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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q ý
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended: September 25, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
  Commission file number: 333-64180 PSF Group Holdings, Inc.  Delaware
State or other jurisdiction of
incorporation or organization
    
    43-1818535
(I.R.S. Employer Identification No.)805 Pennsylvania, Suite 200, Kansas City, Missouri
(Address of principal executive office)
    
    64105
(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 x No o Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes o No x As of September 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 StatementsCondensed Consolidated Balance SheetsCondensed Consolidated Statements of OperationsCondensed Consolidated Statements of Cash FlowsNotes to Condensed Consolidated 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. Exhibits and Reports on Form 8-KSIGNATURESEX-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
 September 25, 2004 and March 27, 2004

(in 000s)

(Unaudited)
 September 25,
    
    March 27,2004
    
    2004ASSETSCURRENT ASSETS:Accounts receivable, net
    
    $
    35,671
    
    
    $
    28,456Inventories
    
    
    180,676
    
    
    
    167,819Deferred income taxes
    
    
    18,369
    
    
    
    16,030Prepaid expenses and other
    
    
    3,219
    
    
    
    3,874Total current assets
    
    
    237,935
    
    
    
    216,179PROPERTY, PLANT, EQUIPMENT AND BREEDING STOCK:Land and improvements
    
    
    100,590
    
    
    
    100,754Buildings
    
    
    294,834
    
    
    
    295,402Machinery and equipment
    
    
    280,086
    
    
    
    278,860Breeding stock
    
    
    41,857
    
    
    
    38,322Construction in progress
    
    
    8,197
    
    
    
    2,173725,564
    
    
    
    715,511Less- accumulated depreciation
    
    
    284,960
    
    
    
    260,699Total property, plant, equipment and breeding stock
    
    
    440,604
    
    
    
    454,812GOODWILL
    
    
    75,998
    
    
    
    75,998OTHER LONG-TERM ASSETS:Deferred financing costs, net
    
    
    4,984
    
    
    
    4,201Other
    
    
    7,229
    
    
    
    7,642Total other long-term assets
    
    
    12,213
    
    
    
    11,843Total assets
    
    $
    766,750
    
    
    $
    758,832LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Checks issued against future
deposits
    
    $
    8,613
    
    
    $
    5,115Accounts payable
    
    
    6,844
    
    
    
    6,332Accrued expenses
    
    
    34,964
    
    
    
    33,168Due to related party
    
    
    
    
    
    
    56Federal income tax payable
    
    
    
    
    
    
    37Accrued interest
    
    
    5,309
    
    
    
    5,888Current maturities of long-term debt and capital leases
    
    
    862
    
    
    
    833Total current liabilities
    
    
    56,592
    
    
    
    51,429LONG-TERM LIABILITIES:Long-term debt and capital leases, less current maturities
    
    
    250,497
    
    
    
    285,069Other long-term liabilities
    
    
    6,863
    
    
    
    6,509Deferred income taxes
    
    
    91,450
    
    
    
    75,813Total long-term liabilities
    
    
    348,810
    
    
    
    367,391Total liabilities
    
    
    405,402
    
    
    
    418,820SHAREHOLDERS EQUITY:Common stock
    
    
    2
    
    
    
    2Additional paid-in capital
    
    
    373,708
    
    
    
    373,708Accumulated other comprehensive income (loss), net of tax
    
    
    
    
    
    
    (54
    )Accumulated deficit
    
    
    (12,362
    )
    
    
    (33,644
    )Total shareholders equity
    
    
    361,348
    
    
    
    340,012Total liabilities and shareholders
equity
    
    $
    766,750
    
    
    $
    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
 13 and 26 weeks ended September 25, 2004 and September 27, 2003
 (in 000s)
 (Unaudited)
 13 Weeks Ended
    
    26 Weeks EndedSeptember 25,
    
    September 27,
    
    September 25,
    
    September 27,2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    218,831
    
    
    $
    178,310
    
    
    $
    430,966
    
    
    $
    349,442Cost of goods sold
    
    
    188,851
    
    
    
    165,678
    
    
    
    376,710
    
    
    
    329,278Gross profit
    
    
    29,980
    
    
    
    12,632
    
    
    
    54,256
    
    
    
    20,164Selling, general and administrative expenses
    
    
    5,319
    
    
    
    3,984
    
    
    
    9,112
    
    
    
    8,226Other income
    
    
    (143
    )
    
    
    (31
    )
    
    
    (662
    )
    
    
    (281
    )Operating income
    
    
    24,804
    
    
    
    8,679
    
    
    
    45,806
    
    
    
    12,219Interest expense (income):Interest expense
    
    
    5,352
    
    
    
    6,387
    
    
    
    11,019
    
    
    
    12,805Interest income
    
    
    (14
    )
    
    
    (27
    )
    
    
    (44
    )
    
    
    (56
    )Interest expense, net
    
    
    5,338
    
    
    
    6,360
    
    
    
    10,975
    
    
    
    12,749Income (loss) before income taxes
    
    
    19,466
    
    
    
    2,319
    
    
    
    34,831
    
    
    
    (530
    )Income tax expense (benefit)
    
    
    7,572
    
    
    
    902
    
    
    
    13,549
    
    
    
    (206
    )Net income (loss)
    
    $
    11,894
    
    
    $
    1,417
    
    
    $
    21,282
    
    
    $
    (324
    )Unrealized gain on interest rate swap, net of tax
    
    
    14
    
    
    
    93
    
    
    
    54
    
    
    
    169Comprehensive income (loss)
    
    $
    11,908
    
    
    $
    1,510
    
    
    $
    21,336
    
    
    $
    (155
    )
 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
 26 Weeks ended September 25, 2004 and September 27, 2003
 (in 000s)
 (Unaudited)
 September 25,
    
    September 27,2004
    
    2003OPERATING ACTIVITIES:Net income (loss)
    
    $
    21,282
    
    
    $
    (324
    )Adjustments to reconcile net income (loss)
to net cash provided by operating activities:Depreciation
    
    
    30,099
    
    
    
    30,902Amortization of deferred financing costs
    
    
    544
    
    
    
    875Deferred income taxes
    
    
    13,298
    
    
    
    (98
    )Net gain on sale of property, plant, equipment and breeding stock
    
    
    (4,109
    )
    
    
    (2,468
    )Changes in operating assets and liabilities, net:Accounts receivable
    
    
    (7,215
    )
    
    
    (7,007
    )Inventories
    
    
    (12,858
    )
    
    
    (9,633
    )Prepaid expenses and other
assets
    
    
    1,122
    
    
    
    (140
    )Accounts payable, accrued expenses and other liabilities
    
    
    1,989
    
    
    
    5,416Net cash provided by operating activities
    
    
    44,152
    
    
    
    17,523INVESTING ACTIVITIES:Purchases of property, plant, equipment and breeding stock
    
    
    (21,728
    )
    
    
    (23,924
    )Proceeds from disposal of property, plant, equipment and breeding stock
    
    
    9,946
    
    
    
    9,357Net cash used in investing activities
    
    
    (11,782
    )
    
    
    (14,567
    )FINANCING ACTIVITIES:Checks issued against future
deposits
    
    
    3,498
    
    
    
    497Payments on revolving debt, net
    
    
    (28,015
    )
    
    
    (3,144
    )Payments for deferred financing costs
    
    
    (1,273
    )
    
    
    Repayments on long-term debt
    
    
    (6,580
    )
    
    
    (309
    )Net cash used in financing activities
    
    
    (32,370
    )
    
    
    (2,956
    )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
    
    $
    11,011
    
    
    $
    11,756Income tax paid (received)
    
    
    323
    
    
    
    (4,211
    )
 The accompanying notes are an integral part of the condensed consolidated financial
statements. 3




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PSF Group Holdings, Inc. and Subsidiaries 
  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  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 options expire, at December 31, 2007, 714 options expire and at
December 31, 2009, 571 options expire. No options have been exercised as of
September 25, 2004. The Company records stock compensation in accordance with Accounting Principles
Board Opinion No. 25 (APB 25). For the 13 and 26 weeks ended September 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 3  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. 4




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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 September 25, 2004, and
September 27, 2003 the Company recognized losses under SFAS 133 of $5.2 million
and gains of $1.5 million, respectively, in net sales for losses and gains
related to lean hog futures and losses of $2.7 million and $0.3 million,
respectively, in costs of goods sold relating to the hedging of feed components
and outside hog purchases at processing facilities. For the first two quarters
ended September 25, 2004, and September 27, 2003 the Company recognized losses
under SFAS 133 of $6.3 million and $1.0 million, respectively, in net sales for
losses related to lean hog futures and losses of $3.5 million and gains of $1.2
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 $4.5
million at September 25, 2004 and a gain of $4.9 million at March 27, 2004 and
is recoded in Prepaid Expenses and Other in the condensed consolidated balance
sheets. The Company holds 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 quarter ended September 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 quarters ended
September 25, 2004 and September 27, 2003, $14,000, net of $9,000 in income
taxes and $93,000, net of $59,000 in income taxes, respectively, included in
comprehensive income (loss) was reclassified to interest expense. For the
first two quarters ended September 25, 2004 and September 27, 2003, $54,000,
net of $35,000 in income taxes and $169,000, net of $108,000 in income taxes,
respectively, included in comprehensive income (loss) was reclassified to
interest expense. The interest rate swap will mature on September 30, 2004. Note 4  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 two
quarters ended September 25, 2004 and September 27, 2003. Note 5  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): September 25, 2004
    
    March 27, 2004Hogs
    
    $
    161,780
    
    
    $
    153,340Processed pork products
    
    
    12,494
    
    
    
    8,383Packaging and supplies
    
    
    1,850
    
    
    
    1,779Grain, feed additives and other
    
    
    4,552
    
    
    
    4,317$
    180,676
    
    
    $
    167,819
 Note 6 - 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 5




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following table represents unallocated corporate expenses and assets,
deferred and current income taxes, interest expense and intersegment
elimination (in thousands): Pork
    
    Hog
    
    CorporateProcessing
    
    Production
    
    and Other
    
    TotalFor the 13 weeks ended September 25, 2004-Net sales
    
    $
    204,973
    
    
    $
    148,662
    
    
    $
    (134,804
    )
    
    $
    218,831Intersegment sales
    
    
    (566
    )
    
    
    (134,238
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    6,336
    
    
    
    22,503
    
    
    
    (4,035
    )
    
    
    24,804For the 13 weeks ended September 27, 2003-Net sales
    
    $
    160,794
    
    
    $
    111,874
    
    
    $
    (94,358
    )
    
    $
    178,310Intersegment sales
    
    
    (355
    )
    
    
    (94,003
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    7,329
    
    
    
    4,477
    
    
    
    (3,127
    )
    
    
    8,679As of and for the 26 weeks ended September 25, 2004-Net sales
    
    $
    400,882
    
    
    $
    291,131
    
    
    $
    (261,047
    )
    
    $
    430,966Intersegment sales
    
    
    (1,257
    )
    
    
    (259,790
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    14,122
    
    
    
    38,386
    
    
    
    (6,702
    )
    
    
    45,806Assets
    
    
    200,230
    
    
    
    534,276
    
    
    
    32,244
    
    
    
    766,750Goodwill
    
    
    25,020
    
    
    
    50,978
    
    
    
    
    
    
    
    75,998For the 26 weeks ended September 27, 2003-Net sales
    
    $
    317,559
    
    
    $
    222,418
    
    
    $
    (190,535
    )
    
    $
    349,442Intersegment sales
    
    
    (1,252
    )
    
    
    (189,283
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    12,155
    
    
    
    6,352
    
    
    
    (6,288
    )
    
    
    12,219As of March 27, 2004-Assets
    
    $
    195,366
    
    
    $
    534,724
    
    
    $
    28,742
    
    
    $
    758,832Goodwill
    
    
    25,020
    
    
    
    50,978
    
    
    
    
    
    
    
    75,998
 Note 7  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 6




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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. Note 8  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 settled with the
plaintiffs and 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 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 by the 2010 deadline, of which, $4.1 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 $4.0 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 7




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by the same attorney (Fred Torrey, et al. vs. PSF, et al., and,
Doyle Bounds, et al. vs. PSF, et al). Two additional nuisance suits were filed
in May 2004 in Daviess County Circuit Court, Gallatin, Missouri entitled Vernon
Hanes et al. v. Premium Standard Farms, Inc. et al and Steve Hanes et al v.
Premium Standard Farms, Inc., et al. There are multiple plaintiffs in each
suit, who claim to live near swine farms owned or under contract with the
Company. Plaintiffs allege that odors from these farms interfered with the
plaintiffs right to use and have quiet enjoyment of their respective
properties. The Company believes it has good defenses to these actions and
intends to vigorously defend these suits. On May 18, 2004 the same lawyer who filed the Adwell, Bounds and Torrey
lawsuits filed a class action lawsuit (Daniel Herrold, et al. and Others
Similarly Situated v. ContiGroup Companies, Inc, Premium Standard Farms, Inc.,
and PSF Group Holdings, Inc.) in the Circuit Court of Jackson County, Kansas
City, Missouri. The action seeks to create a class of plaintiffs living within
10 miles of the Companys farms in Northern Missouri, including contract grower
farms, who are alleged to have suffered interference with their right to use
and have quiet enjoyment of their respective properties. The Company has
removed this case to the U.S. District Court in Kansas City, Missouri. The
Company believes it has good defenses to these actions and intends to
vigorously defend this suit. 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. 8




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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 second quarter ending September 25, 2004, the USDA reported that
the U.S. pork industry produced 5.0 billion pounds compared to 4.8 billion
pounds in the same quarter the previous year. In spite of this increased
supply, average lean hog prices were 31% higher in the recent quarter compared
to the prior year. Also, the USDA pork cutout (the composite wholesale meat
price of a market hog after processing) was 22% higher in the recent quarter
compared to the same period 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 September 24, 2004, the USDA issued a Hog
and Pig report that indicated a 1% increase in the breeding herd and the
current hog inventories, both compared to the previous year. 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 August, 2004 cold storage report, the USDA reported that freezer stocks
of pork on August 31, 2004 were down 10% from the previous year, providing
further evidence of strong demand for pork products in recent periods. On
October 12, 2004, the USDA issued a Crop Production Report, estimating a record
corn crop of 11.6 billion bushels, up 1.5 billion bushels from the prior year.
In the same report, the USDA forecasts a record 3.1 billion bushel soybean
crop, which is 650 million bushels greater than the previous year. Both of
these estimates have reduced the near-term prices of corn and soybean meal, the
primary ingredients in our feed rations. 9




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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 September 25, 2004 Compared to the 13 Weeks Ended September 27,
2003 The following table presents selected financial information for our
production and processing segments for the 13 weeks ended September 25, 2004
and September 27, 2003. Net sales, gross profit and operating (loss) income 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 September 25, 2004 to the quarter ended September 27,
2003. Intersegment sales are based on market prices. For the 13 Weeks Ended
    
    Qtr to Qtr ChangeSeptember 25,
    
    
    
    
    
    September 27,
    
    
    
    
    
    2004 to2004
    
    %
    
    2003
    
    %
    
    2003
    
    %(In millions except percentages)Net SalesProduction
    
    $
    148.6
    
    
    
    67.9
    %
    
    $
    111.9
    
    
    
    62.7
    %
    
    $
    36.7
    
    
    
    32.8
    %Processing
    
    
    205.0
    
    
    
    93.7
    %
    
    
    160.8
    
    
    
    90.2
    %
    
    
    44.2
    
    
    
    27.5
    %Intersegment
    
    
    (134.8
    )
    
    
    (61.6
    )%
    
    
    (94.4
    )
    
    
    (52.9
    )%
    
    
    (40.4
    )
    
    
    (42.8
    )%Total Net Sales
    
    $
    218.8
    
    
    
    100.0
    %
    
    $
    178.3
    
    
    
    100.0
    %
    
    $
    40.5
    
    
    
    22.7
    %Gross ProfitProduction
    
    $
    22.6
    
    
    
    75.3
    %
    
    $
    4.5
    
    
    
    35.7
    %
    
    $
    18.1
    
    
    
    402.2
    %Processing
    
    
    7.4
    
    
    
    24.7
    %
    
    
    8.1
    
    
    
    64.3
    %
    
    
    (0.7
    )
    
    
    (8.6
    )%Total Gross Profit
    
    $
    30.0
    
    
    
    100.0
    %
    
    $
    12.6
    
    
    
    100.0
    %
    
    $
    17.4
    
    
    
    138.1
    %Operating Income (Loss)Production
    
    $
    22.5
    
    
    
    90.7
    %
    
    $
    4.5
    
    
    
    51.7
    %
    
    $
    18.0
    
    
    
    400.0
    %Processing
    
    
    6.3
    
    
    
    25.4
    %
    
    
    7.3
    
    
    
    83.9
    %
    
    
    (1.0
    )
    
    
    (13.7
    )%Corporate
    
    
    (4.0
    )
    
    
    (16.1
    )%
    
    
    (3.1
    )
    
    
    (35.6
    )%
    
    
    (0.9
    )
    
    
    (29.0
    )%Total Operating Income
    
    $
    24.8
    
    
    
    100.0
    %
    
    $
    8.7
    
    
    
    100.0
    %
    
    $
    16.1
    
    
    
    185.1
    %
 Consolidated Net Sales.Net sales increased by $40.5 million, or 22.7%, to $218.8 million
in the second quarter of fiscal year 2005 from $178.3 million in the comparable
period last year. The increase was attributed to an increase in prices of
$38.1 million, combined with an increase in volume of $9.1 million, offset by a
$6.7 million increase in losses recorded for lean hog futures contracts
recorded in net sales. 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. Gross Profit.Gross profit increased by $17.4 million to $30.0 million in the
second quarter of fiscal year 2005 from $12.6 million in the comparable period
last year. As a percentage of net sales, gross profit 10




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increased to 13.7% from
7.1%. The current year gross profit increase is primarily the result of higher
live hog and wholesale pork prices as mentioned above, partially offset by an
8.5% increase in costs to produce our products during the second 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 2.4% in the
second quarter of fiscal year 2005 from 2.2% in the comparable period last
year. In dollar terms, selling, general and administrative expenses increased
by $1.3 million, or 33.5%, to $5.3 million in the second quarter of fiscal year
2005 from $4.0 million in the comparable period last year. The increase is
attributable to increases in accruals relating to bonuses and incentive plans
made during the second quarter of fiscal year 2005. Operating Income.Operating income increased by $16.1 million to $24.8 million
in the second quarter of fiscal year 2005 from $8.7 million in the comparable
period last year. The increase is attributable to the factors mentioned above. Interest Expense, net.Interest expense, net, decreased by $1.0 million, or
15.9%, to $5.3 million in the second quarter of fiscal year 2005 from $6.3
million in the comparable period last year. The decrease is attributed to less
average total debt outstanding during the second 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 second
quarter of fiscal year 2005 and in the comparable period last year. Segment Analysis Hog Production. Net sales increased by $36.7 million, or 32.8%, to $148.6
million in the second quarter of fiscal year 2005 from $111.9 million in the
comparable period last year. The increase primarily resulted from a 32.3%
increase in market hog sales prices, coupled with a 5.5% 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 $6.7 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 $18.1 million to $22.6 million in the second
quarter of fiscal year 2005 from $4.5 million in the comparable period last
year. The increase was the result of higher market hog sales prices as
mentioned above, partially offset by an 11.4% 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 $18.0 million to $22.5 million in the second
quarter of fiscal year 2005 from $4.5 million in the comparable period last
year. The increase is attributed to the factors mentioned above. Pork Processing. Net sales increased $44.2 million, or 27.5%, to $205.0
million in the second quarter of fiscal year 2005 from $160.8 million in the
comparable period last year. The increase resulted from a 21.0% increase in
pork product sales prices, combined with a 5.3% 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 $0.7 million to $7.4 million in the second
quarter of fiscal year 2005 from $8.1 million in the comparable period last
year. While overall sales prices increased 21.0%, our cost to purchase market
hogs increased by 33.7%. However, in absolute dollars, the cost increase of
the hogs outpaced the sales increase of the pork products by $1.2 million
compared to the same period last year. Other processing costs and freight
decreased $0.5 million, or 6.1% on a per head basis, compared to the same
period in the prior year. 11




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##### Table of Contents



Operating income decreased by $1.0 million to $6.3 million in the second
quarter of fiscal year 2005 from $7.3 million in the comparable period last
year. The decrease was attributed to the factors mentioned above. 26 Weeks Ended September 25, 2004 Compared to the 26 Weeks Ended September 27,
2003 The following table presents selected financial information for our
production and processing segments for the 26 weeks ended September 25, 2004
and September 27, 2003. Net sales, gross profit and operating (loss) income 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 two quarters ended September 25, 2004 to the first two quarters ended
September 27, 2003. Intersegment sales are based on market prices. For the 26 Weeks Ended
    
    Year to Year ChangeSeptember 25,
    
    
    
    
    
    September 27,
    
    
    
    
    
    2004 to2004
    
    %
    
    2003
    
    %
    
    2003
    
    %(In millions except percentages)Net SalesProduction
    
    $
    291.1
    
    
    
    67.5
    %
    
    $
    222.4
    
    
    
    63.6
    %
    
    $
    68.7
    
    
    
    30.9
    %Processing
    
    
    400.9
    
    
    
    93.0
    %
    
    
    317.5
    
    
    
    90.9
    %
    
    
    83.4
    
    
    
    26.3
    %Intersegment
    
    
    (261.0
    )
    
    
    (60.6
    )%
    
    
    (190.5
    )
    
    
    (54.5
    )%
    
    
    (70.5
    )
    
    
    (37.0
    )%Total Net Sales
    
    $
    431.0
    
    
    
    100.0
    %
    
    $
    349.4
    
    
    
    100.0
    %
    
    $
    81.6
    
    
    
    23.4
    %Gross ProfitProduction
    
    $
    38.2
    
    
    
    70.3
    %
    
    $
    6.4
    
    
    
    31.7
    %
    
    $
    31.8
    
    
    
    496.9
    %Processing
    
    
    16.1
    
    
    
    29.7
    %
    
    
    13.8
    
    
    
    68.3
    %
    
    
    2.3
    
    
    
    16.7
    %Total Gross Profit
    
    $
    54.3
    
    
    
    100.0
    %
    
    $
    20.2
    
    
    
    100.0
    %
    
    $
    34.1
    
    
    
    168.8
    %Operating Income (Loss)Production
    
    $
    38.4
    
    
    
    83.8
    %
    
    $
    6.3
    
    
    
    51.6
    %
    
    $
    32.1
    
    
    
    509.5
    %Processing
    
    
    14.1
    
    
    
    30.8
    %
    
    
    12.2
    
    
    
    100.0
    %
    
    
    1.9
    
    
    
    15.6
    %Corporate
    
    
    (6.7
    )
    
    
    (14.6
    )%
    
    
    (6.3
    )
    
    
    (51.6
    )%
    
    
    (0.4
    )
    
    
    (6.3
    )%Total Operating Income
    
    $
    45.8
    
    
    
    100.0
    %
    
    $
    12.2
    
    
    
    100.0
    %
    
    $
    33.6
    
    
    
    275.4
    %
 Consolidated Net Sales.Net sales increased by $81.6 million, or 23.4%, to $431.0 million
in the first two quarters of fiscal year 2005 from $349.4 million in the
comparable period last year. The increase was attributed to an increase in
prices of $80.4 million, combined with an increase in volume of $6.5 million,
offset by a $5.3 million increase in losses recorded for lean hog futures
contracts recorded in net sales. 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. Gross Profit.Gross profit increased by $34.1 million to $54.3 million in the
first two quarters of fiscal year 2005 from $20.2 million in the comparable
period last year. As a percentage of net sales, gross profit increased to
12.6% from 5.8%. 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 12.3% increase in costs to produce our products during
the first two quarters of fiscal year 2005 compared to the same period last
year. 12




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Selling, General and Administrative Expenses.Selling, general and
administrative expenses decreased as a percentage of net sales to 2.1% in the
first two quarters of fiscal year 2005 from 2.4% in the comparable period last
year. In dollar terms, selling, general and administrative expenses increased
by $0.9 million, or 10.8%, to $9.1 million in the first two quarters of fiscal
year 2005 from $8.2 million in the comparable period last year. The increase
is attributable to increases in accruals relating to bonuses and incentive
plans made during the second quarter of fiscal year 2005. Operating Income.Operating income increased by $33.6 million to $45.8 million
in the first two quarters of fiscal year 2005 from $12.2 million in the
comparable period last year. The increase is attributable to the factors
mentioned above. Interest Expense, net.Interest expense, net, decreased by $1.8 million, or
14.1%, to $11.0 million in the first two quarters of fiscal year 2005 from
$12.8 million in the comparable period last year. The decrease is attributed
to less average total debt outstanding during the first two 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
two quarters of fiscal year 2005 and in the comparable period last year. Segment Analysis Hog Production. Net sales increased by $68.7 million, or 30.9%, to $291.1
million in the first two quarters of fiscal year 2005 from $222.4 million in
the comparable period last year. The increase primarily resulted from a 30.2%
increase in market hog sales prices, coupled with a 2.3% 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 $5.3 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 $31.8 million to $38.2 million in the first two
quarters of fiscal year 2005 from $6.4 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 14.6% 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 $32.1 million to $38.4 million in the first
two quarters of fiscal year 2005 from $6.3 million in the comparable period
last year. The increase is attributed to the factors mentioned above. Pork Processing. Net sales increased $83.4 million, or 26.3%, to $400.9
million in the first two quarters of fiscal year 2005 from $317.5 million in
the comparable period last year. The increase resulted from a 24.0% increase
in pork product sales prices, combined with a 3.4% 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 increased by $2.3 million to $16.1 million in the first two
quarters of fiscal year 2005 from $13.8 million in the comparable period last
year. While overall sales prices increased 24.0%, our cost to purchase market
hogs increased by 31.0%. However, in absolute dollars, the sales increase of
the pork products outpaced the cost increase of the hogs by $9.1 million
compared to the same period last year. Other processing costs and freight
increased $6.8 million, or 5.4% on a per head basis, compared to the same
period in the prior year. Operating income increased by $1.9 million to $14.1 million in the first
two quarters of fiscal year 2005 from $12.2 million in the comparable period
last year. The increase was attributed to the factors mentioned above. 13




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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 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 $44.2 million and $17.5
million for the first two quarters ended in fiscal years 2005 and 2004,
respectively. The improvement in the first two 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 $11.8 million and $14.6
million for the first two quarters ended in fiscal years 2005 and 2004,
respectively. Net cash used in investing activities consisted of $21.7 million
and $23.9 million for capital expenditures relating to property, plant and
equipment and breeding stock during the first two quarters ended in fiscal
years 2005 and 2004, respectively. We received proceeds from disposal of
property, plant, equipment and breeding stock of $9.9 million and $9.3 million
during the first two 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 $32.4 million and $3.0
million for the first two quarters ended in fiscal years 2005 and 2004,
respectively. During the first two 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 0.5% and 2.0%, 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 September 25, 2004 was $252.5 million, as compared
to $301.7 million at September 27, 2003, excluding a discount on notes of $1.1
million and $1.2 million, respectively. At September 25, 2004, we had $74.5
million outstanding under our revolving credit facility, $11.2 million in
letters of credit and $89.3 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:  
    
    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. 14




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##### Table of Contents



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 8, 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 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. 15




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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 two
quarters ended September 25, 2004, and September 27, 2003 we recognized losses
under SFAS 133 of $6.3 million and $1.0 million, respectively, in net sales for
losses related to lean hog futures and losses of $3.5 million and gains of $1.2
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 September 25, 2004, the potential
change in fair value of exchange-traded contracts, assuming a 10% change in the
underlying commodity price, was $6.0 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 $0.7 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 (currently 2.0% at September 25, 2004).
The swap is accounted for as a cash flow hedge under SFAS 133. During the
first two quarters ended September 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
91⁄4% Notes had a fair value of approximately $187.3 million as of
September 25, 2004 based on inter-dealer prices, as compared to the book value
of $175.0 million as of September 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. 16




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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 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 settled
with the plaintiffs and 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
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 by the 2010 deadline, of
which, $4.1 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 $4.0 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, Kansas
City, Missouri. The action seeks to create a class of plaintiffs living within
10 miles of our farms in 17




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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 Not applicable 
 Item 5. Other Information Not applicable 
 Item 6. Exhibits and Reports on Form 8-K (a)
    
    ExhibitsExhibit 31.1
    
    Certification of John M. Meyer, Chief Executive
Office, pursuant to Rule 13a-15(e)/15d-15(e).Exhibit 31.2
    
    Certification of Stephen A. Lightstone, Chief
Financial Officer, pursuant to Rule 13a-15(e)/15d-15(e).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.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.
 (b)
    
    Reports on Form 8-K.1.
    
    
    A Current Report on Form 8-K was filed with the
SEC on August 10, 2004, to report, under Item 7, our first
quarter earnings. The earnings release, including our
Condensed Consolidated Statements of Operations for the 13
weeks ended June 26, 2004, and June 27, 2003, was filed as
Exhibit 99.1 to the Current Report on Form 8-K.
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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.November 9, 2004
    
    /s/ Stephen A. LightstoneDate
    
    Stephen A. LightstoneExecutive Vice President, Chief FinancialOfficer and Treasurer(Principal Financial andAccounting Officer)
 19