of nonmonetary assets
and eliminates the exception from fair value accounting for nonmonetary exchanges of similar
productive assets and replaces it with an exception for exchanges that do not have commercial
substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future
cash flows of an entity are expected to change significantly as a result of the exchange. This
statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005 and is not expected to have a significant impact on the Companys financial
statements. In December 2004, FASB issued SFAS No. 123 (revised 2004) (SFAS 123R), Share-Based Payment. SFAS
123R sets accounting requirements for share-based compensation to employees, requires companies
to recognize in the income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees and disallows the use of the intrinsic value method
of accounting for stock compensation. SFAS 123R is applicable for all interim and fiscal periods
beginning after June 15, 2005. This statement is effective for the Company beginning the second
quarter of fiscal year 2006 and is not expected to have a significant impact on its financial
statements. 4




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In December 2004, FASB issued FASB Staff Position 109-1 (FSP 109-1) Application of FASB Statement
No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004. FSP 109-1 specifies that a qualified
production activities deduction should be accounted for as a special deduction in accordance with
SFAS 109. FSP 109-1 was effective upon issuance. The Company is currently evaluating the impact
this deduction will have on its results of operations or financial position for fiscal year 2005
and subsequent years. Note 3  Stock-based compensation The Company follows the disclosure provisions of SFAS 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 5,714
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. Currently, 6,000 of the options are fully exercisable. The remaining 571
options will be fully exercisable by December 31, 2006. At December 31, 2005, 6,000 options
expire, and at December 31, 2009, 571 options expire. No options have been exercised as of
December 25, 2004. The Company records stock-based compensation in accordance with Accounting Principles Board Opinion
No. 25 (APB 25). For the 13 and 39 weeks ended December 25, 2004, the Company had no compensation
expense to record in accordance with APB 25. The pro-forma disclosures required by SFAS 148 have
not been included as they did not result in a material pro-forma impact on the financial
statements. Note 4  Derivative instruments and hedging activities The Company follows FASB 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.
Accordingly, these contracts are marked to market through earnings. For the quarters ended
December 25, 2004, and December 27, 2003 the Company recognized losses under SFAS 133 of $2.7
million and gains of $6.8 million, respectively, in net sales for losses and gains related to lean
hog futures and gains of $0.3 million and $1.8 million, respectively, in costs of goods sold
relating to the hedging of feed components and outside hog purchases at processing facilities. For
the first three quarters ended December 25, 2004, and December 27, 2003 the Company recognized
losses under SFAS 133 of $9.0 million and gains of $5.8 million, respectively, in net sales for
losses and gains related to lean hog futures and losses of $3.1 million and gains of $3.0 million,
respectively, in costs of goods sold relating to the hedging of feed components and outside hog
purchases at processing facilities. The fair value of the Companys open exchange traded commodity
contracts was a loss of $0.8 million at December 25, 2004 and a gain of $4.9 million at March 27,
2004 and is recorded in Prepaid Expenses and Other in the condensed consolidated balance sheets. The Company held an interest rate swap agreement, which matured on September 30, 2004, in order to
effectively convert the base interest rate on the bank term note from variable to a fixed rate.
The Company had designated the interest rate swap as a cash flow hedge and for the quarter ended
December 25, 2004, and fiscal year end March 27, 2004, recorded $0 and ($88,000), respectively, in
the condensed consolidated balance sheets relating to the fair value of the swap. For the quarter
ended December 27, 2003, $76,000, net of $48,000 in income taxes, included in comprehensive income
(loss) was reclassified to interest expense. For the first three quarters ended December 25, 2004
and December 27, 2003, $54,000, net of 5




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$35,000 in income taxes and $245,000, net of $156,000 in
income taxes, respectively, included in comprehensive income (loss) was reclassified to interest
expense. Note 5  Goodwill and intangible assets 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 first three quarters ended December 25,
2004 and December 27, 2003. Note 6  Inventories Inventories are valued at the lower of cost, determined on a first-in, first-out (FIFO) basis, or
market. Inventories consist of the following (in thousands): December 25, 2004
    
    
    March 27, 2004Hogs
    
    $
    153,688
    
    

    $
    153,340Processed pork products
    
    
    14,068
    
    
    
    8,383Packaging and supplies
    
    
    2,091
    
    
    
    1,779Grain, feed additives and other
    
    
    3,072
    
    
    
    4,317$
    172,919
    
    
    $
    167,819
 Note 7  Segment information The accounting policies for the Companys business segments are the same as those described in the
footnotes included in the Companys March 27, 2004 audited financial statements. 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, and 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 table presents specific financial information about each segment as reviewed by the
Companys management. The Corporate and Other classification in the following table represents
unallocated corporate expenses and assets, deferred and current income taxes, interest expense and
intersegment elimination (in thousands): 6




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Pork
    
    
    Hog
    
    
    CorporateProcessing
    
    
    Production
    
    
    and Other
    
    
    TotalFor the 13 weeks ended December 25, 2004-Net sales
    
    $
    228,700
    
    
    $
    168,580
    
    
    $
    (150,521
    )
    
    $
    246,759Intersegment sales
    
    
    (347
    )
    
    
    (150,174
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    3,880
    
    
    
    43,516
    
    
    
    (4,907
    )
    
    
    42,489For the 13 weeks ended December 27, 2003-Net sales
    
    $
    177,898
    
    
    $
    118,581
    
    
    $
    (96,713
    )
    
    $
    199,766Intersegment sales
    
    
    (693
    )
    
    
    (96,020
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    14,401
    
    
    
    (6,284
    )
    
    
    (3,326
    )
    
    
    4,791As of and for the 39 weeks ended December 25, 2004-Net sales
    
    $
    629,582
    
    
    $
    459,710
    
    
    $
    (411,567
    )
    
    $
    677,725Intersegment sales
    
    
    (1,604
    )
    
    
    (409,963
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    18,002
    
    
    
    81,902
    
    
    
    (11,609
    )
    
    
    88,295Assets
    
    
    201,545
    
    
    
    519,805
    
    
    
    23,342
    
    
    
    744,692Goodwill
    
    
    25,020
    
    
    
    50,978
    
    
    
    
    
    
    
    75,998For the 39 weeks ended December 27, 2003-Net sales
    
    $
    495,457
    
    
    $
    340,999
    
    
    $
    (287,249
    )
    
    $
    549,207Intersegment sales
    
    
    (1,945
    )
    
    
    (285,304
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    26,556
    
    
    
    68
    
    
    
    (9,616
    )
    
    
    17,008As of March 27, 2004-Assets
    
    $
    195,366
    
    
    $
    534,724
    
    
    $
    28,742
    
    
    $
    758,832Goodwill
    
    
    25,020
    
    
    
    50,978
    
    
    
    
    
    
    
    75,998
 Note 8  Amendment to 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 were capitalized
and are being amortized over the life of the Credit Agreement. 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, 7




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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. Note 9  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
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 plaintiffs
counsel in March 2004 and subsequently affirmed on February 1, 2005 by the U.S. Court of Appeals
for the 8th Circuit, denying the fees. The Company has settled with plaintiffs counsel
for the balance of the fees. 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
extended 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 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 between the settlement date and the 2010
deadline, of which $6.5 million has been spent to date. Included in this commitment is a
fertilizer plant in northern Missouri that will convert solid waste into commercial grade
fertilizer. The fertilizer plant construction has begun and the Company has spent $6.2 million to
date of an estimated $9.6 million to complete the plant. The plant is scheduled to be operational
by the end of the current fiscal year. Two nuisance suits were filed against ContiGroup and the Company during the second quarter of
fiscal year 2003 in the Circuit Court of Jackson County, Kansas City, Missouri (Steven Adwell,
et al. vs. PSF, et al., and, Michael Adwell, et al. vs. PSF, et al.). Two other
nuisance lawsuits were filed in March of 2004 by the same attorney (Fred Torrey, et al. vs.
PSF, et al., and, Doyle Bounds, et al. vs. PSF, et al.). Two additional nuisance suits
were filed in May 2004 in Daviess County Circuit Court, Gallatin, Missouri 8




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##### Table of Contents



entitled Vernon
Hanes et al. v. Premium Standard Farms, Inc. et al. and Steve Hanes et al. v. Premium
Standard Farms, Inc., et al. There are multiple plaintiffs in each suit, who claim to live
near swine farms owned or under contract with the Company. Plaintiffs allege that odors from these
farms interfered with the plaintiffs right to use and have quiet enjoyment of their respective
properties. The Company believes it has good defenses to these actions and intends to vigorously
defend these suits. On May 18, 2004 the same lawyer who filed the Adwell, Bounds and Torrey lawsuits filed a class
action lawsuit (Daniel Herrold, et al. and Others Similarly Situated v. ContiGroup Companies,
Inc, Premium Standard Farms, Inc., and PSF Group Holdings, Inc.) in the Circuit Court of
Jackson County, Kansas City, Missouri. The action seeks to create a class of plaintiffs living
within 10 miles of the Companys farms in northern Missouri, including contract grower farms, who
are alleged to have suffered interference with their right to use and have quiet enjoyment of their
respective properties. The Company has removed this case to the U.S. District Court in Kansas
City, Missouri. The Company believes it has good defenses to these actions and intends to
vigorously defend this suit. 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. 9




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations In this report on Form 10-Q, 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. The terms expect, anticipate, may,
believe, will, and similar expressions made with respect to our earnings and outlook for the
future contain some forward-looking information. Naturally, all forward-looking statements involve
risk and uncertainty and actual results or events could be materially different. Although we
believe that our expectations are based on reasonable assumptions, we can give no assurance that
our goals will be achieved. Important factors that could cause actual results to differ include:
economic conditions generally and in our principal markets; competitive practices and 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, 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 and wholesale pork prices; customer demands and
preferences; and the occurrence of natural disasters and other occurrences beyond our control. In
light of these risks, uncertainties and assumptions, the forward-looking events discussed might not
occur. Please review our Annual Report on Form 10-K 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. General Overview We are a leading vertically integrated provider of pork products operating in two
industry segments: hog production and pork processing. The hog production segment controls
approximately 270,000 sows, of which 223,000 are owned, with operations in Missouri, North
Carolina, and Texas. The majority of the hogs produced in our Missouri and North Carolina
operations are transferred at market value and processed at the Companys two processing plants.
Any excess hog production, as well as the production at our Texas operations, is sold to outside
processors. The pork processing segment consists of two plants, located in Missouri and North
Carolina, which produce fresh and further processed pork products for sale to the wholesale,
retail, food service, and institutional markets in the United States and to export markets. In our third quarter ending December 25, 2004, the USDA reported that the U.S. pork
industry produced 5.4 billion pounds compared to 5.5 billion pounds in the same quarter the
previous year. With the continuing strong demand for products, average lean hog prices were 46%
higher in the recent quarter compared to the prior year. For the first three quarters of our
fiscal year 2005, the U.S. pork industry produced 15.4 billion pounds compared to 15.1 billion
pounds in the previous year. Despite the increase in production, average lean hog prices were 34%
higher in the recent three quarters compared to the prior year as a result of strong demand for
pork products. Also, the USDA pork cutout (the composite wholesale meat price of a market hog
after processing) was 30% higher in the recent quarter and 26% higher in the first three quarters
of our fiscal year 2005 compared to the same periods last year. The continuing trend of 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 December 28, 2004, the USDA issued its Hogs and Pigs Inventory Report that indicated a 0.7%
decrease in the breeding herd and current market hog inventories just fractionally above the
year-ago level. Continued strong demand has kept cash prices higher than historical prices for
this recent quarter. Ongoing strength in hog prices is contingent on continued or increased demand
for pork products or a reduced supply of hogs in the future. In the December, 2004 Cold Storage
report, the USDA reported that freezer stocks of pork on November 30, 2004 were down 2% from the
previous year, providing further evidence of strong demand for pork products in recent periods. On
December 10, 2004, the USDA issued a Crop Production report, 10




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estimating a record corn crop of 11.7 billion bushels, up 1.6 billion bushels from the prior
year. In the same report, the USDA forecasts a record 3.2 billion bushel soybean crop, which is
700 million bushels greater than the previous year. Both of these estimates of production have
reduced the near-term prices of corn and soybean meal, the primary ingredients in our feed rations. 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 are currently operating a herd health program and production flow intended
to stabilize a PRRS positive herd and reduce the impact of PRRS in the system. Results of Operations 13 Weeks Ended December 25, 2004 Compared to the 13 Weeks Ended December 27, 2003 The following table presents selected financial information for our production and processing
segments for the 13 weeks ended December 25, 2004 and December 27, 2003. Net sales, gross profit
and operating income (loss) by segment are also presented as a percentage of their respective
totals. The two columns under quarter-to-quarter change show the dollar and percentage change from
the quarter ended December 25, 2004 to the quarter ended December 27, 2003. Intersegment sales are
based on market prices. For the 13 Weeks Ended
    
    
    Qtr to Qtr ChangeDecember 25, 2004
    
    
    %
    
    
    December 27, 2003
    
    
    %
    
    
    2004 to 2003
    
    
    %(In millions except percentages)Net SalesProduction
    
    $
    168.6
    
    
    
    68.3
    %
    
    $
    118.6
    
    
    
    59.4
    %
    
    $
    50.0
    
    
    
    42.2
    %Processing
    
    
    228.7
    
    
    
    92.7
    %
    
    
    177.9
    
    
    
    89.0
    %
    
    
    50.8
    
    
    
    28.6
    %Intersegment
    
    
    (150.5
    )
    
    
    (61.0
    )%
    
    
    (96.7
    )
    
    
    (48.4
    )%
    
    
    (53.8
    )
    
    
    (55.6
    )%Total Net Sales
    
    $
    246.8
    
    
    
    100.0
    %
    
    $
    199.8
    
    
    
    100.0
    %
    
    $
    47.0
    
    
    
    23.5
    %Gross ProfitProduction
    
    $
    43.6
    
    
    
    89.7
    %
    
    $
    (6.3
    )
    
    
    (70.0
    )%
    
    $
    49.9
    
    
    
    792.1
    %Processing
    
    
    5.0
    
    
    
    10.3
    %
    
    
    15.3
    
    
    
    170.0
    %
    
    
    (10.3
    )
    
    
    (67.3
    )%Total Gross Profit
    
    $
    48.6
    
    
    
    100.0
    %
    
    $
    9.0
    
    
    
    100.0
    %
    
    $
    39.6
    
    
    
    440.0
    %Operating Income (Loss)Production
    
    $
    43.5
    
    
    
    102.4
    %
    
    $
    (6.3
    )
    
    
    (131.2
    )%
    
    $
    49.8
    
    
    
    790.5
    %Processing
    
    
    3.9
    
    
    
    9.2
    %
    
    
    14.4
    
    
    
    300.0
    %
    
    
    (10.5
    )
    
    
    (72.9
    )%Corporate
    
    
    (4.9
    )
    
    
    (11.5
    )%
    
    
    (3.3
    )
    
    
    (68.8
    )%
    
    
    (1.6
    )
    
    
    (48.5
    )%Total Operating Income
    
    $
    42.5
    
    
    
    100.0
    %
    
    $
    4.8
    
    
    
    100.0
    %
    
    $
    37.7
    
    
    
    785.4
    %
 Consolidated Net Sales.Net sales increased by $47.0 million, or 23.5%, to $246.8 million in the third quarter
of fiscal year 2005 from $199.8 million in the comparable period last year. The increase was
attributed to an increase in prices of $54.6 million, combined with an increase in volume of $1.9
million, offset by a $9.5 million change recorded in net sales for lean hog futures contracts.
Overall, live hog and wholesale pork
prices increased compared to the prior period despite larger than expected supplies of pork
industry wide. Several factors including a decrease in production of beef, the continuing effect
of the first case of BSE (bovine spongiform encephalopathy) in a cow in the United States, the
Avian Influenza virus affecting the 11




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poultry industry, and diet trends among Americans have kept
demand for pork products strong both domestically and internationally. See Segment Analysis below
for comments on changes in sales by business segment. Gross Profit.Gross profit increased by $39.6 million to $48.6 million in the third quarter of
fiscal year 2005 from $9.0 million in the comparable period last year. As a percentage of net
sales, gross profit increased to 19.7% from 4.5%. The current year gross profit increase is
primarily the result of higher live hog and wholesale pork prices as mentioned above, partially
offset by a 2.9% increase in costs to produce our products during the third quarter of fiscal year
2005 compared to the same period last year. Selling, General and Administrative Expenses.Selling, general and administrative expenses
increased as a percentage of net sales to 2.6% in the third quarter of fiscal year 2005 from 2.2%
in the comparable period last year. In dollar terms, selling, general and administrative expenses
increased by $1.9 million, or 42.7%, to $6.3 million in the third quarter of fiscal year 2005 from
$4.4 million in the comparable period last year. The increase is attributable to accruals
primarily relating to bonuses and incentive plans made during the third quarter of fiscal year
2005. Operating Income.Operating income increased by $37.7 million to $42.5 million in the third
quarter of fiscal year 2005 from $4.8 million in the comparable period last year. The increase is
attributable to the factors mentioned above. Interest Expense, net.Interest expense, net, decreased by $1.1 million, or 19.4%, to $4.9 million
in the third quarter of fiscal year 2005 from $6.0 million in the comparable period last year. The
decrease is attributed to less average total debt outstanding during the third quarter of fiscal
year 2005 compared to the same period in the prior year. See Liquidity and Capital Resources below
for more information. Income Tax Benefit / Expense.Our effective tax rate was 38.9% in the third quarter of fiscal year
2005 and in the comparable period last year. Segment Analysis Hog Production. Net sales increased by $50.0 million, or 42.2%, to $168.6 million in the third
quarter of fiscal year 2005 from $118.6 million in the comparable period last year. The increase
primarily resulted from a 48.7% increase in market hog sales prices, coupled with a 3.1% increase
in volume attributable to an increase in production in Missouri and North Carolina and offset by a
decrease in production in Texas due to health issues. As mentioned above, losses recorded for lean
hog futures contracts had a $9.5 million negative impact on the change in net sales. Intersegment
sales to our pork processing segment transferred at market prices are eliminated in the Condensed
Consolidated Statements of Operations. Gross profit increased by $49.9 million to $43.6 million in the third quarter of fiscal year
2005 from a loss of $6.3 million in the comparable period last year. The increase was the result
of higher market hog sales prices as mentioned above, coupled with a 2.9% decrease in hog
production costs on a per hundred weight basis. The majority of the decrease in hog production
cost was due to lower feed input costs compared to the same period last year. Operating income increased by $49.8 million to $43.5 million in the third quarter of fiscal
year 2005 from a loss of $6.3 million in the comparable period last year. The increase is
attributed to the factors mentioned above. Pork Processing. Net sales increased $50.8 million, or 28.6%, to $228.7 million in the third
quarter of fiscal year 2005 from $177.9 million in the comparable period last year. The increase
resulted from a 28.3% increase in pork product sales prices, combined with a slight increase in
volume processed compared to the same period last year. Gross profit decreased by $10.3 million to $5.0 million in the third quarter of fiscal year
2005 from $15.3 million in the comparable period last year. While overall sales prices increased
28.3%, our cost 12




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to purchase market hogs increased by 51.8%. In absolute dollars, the cost increase
of the hogs outpaced the sales increase of the pork products by $8.8 million compared to the same
period last year. Other processing costs and freight increased $1.4 million, or 2.7% on a per head
basis, compared to the same period in the prior year. Operating income decreased by $10.5 million to $3.9 million in the third quarter of fiscal
year 2005 from $14.4 million in the comparable period last year. The decrease was attributed to
the factors mentioned above. 39 Weeks Ended December 25, 2004 Compared to the 39 Weeks Ended December 27, 2003 The following table presents selected financial information for our production and processing
segments for the 39 weeks ended December 25, 2004 and December 27, 2003. Net sales, gross profit
and operating income (loss) by segment are also presented as a percentage of their respective
totals. The two columns under year-to-year change show the dollar and percentage change from the
first three quarters ended December 25, 2004 to the first three quarters ended December 27, 2003.
Intersegment sales are based on market prices. For the 39 Weeks Ended
    
    
    Year to Year ChangeDecember 25, 2004
    
    
    %
    
    
    December 27, 2003
    
    
    %
    
    
    2004 to 2003
    
    
    %(In millions except percentages)Net SalesProduction
    
    $
    459.7
    
    
    
    67.8
    %
    
    $
    341.0
    
    
    
    62.1
    %
    
    $
    118.7
    
    
    
    34.8
    %Processing
    
    
    629.6
    
    
    
    92.9
    %
    
    
    495.5
    
    
    
    90.2
    %
    

    
    134.1
    
    
    
    27.1
    %Intersegment
    
    
    (411.6
    )
    
    
    (60.7
    )%
    
    
    (287.3
    )
    
    
    (52.3
    )%
    
    
    (124.3
    )
    
    
    (43.3
    )%Total Net Sales
    
    $
    677.7
    
    
    
    100.0
    %
    
    $
    549.2
    
    
    
    100.0
    %
    
    $
    128.5
    
    
    
    23.4
    %Gross ProfitProduction
    
    $
    81.8
    
    
    
    79.5
    %
    
    $
    0.1
    
    
    
    0.3
    %
    
    $
    81.7
    
    
    
    81,700.0
    %Processing
    
    
    21.1
    
    
    
    20.5
    %
    
    
    29.1
    
    
    
    99.7
    %
    
    
    (8.0
    )
    
    
    (27.5
    )%Total Gross Profit
    
    $
    102.9
    
    
    
    100.0
    %
    
    $
    29.2
    
    
    
    100.0
    %
    
    $
    73.7
    
    
    
    252.4
    %Operating Income (Loss)Production
    
    $
    81.9
    
    
    
    92.8
    %
    
    $
    0.1
    
    
    
    0.6
    %
    
    $
    81.8
    
    
    
    81,800.0
    %Processing
    
    
    18.0
    
    
    
    20.4
    %
    
    
    26.5
    
    
    
    155.9
    %
    
    
    (8.5
    )
    
    
    (32.1
    )%Corporate
    
    
    (11.6
    )
    
    
    (13.1
    )%
    
    
    (9.6
    )
    
    
    (56.5
    )%
    
    
    (2.0
    )
    
    
    (20.8
    )%Total Operating Income
    
    $
    88.3
    
    
    
    100.0
    %
    
    $
    17.0
    
    
    
    100.0
    %
    
    $
    71.3
    
    
    
    419.4
    %
 Consolidated Net Sales.Net sales increased by $128.5 million, or 23.4%, to $677.7 million in the first three
quarters of fiscal year 2005 from $549.2 million in the comparable period last year. The increase
was attributed to an increase in prices of $135.0 million, combined with an increase in volume of
$8.3 million, offset by a $14.8 million change recorded in net sales for lean hog futures
contracts. Overall, live hog and wholesale pork prices increased compared to the prior period
despite larger than expected supplies of pork industry wide.
Several factors including a decrease in production of beef, the continuing effect of the first case
of BSE (bovine spongiform encephalopathy) in a cow in the United States, the Avian Influenza virus
affecting the poultry industry, and diet trends among Americans have kept demand for pork products
strong. See Segment Analysis below for comments on changes in sales by business segment. 13




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Gross Profit.Gross profit increased by $73.7 million to $102.9 million in the first three
quarters of fiscal year 2005 from $29.2 million in the comparable period last year. As a
percentage of net sales, gross profit increased to 15.2% from 5.3%. The current year gross profit
increase is primarily the result of higher live hog and wholesale pork prices as mentioned above,
partially offset by a 8.9% increase in costs to produce our products during the first three
quarters of fiscal year 2005 compared to the same period last year. Selling, General and Administrative Expenses.Selling, general and administrative expenses as a
percentage of net sales were 2.3% in the first three quarters of fiscal years 2005 and 2004. In
dollar terms, selling, general and administrative expenses increased by $2.7 million, or 21.9%, to
$15.4 million in the first three quarters of fiscal year 2005 from $12.7 million in the comparable
period last year. The increase is attributable to accruals primarily relating to bonuses and
incentive plans made during the second and third quarters of fiscal year 2005. Operating Income.Operating income increased by $71.3 million to $88.3 million in the first three
quarters of fiscal year 2005 from $17.0 million in the comparable period last year. The increase
is attributable to the factors mentioned above. Interest Expense, net.Interest expense, net, decreased by $3.0 million, or 15.7%, to $15.8
million in the first three quarters of fiscal year 2005 from $18.8 million in the comparable period
last year. The decrease is attributed to less average total debt outstanding during the first
three quarters of fiscal year 2005 compared to the same period in the prior year. See Liquidity
and Capital Resources below for more information. Income Tax Benefit / Expense.Our effective tax rate was 38.9% in the first three quarters of
fiscal year 2005 and in the comparable period last year. Segment Analysis Hog Production. Net sales increased by $118.7 million, or 34.8%, to $459.7 million in the first
three quarters of fiscal year 2005 from $341.0 million in the comparable period last year. The
increase primarily resulted from a 36.4% increase in market hog sales prices, coupled with a 2.6%
increase in volume attributable to increases in production in Missouri and North Carolina and
offset by a decrease in production in Texas due to health issues. As mentioned above, losses
recorded for lean hog futures contracts had a $14.8 million negative impact on the change in net
sales. Intersegment sales to our pork processing segment transferred at market prices are
eliminated in the Condensed Consolidated Statements of Operations. Gross profit increased by $81.7 million to $81.8 million in the first three quarters of fiscal
year 2005 from $0.1 million in the comparable period last year. The increase was the result of
hogs produced at higher market hog sales prices as mentioned above, partially offset by an 8.2%
increase in hog production costs on a per hundred weight basis. The majority of the increase in
hog production cost 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 $81.8 million to $81.9 million in the first three quarters of
fiscal year 2005 from $0.1 million in the comparable period last year. The increase is attributed
to the factors mentioned above. Pork Processing. Net sales increased $134.1 million, or 27.1%, to $629.6 million in the first
three quarters of fiscal year 2005 from $495.5 million in the comparable period last year. The
increase resulted from a 24.3% increase in pork product sales prices, combined with a 2.2% increase
in volume processed compared
to the same period last year. The increase in volume was primarily attributable to an increase in
Saturdays worked at both processing facilities. Gross profit decreased by $8.0 million to $21.1 million in the first three quarters of fiscal
year 2005 from $29.1 million in the comparable period last year. While overall sales prices
increased 24.3%, 14




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##### Table of Contents



our cost to purchase market hogs increased by 38.0%. In absolute dollars, the
cost increase of the hogs outpaced the sales increase of the pork products by $4.7 million compared
to the same period last year. Other processing costs and freight increased $3.3 million, or 0.4%
on a per head basis, compared to the same period in the prior year. Operating income decreased by $8.5 million to $18.0 million in the first three quarters of
fiscal year 2005 from $26.5 million in the comparable period last year. The decrease was
attributed to the factors mentioned above. Liquidity and Capital Resources Our primary sources of financing have 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 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 operating activities was $94.7 million and $46.3 million for the
first three quarters ended in fiscal years 2005 and 2004, respectively. The improvement in the
first three quarters of fiscal year 2005 compared to the same period last year was primarily due to
an increase in net income and the use of net operating loss carryforwards to reduce cash tax
payments. Net cash flow used in investing activities was $19.4 million and $19.9 million for the first
three quarters ended in fiscal years 2005 and 2004, respectively. Net cash used in investing
activities consisted of $33.7 million and $33.5 million for capital expenditures relating to
property, plant and equipment and breeding stock during the first three quarters ended in fiscal
years 2005 and 2004, respectively. We received proceeds from disposal of property, plant,
equipment and breeding stock of $14.3 million and $13.6 million during the first three quarters
ended in fiscal years 2005 and 2004, respectively, primarily representing culled breeding stock.
The increase in proceeds is directly related to the increase in market hog sales prices which help
determine the cull sow market prices. Net cash flow used in financing activities was $75.3 million and $26.4 million for the first
three quarters ended in fiscal years 2005 and 2004, respectively. During the first three quarters
of fiscal year 2005 and 2004, excess cash generated was used to pay down outstanding debt. 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 0.25% and
1.75%, 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 is
classified as long-term on the condensed consolidated balance sheets. Total indebtedness at December 25, 2004 was $207.9 million, as compared to $278.5 million at
December 27, 2003, excluding a discount on notes of $1.1 million and $1.2 million, respectively.
At December 25, 2004, we had $30.2 million outstanding under our revolving credit facility, $11.2
million in letters of credit and $133.6 million available for borrowing under our revolving credit
facility. In fiscal 2005, we expect to spend approximately $36 million on net capital expenditures as
follows: 15




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##### Table of Contents




    Approximately $11 million in upgrades and improvements in our processing
operations;
    Approximately $16 million in upgrades and improvements in our production
operations, and investments to develop and implement new technologies for improved
waste handling; and
    Approximately $9 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. For a discussion of our contractual obligations, see a discussion of future commitments under
Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, in
our Form 10-K for the fiscal year ended March 27, 2004. Other than the contract to build the
fertilizer plant discussed in Note 9, there have been no significant developments with respect to
our contractual obligations since March 27, 2004. 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 a liability has been incurred or a loss is
probable and the amount is reasonably estimable. Actual costs may vary from estimates we make.
Management believes the estimates are reasonable based on current information. Derivative 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 16




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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. For the first three quarters ended
December 25, 2004, and December 27, 2003 we recognized losses under SFAS 133 of $9.0 million and
gains of $5.8 million, respectively, in net sales for losses and gains related to lean hog futures
and losses of $3.1 million and gains of $3.0 million, respectively, in costs of goods sold relating
to the hedging of feed components and outside hog purchases at processing facilities. For open
futures contracts, we use a sensitivity analysis technique to evaluate the effect that changes in
the market value of commodities will have on these commodity derivative instruments. As of
December 25, 2004, the potential change in fair value of exchange-traded contracts, assuming a 10%
change in the underlying commodity price, would be $7.9 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 $0.3 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 the variable base interest rate of our
bank term debt to a fixed rate of 3.0125% plus the agent banks applicable margin (2.0% at
maturity). The swap matured on September 30, 2004. The swap was accounted for as a cash flow
hedge under SFAS 133. During the first three quarters ended December 25, 2004, we recognized a
$0.1 million gain, net of tax, into Accumulated Other Comprehensive Income (Loss) for the market
value of the swap. The
9 1/4% Notes had a fair value of approximately $187.3 million as of December 25, 2004 based
on inter-dealer prices, as compared to the book value of $175.0 million as of December 25, 2004. 
 Item 3. Qualitative and Quantitative Disclosures About Market Risk Please see Managements Discussion and Analysis of Financial Condition and Results of
Operations  Market Risk above. 
 Item 4. Controls and Procedures As of the end of the period covered by this report, we have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures under the supervision and with the
participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO). Based on
this evaluation, our management, including the CEO and CFO, concluded that our disclosure controls
and procedures were effective. There have been no significant changes in our internal controls or
in other factors that could significantly affect internal controls subsequent to the date of their
evaluation. 17




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PART II  OTHER INFORMATION 
 Item 1. 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 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
plaintiffs counsel in March 2004 and subsequently affirmed on February 1, 2005 by the U.S. Court
of Appeals for the 8th Circuit, denying the fees. We have settled with plaintiffs
counsel for the balance of the fees. 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 extended 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 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 between the settlement date and the 2010
deadline, of which $6.5 million has been spent to date. Included in this commitment is a
fertilizer plant in northern Missouri that will convert solid waste into useable commercial grade
fertilizer. The fertilizer plant construction has begun and we have spent $6.2 million to date of
an estimated $9.6 million to complete the plant. The plant is scheduled to be operational by the
end of the current fiscal year. 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 other nuisance
lawsuits were filed in March of 2004 by the same attorney (Fred Torrey, et al. vs. PSF, et
al., and, Doyle Bounds, et al. vs. PSF, et al.). Two additional nuisance suits were
filed in May 2004 in Daviess County Circuit Court, Gallatin, Missouri entitled Vernon Hanes et
al. v. Premium Standard Farms, Inc. et al., and Steve Hanes et al. v. Premium Standard
Farms, Inc., et al. There are multiple plaintiffs in each suit, who claim to live near swine
farms owned or under contract with us. Plaintiffs allege that odors from these farms interfered
with the plaintiffs right to use and have quiet enjoyment of their respective properties. 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 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, 18




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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. We have removed this case to the U.S. District Court in Kansas City, Missouri. We
believe we have good defenses to these actions and intend to vigorously defend this suit. In addition, we are involved from time to time in routine litigation incidental to our
business. Although no assurance can be given as to the outcome or expense associated with any of
these routine proceedings, we believe that none of such proceedings currently pending should,
individually or in the aggregate, have a material adverse effect on our financial statements. 
 Item 2. Changes in Securities Not applicable 
 Item 3. Defaults Upon Senior Securities Not applicable 
 Item 4. Submission of Matters to a Vote of Security Holders  The annual meeting of shareholders was held on September 30, 2004 in Kansas City, Missouri.
The only item submitted to a vote of shareholders was the election of directors. The
table below briefly describes the results of the shareholders vote. For
    
    WithheldTo elect Class A directors:Ronald Justice
    
    
    78,562
    
    
    
    0Maurice McGill
    
    
    78,562
    
    
    
    0Dean Mefford
    
    
    78,562
    
    
    
    0Mitch Petrick
    
    
    78,562
    
    
    
    0To elect Class B directors:Paul Fribourg
    
    
    113,301
    
    
    
    0John Meyer
    
    
    113,301
    
    
    
    0Vart Adjemian
    
    
    113,301
    
    
    
    0Michael Zimmerman
    
    
    113,301
    
    
    
    0
 
 Item 5. Other Information Not applicable 
 Item 6. Exhibits Exhibit 31.1
    
    Certification of John M. Meyer, Chief Executive Office, pursuant to
Rule 13a-14(a)/15d-14(a).Exhibit 31.2
    
    Certification of Stephen A. Lightstone, Chief Financial Officer,
pursuant to Rule 13a-14(a)/15d-14(a).Exhibit 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.
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Exhibit 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.
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SIGNATURES 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. PSF GROUP HOLDINGS, INC.February 8, 2005
    
    /s/ Stephen A. LightstoneDate
    
    
    
    Stephen A. LightstoneExecutive Vice President, Chief FinancialOfficer and Treasurer(Principal Financial and
Accounting Officer)
 21