1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 10, 2001
REGISTRATION NO. 333-64180
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PREMIUM STANDARD FARMS, INC.
(EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER)
<Table>
DELAWARE 2011 43-1755411
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</Table>
423 WEST 8TH STREET, SUITE 200
KANSAS CITY, MISSOURI 64105
(816) 472-7675
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF CO-REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
<Table>
PSF GROUP HOLDINGS, INC. THE LUNDY PACKING COMPANY LUNDY INTERNATIONAL, INC.
DELAWARE 6719 NORTH CAROLINA 2011 NORTH CAROLINA 0213
43-1818535 56-0507254 56-1312631
423 WEST 8TH ST, SUITE 200 423 WEST 8TH ST, SUITE 200 423 WEST 8TH ST, SUITE 200
KANSAS CITY, MO 64105 KANSAS CITY, MO 64105 KANSAS CITY, MO 64105
(816) 472-7675 (816) 472-7675 (816) 472-7675
</Table>
PREMIUM STANDARD FARMS
OF NORTH CAROLINA, INC.
DELAWARE 0213
06-1594088
423 WEST 8TH ST, SUITE 200
KANSAS CITY, MO 64105
(816) 472-7675
------------------------
STEPHEN A. LIGHTSTONE
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER & TREASURER
423 WEST 8TH STREET, SUITE 200
KANSAS CITY, MO 64105
(816) 472-7675
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
JEFFREY T. HAUGHEY AND H. DALE DIXON III
BLACKWELL SANDERS PEPER MARTIN LLP
TWO PERSHING SQUARE
2300 MAIN STREET, SUITE 1000
KANSAS CITY, MISSOURI 64108
(816) 983-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
------------------------
THE CO-REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE CO-REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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2
PROSPECTUS
PREMIUM STANDARD FARMS, INC.
OFFER TO EXCHANGE
$175,000,000 PRINCIPAL AMOUNT OF ITS
9 1/4% SENIOR NOTES DUE 2011,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR ANY AND ALL OF ITS OUTSTANDING 9 1/4% SENIOR NOTES DUE 2011
We are offering to exchange all of our outstanding 9 1/4% senior notes due
2011, which we refer to as the old notes, for our registered 9 1/4% senior notes
due 2011, which we refer to as the exchange notes. We refer to the old notes and
the exchange notes collectively as the notes. The terms of the exchange notes
are identical to the terms of the old notes except that the exchange notes have
been registered under the Securities Act of 1933 and, therefore, are freely
transferable.
PLEASE CONSIDER THE FOLLOWING:
- Our offer to exchange old notes for exchange notes will be open until
5:00 p.m., New York City time, on September 13, 2001, unless we extend
the offer.
- You should also carefully review the procedures for tendering the old
notes beginning on page 27 of this prospectus.
- If you fail to tender your old notes, you will continue to hold
unregistered securities and your ability to transfer them could be
adversely affected.
- No public market currently exists for the notes. We do not intend to list
the exchange notes on any securities exchange and, therefore, no active
public market is anticipated.
INFORMATION ABOUT THE NOTES:
- The notes will mature on June 15, 2011.
- We will pay interest on the notes semi-annually on June 15 and December
15 of each year beginning December 15, 2001 at the rate of 9 1/4% per
annum.
- We may redeem the notes on or after June 15, 2006 at the rates set forth
on page 78 of this prospectus.
- We also have the option until June 15, 2004, to redeem up to 35% of the
original aggregate principal amount of the notes with the net proceeds of
certain types of qualified equity offerings.
- Our parent, PSF Group Holdings, and our wholly-owned domestic
subsidiaries have guaranteed the notes.
- The notes are unsecured obligations and are effectively junior to all of
our secured indebtedness and the secured indebtedness of the guarantors.
- If we undergo a change of control or sell some of our assets, we may be
required to offer to purchase notes from you.
YOU SHOULD CAREFULLY REVIEW THE RISK FACTORS BEGINNING ON PAGE 12 OF THIS
PROSPECTUS. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE EXCHANGE NOTES OR
DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
August 14, 2001
3
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Summary..................................................... 1
Risk Factors................................................ 12
The Exchange Offer.......................................... 25
Use of Proceeds............................................. 32
Capitalization.............................................. 33
Unaudited Pro Forma Consolidated Statement of Operations.... 34
Selected Historical Consolidated Financial Information...... 36
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 39
Business.................................................... 49
Management.................................................. 64
Principal Stockholders...................................... 72
Related Party Transactions.................................. 74
Description of the Credit Agreement......................... 75
Description of the Notes.................................... 77
Important United States Federal Tax Consequences............ 112
Plan of Distribution........................................ 116
Legal Matters............................................... 116
Independent Auditors........................................ 116
Index to Financial Statements............................... F-1
</Table>
------------------------
WHERE YOU CAN FIND MORE INFORMATION
Upon effectiveness of the Registration Statement of which this prospectus
is a part, we will file annual and quarterly and other information with the
Securities and Exchange Commission (the "Commission"). You may read and copy any
reports, statements and other information we file at the Commission's public
reference rooms in Washington, D.C., New York, New York, and Chicago, Illinois.
Please call 1-800-SEC-0330 for further information on the public reference
rooms. Our filings will also be available to the public from commercial document
retrieval services and at the web site maintained by the Commission at
http://www.sec.gov.
We have filed a Registration Statement on Form S-4 to register with the
Commission the exchange notes and the guarantees to be issued in exchange for
the old notes. This prospectus is part of that Registration Statement. As
allowed by the Commission's rules, this prospectus does not contain all of the
information you can find in the Registration Statement or the exhibits to the
Registration Statement. This information is available free of charge to any
holders of securities of Premium Standard Farms upon written or oral request to
Stephen A. Lightstone, Premium Standard Farms, Inc., 423 West 8th Street, Suite
200, Kansas City, Missouri 64105, telephone: (816) 472-7675. IN ORDER TO OBTAIN
TIMELY DELIVERY OF SUCH DOCUMENTS, HOLDERS MUST REQUEST THIS INFORMATION NO
LATER THAN FIVE BUSINESS DAYS PRIOR TO THE EXPIRATION DATE OF THE EXCHANGE OFFER
FOR THE NOTES.
We have not authorized anyone to give you any information or to make any
representations about the transactions we discuss in this prospectus other than
those contained herein. If you are given any information or representations
about these matters that is not discussed, you must not rely on that
information. This prospectus is not an offer to sell or a solicitation of an
offer to buy securities anywhere or to anyone where or to whom we are not
permitted to offer or sell securities under applicable law. The information
contained in this prospectus is current only as of the date on the cover page of
this prospectus and may change after that date. The delivery of this prospectus
does not, under any circumstances, mean that there has not been a change in our
affairs since the date hereof. It also does not mean that the information in
this prospectus is correct after this date.
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MARKET AND INDUSTRY DATA AND FORECASTS
Market data and certain industry forecasts used throughout this prospectus
were obtained from internal surveys, market research, consultant surveys,
publicly available information and industry publications and surveys. Reports
prepared or published by Sparks Companies, Inc., the National Pork Producers
Council, Agrimetrics Associates Inc. and the USDA were the primary sources for
third-party industry data and forecasts. Industry surveys, publications,
consultant surveys and forecasts generally state that the information contained
therein has been obtained from sources believed to be reliable, but that the
accuracy and completeness of such information is not guaranteed. We have not
independently verified any of the data from third-party sources nor have we
ascertained the underlying economic assumptions relied upon therein. Similarly,
internal surveys, industry forecasts and market research, which we believe to be
reliable based upon our management's knowledge of the industry, have not been
independently verified. Forecasts are particularly likely to be inaccurate,
especially over long periods of time. In addition, we do not know what
assumptions regarding general economic growth were used in preparing the
forecasts we cite. We do not make any representation as to the accuracy of
information described in this paragraph.
FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" within the meaning of
Section 17A of the Securities Act of 1933, and Section 21E of the Securities
Exchange Act of 1934. When used in this prospectus, the words "anticipates,"
"believes," "expects," "intends" and similar expressions identify such
forward-looking statements. Although we believe that such statements are based
on reasonable assumptions, these forward-looking statements are subject to
numerous factors, risks and uncertainties that could cause actual outcomes and
results to be materially different from those projected. These factors, risks
and uncertainties include, among others, the following:
- economic conditions generally and in our principal markets;
- competitive practices in the pork production and processing industries;
- the impact of consolidation in the pork production and processing
industries;
- the impact of current and future laws, governmental regulations and
fiscal policies affecting our industry and operations, including
environmental laws and regulations;
- the availability of additional capital to fund future commitments and
expansion and the cost and terms of financing;
- outbreaks of disease in our herds;
- feed ingredient costs;
- fluctuations in live hog prices and the price of pork products;
- customer demands and preferences; and
- the occurrence of natural disasters and other occurrences beyond our
control.
Our actual results, performance or achievements could differ materially
from those expressed in, or implied by, the forward-looking statements. We can
give no assurances that any of the events anticipated by the forward-looking
statements will occur or, if any of them do, what impact they will have on our
results of operations and financial condition.
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5
SUMMARY
This summary highlights some of the information in this prospectus and
summarizes the material terms of the exchange offer. It is not complete and may
not contain all of the information that you should consider before deciding to
exchange your old notes. You should read the entire prospectus carefully,
including the "Risk Factors" section and the financial statements and the notes
to those statements.
In this prospectus, the terms "we," "us," and "our" refer collectively to
Premium Standard Farms, Inc. and its subsidiaries. All of our outstanding
capital stock is owned by PSF Group Holdings, Inc.
OUR COMPANY
We are a leading vertically integrated provider of pork products to the
wholesale and retail, food service and institutional markets in the United
States. By combining modern, efficient production and processing facilities,
sophisticated genetics, and strict control over the variables of health, diet
and environment, we produce value-added premium pork products. We are the second
largest owner of sows in North America, with over 200,000 sows producing
approximately 3.9 million hogs per year in production operations located on over
100,000 acres in Missouri, Texas and North Carolina. We are also the eighth
largest pork processor in the United States, with two plants capable of
processing over 3.7 million hogs per year. In our fiscal year ended March 31,
2001, we generated revenues of $540.6 million, operating income of $60.6
million, EBITDA of $112.3 million and net income of $22.0 million. During the
quarter ended June 30, 2001, we generated revenues of $171.2 million, operating
income of $24.2 million, EBITDA of $37.8 million and net income of $9.1 million.
Our production and processing operations are organized as three separate
pods located in Missouri, Texas and North Carolina. Our Missouri and North
Carolina pods each combine hog production farms with a pork processing plant.
Our Texas pod currently has only hog production operations. We eventually plan
to add a pork processing plant in Texas to achieve full integration of the pod
similar to our Missouri operations. Our pods incorporate feed mill operations
and internal trucking facilities to maximize our ability to control costs,
manage feed formulations and minimize the risk of disease. The designs of our
processing facilities are modern and efficient, incorporating unique animal
handling systems and sophisticated monitoring techniques to ensure high quality
pork products. Because of our integrated hog production and pork processing
operations, we have achieved the distinction of being the first pork company to
receive Process Verified accreditation from the USDA, which periodically audits
the entire process ensuring traceability from farms to the customer.
We sell fresh pork products to select supermarket chains, meat
distributors, further processors, food service companies, and institutional food
customers. The strict quality control provided by the vertical integration of
our production and processing operations allows us to provide premium products
and to focus on discriminating customers in the retail, food service, export and
further processing markets. We believe this allows us to obtain higher prices
for our products than our more commodity-focused competitors.
In addition to our sales of fresh pork products, we also sell excess live
hogs, processed meat products and pork by-products.
INDUSTRY OVERVIEW
Pork products are the third largest source of meat protein in the United
States and the largest source globally. The market for pork products in the
United States totaled 97.9 million hogs and 18.9 billion pounds of pork in a $33
billion industry in 2000. The primary driver of demand for pork products in the
United States has been population growth. However, between 1997 and 1999, U.S.
per capita consumption increased from 45.8 pounds to 50.9 pounds per annum
according to the National Pork Producers Council. U.S. exports of pork products
have grown substantially in recent years. Between 1995 and 2000, exports
increased at an 11.1% compound annual growth rate from 770 million pounds to 1.3
billion pounds. U.S. exports are projected by Sparks Companies, Inc. to increase
an additional 21% in calendar year 2001.
1
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The United States pork industry is divided into two segments: hog
production and pork processing. Hog production, while rapidly consolidating,
remains highly fragmented, with nearly 86,000 producers in 2000. In contrast,
pork processing is a competitive, but highly concentrated and consolidating
industry, with the top ten processors representing approximately 87% of total
federally inspected industry capacity in 2000.
Based on Sparks Companies, Inc.'s recent analysis of the USDA Hog and Pig
Report released in July 2001, we estimate that live hog prices will average
approximately $45 per hundred weight in 2001, and hog production is expected to
be slightly higher for 2001 as compared to 2000. Pork product prices in 2001 are
expected to increase slightly, with the total amount of commercial processing in
the U.S. estimated at 98.2 million hogs in 2001 compared to 97.9 million hogs in
2000.
We expect several on-going industry trends to continue in 2001. These
include increasing consumer demand for high-quality pork products in the United
States and globally, continued consolidation of the hog production industry,
further integration of hog production and pork processing operations and
stricter environmental regulations governing new and existing hog operations. We
believe the trends will result in favorable demand for our products, more stable
live hog and pork product prices and generally improved industry conditions.
COMPETITIVE STRENGTHS
We believe the following competitive strengths position us to enhance our
growth and profitability:
- Vertically Integrated Production and Processing. All of the hogs used by
our Milan, Missouri processing plant are sourced from our Missouri and
Texas hog production operations. In fiscal 2001, since our North Carolina
acquisitions, approximately 61% of hogs used by our Clinton, North
Carolina plant were supplied by our North Carolina hog production
operations, with the remaining 39% supplied through contracts with
independent producers. Vertical integration gives us strict control over
our process, from a hog's initial genetic makeup to the pork product
ultimately produced and shipped. This is a powerful advantage for
competing effectively in the rapidly consolidating pork industry because
it allows us to:
- produce premium and specialty products, which typically command higher
prices than commodity price products, by regulating the variables of
genetics, environment, health and diet;
- target premium customers, who are willing to pay premium prices, by
tailoring our production process to meet the exacting specifications of
discriminating customers in our target market;
- reduce our production costs and maximize value, by significantly
reducing our hog procurement costs and streamlining our logistics,
transportation and production schedules and capturing more of the value
of our hogs through our own processing rather than passing this value
on to other processors; and
- reduce earnings volatility and exposure to market fluctuations, by
providing us with an assured supply of hogs and reducing our exposure
to pricing volatility.
- Strong Market Position with Large Scale Operations. Our large-scale
integrated operations, geographic dispersal and strong market position
allow us to serve a broad range of customers in our target market, while
maintaining economies of scale and marketing leverage.
- Efficient, Modern Facilities and Operations. Our Milan, Missouri
processing plant is currently one of the most modern and technically
advanced facilities of its kind, and we believe our Clinton, North
Carolina plant will be the most advanced facility of its kind in the
United States when our North Carolina capital improvement plans are
complete. Our hog production operations allow us to achieve
industry-leading productivity statistics. According to data compiled by
Agrimetrics Associates, Inc., our costs of production are in the lowest
quartile of all pork producers surveyed, and we are consistently among
the top processors in terms of return on hogs processed, which is a
function of both price and yield.
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- Experienced Management Team. Our senior and operational management
personnel, on average, have over thirteen years of experience in farm
production and/or the fresh meat industry.
BUSINESS STRATEGY
We are pursuing a strategy designed to increase our revenues and cash flow.
Key elements of our strategy include:
- Further Develop Vertical Integration. We intend to increase integration
in our North Carolina operations by renovating our recently acquired
processing plant, upgrading the genetics of our breed stock, improving
feed manufacturing and increasing supervision of contract growers in
order to put in place a USDA Process Verified program similar to the
program that is in place for our fully integrated Missouri operations.
Ultimately, we intend to have two fully-integrated geographically
separated pods located in these states, allowing us to serve the U.S. and
international markets cost effectively. When justified in the future by
market conditions, customer relationships and other circumstances, we
also intend to expand our Texas operations to add a processing plant that
will create a third fully integrated pod modeled upon our Missouri
operations.
- Focus on High Quality and Value-Added Products. We intend to continue to
focus on producing high quality and value-added products for our
discriminating customers, and to further differentiate ourselves from
commodity oriented competitors by developing new brands and additional
products. We believe our capital improvements to our Clinton, North
Carolina processing plant will allow us to market premium products
similar to those produced by our Milan, Missouri plant, as well as smoked
and processed pork products.
- Expand Production and Processing Capacity. We intend to further expand
hog production at our Texas facilities by adding 10,000 new sows, which
we expect will produce approximately 200,000 new hogs per year beginning
in fiscal year 2003. In addition, we believe our Texas production
facilities have adequate space and have obtained all environmental and
land use permits required for further expansion in a manner that could
replicate our Missouri hog production facilities. We also intend, through
modernization and efficiency efforts, to increase processing capacity at
our Clinton, North Carolina plant from its current 6,500 hogs per day to
8,000 hogs per day on an eight-hour shift, with additional capacity to
process up to 10,000 hogs per day on a ten-hour shift on a seasonal
basis.
- Maintain Position as a Low Cost Producer. We intend to continue to
measure our production and processing activities continually in an effort
to increase our hog production efficiencies, lower our break-even costs,
improve our processing yields and develop new value-added products.
- Continue Expansion into International Markets. We intend to continue our
efforts to develop sales outside the United States. In particular, we
intend to increase our export volumes to Japan, as this market ascribes
significant value to premium, process-controlled traceable products. We
also intend to actively expand sales in the South Korean, Chinese and
Taiwanese markets.
- Manage Market Risks. We will continue to draw upon the strength of our
risk management team and monitor daily opportunities to lock in favorable
margins by hedging both feed and energy costs, as well as fresh meat
sales.
- Environmental Stewardship. We will continue to be a leader in the pork
industry in researching, developing and implementing new waste handling
and environmental technologies and solutions, including source reduction,
risk reduction, improved manure treatment, beneficial reuse of waste
products (creating value-added products) and water reuse.
OUR HISTORY
The hog production business of Premium Standard Farms was originally
founded in 1988. In 1994, we completed construction of our Milan, Missouri
processing plant. Due primarily to start-up costs and the
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low level of initial production at that plant, as well as the rapid expansion of
our Missouri and Texas operations, the corporation that previously ran our
Missouri and Texas operations filed Chapter 11 bankruptcy on July 2, 1996. In
September 1996, the reorganization became effective and our business emerged
from Chapter 11. Premium Standard Farms in its current corporate form resulted
from this restructuring.
Since emerging from bankruptcy, we have expanded our business in two
significant ways. On May 13, 1998, we expanded our Missouri operations in a
series of transactions with ContiGroup Companies, Inc. (formerly known as
Continental Grain). In these transactions, ContiGroup purchased a 51.0 percent
ownership interest in our parent company, PSF Group Holdings, for $182.3
million. In exchange, we purchased the North Missouri Farms hog production
operations then owned by ContiGroup for $75.0 million. Our transactions with
ContiGroup were treated for accounting purposes as a reverse acquisition by
ContiGroup. Thus, even though we trace our roots as a business to the Premium
Standard Farms that underwent reorganization and emerged from bankruptcy in
1996, the financial data included in this prospectus for the periods prior to
May 1998 relates to ContiGroup's North Missouri Farms operations rather than to
Premium Standard Farms itself. Despite this accounting treatment, we will
discuss the pre-1998 business of Premium Standard Farms at times in this
prospectus since that business provided the basis for our current vertically
integrated operations.
In fiscal 2001, we expanded our operations through two acquisitions in
North Carolina. We acquired The Lundy Packing Company, which consisted of hog
production and pork processing operations, on August 25, 2000. On September 22,
2000, we then acquired Premium Standard Farms of North Carolina from ContiGroup.
In the latter transaction, ContiGroup received cash and additional shares of PSF
Group Holdings stock, bringing its overall ownership of our parent's outstanding
common stock to 53.1 percent.
Premium Standard Farms is a Delaware company formed in 1996. PSF Group
Holdings, our parent corporation, is a Delaware company formed in 1998. The
Lundy Packing Company and Lundy International, Inc. are North Carolina
corporations, incorporated in 1948 and 1981, respectively. Premium Standard
Farms of North Carolina, Inc., is a Delaware corporation, incorporated in 2000.
Our principal executive offices are located at 423 West 8th Street, Suite 200,
Kansas City, Missouri and our telephone number is (816) 472-7675.
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9
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
THE EXCHANGE OFFER............ $1,000 principal amount of exchange notes in
exchange for each $1,000 principal amount of
old notes. As of the date hereof $175.0 million
in aggregate principal amount of old notes are
outstanding.
Based on interpretations by the staff of the
Commission, as set forth in no-action letters
issued to certain third parties unrelated to
us, we believe that exchange notes issued
pursuant to the exchange offer in exchange for
old notes may be offered for resale, resold or
otherwise transferred by you without compliance
with the registration and prospectus delivery
requirements of the Securities Act, unless you:
- are an "affiliate" of ours within the
meaning of Rule 405 under the Securities
Act;
- are a broker-dealer who purchased old
notes directly from us for resale under
Rule 144A or Regulation S or any other
available exemption under the Securities
Act;
- acquired the exchange notes other than
in the ordinary course of your business;
or
- have an arrangement with any Person to
engage in the distribution of exchange
notes. However, the Commission has not
considered the exchange offer in the
context of a no-action letter and we
cannot be sure that the staff of the
Commission would make a similar
determination with respect to the
exchange offer as in such other
circumstances. Furthermore, in order to
participate in the exchange offer, you
must make the representations set forth
in the letter of transmittal that we are
sending you with this prospectus.
Registration Rights
Agreement..................... We sold the old notes on June 7, 2001, in a
private placement in reliance on Section 4(2)
of the Securities Act. The old notes were
immediately resold by the initial purchasers in
reliance on Rule 144A and Regulation S under
the Securities Act. At the same time, we
entered into a registration rights agreement
with the initial purchasers requiring us to
make the exchange offer. The registration
rights agreement also requires us to use
reasonable best efforts to consummate the
exchange offer by December 7, 2001.
If we do not do so, the interest rate on the
old notes will increase, initially by 0.50%.
See "The Exchange Offer -- Purpose and Effect."
Expiration Date............... The exchange offer will expire at 5:00 p.m.,
September 13, 2001, New York City time, or a
later date and time if we extend it (the
"Expiration Date").
Withdrawal.................... The tender of the old notes pursuant to the
exchange offer may be withdrawn at any time
prior to the Expiration Date. Any old notes not
accepted for exchange for any reason will be
returned
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without expense as soon as practicable after
the expiration or termination of the exchange
offer.
Interest on the Exchange Notes
and the Old Notes............. Interest on the exchange notes will accrue from
the date of the original issuance of the old
notes or from the date of the last payment of
interest on the old notes, whichever is later.
No additional interest will be paid on the old
notes tendered and accepted for exchange.
Conditions to the Exchange
Offer......................... The exchange offer is subject to customary
conditions, some of which may be waived by us.
See "The Exchange Offer -- Conditions to
Exchange Offer."
Procedures for Tendering Old
Notes......................... If you wish to accept the exchange offer, you
must complete, sign and date the letter of
transmittal, or a copy of the letter of
transmittal, in accordance with the
instructions contained in this prospectus and
in the letter of transmittal, and mail or
otherwise deliver the letter of transmittal, or
the copy, together with the old notes and any
other required documentation, to the exchange
agent at the address set forth in this
prospectus. If you are a person holding the old
notes through the Depository Trust Company and
wish to accept the exchange offer, you must do
so through the Depository Trust Company's
Automated Tender Offer Program, by which you
will agree to be bound by the letter of
transmittal. By executing or agreeing to be
bound by the letter of transmittal, you will be
making a number of important representations to
us, as described under "The Exchange
Offer -- Purpose and Effect."
Under the circumstances specified in the
registration rights agreement, we may be
required to file a "shelf" registration
statement for the old notes for a continuous
offering under Rule 415 under the Securities
Act.
We will accept for exchange any and all old
notes that are properly tendered in the
exchange offer prior to the Expiration Date.
The exchange notes issued in the exchange offer
will be delivered promptly following the
Expiration Date. See "The Exchange
Offer -- Terms of the Exchange Offer."
Exchange Agent................ Wilmington Trust Company is serving as exchange
agent in connection with the exchange offer.
Federal Income Tax
Considerations................ We believe the exchange of old notes for
exchange notes in the exchange offer will not
constitute a sale or an exchange for federal
income tax purposes. See "Important Federal
Income Tax Considerations."
Effect of Not Tendering....... Old notes that are not tendered or that are
tendered but not accepted will, following the
completion of the exchange offer, continue to
be subject to their existing transfer
restrictions. We will have no further
obligation to provide for registration under
the Securities Act of such old notes.
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SUMMARY OF THE TERMS OF THE EXCHANGE NOTES
Issuer........................ Premium Standard Farms, Inc.
Securities Offered............ $175,000,000 aggregate principal amount of
9 1/4% Senior Notes due 2011.
Maturity...................... June 15, 2011.
Interest...................... Payable semi-annually in arrears on June 15 and
December 15, commencing December 15, 2001.
Optional Redemption........... We may redeem any of the exchange notes
beginning on June 15, 2006. The initial
redemption price is 104.625% of their principal
amount plus accrued interest. The redemption
price will decline each year after 2006 and
will be 100% of their principal amount, plus
accrued interest, beginning on June 15, 2009.
In addition, before June 15, 2004, we may
redeem up to 35% of the exchange notes at a
redemption price of 109.250% of their principal
amount plus accrued interest, using the
proceeds from sales of specified kinds of our
capital stock. We may make such redemption only
if after such redemption, at least 65% of the
aggregate principal amount of exchange notes
originally issued remains outstanding.
Change of Control............. Upon a change of control, we will be required
to make an offer to purchase the exchange notes
at a price equal to 101% of their principal
amount plus accrued interest to the date of
repurchase. We may not have sufficient funds
available at the time of any change of control
to make any required debt repayment.
Ranking....................... The exchange notes will be senior unsecured
obligations.
The exchange notes will rank equally in right
of payment with all of our unsecured
unsubordinated indebtedness. The exchange notes
will be effectively junior to all our secured
indebtedness.
As of June 30, 2001, we had $268.9 million in
indebtedness outstanding, including $87.3
million of secured indebtedness under our
credit facility.
Guarantees.................... PSF Group Holdings and each of our wholly owned
domestic subsidiaries will fully and
unconditionally guarantee the exchange notes on
a senior unsecured basis. As of June 30, 2001,
the guarantors had $4.6 million of indebtedness
(other than their obligations under our credit
facility), all of which was secured. The
guarantee by each guarantor will rank equally
in right of payment with each guarantor's
unsecured indebtedness. The guarantees will be
effectively junior to all secured indebtedness
of the guarantors.
Certain Covenants............. The terms of the exchange notes will limit our
ability and the ability of our subsidiaries to:
- incur additional indebtedness;
- create liens;
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- pay dividends and make distributions in
respect of capital stock;
- redeem capital stock;
- make investments or other restricted
payments;
- sell assets;
- issue or sell stock of restricted
subsidiaries;
- enter into transactions with affiliates;
and
- effect a consolidation or merger.
These covenants are subject to a number of
important qualifications and exceptions.
RISK FACTORS
See "Risk Factors" beginning on page 12 for a discussion of certain risks
relating to us, our business and an investment in the exchange notes.
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SUMMARY HISTORICAL CONSOLIDATED AND UNAUDITED
PRO FORMA FINANCIAL INFORMATION
The following tables set forth summary historical consolidated financial
information for PSF Group Holdings from inception (May 13, 1998, the date of the
ContiGroup acquisition) through June 30, 2001, and summary unaudited pro forma
information for the year ended March 31, 2001. The summary historical
consolidated financial information for the fiscal years ended March 31, 2001 and
March 25, 2000 has been derived from our consolidated financial statements,
which have been audited by Arthur Andersen LLP, independent public accountants,
as indicated in their report, and are included in the back of this prospectus.
The summary historical consolidated financial information for the quarters ended
June 30, 2001 and June 24, 2000 has been derived from our unaudited condensed
consolidated financial statements, which are also included in the back of this
prospectus. The historical consolidated financial information presented for the
year ending March 31, 2001 and the quarter ended June 30, 2001 reflects our
acquisition of The Lundy Packing Company on August 25, 2000 and our acquisition
of Premium Standard Farms of North Carolina, Inc. on September 22, 2000, both of
which were accounted for in accordance with the purchase method of accounting.
The unaudited pro forma statement of operations set forth below gives
effect to our acquisitions of The Lundy Packing Company and Premium Standard
Farms of North Carolina and the offering of the old notes and the application of
the net proceeds therefrom as if they had been consummated on March 26, 2000.
The unaudited pro forma financial statement of operations is not necessarily
indicative of future results of operations or the results that might have
occurred if the foregoing transactions had been consummated on such date. There
can be no assurance that assumptions used in the preparation of the pro forma
financial data will prove to be correct. This data should be read in conjunction
with "Unaudited Pro Forma Consolidated Statement of Operations," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and the notes thereto included in the back of this
prospectus.
<Table>
<Caption>
HISTORICAL PRO FORMA
------------------------------------------------------------- -----------------
FOR THE FOR THE FOR THE
FOR THE PERIOD FISCAL YEARS ENDED QUARTERS ENDED FISCAL YEAR ENDED
--------------- --------------------- ------------------- -----------------
MAY 13, 1998 TO MARCH 25, MARCH 31, JUNE 24, JUNE 30, MARCH 31,
MARCH 27, 1999 2000 2001 2000 2001 2001
--------------- --------- --------- -------- -------- -----------------
(DOLLARS IN THOUSANDS)
STATEMENTS OF OPERATIONS
DATA:
Net sales................. $237,090 $306,266 $ 540,576 $ 87,920 $171,162 $680,076
Cost of goods sold........ 249,757 265,929 456,184 63,683 141,376 593,195
Selling, general and
administrative
expenses................ 20,027 18,830 19,413 3,451 5,636 20,933
Impairment of fixed
assets(1)............... -- 5,000 -- -- -- --
Amortization expense...... 1,945 2,320 3,180 580 -- 3,490
Other expense (income).... 682 (47) 1,210 (436) (28) 2,648
Operating income (loss)... (35,321) 14,234 60,589 20,642 24,178 59,810
Interest expense, net..... 17,601 21,220 23,208 4,605 6,796 27,019
Income tax expense
(benefit)............... (20,377) (1,699) 15,367 6,519 6,969 13,531
Extraordinary loss, net
of tax.................. -- -- -- -- 1,315 --
Net income (loss)......... (32,545) (5,287) 22,014 9,518 9,098 19,260
OTHER FINANCIAL DATA:
GAAP cash flow:
Operating activities.... $ (7,620) $ 55,522 $ 61,679 $ 20,554 $ 19,456 --
</Table>
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<Table>
<Caption>
HISTORICAL PRO FORMA
------------------------------------------------------------- -----------------
FOR THE FOR THE FOR THE
FOR THE PERIOD FISCAL YEARS ENDED QUARTERS ENDED FISCAL YEAR ENDED
--------------- --------------------- ------------------- -----------------
MAY 13, 1998 TO MARCH 25, MARCH 31, JUNE 24, JUNE 30, MARCH 31,
MARCH 27, 1999 2000 2001 2000 2001 2001
--------------- --------- --------- -------- -------- -----------------
(DOLLARS IN THOUSANDS)
Investing activities.... $(17,322) $(15,242) $(145,992) $ (4,391) $(22,484) --
Financing activities.... (227) (42,677) 91,219 (18,295) (4,104) --
EBITDA(2)................. 2,330 62,527 112,292 31,659 37,762 $121,101
EBITDA margin(3).......... 0.98% 20.42% 20.77% 36.01% 22.06% 17.81%
Capital expenditures...... $ 22,126 $ 23,669 $ 43,224 $ 6,044 $ 26,208 --
Debt to EBITDA(4)......... 90.72x 2.81x 2.38x -- -- 2.27x
Depreciation, amortization
and impairment.......... $ 37,651 $ 48,293 $ 51,703 $ 10,991 $ 13,791 $ 58,850
EBITDA to interest
expense(5).............. 0.13x 2.94x 4.65x -- -- 4.33x
Ratio of earnings to fixed
charges(6).............. -- -- 2.47x -- 3.47x 2.10x
Pounds of pork sales
(millions).............. 296.79 345.84 603.88 82.61 168.95 --
Total hogs processed
(millions).............. 1.61 1.92 3.02 0.45 0.92 --
</Table>
<Table>
<Caption>
AS OF AS OF
AS OF ---------------------- --------------------
--------------- MARCH 25, MARCH 31, JUNE 24, JUNE 30,
MARCH 27, 1999 2000 2001 2000 2001
--------------- --------- --------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital...................... $ 70,010 $ 51,698 $119,764 $ 72,769 $110,359
Property, plant, equipment and
breedstock......................... 456,961 427,662 496,882 421,930 507,469
Goodwill............................. 59,438 57,398 75,998 56,888 75,998
Total assets......................... 617,455 584,498 773,440 582,276 783,629
Total long-term debt and capital
leases (including current
portion)........................... 211,384 175,997 267,216 157,732 268,927
Shareholders' equity................. 324,955 319,668 357,837 329,187 363,411
</Table>
- ---------------
(1) During fiscal 2000, certain assets under construction, which were originally
being constructed for an expansion in Texas, were determined to be
unrecoverable due to a change in expansion plans. A non-cash impairment loss
was taken during the year ended March 25, 2000.
(2) EBITDA represents earnings before interest, taxes, depreciation,
amortization and impairment of fixed assets. EBITDA and the related ratios
are presented because we believe they are frequently used by securities
analysts, investors and other interested parties in the evaluation of
companies in our industry. However, other companies in our industry may
calculate EBITDA differently than we do. Therefore, EBITDA is not
necessarily comparable to similarly titled measures of these companies.
EBITDA is not a measurement of financial performance under generally
accepted accounting principles and should not be considered as an
alternative to cash flow from operating activities or as a measure of
liquidity or an alternative to net income as indicators of our operating
performance or any other measures of performance derived in accordance with
generally accepted accounting principles. See the Statements of Cash Flow
included in our consolidated financial statements.
(3) Represents EBITDA as a percentage of net sales.
(4) Represents debt divided by EBITDA. Due to the seasonal nature of our
business, we have not provided this calculation on an annualized basis for
the three months ended June 30, 2001 or June 24, 2000.
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(5) Represents EBITDA divided by gross interest expense. Due to the seasonal
nature of our business, we have not provided this calculation for the three
months ended June 30, 2001 or June 24, 2000.
(6) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. For this purpose, "earnings" include net income (loss) before
taxes and fixed charges. Fixed charges include interest, amortization of
debt expense and the portion of rental expense that is representative of the
interest factor in these rentals. For the period ended March 27, 1999 and
the fiscal year ended 2000 our earnings were insufficient to cover our fixed
charges by $52.9 million and $7.0 million, respectively.
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks described below are not the only ones facing our
company. Additional risks and uncertainties not presently known to us or that we
currently believe to be immaterial may also materially and adversely affect our
business operations. Any of the following risks could materially and adversely
affect our business, financial condition or results of operations. In such case,
you may lose all or part of your original investment.
RISK FACTORS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY UNDER OUR EXISTING CORPORATE STRUCTURE UPON
WHICH YOU CAN EVALUATE OUR PERFORMANCE.
In 1998, ContiGroup purchased a 51% ownership interest in our parent and
simultaneously, we purchased the North Missouri Farms hog production operations
owned by ContiGroup. These transactions were treated for accounting purposes as
a reverse acquisition by ContiGroup. As a result, ContiGroup's North Missouri
Farms operations, not our Missouri and Texas operations, are considered our
predecessor, and the financial information in this prospectus prior to May 1998
relate to the operations of our predecessor.
On August 25, 2000, we acquired The Lundy Packing Company for approximately
$67.2 million in cash and the assumption of approximately $31.0 million in debt.
On September 22, 2000, we purchased ContiGroup's North Carolina hog production
operations for $16.2 million in cash and $16.2 million in shares of Class B
Common Stock of PSF Group Holdings. These acquisitions significantly increased
our operations, however, they are included in our historical results of
operations only from their date of acquisition.
As a result of these transactions, we have a limited operating history
under our existing corporate structure upon which you can evaluate our
performance.
OUR HISTORY OF OPERATIONS INCLUDES NET LOSSES AND BANKRUPTCY, AND WE MAY INCUR
NET LOSSES IN THE FUTURE.
On July 2, 1996, we filed a plan of reorganization under Chapter 11 of the
United States Bankruptcy Code, which became effective on September 17, 1996.
Because ContiGroup's North Missouri Farms operations are considered our
predecessor, our bankruptcy reorganization is not reflected in the financial
statements included in this prospectus. Our bankruptcy resulted from our net
losses from December 31, 1992 to June 30, 1996 totaling $207.3 million,
excluding restructuring items. These losses were due in significant part to a
combination of aggressive expansion of the Missouri and Texas operations, high
break-even costs, high feed ingredient prices, interest expense, "start-up"
losses on newly constructed units, and depreciation on assets which had not yet
reached their full productive and earning capacity. As a result of these losses,
we did not make a required interest payment of approximately $7.0 million due on
our then-outstanding senior secured notes.
Although we generated $22.0 million of net income in fiscal 2001, we
experienced net losses from operations of approximately $5.3 million in fiscal
2000 and approximately $32.5 million in fiscal 1999. These losses were due
primarily to low hog and pork prices. There can be no assurance as to our
ability to generate positive cash flow in future periods. If we are unable to
generate positive cash flow in the future, we may not be able to make required
payments on our debt obligations, including your notes.
IF OUR PORK PRODUCTS BECOME CONTAMINATED, WE MAY BE SUBJECT TO PRODUCT LIABILITY
CLAIMS AND PRODUCT RECALLS.
Pork products may be subject to contamination by disease producing
organisms, or pathogens, such as Listeria monocytogenes, Salmonella and generic
E coli. These pathogens are generally found in the environment and as a result,
there is a risk that they as a result of food processing could be present in our
processed pork products. This risk may be controlled, but may not be eliminated,
by adherence to good
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manufacturing practices and finished product testing. Once contaminated products
have been shipped for distribution, illness and death may result if the
pathogens are not eliminated at the further processing, foodservice or consumer
level. Even an inadvertent shipment of contaminated products is a violation of
law and may lead to increased risk of exposure to product liability claims,
product recalls and increased scrutiny by federal and state regulatory agencies
and may have a material adverse effect on our business, reputation, prospects,
results of operations and financial condition.
PRODUCT LIABILITY CLAIMS OR PRODUCT RECALLS COULD ADVERSELY AFFECT OUR BUSINESS
REPUTATION AND EXPOSE US TO INCREASED SCRUTINY BY FEDERAL AND STATE REGULATORS.
The packaging, marketing and distribution of food products entails an
inherent risk of product liability and product recall and the resultant adverse
publicity. We may be subject to significant liability if the consumption of any
of our products causes injury, illness or death. We could be required to recall
certain of our products in the event of contamination or damage to the products.
In addition to the risks of product liability or product recall due to
deficiencies caused by our production or processing operations, we may encounter
the same risks if any third party tampers with our products. We cannot assure
you that we will not be required to perform product recalls, or that product
liability claims will not be asserted against us, in the future. Any claims that
may be made may create adverse publicity that would have a material adverse
effect on our ability to market our products successfully and on our business,
reputation, prospects, financial condition and results of operations.
OUR OPERATIONS ARE SUBJECT TO NUMEROUS LAWS AND REGULATIONS, EXPOSING US TO
POTENTIAL CLAIMS AND COMPLIANCE COSTS THAT COULD ADVERSELY AFFECT OUR BUSINESS.
Various federal, state and local environmental and health and safety laws
and regulations apply to our operations. Those laws and regulations particularly
relate to our processing plants and our waste treatment lagoons and facilities.
Our pork processing plants are subject to regulation by the USDA and we
cannot assure you that USDA enforcement proceedings will not be brought against
us in the future. Such proceedings could cause disruptions in our operations and
lead to material costs, liabilities or other losses. Prior to our acquisition of
the North Carolina processing plant, that plant had received a high number of
USDA-FSIS Non-Compliance Reports. We cannot assure you that our capital
improvements to our North Carolina plant will be successful in alleviating all
of the USDA's concerns.
The nature of our hog production operations exposes us to the risk of
environmental claims, including claims for damages to property, nuisance and
injury to persons resulting from the environmental, health and safety impacts of
our operations, and these claims could cause us to experience material costs,
liabilities or other losses. We were a successor to a nuisance suit brought by
neighbors of our northern Missouri pork operations. For more information, see
"Business -- Litigation." The risks of nuisance and community issues are
inherent in our operations even if we are in compliance with applicable
regulations, and the risk of claims based on these issues may increase in the
future.
Further, confined animal feeding operations such as ours have recently come
under intense review by federal, state and local regulators. These regulators,
including the federal Environmental Protection Agency, have proposed new
regulations and attempted to apply certain existing regulations for the first
time to agricultural operations. These regulations could result in the
prevention or restriction of some of our operations, and noncompliance with them
has resulted, and may in the future result, in the imposition of fines and
penalties. The State of Missouri, for example, has promulgated a new rule that
comes into effect on January 1, 2002 to regulate odor emissions from large
animal feeding operations such as ours. This rule required us to develop plans
to reduce odor emissions and to submit such plans to state authorities. This
rule also requires us to make any changes needed to reduce odors at the property
line to certain established levels. We have also entered into a consent judgment
with the Attorney General of Missouri pursuant to which we are obligated to
spend $25 million over the course of five years. For more information, see
"Business -- Litigation."
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The State of North Carolina has issued a moratorium on construction of new
waste treatment lagoons and spray fields associated with hog operations. We
anticipate that this moratorium will be extended until more effective and
environment-friendly technologies for the handling of animal wastes are
developed. On September 29, 2000, we reached agreement with the Attorney General
of North Carolina with respect to our acquired waste lagoons and spray fields.
In that agreement, we committed to implement "Environmentally Superior
Technologies" within three years after an independent panel has determined that
such technologies are both effective and economically feasible to construct and
operate. We cannot assure you, however, that the technologies will not cost more
than we anticipate. We also cannot assure you that lagoons and spray fields will
not be banned in North Carolina in the future, leading to increased competition
for growers and disruption to our North Carolina operations.
We are a defendant in a citizen's action suit seeking to enforce alleged
violations of the Clean Air Act, Clean Water Act and CERCLA. The plaintiffs are
seeking injunctive relief, civil penalties and attorneys' fees. The federal
Environmental Protection Agency has also intervened in the case. We cannot
assure you that our defense will be successful.
We cannot assure you that future events, such as changes in existing laws
and regulations or enforcement policies which result in additional compliance
costs, or additional claims for nuisance, personal injury or property damage,
will not have a material adverse effect on our business, financial condition and
results of operations.
For additional information on environmental, health and safety regulation
and compliance, see "Business -- Regulation" and "Business -- Litigation."
CHANGES IN CORPORATE FARMING LAWS IN SOME OF THE STATES WHERE WE OPERATE OR A
FINDING THAT WE ARE NOT IN COMPLIANCE WITH EXISTING LAWS COULD ADVERSELY AFFECT
OUR BUSINESS.
Several states have enacted "corporate farming laws" that restrict the
ability of corporations to engage in farming activities. Missouri is among these
states, but Texas and North Carolina currently are not. Missouri's corporate
farming law in many cases bars corporations from owning agricultural land and
engaging in farming activities. We believe our operations currently comply with
the Missouri corporate farming law and its existing exemptions, but the Missouri
laws could be subject to challenge or amendment by Missouri governmental bodies
in the future. Further, even with the exemptions, the corporate farming laws
restrict our ability to expand beyond the counties in which we currently
operate.
OUTBREAKS OF DISEASE CAN ADVERSELY AFFECT OUR REVENUES AND OPERATING MARGINS.
The productivity and profitability of any hog operation depends, to a great
extent, on the ability to maintain animal health and control disease. Disease
can reduce the number of offspring weaned per sow and hamper the growth of hogs
to finished size. Diseases can be spread from other infected hogs, in feed, in
trucks, by rodents or birds, by people visiting the farms or through the air. We
have experienced outbreaks of certain diseases in the past, and may in the
future, including Transmittable Gastroenteritis (TGE), and Porcine Reproductive
and Respiratory Syndrome (PRRS), a respiratory disease commonly affecting swine
herds.
We also face the risk of outbreaks of other diseases that have not affected
our herds previously, including foot-and-mouth disease, which is a highly
contagious viral disease affecting swine, cattle, sheep and goat herds. Until
the outbreaks of the disease recently reported in Europe which have led to the
destruction of thousands of animals, foot-and-mouth disease had been primarily
limited to Africa, the Middle East, Asia and South America. Although
foot-and-mouth disease is generally not lethal in adult pigs, mortality is
common when younger pigs are infected. If we experience an outbreak of
foot-and-mouth disease, we will likely be required to destroy all of our herd
that has the potential of being infected. If this occurs, our production and our
ability to sell our pork products would be adversely affected. In addition,
because foot-and-mouth disease is highly contagious and destructive to
susceptible livestock, if an outbreak of foot-and-mouth disease were confirmed
in the United States, our ability to export our pork products could be adversely
affected, even if our herds were not infected with the disease.
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IF WE ARE NOT ABLE TO COMPLETE THE CAPITAL IMPROVEMENTS TO OUR PROCESSING
FACILITIES IN NORTH CAROLINA TIMELY OR EFFICIENTLY, WE MAY BE REQUIRED TO INCUR
ADDITIONAL COSTS AND MAY NOT ACHIEVE ANTICIPATED INCREASES IN SALES AND MARGINS.
We need to make substantial improvements in our North Carolina processing
facility in order to increase capacity and to bring this facility up to the same
quality as our Missouri processing facility. We are currently in the process of
implementing these capital improvements. We expect the total cost of these
improvements to be approximately $37 million and to complete the improvements by
the fourth quarter of our fiscal year 2002. We do not expect to benefit
significantly from these improvements until they are completed. If we are not
able to complete the improvements on schedule, our business could be adversely
affected in the following ways:
- we may not be able to obtain Process Verified accreditation from the USDA
for our pork products processed at this facility, which would adversely
affect our ability to increase our export sales from this facility;
- we may not be able to increase our production of higher-margin pork
products at our North Carolina facility;
- we may not be able to improve the level of customer service that our
North Carolina facility has historically provided, which could adversely
affect our ability to increase our customer base and to target
discriminating customers; and
- we may be required to continue to operate our North Carolina facility at
less than full capacity, which would adversely affect our sales and
margins.
In addition, our costs of completing the improvements may exceed the
amounts we have budgeted, which could require us to borrow additional funds for,
or dedicate additional cash flow to, the capital improvement project. Our
inability to complete the capital improvements on time may also divert our
management's attention from our day-to-day business.
IF WE ARE NOT ABLE TO COMPLETE THE EXPANSION OF OUR TEXAS HOG PRODUCTION
OPERATIONS TIMELY OR EFFICIENTLY, WE MAY BE REQUIRED TO INCUR ADDITIONAL COSTS
AND MAY NOT ACHIEVE ANTICIPATED INCREASES IN REVENUES.
We are currently expanding our Texas hog production facilities to house an
additional 10,000 sows and their offspring. We expect to complete this expansion
in 2002 at a total cost of approximately $25 million. We do not expect to
benefit significantly from this expansion until it is completed. If we are not
able to complete this expansion on schedule, our business could be adversely
affected in the following ways:
- because we have already begun to produce the additional hogs at our Texas
facility, we may be required to contract with third parties to finish our
hogs at a higher cost;
- we may not receive the additional revenues we anticipate from the
increased sales of market hogs from our Texas operations; and
- because we expect to use some of the additional animals we produce to
replenish our existing breeding herds, we may be required to purchase
higher cost replacement sows for our existing operations.
In addition, our costs of completing the expansion may exceed the amounts
we have budgeted, which could require us to borrow additional funds for, or
dedicate additional cash flow to, the expansion project. Our inability to
complete the Texas expansion on time may also divert our management's attention
from our day-to-day business.
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OUR FEED COMPONENT COSTS AND THE SALES OF OUR PORK PRODUCTS ARE SUBJECT TO
SEASONAL VARIATIONS AND, AS A RESULT, OUR QUARTERLY OPERATING RESULTS MAY
FLUCTUATE.
Our quarterly operating results are influenced by seasonal fluctuations in
the price of our primary feed components, corn and soybean meal, and by seasonal
fluctuations in wholesale pork prices. The prices we pay for our feed components
are generally lowest in August, September and October, which corresponds with
the corn and soybean harvests. Generally, the prices for these commodities will
increase over the following months leading up to the next harvest due to the
storage costs. As a result, our costs in the production side of our business
tend to increase during this period.
Live hog and wholesale pork prices are similarly affected by seasonal
factors. It generally takes approximately 11 months from conception for a hog to
reach market weight, and because sows are generally less productive in summer
months as a result of seasonal conditions, there are generally fewer hogs
available in the months of April, May and June. This decrease in supply of live
hogs generally causes live hog and wholesale pork prices to be higher on average
during these months, and our revenues tend to increase accordingly. Conversely,
there are generally more hogs available in the months of October, November and
December, which generally causes live hog and wholesale pork prices to be lower
on average during these months and adversely affects our revenues.
As a result of these seasonal and quarterly fluctuations, we believe that
comparisons of our sales and operating margins between quarters within a single
fiscal year are not necessarily meaningful and that these comparisons cannot be
relied upon as indicators of our future performance.
INCREASES IN THE COSTS OF OUR FEED COMPONENTS COULD ADVERSELY AFFECT OUR COSTS
AND OPERATING MARGINS.
The results in our business can be negatively affected by increased costs
of our feed components, which consist primarily of corn and soybean meal. The
cost and supply of feed components are determined by constantly changing market
forces of supply and demand, which are driven by matters over which we have no
control, including weather, current and projected worldwide grain stocks and
prices, grain export prices and supports and governmental agricultural policies.
For example, the annual average price of corn has ranged from a low of $1.72 per
bushel to a high of $3.70 per bushel during the period from 1980 to 2000. The
annual average price of soybean meal has ranged from a low of $131.53 per ton to
a high of $250.28 per ton in the same period. In our fiscal year ended March 31,
2001, our purchases of feed components comprised approximately 30.5% of our
total cost of goods sold. As a result of our Texas hog production expansion, we
expect our feed component costs to increase as a percentage of our total costs
over the next 12 to 24 months, and we will be more vulnerable to increases in
feed component costs. Unless live hog and wholesale pork prices correspondingly
increase, increases in the prices of our feed components would adversely affect
our operating margins. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview -- Cost of Goods Sold."
We purchase a portion of our feed requirements in advance at fixed prices
in order to hedge our short-term exposure to future price fluctuations. We use
forward contracts, as well as futures and options contracts, to establish
adequate supplies of future grain requirements and to reduce the risk of market
fluctuations. These contracts may result in off-balance sheet market risk which
is dependent on fluctuations in the grain markets. In periods of declining
commodity prices, our advance purchases and hedging transactions could result in
our paying more for feed components than our competitors.
For further discussion of the risks associated with commodity prices, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Market Risk."
DECREASES IN WHOLESALE PORK AND LIVE HOG PRICES COULD ADVERSELY AFFECT OUR
REVENUES AND OPERATING MARGINS.
Our revenues depend greatly on the price at which pork products can be
sold. These prices can be volatile as a result of a number of factors. The most
important factors are the supply and demand in the markets for pork and other
meat products, particularly beef and poultry. Any significant decrease in pork
product prices for a sustained period of time could have a material adverse
effect on our revenues and,
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unless our feed component and other costs correspondingly decrease, in our
operating margins. For example, the annual average USDA #2 cutout price, which
is a standard measure for determining current market prices of pork primal cuts,
has ranged from a low of $53.02 per hundred weight to a high of $76.87 per
hundred weight during the period from 1990 to 2000. The cyclical nature of
pricing and investment in our industry is likely to continue and as a result, we
may experience periods of overcapacity, declining prices and lower profit
margins at times in the future.
Our revenues are primarily derived from the sale of pork products. In
fiscal 2001 approximately 12% of our revenues came from our sale of hogs to
other processors. We expect this to increase slightly when our Texas hog
production expansion is complete. As a result, our business, financial condition
and results of operation could be materially impacted by significant changes in
the selling price for hogs. For example, an excess supply of live hogs in the
industry caused live hog prices to reach a record low in December of 1998,
hitting a one-day low of $8.00 per hundred weight, averaging $14.17 per hundred
weight for the month of December, and averaging $31.91 per hundred weight in
1998 and $31.49 in 1999, as compared to an average of $47.80 per hundred weight
for the period between 1990 and 1997. These low prices produced losses in the
production side of our business that could not be entirely offset by margins
from our processing operation.
OUR REVENUES DEPEND ON OUR HERD PRODUCTIVITY AND FEED EFFICIENCY, AND DECREASES
IN PRODUCTIVITY AND EFFICIENCY CAN ADVERSELY AFFECT OUR PROFITABILITY AND
MARGINS.
Sow herd productivity and feed efficiency are important measures by which
we evaluate the performance of our production operations. Sow productivity is
commonly calculated as the number of offspring per sow per year that reach 45 to
50 pounds and measures the performance of our breeding, gestation, farrowing and
nursery operations. Changes in sow productivity can have a material effect on
profitability and margins because a substantial portion of the costs of
operating a sow unit are either fixed or related to the number of sows. Sows
generally have approximately six litters during their reproductive lives, and
are most productive on average during the third and fourth litters. Rapid
expansion of our sow herd can adversely affect our sow herd productivity because
the additional sows will be less productive in their earlier litters. Sow
productivity also can be influenced by a number of other factors, including the
number and quality of our employees, the health condition of our hogs and their
genetics and environment.
Feed efficiency is commonly measured in terms of feed conversion ratios. A
feed conversion ratio is calculated by the number of pounds of feed, which
consists primarily of corn and soybean meal, consumed to produce a pound of live
weight in hogs in our finishing units. It is a measure of the performance of our
hog-finishing operations. Changes in feed efficiency affect per head feed
consumption. As a result, they affect the aggregate cost of feed, which is the
primary cost component in our hog-production operations. A number of factors
influence feed efficiency, including, the capacity and use of our finishing
facilities, the number and quality of our employees, the health condition of our
animals, genetics, and the nutrient value of available feed ingredients.
Because of the many factors involved, we cannot assure you that existing
herd productivity and feed efficiency levels will be maintained in the future.
We also cannot assure you that any decline in those levels will not have a
material adverse effect on our costs, operating margins or ability to compete
with other hog producers.
CHANGES IN CONSUMER PREFERENCES AND DISTRIBUTION CHANNELS COULD ADVERSELY AFFECT
OUR BUSINESS.
Like other food producing businesses, we are subject to the risks of:
- evolving consumer preferences and nutritional and health-related
concerns; and
- changes in food distribution channels and increased buying power of large
supermarket chains, warehouse clubs, mass merchandisers, supercenters and
other retail outlets that tend to resist price increases and have
stringent inventory and management requirements.
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The occurrence of any of these risks could have a material adverse effect
on our business, financial condition and results of operations.
THE OCCURRENCE OF UNANTICIPATED NATURAL DISASTERS COULD DESTROY OUR HERDS AND
FACILITIES.
The occurrence of unanticipated natural disasters could adversely affect
our business in the following ways:
- our production and processing operations materially depend on the
availability of large supplies of fresh water, and our animals' health
and our ability to operate our processing facilities at full capacity
could be adversely affected if we experience a shortage of fresh water
due to floods, droughts, depletion of underground aquifers or other
causes beyond our control;
- one of our principal costs in the production side of our business is feed
costs, and our feed costs may increase if crop supplies are reduced as a
result of droughts, floods, hail storms, crop diseases or other causes
beyond our control; and
- our production and processing facilities and our swine herds could be
materially damaged by floods, hurricanes and tornadoes.
OUR PROFITABILITY MAY SUFFER AS A RESULT OF COMPETITION IN OUR MARKETS.
We operate in a highly competitive environment and face significant
competition in all of our markets. Some of our competitors possess significantly
greater financial, technical and other resources than we do. Some of our larger
competitors may be able to decrease pricing of pork products in the markets in
which we operate. The hog production and processing industries are rapidly
consolidating, and the consolidation process may lead to more vertically
integrated pork producers. We could experience increased price competition for
our pork products and lose existing customers if other vertically integrated hog
and pork processing companies gain market share or if the influence of
relatively higher-cost products of smaller farms decreases. When hog prices are
lower than our hog production costs, our non-integrated pork processing
competitors may have a cost advantage. Those competitors can purchase lower cost
hogs on the spot market, while we would have to continue to use hogs produced by
our own hog production operations. We cannot assure you that we will have
sufficient resources to compete effectively in our industry.
OUR PERFORMANCE DEPENDS ON FAVORABLE LABOR RELATIONS WITH OUR EMPLOYEES. ANY
DETERIORATION OF THOSE RELATIONS OR INCREASE IN LABOR COSTS COULD ADVERSELY
AFFECT OUR BUSINESS.
Our employees are not represented by any labor union. However, in 1997, the
Western Missouri & Kansas Laborers' District Council of the Laborers'
International Union of North America, AFL-CIO, filed a petition with the
National Labor Relations Board, seeking an election among the production and
maintenance employees at our Milan, Missouri facility. Our employees voted not
to form a union when that election was conducted. We cannot assure you that
further efforts will not be made to unionize our work force.
In 1993, the United Food and Commercial Workers Union (UFCW) commenced an
organizing campaign among employees at The Lundy Packing Company.
Notwithstanding a number of objections by Lundy, the NLRB certified the UFCW as
the collective bargaining representative. The United States Court of Appeals for
the Fourth Circuit invalidated the NLRB's certification of the UFCW and
dismissed the case. The United States Supreme Court denied certiorari requested
by the NLRB and UFCW. There can be no assurance that additional organization
efforts will not be attempted.
In addition, we have experienced high turnover in our Missouri production
and processing employees in the past, and our location in rural Missouri limits
our ability to find replacement workers for those operations. Our Missouri
operations are currently located in five sparsely populated counties, and we
currently employ approximately 2,200 people. As a result, we have a limited pool
of potential replacement workers for those operations.
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Any significant increase in labor costs, deterioration of employee
relations, slowdowns or work stoppages at any of our locations, whether due to
union activities, employee turnover or otherwise, could have a material adverse
effect on our business, financial condition and results of operations. See
"Business -- Employees."
OUR INVOLVEMENT IN INTERNATIONAL MARKETS EXPOSES US TO POLITICAL AND ECONOMIC
RISKS IN FOREIGN COUNTRIES, AS WELL AS TO RISKS RELATED TO CURRENCY VALUES AND
IMPORT/EXPORT POLICIES.
We intend to expand our international sales. In our fiscal year ended March
31, 2001 and our quarter ended June 30, 2001, exports, primarily to Japan,
Canada, Russia and Mexico, accounted for approximately 8% of our total revenues.
The markets for our products in countries outside of the United States vary in
several material respects from markets in the United States. These variances
include differences in pork consumption levels and marketing and distribution
practices.
Our international activities also pose other risks not faced by companies
that limit themselves to United States markets. These risks include:
- changes in foreign currency exchange rates;
- exchange controls;
- changes in a specific country's or region's political or economic
conditions, particularly in emerging markets;
- hyperinflation;
- tariffs, other trade protection measures and import or export licensing
requirements;
- potentially negative consequences from changes in tax laws; and
- different regulatory structures and unexpected changes in regulatory
requirements.
We cannot assure you that we will be successful in identifying favorable
international expansion opportunities or that we will be able to further
penetrate and compete effectively in international markets.
THE LOSS OF ONE OR MORE OF OUR FOUR LARGEST CUSTOMERS COULD SIGNIFICANTLY AND
ADVERSELY AFFECT OUR CASH FLOW, MARKET SHARE AND PROFITS.
Our four largest customers accounted for approximately 27% of our total
revenues in fiscal 2001 and approximately 23% of our total revenues in our
quarter ended June 30, 2001. We expect that these customers will continue to
account for a substantial portion of our revenues for the foreseeable future. As
a result, if we lose one or more of these customers, or if there is a decline in
the amount of pork products they purchase from us, our cash flow, market share
and profits would be adversely affected.
In addition, our export sales are predominately focused on Japan, and our
sales to Japanese customers represented approximately 6% of our total revenues
in fiscal 2001 and approximately 5% of our total revenues in our quarter ended
June 30, 2001. Substantially all of our Japanese exports were sold through a
relationship with our Japanese trading partner, with whom we renewed a
three-year contract under which, in Japan, we sell exclusively to this partner
certain of the chilled pork products we produce at our Milan plant. If we lose
our relationship with our Japanese trading partner, our cash flow, market share
and profits could be materially and adversely affected.
CONTIGROUP HAS THE ABILITY, SUBJECT TO CERTAIN SUPERMAJORITY APPROVAL
REQUIREMENTS, TO DIRECT OUR BUSINESS AND AFFAIRS, AND CONTIGROUP'S INTERESTS
COULD CONFLICT WITH YOURS.
ContiGroup currently owns 53.1%, or approximately 48.0% if all outstanding
warrants are exercised, of our parent company's common stock and has the right
to elect a majority of our parent company's board of directors. As a result,
ContiGroup currently has the ability, subject to certain supermajority approval
requirements, to direct our parent's and our business and affairs. The interests
of ContiGroup and its
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affiliates could conflict with your interests. For example, if we encounter
financial difficulties or are unable to pay our debts as they mature, the
interests of ContiGroup as a stockholder in our parent could conflict with your
interests as a holder of our debt. In addition, our Chief Executive Officer and
General Counsel are also officers of ContiGroup and, as such, may face similar
conflicts of interest. Our stockholders may also have an interest in pursuing
acquisitions, divestitures, financing or other transactions that, in their
judgment, could enhance their equity investments, even though such transactions
might involve risks to you as a holder of the exchange notes. In addition,
ContiGroup currently owns and may in the future own businesses that directly
compete with ours.
STATEMENTS MADE IN THIS PROSPECTUS ABOUT FUTURE PLANS AND EVENTS MAY PROVE TO BE
INACCURATE.
We have made forward-looking statements in this document, including
statements about forecasts, our plans, strategies and prospects, under the
headings "Summary," "Business," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." These forward-looking statements
are based on our management's beliefs and assumptions and on information
currently available to our management. We can give you no assurance that our
plans, intentions and expectations will be achieved.
Forward-looking statements involve risks, uncertainties and assumptions
including those identified above. Actual results may differ materially from
those expressed in these forward-looking statements. You should understand that
many important factors, in addition to those discussed in this "Risk Factors"
section and elsewhere in this prospectus, could cause our results to differ
materially from those expressed in forward-looking statements. These factors
include:
- economic conditions generally and in our principal markets;
- competitive practices in the pork production and processing industries;
- the impact of consolidation in the pork production and processing
industries;
- the impact of current and future laws, governmental regulations and
fiscal policies affecting our industry and operations, including
environmental laws and regulations;
- the availability of additional capital to fund future commitments and
expansion and the cost and terms of financing;
- outbreaks of disease in our herds;
- feed ingredient costs;
- fluctuations in live hog prices and the price of pork products;
- customer demands and preferences; and
- the occurrence of natural disasters and other occurrences beyond our
control.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by these cautionary statements.
Forecasts are particularly likely to be inaccurate, especially over longer
periods of time. In addition, we do not know what assumptions regarding general
economic growth or other factors were used in preparing the forecasts we cite.
We do not have any intention or obligation to update forward-looking statements
after we distribute this prospectus.
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RISK FACTORS RELATED TO THE SECURITIES OFFERED
WE HAVE SUBSTANTIAL DEBT OUTSTANDING THAT COULD NEGATIVELY IMPACT OUR BUSINESS
AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE EXCHANGE NOTES.
We have a significant amount of outstanding debt. As of June 30, 2001, we
had total consolidated debt outstanding of $268.9 million. Our high level of
debt could:
- make it difficult to satisfy our obligations, including making interest
payments under the notes and our other debt obligations;
- limit our ability to obtain additional financing to operate our business;
- limit our flexibility in planning for and reacting to changes in our
industry;
- place us at a competitive disadvantage relative to some of our
competitors that have less debt;
- increase our vulnerability to general adverse economic and industry
conditions, including changes in interest rates, lower hog prices or a
downturn in our business or the economy; and
- require us to dedicate a substantial portion of our cash flow to payments
on our debt, reducing our ability to use our cash flow for other
purposes.
DESPITE OUR SUBSTANTIAL INDEBTEDNESS, WE MAY STILL INCUR SIGNIFICANTLY MORE
DEBT, WHICH COULD INTENSIFY THE RISKS DESCRIBED ABOVE.
The terms of the indenture do not prohibit us from incurring significant
additional indebtedness in the future. As of June 30, 2001, we had $86.5 million
available for additional borrowing under our revolving credit facility. We
intend to borrow additional funds to fund our capital expenditures and working
capital needs. We may also incur additional debt to finance future acquisitions.
We may secure any additional debt we borrow, and if we do, such debt will be
effectively senior to the exchange notes. If we borrow additional funds for
these or other purposes, it will become more likely that we will experience some
or all of the risks described above.
BECAUSE THE EXCHANGE NOTES ARE EFFECTIVELY SUBORDINATED TO OUR SECURED DEBT, IF
WE ARE IN DEFAULT ON OUR SECURED DEBT YOU MAY NOT RECEIVE FULL PAYMENT ON YOUR
EXCHANGE NOTES.
The exchange notes are effectively subordinated to our secured debt up to
the value of the collateral securing that debt. As a result, if we are in
default on these obligations, you may not receive principal and interest
payments on your exchange notes. As of June 30, 2001, we had $87.3 million of
secured debt outstanding under the bank credit facilities, and the ability to
borrow $86.5 million more under these facilities. All borrowings under our
credit facility are secured by substantially all of our assets and substantially
all of the assets of our subsidiaries and are guaranteed by our parent, PSF
Group Holdings.
WE MAY NOT HAVE SUFFICIENT CASH FLOW TO PAY YOUR EXCHANGE NOTES AND OUR OTHER
DEBT.
Our ability to pay principal and interest on your exchange notes and on our
other debt and to fund our planned capital expenditures depends on our future
operating performance. Our future operating performance is subject to a number
of risks and uncertainties that are often beyond our control, including general
economic conditions and financial, competitive, regulatory and environmental
factors. For a discussion of some of these risks and uncertainties, please see
"Risk Factors -- Risk Factors Related to Our Business." Consequently, we cannot
assure you that we will have sufficient cash flow to meet our liquidity needs,
including paying our indebtedness.
If our cash flow and capital resources are insufficient to allow us to make
scheduled payments on your notes or our other debt, we may have to sell assets,
seek additional capital or restructure or refinance our debt. We cannot assure
you that the terms of our debt will allow these alternative measures or that
such measures would satisfy our scheduled debt service obligations.
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If we cannot make scheduled payments on our debt:
- our debtholders could declare all outstanding principal and interest to
be due and payable;
- the lenders under our credit facility could terminate their commitments
and commence foreclosure proceedings against our assets;
- we could be forced into bankruptcy or liquidation; and
- you could lose all or a part of your investment in the exchange notes.
THE TERMS OF OUR DEBT MAY RESTRICT OUR ABILITY TO PLAN FOR OR RESPOND TO CHANGES
IN OUR BUSINESS, WHICH COULD LIMIT OUR ABILITY TO MAKE INTEREST OR PRINCIPAL
PAYMENTS ON YOUR EXCHANGE NOTES.
Either our senior secured credit facility or the indenture governing your
notes, or both, restrict, among other things, our ability to:
- grant liens on our assets;
- merge or consolidate with, or acquire substantially all of the assets of,
another company;
- enter into transactions with our affiliates;
- make investments;
- incur additional debt or issue guarantees;
- sell, lease or otherwise dispose of our assets;
- make capital expenditures;
- pay dividends or make distributions to our stockholders;
- purchase or redeem our capital stock;
- issue or distribute capital stock of our subsidiaries;
- enter into operating leases of property;
- pay subordinated debt;
- construct additional hog production facilities; and
- materially change our business.
Our credit facility requires us to maintain specified financial ratios and
meet specific financial tests. Our failure to comply with these covenants could
result in an event of default that, if not cured or waived, would prevent us
from borrowing under our revolving credit facility and could cause us to be
required to repay our borrowings before their due date. If we were unable to
make this repayment or otherwise refinance these borrowings, our lenders could
foreclose on our assets. If we were unable to refinance these borrowings on
favorable terms, we may not be able to pay interest and principal on your
exchange notes.
BECAUSE OUR CREDIT FACILITY BEARS INTEREST AT A VARIABLE RATE, AN INCREASE IN
INTEREST RATES COULD ADVERSELY AFFECT OUR ABILITY TO PAY PRINCIPAL AND INTEREST
ON YOUR EXCHANGE NOTES.
Our credit facility bears interest at a variable rate that will not be
capped at a maximum interest rate. As a result, if interest rates increase, the
required payments under our credit facility will also increase. As our credit
facility payments increase, the amount of funds we have available for other
purposes, including payment of principal and interest on your exchange notes,
decreases. A significant and prolonged increase in interest rates could
adversely affect our ability to pay principal and interest on your exchange
notes. In addition, we cannot assure you that any interest rate hedging
agreements we enter into will adequately protect against this interest rate
risk.
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THE MARKET PRICE FOR THE EXCHANGE NOTES MAY BE VOLATILE.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the price of securities
similar to the exchange notes. The market for the exchange notes, if any, may be
subject to similar disruptions. Any such disruption could adversely affect the
value of your exchange notes.
FEDERAL AND STATE LAWS PERMIT A COURT TO VOID THE SUBSIDIARY GUARANTEES UNDER
CERTAIN CIRCUMSTANCES.
The guarantee of the exchange notes by our subsidiaries may be subject to
review under federal or state fraudulent transfer laws. While the relevant laws
may vary from state to state, under such laws, a subsidiary guarantee will be a
fraudulent conveyance if (1) any of our subsidiaries guaranteed the notes with
the intent of hindering, delaying or defrauding creditors, or (2) any of the
subsidiary guarantors received less than reasonably equivalent value or fair
consideration in return for its guarantee, and in the case of (2) only, one of
the following is also true:
- any of the subsidiary guarantors was insolvent, or became insolvent, when
they guaranteed the exchange notes;
- the guarantee left the applicable subsidiary guarantor with an
unreasonably small amount of capital; or
- the applicable subsidiary guarantor intended to, or believed that it
would, be unable to pay its debts as they matured.
If any guarantee of the exchange notes were to be deemed a fraudulent
conveyance, a court could, among other things, void the relevant subsidiary
guarantor's obligations under its guarantee and require the repayment of any
amounts paid thereunder.
Generally, an entity will be considered insolvent if:
- the sum of its debts is greater than the value of its property;
- the present fair value of its assets is less than the amount that it will
be required to pay on its existing debts as they become due; or
- it cannot pay its debts as they become due.
We cannot be sure as to whether a court would determine that immediately
after our subsidiaries guaranteed the exchange notes, each of the subsidiary
guarantors would be solvent, would have sufficient capital to carry on its
business and would be able to pay its debts as they mature or what standard a
court would apply in making these determinations.
RISK FACTORS RELATED TO THE EXCHANGE OFFER
IF YOU DO NOT PROPERLY TENDER YOUR OLD NOTES, YOU WILL CONTINUE TO HOLD
UNREGISTERED OLD NOTES AND YOUR ABILITY TO TRANSFER OLD NOTES WILL BE ADVERSELY
AFFECTED.
We will only issue exchange notes in exchange for old notes that are timely
received by the exchange agent together with all required documents, including a
properly completed and signed letter of transmittal. Therefore, you should allow
sufficient time to ensure timely delivery of the old notes and you should
carefully follow the instructions on how to tender your old notes. Neither we
nor the exchange agent are required to tell you of any defects or irregularities
with respect to your tender of the old notes. If you do not tender your old
notes or if we do not accept your old notes because you did not tender your old
notes properly, then, after we consummate the exchange offer, you may continue
to hold old notes that are subject to the existing transfer restrictions. In
addition, if you tender your old notes for the purpose of participating in a
distribution of the exchange notes, you will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale of the exchange notes. If you are a broker-dealer
that receives exchange notes for your own account in exchange for old
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notes that you acquired as a result of market-making activities or any other
trading activities, you will be required to acknowledge that you will deliver a
prospectus in connection with any resale of such exchange notes. After the
exchange offer is consummated, if you continue to hold any old notes, you may
have difficulty selling them because there will be less old notes outstanding.
In addition, if a large amount of old notes are not tendered or are tendered
improperly, the limited amount of exchange notes that would be issued and
outstanding after we consummate the exchange offer could lower the market price
of such exchange notes.
YOU CANNOT BE SURE THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE EXCHANGE
NOTES.
The exchange notes are a new issue of securities with no established
trading market and will not be listed on any securities exchange. The liquidity
of the trading market in the exchange notes, and the market price quoted for the
exchange notes, may be adversely affected by changes in the overall market for
high-yield securities and by changes in our financial performance or prospects
or in the prospects for companies in our industry generally. As a result, you
cannot be sure that an active trading market will develop for the exchange
notes.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT
Together with the sale by us of the old notes on June 7, 2001, we entered
into a registration rights agreement, dated June 4, 2001, with the placement
agents, which requires that we file a registration statement under the
Securities Act with respect to the exchange notes and, upon the effectiveness of
that registration statement, offer to the holders of the old notes the
opportunity to exchange their old notes for a like principal amount of exchange
notes. The exchange notes will be issued without a restrictive legend and
generally may be reoffered and resold without registration under the Securities
Act. The registration rights agreement further provides that we must use
reasonable best efforts to begin the exchange offer within 60 days after the
registration statement, of which this prospectus forms a part, becomes effective
and to consummate the exchange offer by December 7, 2001.
Except as described below, upon the completion of the exchange offer, our
obligations with respect to the registration of the old notes and the exchange
notes will terminate. A copy of the registration rights agreement has been filed
as an exhibit to the registration statement of which this prospectus is a part,
and this summary of the material provisions of the registration rights agreement
does not purport to be complete and is qualified in its entirety by reference to
the complete registration rights agreement. As a result of the timely
consummation of the exchange offer, we will not have to pay certain additional
interest on the old notes provided in the registration rights agreement.
Following the completion of the exchange offer, holders of old notes not
tendered will not have any further registration rights other than as set forth
in the paragraphs below, and those old notes will continue to be subject to
certain restrictions on transfer. Accordingly, the liquidity of the market for
the old notes could be adversely affected upon consummation of the exchange
offer.
In order to participate in the exchange offer, a holder must represent to
us, among other things, that:
- the exchange notes acquired pursuant to the exchange offer are being
obtained in the ordinary course of business of the holder;
- the holder is not engaging in and does not intend to engage in a
distribution of the exchange notes;
- the holder does not have an arrangement or understanding with any Person
to participate in the distribution of the exchange notes; and
- the holder is not an "affiliate," as defined under Rule 405 under the
Securities Act, of ours.
Under certain circumstances specified in the registration rights agreement,
we may be required to file a "shelf" registration statement for a continuous
offering in connection with the old notes pursuant to Rule 415 under the
Securities Act. See "-- Procedures for Tendering."
Based on an interpretation by the Commission's staff set forth in no-action
letters issued to third parties unrelated to us, we believe that, with the
exceptions set forth below, exchange notes issued in the exchange offer may be
offered for resale, resold and otherwise transferred by the holder of exchange
notes without compliance with the registration and prospectus delivery
requirements of the Securities Act, unless the holder:
- is an "affiliate" of ours within the meaning of Rule 405 under the
Securities Act;
- is a broker-dealer who purchased old notes directly from us for resale
under Rule 144A or Regulation S or any other available exemption under
the Securities Act;
- acquired the exchange notes other than in the ordinary course of the
holder's business; or
- the holder has an arrangement with any Person to engage in the
distribution of exchange notes.
Any holder who tenders in the exchange offer for the purpose of
participating in a distribution of the exchange notes cannot rely on this
interpretation by the Commission's staff and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with a
secondary
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resale transaction. Each broker-dealer that receives exchange notes for its own
account in exchange for old notes, where such old notes were acquired by such
broker-dealer as a result of market making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such exchange notes. See "Plan of Distribution."
Broker-dealers who acquired old notes directly from us and not as a result of
market making activities or other trading activities may not rely on the staff's
interpretations discussed above or participate in the exchange offer and must
comply with the prospectus delivery requirements of the Securities Act in order
to sell the old notes.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all old notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on September
13, 2001, or such date and time to which we extend the offer. We will issue
$1,000 in principal amount of exchange notes in exchange for each $1,000
principal amount of outstanding old notes accepted in the exchange offer.
Holders may tender some or all of their old notes pursuant to the exchange
offer. However, old notes may be tendered only in integral multiples of $1,000
in principal amount.
The exchange notes will evidence the same debt as the old notes and will be
issued under the terms of, and entitled to the benefits of, the indenture
relating to the old notes.
As of the date of this prospectus, old notes representing $175.0 million in
aggregate principal amount were outstanding and there was one registered holder,
a nominee of the Depository Trust Company. This prospectus, together with the
letter of transmittal, is being sent to the registered holder and to others
believed to have beneficial interests in the old notes. We intend to conduct the
exchange offer in accordance with the applicable requirements of the Exchange
Act and the rules and regulations of the Commission promulgated under the
Exchange Act.
We will be deemed to have accepted validly tendered old notes when, as, and
if we have given oral or written notice thereof to Wilmington Trust Company, the
exchange agent. The exchange agent will act as agent for the tendering holders
for the purpose of receiving the exchange notes from us. If any tendered old
notes are not accepted for exchange because of an invalid tender, the occurrence
of certain other events set forth under the heading "Conditions to the Exchange
Offer" or otherwise, certificates for any such unaccepted old notes will be
returned, without expense, to the tendering holder of those old notes as
promptly as practicable after the expiration date unless the exchange offer is
extended.
Holders who tender old notes in the exchange offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of old notes in the
exchange offer. We will pay all charges and expenses, other than certain
applicable taxes, applicable to the exchange offer. See "Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The expiration date shall be 5:00 p.m., New York City time, on September
13, 2001, unless we, in our sole discretion, extend the exchange offer, in which
case the expiration date shall be the latest date and time to which the exchange
offer is extended. In order to extend the exchange offer, we will notify the
exchange agent and each registered holder of any extension by oral or written
notice prior to 9:00 a.m., New York City time, on the next business day after
the previously scheduled expiration date. We reserve the right, in our sole
discretion:
(A) to delay accepting any old notes, to extend the exchange offer or,
if any of the conditions set forth under "Conditions to Exchange Offer"
shall not have been satisfied, to terminate the exchange offer, by giving
oral or written notice of that delay, extension or termination to the
exchange agent, or
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(B) to amend the terms of the exchange offer in any manner. In the
event that we make a fundamental change to the terms of the exchange offer,
we will file a post-effective amendment to the registration statement.
PROCEDURES FOR TENDERING
Only a holder of old notes may tender the old notes in the exchange offer.
Except as set forth under "Book Entry Transfer," to tender in the exchange offer
a holder must complete, sign, and date the letter of transmittal, or a copy of
the letter of transmittal, have the signatures on the letter of transmittal
guaranteed if required by the letter of transmittal, and mail or otherwise
deliver the letter of transmittal or copy to the exchange agent prior to the
expiration date. In addition:
- certificates for the old notes must be received by the exchange agent
along with the letter of transmittal prior to the expiration date;
- a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of the old notes, if that procedure is available, into the
exchange agent's account at the Depository Trust Company (the "Book-Entry
Transfer Facility") following the procedure for book-entry transfer
described below, must be received by the exchange agent prior to the
expiration date; or
- you must comply with the guaranteed delivery procedures described below.
To be tendered effectively, the letter of transmittal and other required
documents must be received by the exchange agent at the address set forth under
"Exchange Agent" prior to the expiration date.
Your tender, if not withdrawn before the expiration date will constitute an
agreement between you and us in accordance with the terms and subject to the
conditions set forth herein and in the letter of transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT YOUR ELECTION AND RISK.
INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT YOU USE AN OVERNIGHT OR HAND
DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF
TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO US. YOU MAY REQUEST YOUR BROKERS,
DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THESE
TRANSACTIONS FOR YOU.
Any beneficial owner whose old notes are registered in the name of a
broker, dealer, commercial bank, trust company, or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on the beneficial owner's behalf. If the beneficial
owner wishes to tender on the owner's own behalf, the owner must, prior to
completing and executing the letter of transmittal and delivering the owner's
old notes, either make appropriate arrangements to register ownership of the old
notes in the beneficial owner's name or obtain a properly completed bond power
from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution")
unless old notes tendered pursuant thereto are tendered:
(A) by a registered holder who has not completed the box entitled
"Special Registration Instruction" or "Special Delivery Instructions" on
the letter of transmittal or
(B) for the account of an Eligible Institution. If signatures on a
letter of transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, the guarantee must be by any eligible guarantor
institution that is a member of or participant in the Securities Transfer
Agents Medallion Program, the New York Stock Exchange Medallion Signature
Program or an Eligible Institution.
27
32
If the letter of transmittal is signed by a Person other than the
registered holder of any old notes listed in the letter of transmittal, the old
notes must be endorsed or accompanied by a properly completed bond power, signed
by the registered holder as that registered holder's name appears on the old
notes.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to us of
their authority to so act must be submitted with the letter of transmittal
unless waived by us.
All questions as to the validity, form, eligibility, including time of
receipt, acceptance, and withdrawal of tendered old notes will be determined by
us in our sole discretion, which determination will be final and binding. We
reserve the absolute right to reject any and all old notes not properly tendered
or any old notes our acceptance of which would, in the opinion of our counsel,
be unlawful. We also reserve the right to waive any defects, irregularities or
conditions of tender as to particular old notes. Our interpretation of the terms
and conditions of the exchange offer, including the instructions in the letter
of transmittal, will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of old notes must be cured
within such time as we shall determine. Although we intend to notify holders of
defects or irregularities with respect to tenders of old notes, neither we, the
exchange agent, nor any other Person shall incur any liability for failure to
give that notification. Tenders of old notes will not be deemed to have been
made until such defects or irregularities have been cured or waived. Any old
notes received by the exchange agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned by the exchange agent to the tendering holders, unless otherwise
provided in the letter of transmittal, as soon as practicable following the
expiration date, unless the exchange offer is extended.
In addition, we reserve the right in our sole discretion to purchase or
make offers for any old notes that remain outstanding after the expiration date
or, as set forth under "Conditions to the Exchange Offer," to terminate the
exchange offer and, to the extent permitted by applicable law, purchase old
notes in the open market, in privately negotiated transactions, or otherwise.
The terms of any such purchases or offers could differ from the terms of the
exchange offer.
By tendering, you will be representing to us that, among other things:
- the exchange notes acquired in the exchange offer are being obtained in
the ordinary course of business of the Person receiving such exchange
notes, whether or not such Person is the registered holder;
- you are not engaging in and do not intend to engage in a distribution of
the exchange notes;
- you do not have an arrangement or understanding with any Person to
participate in the distribution of such exchange notes; and
- you are not an "affiliate," as defined under Rule 405 of the Securities
Act, of ours.
In all cases, issuance of exchange notes for old notes that are accepted
for exchange in the exchange offer will be made only after timely receipt by the
exchange agent of certificates for such old notes or a timely Book-Entry
Confirmation of such old notes into the exchange agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed letter of
transmittal or, with respect to the Depository Trust Company and its
participants, electronic instructions in which the tendering holder acknowledges
its receipt of and agreement to be bound by the letter of transmittal, and all
other required documents. If any tendered old notes are not accepted for any
reason set forth in the terms and conditions of the exchange offer or if old
notes are submitted for a greater principal amount than the holder desires to
exchange, such unaccepted or non-exchanged old notes will be returned without
expense to the tendering holder or, in the case of old notes tendered by
book-entry transfer into the exchange agent's account at the Book-Entry Transfer
Facility according to the book-entry transfer procedures described below, those
nonexchanged old notes will be credited to an account maintained with that
Book-Entry
28
33
Transfer Facility, in each case, as promptly as practicable after the expiration
or termination of the exchange offer.
Each broker-dealer that receives exchange notes for its own account in
exchange for old notes, where those old notes were acquired by such
broker-dealer as a result of market making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of those exchange notes. See "Plan of Distribution."
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the old notes at the Book-Entry Transfer Facility for purposes of the
exchange offer within two business days after the date of this prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of old notes being tendered by
causing the Book-Entry Transfer Facility to transfer such old notes into the
exchange agent's account at the Book-Entry Transfer Facility in accordance with
that Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of old notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the letter of transmittal or copy of the letter of
transmittal, with any required signature guarantees and any other required
documents, must, in any case other than as set forth in the following paragraph,
be transmitted to and received by the exchange agent at the address set forth
under "Exchange Agent" on or prior to the expiration date or the guaranteed
delivery procedures described below must be complied with.
The Depository Trust Company's Automated Tender Offer Program ("ATOP") is
the only method of processing exchange offers through the Depository Trust
Company. To accept the exchange offer through ATOP, participants in the
Depository Trust Company must send electronic instructions to the Depository
Trust Company through the Depository Trust Company's communication system
instead of sending a signed, hard copy letter of transmittal. The Depository
Trust Company is obligated to communicate those electronic instructions to the
exchange agent. To tender old notes through ATOP, the electronic instructions
sent to the Depository Trust Company and transmitted by the Depository Trust
Company to the exchange agent must contain the character by which the
participant acknowledges its receipt of and agrees to be bound by the letter of
transmittal.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the old notes desires to tender old notes and the
old notes are not immediately available, or time will not permit that holder's
old notes or other required documents to reach the exchange agent before the
expiration date, or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if:
- the tender is made through an Eligible Institution;
- prior to the expiration date, the exchange agent receives from that
Eligible Institution a properly completed and duly executed letter of
transmittal or a facsimile of duly executed letter of transmittal and
notice of guaranteed delivery, substantially in the form provided by us,
by telegram, telex, fax transmission, mail or hand delivery, setting
forth the name and address of the holder of old notes and the amount of
old notes tendered and stating that the tender is being made by
guaranteed delivery and guaranteeing that within three New York Stock
Exchange, Inc. ("NYSE") trading days after the date of execution of the
notice of guaranteed delivery, the certificates for all physically
tendered old notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, will be deposited by the Eligible
Institution with the exchange agent; and
- the certificates for all physically tendered old notes, in proper form
for transfer, or a Book-Entry Confirmation, as the case may be, are
received by the exchange agent within three NYSE trading days after the
date of execution of the notice of guaranteed delivery.
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34
WITHDRAWAL RIGHTS
Tenders of old notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the expiration date.
For a withdrawal of a tender of old notes to be effective, a written or,
for the Depository Trust Company participants, electronic ATOP transmission
notice of withdrawal, must be received by the exchange agent at its address set
forth under "Exchange Agent" prior to 5:00 p.m., New York City time, on the
expiration date. Any such notice of withdrawal must:
- specify the name of the Person having deposited the old notes to be
withdrawn (the "Depositor");
- identify the old notes to be withdrawn, including the certificate number
or numbers and principal amount of such old notes;
- be signed by the holder in the same manner as the original signature on
the letter of transmittal by which such old notes were tendered,
including any required signature guarantees, or be accompanied by
documents of transfer sufficient to have the trustee register the
transfer of such old notes into the name of the Person withdrawing the
tender; and
- specify the name in which any such old notes are to be registered, if
different from that of the Depositor.
All questions as to the validity, form, eligibility and time of receipt of
such notices will be determined by us, whose determination shall be final and
binding on all parties. Any old notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the exchange offer. Any old
notes which have been tendered for exchange but which are not exchanged for any
reason will be returned to the holder of those old notes without cost to that
holder as soon as practicable after withdrawal, rejection of tender, or
termination of the exchange offer. Properly withdrawn old notes may be
retendered by following one of the procedures under "Procedures for Tendering"
at any time on or prior to the expiration date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the exchange offer, we will not be
required to accept for exchange, or to issue exchange notes in exchange for, any
old notes and may terminate or amend the exchange offer if at any time before
the acceptance of those old notes for exchange or the exchange of the exchange
notes for those old notes, we determine that the exchange offer violates
applicable law, any applicable interpretation of the staff of the Commission or
any order of any governmental agency or court of competent jurisdiction.
The foregoing conditions are for our sole benefit and may be asserted by us
regardless of the circumstances giving rise to any such condition or may be
waived by us in whole or in part at any time and from time to time in our sole
discretion. The failure by us at any time to exercise any of the foregoing
rights shall not be deemed a waiver of any of those rights and each of those
rights shall be deemed an ongoing right which may be asserted at any time and
from time to time.
In addition, we will not accept for exchange any old notes tendered, and no
exchange notes will be issued in exchange for those old notes, if at such time
any stop order shall be threatened or in effect with respect to the registration
statement of which this prospectus constitutes a part or the qualification of
the indenture under the Trust Indenture Act of 1939. In any of those events we
are required to use every reasonable effort to obtain the withdrawal of any stop
order at the earliest possible time.
EXCHANGE AGENT
All executed letters of transmittal should be directed to the exchange
agent. Wilmington Trust Company has been appointed as exchange agent for the
exchange offer. Questions, requests for assistance
30
35
and requests for additional copies of this prospectus or of the letter of
transmittal should be directed to the exchange agent addressed as follows:
WILMINGTON TRUST COMPANY, EXCHANGE AGENT
<Table>
By Overnight Delivery or
Registered or Certified Mail: By Hand in New York: By Hand in Delaware:
Wilmington Trust Company Wilmington Trust Company Wilmington Trust Company
Rodney Square North c/o Computershare Trust 1105 Rodney Square North
1100 Rodney Square North Company of New York Wilmington, DE
Wilmington, DE 19890 Wall Street Plaza Attn: Corporate Trust, 1st
Attn: Corporate Trust 88 Pine Street, 19th Floor Floor
New York, NY 10005
Facsimile Transmission Number:
(For Eligible Institutions
Only)
(302) 651-1079
Confirm Receipt of Facsimile
by Telephone:
(302) 651-8869
</Table>
Originals of all documents sent by facsimile should be sent promptly by
registered or certified mail, by hand or by overnight delivery service.
FEES AND EXPENSES
We will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. The principal solicitation is being made by
mail; however, additional solicitations may be made in Person or by telephone by
our officers and employees. The estimated cash expenses to be incurred in
connection with the exchange offer will be paid by us and will include
accounting, legal, printing, and related fees and expenses.
TRANSFER TAXES
Holders who tender their old notes for exchange will not be obligated to
pay any transfer taxes in connection with that tender or exchange, except that
holders who instruct us to register exchange notes in the name of, or request
that old notes not tendered or not accepted in the exchange offer be returned
to, a Person other than the registered tendering holder will be responsible for
the payment of any applicable transfer tax on those old notes.
31
36
USE OF PROCEEDS
This exchange offer is intended to satisfy our obligations under the
registration rights agreement dated as of June 4, 2001 by and among PSF Group
Holdings, Premium Standard Farms, The Lundy Packing Company, Lundy
International, Inc., Premium Standard Farms of North Carolina, Inc., and Morgan
Stanley & Co. Incorporated and J.P. Morgan Securities Inc., as placement agents.
We will not receive any cash proceeds from the issuance of the exchange notes.
We will only receive old notes with a total principal amount equal to the total
principal amount of the exchange notes issued in the exchange offer.
We used a portion of the net proceeds from the sale of the old notes, which
were approximately $169.1 million, to redeem all $137.9 million principal amount
of our 11% Senior Secured Notes (Partial Pay-In-Kind) due on September 17, 2003
and to repay $25.0 million principal amount of our bank term loan. The 11%
Senior Secured Notes were redeemed at 101% of their principal amount plus
accrued interest to the date of redemption. We used the balance of the net
proceeds to pay down our revolving credit facility. For a description of our
bank term loan and our revolving credit facility, see "Description of the Credit
Agreement" beginning on page 75.
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37
CAPITALIZATION
The following table sets forth our consolidated capitalization as of June
30, 2001, on a historical basis after giving effect to the issuance of the old
notes and the application of the proceeds therefrom. This table should be read
in conjunction with the information contained in "Use of Proceeds," "Unaudited
Pro Forma Consolidated Statement of Operations" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" as well as the
Financial Statements and the notes thereto included in the back of this
prospectus.
<Table>
<Caption>
AS OF JUNE 30, 2001
------------------------
(IN THOUSANDS EXCEPT FOR
SHARE INFORMATION)
Debt:
Credit Facility
Revolving credit facility.............................. $ 6,000(1)
Term loan facility..................................... 81,250
Senior unsecured notes.................................... 175,000
Other notes payable and capital leases.................... 6,677
--------
Total debt........................................ 268,927
--------
Shareholders' Equity:
Class A common stock, $1 par value, 250,000 shares
authorized, 100,000 shares issued and outstanding...... $ 100
Class B common stock, $1 par value, 300,000 shares
authorized, 113,301 shares issued and outstanding...... 113
Preferred Stock, $1 par value, 10,000 shares authorized,
no shares outstanding.................................. --
Additional paid-in capital................................ 373,447
Accumulated other comprehensive income.................... (3,529)
Accumulated deficit....................................... (6,720)
--------
Total shareholders' equity........................ 363,411
--------
Total Capitalization.............................. $632,338
========
</Table>
- ---------------
(1)$86.5 million available, net of $7.5 million in letters of credit
outstanding, subject to certain conditions.
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38
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following Unaudited Pro Forma Consolidated Statement of Operations has
been derived by the application of unaudited pro forma adjustments to the
historical consolidated Statement of Operations of PSF Group Holdings for the
year ended March 31, 2001. The Unaudited Pro Forma Consolidated Statement of
Operations gives effect to (i) the offering of the old notes and the application
of substantially all of the proceeds to redeem all outstanding 11% Senior
Secured Notes due 2003 and to repay $25.0 million principal amount of our bank
term loan, and (ii) our acquisitions of The Lundy Packing Company and Premium
Standard Farms of North Carolina, Inc. (PSFNC), as if they had been consummated
on March 26, 2000. The adjustments necessary to fairly present this unaudited
pro forma consolidated financial information have been made based on available
information and in the opinion of management are reasonable and are described in
the accompanying notes.
The unaudited pro forma consolidated financial information should not be
considered indicative of actual results that would have been achieved had these
transactions been consummated on the date indicated and does not purport to
indicate results of operations for any future period. We cannot assure you that
the assumptions used in the preparation of the unaudited pro forma consolidated
financial information will prove to be correct. You should read the Unaudited
Pro Forma Consolidated Statement of Operations together with "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and the notes thereto,
included in the back of this prospectus.
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39
PSF GROUP HOLDINGS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 2001
(IN THOUSANDS)
<Table>
<Caption>
PSF
GROUP LUNDY PSFNC PURCHASE OFFERING
HISTORICAL PRE-ACQUISITION(1) PRE-ACQUISITION(1) ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ------------------ ------------------ ----------- ----------- ---------
Net sales...................... $540,576 $111,236 $28,264 $ -- $ -- $680,076
Cost of goods sold............. 456,184 112,566 22,314 2,131(2) -- 593,195
-------- -------- ------- ------- ------- --------
Gross profit (loss)............ 84,392 (1,330) 5,950 (2,131) -- 86,881
Selling, general and
administrative expenses...... 19,413 1,151 369 -- -- 20,933
Amortization expense........... 3,180 -- -- 310(3) -- 3,490
Other expense.................. 1,210 1,357 81 -- -- 2,648
-------- -------- ------- ------- ------- --------
Operating income (loss)........ 60,589 (3,838) 5,500 (2,441) -- 59,810
Interest expense, net.......... 23,208 2,184 -- -- 1,627(4) 27,019
-------- -------- ------- ------- ------- --------
Income (loss) before tax....... 37,381 (6,022) 5,500 (2,441) (1,627) 32,791
Income tax expense (benefit)... 15,367 (2,409) 2,200 (976)(5) (651)(5) 13,531
-------- -------- ------- ------- ------- --------
Net income (loss).............. $ 22,014 $ (3,613) $ 3,300 $(1,465) $ (976) $ 19,260
======== ======== ======= ======= ======= ========
OTHER FINANCIAL DATA:
EBITDA(6)...................... $112,292 $ (625) $ 6,993 $ 2,441 $121,101
</Table>
- ---------------
(1) Represents historical results of operations from Lundy and PSFNC from March
26, 2000 through the respective acquisition dates of August 25 and September
22, 2000.
(2) The adjustment to cost of goods sold represents the incremental depreciation
on the stepped-up assets under purchase accounting for both the Lundy
acquisition and the PSFNC acquisition. The adjustment includes approximately
$2.0 million and $155,000 in incremental depreciation related to Lundy and
PSFNC, respectively.
(3) The adjustment to amortization expense relates to the increase in goodwill
associated with the purchase accounting treatment of the Lundy and PSFNC
acquisitions. Goodwill increased by $14.5 million and $6.5 million for the
Lundy and PSFNC acquisitions, respectively. Goodwill is being amortized over
30 years.
(4) The adjustment to interest expense reflects the following:
<Table>
<Caption>
YEAR ENDED
MARCH 31, 2001
--------------
(IN THOUSANDS)
Interest expense on previously existing indebtedness which
was repaid with the proceeds from the offering of the old
notes..................................................... $(18,036)
Interest expense on the notes............................... 16,188
Interest expense on debt issued to finance the Lundy and
PSFNC acquisitions (at an assumed rate of 9.625%)......... 3,475
--------
Total adjustment............................................ $ 1,627
========
</Table>
The adjustment does not reflect a prepayment premium of $1.4 million on the
11% Senior Secured Notes which was repaid with the proceeds of the offering
of the old notes.
(5) The adjustments to income tax benefit reflects the tax effect of the
purchase and offering adjustments at 40% of income before tax.
(6) EBITDA represents earnings before interest, taxes, depreciation,
amortization and impairment. EBITDA is presented because we believe it is
frequently used by securities analysts, investors and other interested
parties in the evaluation of companies in our industry. However, other
companies in our industry may calculate EBITDA differently than we do.
Therefore, EBITDA is not necessarily comparable to similarly titled measures
of these companies. EBITDA is not a measurement of financial performance
under generally accepted accounting principles and should not be considered
as an alternative to cash flow from operating activities or as a measure of
liquidity or an alternative to net income as indicators of our operating
performance or any other measures of performance derived in accordance with
generally accepted accounting principles.
35
40
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected historical consolidated financial
information for PSF Group Holdings from inception (May 13, 1998, the date of the
ContiGroup acquisition) through the period ended March 27, 1999 and for the
fiscal years ended March 25, 2000 and March 31, 2001, which was derived from our
consolidated financial statements, which have been audited by Arthur Andersen
LLP, independent public accountants, which are included in the back of this
prospectus. The following table also includes summary historical consolidated
financial information for the quarters ended June 30, 2001 and June 24, 2000,
which was derived from our unaudited condensed consolidated financial
statements, which are also included in the back of this prospectus. The
financial information presented for the years ending March 29, 1997, March 28,
1998, and the period from March 29, 1998 to May 12, 1998 are for ContiGroup's
North Missouri Farms division, our predecessor company which was derived from
the unaudited financial statements of that company.
The financial information presented for the year ending March 31, 2001 and
the quarter ended June 30, 2001, reflects our acquisition of The Lundy Packing
Company on August 25, 2000 and our acquisition of Premium Standard Farms of
North Carolina, Inc. on September 22, 2000, both of which were accounted for in
accordance with the purchase method of accounting. This data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and the notes thereto
included in the back of this prospectus.
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41
PSF GROUP HOLDINGS, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
<Table>
<Caption>
PREDECESSOR PSF GROUP HOLDINGS
--------------------------------------- ---------------------------------------
FISCAL YEARS ENDED FOR THE PERIOD FOR THE PERIOD FISCAL YEARS ENDED
--------------------- --------------- --------------- ---------------------
MARCH 29, MARCH 28, MARCH 29, 1998 MAY 13, 1998 TO MARCH 25, MARCH 31,
1997 1998 TO MAY 12, 1998 MARCH 27, 1999 2000 2001
--------- --------- --------------- --------------- --------- ---------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net Sales.................... $ 37,405 $48,148 $ 4,638 $237,090 $306,266 $ 540,576
Cost of goods sold........... 29,622 43,335 5,935 249,757 265,929 456,184
Selling, general and
administrative expenses.... 784 1,029 118 20,027 18,830 19,413
Impairment of fixed
assets(1).................. -- -- -- -- 5,000 --
Amortization expense......... -- -- -- 1,945 2,320 3,180
Other expense (income)....... -- -- -- 682 (47) 1,210
Operating income (loss)...... 6,999 3,784 (1,415) (35,321) 14,234 60,589
Interest expense, net........ 1,385 1,670 296 17,601 21,220 23,208
Income tax expense
(benefit).................. 2,246 846 (684) (20,377) (1,699) 15,367
Extraordinary loss, net of
tax........................
Net income (loss)............ 3,368 1,268 (1,027) (32,545) (5,287) 22,014
OTHER FINANCIAL DATA:
GAAP cash flow:
Operating activities....... $ 5,164 $ 8,321 $ (756) $ (7,620) $ 55,522 $ 61,679
Investing activities....... (23,961) (1,641) (2,654) (17,322) (15,242) (145,992)
Financing activities....... 20,407 (7,934) 3,673 (227) (42,677) 91,219
EBITDA(2).................... 11,176 9,193 (714) 2,330 62,527 112,292
EBITDA margin(3)............. 29.88% 19.09% (15.39)% 0.98% 20.42% 20.77%
Capital expenditures......... $ 23,961 $ 1,641 $ 2,654 $ 22,126 $ 23,669 $ 43,224
Debt to EBITDA(4)............ -- -- -- 90.72x 2.81x 2.38x
Depreciation, amortization
and impairment............. $ 4,177 $ 5,409 $ 701 $ 37,651 $ 48,293 $ 51,703
EBITDA to interest
expense(5)................. 8.07x 5.50x (2.41)x 0.13x 2.94x 4.65x
Ratio of earnings to fixed
charges(6)................. -- -- -- -- -- 2.47x
Pounds of pork sales
(millions)(7).............. -- -- -- 296.79 345.84 603.88
Total hogs processed
(millions)(7).............. -- -- -- 1.61 1.92 3.02
BALANCE SHEET DATA (AT PERIOD
END):
Working capital.............. $ 13,998 $11,600 $12,312 $ 70,010 $ 51,698 $ 119,764
Property, plant, equipment
and breedstock............. 59,132 55,364 57,317 456,961 427,662 496,882
Goodwill..................... -- -- -- 59,438 57,398 75,998
Total assets................. 74,945 68,413 70,211 617,455 584,498 773,440
Total long-term debt and
capital leases (including
current portion)........... -- -- -- 211,384 175,997 267,216
Shareholders' equity......... 73,839 67,173 69,836 324,955 319,668 357,837
<Caption>
PSF GROUP HOLDINGS
-----------------------
FOR THE QUARTERS ENDED
-----------------------
JUNE 24, JUNE 30,
2000 2001
---------- ----------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net Sales.................... $ 87,920 $171,162
Cost of goods sold........... 63,683 141,376
Selling, general and
administrative expenses.... 3,451 5,636
Impairment of fixed
assets(1).................. -- --
Amortization expense......... 580 --
Other expense (income)....... (436) (28)
Operating income (loss)...... 20,642 24,178
Interest expense, net........ 4,605 6,796
Income tax expense
(benefit).................. 6,519 6,969
Extraordinary loss, net of
tax........................ -- 1,315
Net income (loss)............ 9,518 9,098
OTHER FINANCIAL DATA:
GAAP cash flow:
Operating activities....... $ 20,554 $ 19,456
Investing activities....... (4,391) (22,484)
Financing activities....... (18,295) (4,104)
EBITDA(2).................... 31,659 37,762
EBITDA margin(3)............. 36.01% 22.06%
Capital expenditures......... 6,044 26,208
Debt to EBITDA(4)............ -- --
Depreciation, amortization
and impairment............. 10,991 13,791
EBITDA to interest
expense(5)................. -- --
Ratio of earnings to fixed
charges(6)................. -- 3.47x
Pounds of pork sales
(millions)(7).............. 82.61 168.95
Total hogs processed
(millions)(7).............. 0.45 0.92
BALANCE SHEET DATA (AT PERIOD
END):
Working capital.............. $ 72,769 $110,359
Property, plant, equipment
and breedstock............. 421,930 507,469
Goodwill..................... 56,888 75,998
Total assets................. 582,276 783,629
Total long-term debt and
capital leases (including
current portion)........... 157,732 268,927
Shareholders' equity......... 329,187 363,411
</Table>
- ---------------
(1) During fiscal 2000, certain assets under construction, which were originally
being constructed for an expansion in Texas, were determined to be
unrecoverable due to a change in expansion plans. A non-cash impairment loss
was taken during the year.
(2) EBITDA represents earnings before interest, taxes, depreciation,
amortization and impairment. EBITDA and the related ratios are presented
because we believe they are frequently used by securities analysts,
investors and other
37
42
interested parties in the evaluation of companies in our industry. However,
other companies in our industry may calculate EBITDA differently than we do.
Therefore, EBITDA is not necessarily comparable to similarly titled measures
of these companies. EBITDA is not a measurement of financial performance
under generally accepted accounting principles and should not be considered
as an alternative to cash flow from operating activities or as a measure of
liquidity or an alternative to net income as indicators of our operating
performance or any other measures of performance derived in accordance with
generally accepted accounting principles. See the Statements of Cash Flow
included in our consolidated financial statements.
(3) Represents EBITDA as a percentage of net sales.
(4) Represents debt divided by EBITDA. Due to the seasonal nature of our
business, we have not provided this calculation on an annualized basis for
the three months ended June 30, 2001 or June 24, 2000.
(5) Represents EBITDA divided by gross interest expense. Due to the seasonal
nature of our business, we have not provided their calculation for the three
months ended June 30, 2001 or June 24, 2000.
(6) The ratio of earnings to fixed charges, is computed by dividing earnings by
fixed charges. For this purpose, "earnings" include net income (loss) before
taxes and fixed charges. "Fixed charges" include interest, amortization of
debt expense and the portion of rental expense that is representative of the
interest factor in these rentals. For the period ended March 27, 1999 and
the fiscal year ended 2000 our earnings were insufficient to cover our fixed
charges by $52.9 million and $7.0 million, respectively.
(7) Our predecessor company did not process hogs or sell fresh pork.
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43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements, including the notes thereto, and the other financial information
appearing elsewhere in this prospectus.
OVERVIEW
As a vertically integrated provider of pork products, we operate in both
pork industry segments: hog production and pork processing. In fiscal 2001, we
made two strategic acquisitions to strengthen our position in the food
production industry. On August 25, 2000, we acquired The Lundy Packing Company
and its affiliated companies, which owned a processing plant in North Carolina
capable of processing 1.8 million hogs per year and owned approximately 41,000
sows. On September 22, 2000, we acquired, from ContiGroup, Premium Standard
Farms of North Carolina, which owned approximately 24,000 sows. As a result of
these acquisitions, we are the second largest owner of sows in North America,
with over 200,000 sows producing approximately 3.9 million hogs per year. We are
also the eighth largest pork processor in the United States, with two plants
capable of processing over 3.7 million hogs per year.
Our fiscal year is the 52 or 53-week period, which ends on the last
Saturday in March. Our financial statements include activity from the fiscal
years ended March 31, 2001 (53 weeks) and March 25, 2000 (52 weeks), and the
period from May 13, 1998, through March 27, 1999 (45.5 weeks).
NET SALES
Our net sales are generated from the sale of pork products to retailers,
food service suppliers, further processors, export buyers, and to a lesser
extent the sale of market hogs to other pork processors. In fiscal 2001, sales
of pork products accounted for approximately 88% of our net sales, with the
remaining 12% coming from sales of market hogs. In our quarter ended June 30,
2001, sales of pork products accounted for approximately 93% of our net sales,
with the remaining 7% coming from sales of market hogs.
Pork product sales are of primal cuts, such as hams, loins, bellies, butts,
picnics and ribs, and to a lesser extent of other by-products. Primal products
are also converted further into boneless items or, in our North Carolina
operations, further processed into items such as smoked hams, cured hams, and
sliced bacon. Our processing revenues are primarily driven by the operating rate
of our facilities and the value that we extract from the hogs that we process.
For our fiscal years ended March 31, 2001 and March 25, 2000, and for the period
between May 13, 1998 and March 27, 1999, we processed 3.0 million, 1.9 million
and 1.6 million hogs respectively. For our quarters ended June 30, 2001 and June
24, 2000, we processed 0.9 million and 0.5 million hogs, respectively. Our
Missouri processing plant is currently capable of processing 7,100 hogs per day
and our Clinton, North Carolina processing plant is currently capable of
processing 6,500 hogs per day. We are currently implementing improvements to our
Clinton, North Carolina processing facility, which are expected to be completed
by the end of the fourth quarter in fiscal 2002, to increase its capacity to
8,000 hogs per day, with additional capacity to process up to 10,000 hogs per
day on a ten-hour shift on a seasonal basis. The value that we extract from hogs
processed is primarily driven by pork prices, processing yields and to a lesser
extent, by product mix, as premium products and boneless and further processed
products generate higher prices and operating margins.
Wholesale pork prices fluctuate seasonally and cyclically due to changes in
supply and demand for pork. The annual average USDA #2 cutout price has ranged
from a low of $53.02 per hundred weight to a high of $76.87 per hundred weight
during the period from 1990 to 2000. The USDA #2 cutout price is a standard
measure of the price of primal cuts produced by pork processing operations that
is published daily by the U.S. Department of Agriculture. We expect that pork
product prices may increase slightly in 2001. In addition, we believe that our
vertical integration allows us to obtain higher prices for our products than our
more commodity-driven competitors. See "Market Risk."
Revenue from the sale of market hogs is driven by the number of hogs sold
(in excess of what our processing facilities require), the average weight, and
the current market price (including any quality
39
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premiums). We are currently expanding our Texas hog production facilities to add
10,000 new sows, which we expect will produce approximately 200,000 new hogs per
year beginning in fiscal year 2003. We intend to sell most of these new hogs to
third party processors rather than process them at our own facilities and have
entered into a long-term supply contract with a processor who has agreed to
acquire the majority of these new hogs. When justified by market conditions,
customer relationships and other circumstances, we intend to add a processing
plant in Texas that will create a third fully integrated pod.
Historically, live hog prices have experienced cyclical and seasonal supply
and demand fluctuations. Overproduction of hogs caused a severely depressed hog
market during late calendar year 1998 and much of 1999.
Hog prices reached twenty-year lows in calendar years 1998 and 1999 with
average prices of $31.91 and $31.49 per hundred weight for those years. As a
result, many smaller producers were forced to liquidate their sow herds and exit
production, and the remaining producers have remained reluctant to expand
despite an improving market environment. This constrained supply combined with
an overall increase in consumer demand for pork products has resulted in
improving hog prices. Average Iowa/ Southern Minnesota live hog prices, a
commonly-used USDA-quoted market price, increased from $31.49 per hundred weight
in calendar year 1999 to $43.02 per hundred weight in calendar year 2000.
Although there was some sow herd liquidation, there have been improvements in
the remaining sow herd's productivity, which have mitigated the impact on market
hog inventories. Currently, the demand for pork coupled with more stable
production numbers has proven to be sufficient to create favorable market
conditions.
COST OF GOODS SOLD
Our cost of goods sold is driven primarily by several key factors. For our
pork processing operations, the main costs (excluding market hogs) are labor,
packaging, utilities, and facility expenses. Given the high fixed costs required
to build, maintain and operate a processing plant, unit costs are impacted
somewhat by processing volumes. For fiscal 2001 and the quarter ended June 30,
2001, the costs associated with our North Carolina pork processing facility
reflected the fact that approximately 39% and 33%, respectively, of the hogs
processed at that facility were purchased at market price from independent local
farmers under supply contracts. For our hog production operations, the main
costs are feed, labor, utilities, and facility expenses which include
maintenance, depreciation and contract grower fees. The costs associated with
feed generally represent 50% to 60% of the total cost to raise a market hog
depending on the price of corn and soybean meal. We are proactive in recognizing
opportunities to improve our cost structure and have been very effective in
managing our costs to become one of the lowest cost producers in the industry.
The cost of corn and soybean meal fluctuates constantly. The annual average
price of corn has ranged from a low of $1.72 per bushel to a high of $3.70 per
bushel during the period from 1980 to 2000. The annual average price of soybean
meal has ranged from a low of $131.53 per ton to a high of $250.28 per ton in
the same period. See "Risk Factors."
Increases in the price of these commodities result in increases in our feed
costs, while decreases reduce our feed costs. The relative impact of price
changes in these commodities varies based on the percentage that each makes up
in our feed composition. See "Market Risk."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Sales and marketing expenses consist primarily of salaries for
company-employed sales people as well as trade promotions, advertising,
commissions and other marketing costs. General and administrative costs consist
primarily of general management, accounting, tax and legal.
40
45
SEASONALITY
Our quarterly operating results are influenced by seasonal fluctuations in
the price of our primary feed components, corn and soybean meal, and by seasonal
fluctuations in wholesale pork prices. The prices we pay for our feed components
are generally lowest in August, September and October, which corresponds with
the corn and soybean harvests. Generally, the prices for these commodities will
increase over the following months leading up to the next harvest due to the
increased storage costs. As a result, our costs in the production side of our
business tend to increase during this period.
Live hog and wholesale pork prices are similarly affected by seasonal
factors. It generally takes approximately 11 months from conception for a hog to
reach market weight, and because sows are generally less productive in summer
months as a result of seasonal conditions, there are generally fewer hogs
available in the months of April, May and June. This decrease in supply of live
hogs generally causes live hog and wholesale pork prices to be higher on average
during these months, and our revenues tend to increase accordingly. Conversely,
there are generally more hogs available in the months of October, November and
December, which generally causes live hog and wholesale pork prices to be lower
on average during these months and adversely affects our revenues.
The unaudited financial information contained in the following table
illustrates the net impact of these seasonal factors on our net sales, operating
income (loss), EBITDA and EBITDA margins in each of the eight fiscal quarters
during our two most recently completed fiscal years.
<Table>
<Caption>
FOR THE FISCAL QUARTERS ENDED
-----------------------------------------------------------------------------------------
FY 2000 FY 2001
------------------------------------------- -------------------------------------------
JUNE 26, SEPT. 25, DEC. 25, MARCH 25, JUNE 24, SEPT. 23, DEC. 23, MARCH 31,
1999 1999 1999 2000 2000 2000 2000 2001
-------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Net Sales.................... $70,833 $71,906 $82,136 $81,391 $87,920 $111,912 $168,958 $171,786
Operating Income (Loss)...... 2,675 4,182 (4,264) 11,641 20,643 20,273 9,195 10,478
EBITDA....................... 13,470 15,034 6,564 22,459 31,659 32,245 23,297 25,038
EBITDA margin................ 19% 21% 8% 28% 36% 29% 14% 15%
</Table>
RESULTS OF OPERATIONS
First Quarter Ended June 30, 2001 Compared to the First Quarter Ended June 24,
2000
Consolidated
The following table presents selected historical financial information for
our production and processing segments for the quarters ended June 24, 2000 and
June 30, 2001. Results of operations for the quarter ended June 30, 2001 include
information for The Lundy Packing Company and Premium Standard Farms of North
Carolina, Inc. 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 June 24, 2000 to the quarter ended June 30, 2001. Intersegment
sales are based on live hog prices.
<Table>
<Caption>
QUARTER-TO-
QUARTER
FOR THE QUARTER ENDED CHANGE
-------------------------------------- ----------------
JUNE 24, JUNE 30, 2000 TO
2000 % 2001 % 2001 %
-------- ----- -------- ----- ------- -----
(IN MILLIONS, EXCEPT PERCENTAGES)
NET SALES
Production............................................ $ 69.4 79.0% $ 113.8 66.5% $ 44.4 63.9%
Processing............................................ 77.0 87.5 160.0 93.4 83.0 107.8
Intersegment.......................................... (58.5) (66.5) (102.6) (59.9) (44.1) 75.4
------ ----- ------- ----- ------- -----
NET SALES........................................... $ 87.9 100.0% $ 171.2 100.0% $ 83.3 94.7%
====== ===== ======= ===== ======= =====
</Table>
41
46
<Table>
<Caption>
QUARTER-TO-
QUARTER
FOR THE QUARTER ENDED CHANGE
-------------------------------------- ----------------
JUNE 24, JUNE 30, 2000 TO
2000 % 2001 % 2001 %
-------- ----- -------- ----- ------- -----
(IN MILLIONS, EXCEPT PERCENTAGES)
GROSS PROFIT
Production............................................ $ 20.9 86.2% $ 26.6 89.3% $ 5.7 27.5%
Processing............................................ 3.3 13.8 3.2 10.7 (0.1) (4.0)
------ ----- ------- ----- ------- -----
TOTAL GROSS PROFIT.................................. $ 24.2 100.0% $ 29.8 100.0% $ 5.6 23.1%
====== ===== ======= ===== ======= =====
OPERATING INCOME (LOSS)
Production............................................ $ 21.3 102.9% $ 26.3 108.6% $ 5.0 23.6%
Processing............................................ 2.7 13.2 2.5 10.3 (0.2) (8.4)
Corporate............................................. (3.3) (16.1) (4.6) (18.9) (1.3) (39.4)
------ ----- ------- ----- ------- -----
TOTAL OPERATING INCOME.............................. $ 20.7 100.0% $ 24.2 100.0% $ 3.5 17.1%
====== ===== ======= ===== ======= =====
</Table>
Net Sales. Net sales increased by $83.3 million, or 94.7%, to $171.2
million in the first quarter of fiscal year 2002 from $87.9 million in the
comparable period last year. The acquisitions of The Lundy Packing Company and
Premium Standard Farms of North Carolina, Inc. accounted for the increase in net
sales. The unit selling prices and volume of the remaining operations remained
consistent with the comparable period. See the following section for comments on
sales changes by business segment.
Gross profit. Gross profit increased by $5.6 million, or 23.1%, to $29.8
million in the first quarter of fiscal year 2002 from $24.2 million in the
comparable period last year. The current year gross profit increases are
primarily the result of the inclusion of The Lundy Packing Company and Premium
Standard Farms of North Carolina, Inc. offset slightly by higher costs of
raising live hogs in the hog production segment compared to the comparable
period last year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses improved as a percentage of net sales to 3.3% in the
first quarter of fiscal year 2002 from 3.9% in the comparable period last year
due primarily to economies of scale. In dollar terms, selling, general and
administrative expenses increased by $2.2 million, or 63.3%, to $5.6 million in
the first quarter of fiscal year 2002 from $3.4 million in the comparable period
last year due to increased selling expenses incurred with the acquisition of The
Lundy Packing Company and increased legal expenses.
Operating Income. Operating income increased by $3.5 million, or 17.1%, to
$24.2 million in the first quarter of fiscal year 2002 from $20.7 million in the
comparable period last year. The increase is attributable to the factors
mentioned above.
Interest Expense, net. Interest expense, net, increased by $2.2 million,
or 47.8%, to $6.8 million in the first quarter of fiscal year 2002 from $4.6
million in the comparable period last year. The increase was primarily caused by
the increase in borrowings to finance the acquisitions of The Lundy Packing
Company and Premium Standard Farms of North Carolina, Inc. See "-- Liquidity and
Capital Resources" for more information.
Income Tax Expense. Our effective tax rate was 40.0% in the first quarter
of fiscal year 2002 compared to 40.6% in the comparable period last year.
Segment Analysis
Hog Production. Net sales increased by $44.4 million, or 63.9%, to $113.8
million in the first quarter of fiscal year 2002 from $69.4 million in the
comparable period last year. The acquisition of Premium Standard Farms of North
Carolina accounted for $43.4 million of the increase in net sales, with the
remaining increase accounted for by an increase in volume offset by
mark-to-market adjustments on our lean hog futures contracts. Intersegment sales
to our pork processing segment transferred at market prices are eliminated in
the Consolidated Statements of Operations.
42
47
Gross profit increased by $5.7 million, or 27.5%, to $26.6 million in the
first quarter of fiscal year 2002 from $20.9 million in the comparable period
last year. The acquisition of Premium Standard Farms of North Carolina accounted
for $7.4 million of the increase, with the remaining being offset by lower
market hog sales prices and slightly higher feed costs during the first quarter
of fiscal year 2002 compared to the same period last year.
Operating income increased by $5.0 million, or 23.6%, to $26.3 million in
the first quarter of fiscal year 2002 from $21.3 million in the comparable
period last year. The increase is attributed to the factors mentioned above,
offset slightly by minority interest related to the acquisition of hog
production facilities previously owned by The Lundy Packing Company.
Pork Processing. Net sales increased $83.0 million, or 107.8%, to $160.0
million in the first quarter of fiscal year 2002 from $77.0 million in the
comparable period last year. The acquisition of The Lundy Packing Company
accounted for $79.2 million of the increase in net sales, with the remainder
accounted for by an increase in processing volume offset by a decrease in pork
product sales prices.
Gross profit decreased by $0.1 million, or 4.0%, to $3.2 million in the
first quarter of fiscal year 2002 from $3.3 million in the comparable period
last year. The decrease was the result of lower margins on pork products due to
higher market hog costs partially offset by the incremental gross profit
generated from The Lundy Packing Company.
Operating income decreased by $0.2 million, or 8.4%, to $2.5 million in the
first quarter of fiscal year 2002 from $2.7 million in the comparable period
last year. The decrease was attributed to the factors mentioned above, as well
as to an increase in selling, general and administrative expenses associated
with the addition of The Lundy Packing Company.
Years Ended March 31, 2001 and March 25, 2000 and 45.5 Week Period Ended March
27, 1999
The following table presents selected historical financial information for
our production and processing segments for the period May 13, 1998 to March 27,
1999, for each of the fiscal years 2000 and 2001. Results of operations for the
period ended March 31, 2001 include information for The Lundy Packing Company
from August 25, 2000 and information for Premium Standard Farms of North
Carolina, Inc. from September 22, 2000, the respective dates of acquisition. Net
sales, gross profit (loss) and operating income (loss) by segment are also
presented as a percentage of their respective totals. The four columns under
year-to-year change show the dollar and percentage change from the period May
13, 1998 to March 27, 1999 to the fiscal year 2000 and from the fiscal year 2000
to 2001. Intersegment sales are based on live hog prices.
43
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<Table>
<Caption>
FOR THE PERIOD FOR THE FISCAL YEARS ENDED YEAR-TO-YEAR CHANGE
------------------------ --------------------------------------- -----------------------------------
MAY 13, 1998 TO MARCH 25, MARCH 31, 1999 TO 2000 TO
MARCH 27, 1999 % 2000 % 2001 % 2000 % 2001 %
--------------- ------ --------- ------ --------- ------ ------- ------ ------- -----
(IN MILLIONS, EXCEPT PERCENTAGES)
NET SALES
Production............ $157.0 66.2% $ 220.9 72.1% $ 359.1 66.4% $ 63.9 40.7% $ 138.2 62.6%
Processing............ 204.4 86.2 266.7 87.1 475.7 88.0 62.3 30.5 209.0 78.4
Intersegment.......... (124.3) (52.4) (181.3) (59.2) (294.2) (54.4) (57.0) 45.9 (112.9) 62.3
------ ------ ------- ------ ------- ------ ------ -------
Net Sales............. $237.1 100.0% $ 306.3 100.0% $ 540.6 100.0% $ 69.2 29.2% $ 234.3 76.5%
====== ====== ======= ====== ======= ====== ====== =======
GROSS PROFIT (LOSS)
Production............ $(46.3) 367.5% $ 11.1 27.5% $ 62.4 73.9% $ 57.4 (124.0)% $ 51.3 462.2%
Processing............ 33.7 (267.5) 29.2 72.5 22.0 26.1 (4.5) (13.4) (7.2) (24.7)
------ ------ ------- ------ ------- ------ ------ -------
Total Gross Profit
(Loss)............ $(12.6) 100.0% $ 40.3 100.0% $ 84.4 100.0% $ 52.9 (419.8)% $ 44.1 109.4%
====== ====== ======= ====== ======= ====== ====== =======
OPERATING INCOME (LOSS)
Production............ $(46.7) 132.3% $ 6.1 43.0% $ 62.7 103.5% $ 52.8 (113.1)% $ 56.6 927.9%
Processing............ 31.8 (90.1) 26.7 188.0 16.3 26.9 (5.1) (16.0) (10.4) (39.0)
Corporate............. (20.4) 57.8 (18.6) (131.0) (18.4) (30.4) 1.8 0.0 0.2 0.0
------ ------ ------- ------ ------- ------ ------ -------
Total Operating
Income (Loss)..... $(35.3) 100.0% $ 14.2 100.0% $ 60.6 100.0% $ 49.5 (140.2)% $ 46.4 326.8%
====== ====== ======= ====== ======= ====== ====== =======
</Table>
Year Ended March 31, 2001 Compared to the Year Ended March 25, 2000
Consolidated
Net sales. Net sales increased by $234.3 million, or 76.5%, to $540.6
million in 2001 from $306.3 million in 2000. The acquisitions of The Lundy
Packing Company and Premium Standard Farms of North Carolina accounted for
$184.8 million of the increase in net sales, with the remaining $49.5 million
the result of an increase in pork product sales attributable to improving pork
prices and a slightly higher volume produced.
Cost of Goods Sold. Cost of goods sold increased by $190.3 million, or
71.5%, to $456.2 million in 2001 from $265.9 million in 2000. The acquisitions
of The Lundy Packing Company and Premium Standard Farms of North Carolina
accounted for $177.0 million of the increase. Cost of goods sold as a percentage
of net sales improved to 84.4% in 2001 from 86.8% in 2000. This improvement was
the result of improving pork product prices, as mentioned above, offset
partially by an increase in volume produced, higher costs of feed in our hog
production segment and higher costs of outside purchases of market hogs in our
pork processing segment.
Gross Profit. Gross profit increased by $44.1 million, or 109.4%, to $84.4
million in 2001 from $40.3 million in 2000 and increased to 15.6% of net sales
in 2001 from 13.2% in 2000, due to the factors mentioned above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses improved as a percentage of net sales to 3.6% in 2001
from 6.1% in 2000 due primarily to economies of scale. In dollar terms, selling,
general and administrative expenses increased by $0.6 million, or 3.2%, to $19.4
million in 2001 from $18.8 million in 2000 due primarily to the acquisitions in
2001.
Operating Income. Operating income increased by $46.4 million, or 326.8%,
to $60.6 million in 2001 from $14.2 million in 2000. The increase is
attributable to the factors mentioned above.
Interest Expense, net. Interest expense, net, increased by $2.0 million,
or 9.4%, to $23.2 million in 2001 from $21.2 million in 2000. The increase was
primarily caused by the increase in borrowings to finance the acquisitions of
The Lundy Packing Company and Premium Standard Farms of North Carolina.
Income Tax Expense. Our effective tax rate was 41.1% in 2001 and 24.3% in
2000. The increase in effective rate was the result of the relative impact of
permanent differences between book and tax income.
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49
Segment Analysis
Hog Production. Net sales increased by $138.2 million, or 62.6%, to $359.1
million in 2001 from $220.9 million in 2000. The acquisition of Premium Standard
Farms of North Carolina accounted for $83.9 million of the increase in net
sales, with the remaining $54.3 million the result of an average increase of
22.6% in market hog prices. Intersegment sales to our pork processing segment
transferred at market prices are eliminated in the Consolidated Statements of
Operations.
Gross profit increased by $51.3 million, or 462.2%, to $62.4 million in
2001 from $11.1 million in 2000. The increase is primarily related to the
increase in market hog prices, which was slightly offset by increases in feed
costs in 2001 compared to 2000.
Operating income increased by $56.6 million, or 927.9%, to $62.7 million in
2001 from $6.1 million in 2000. In 2000 there was a $5.0 million nonrecurring
asset impairment charge with the remaining increase attributed to factors
mentioned above.
Pork Processing. Revenues increased by $209.0 million, or 78.4%, to $475.7
million in 2001 from $266.7 million in 2000. The acquisition of The Lundy
Packing Company accounted for $169.0 million of the increase in net sales, with
the remaining $40.0 million the result of increased pork product sales
attributable to an increase in prices and a slight increase in volume processed.
Gross profit decreased by $7.2 million, or 24.7%, to $22.0 million in 2001
from $29.2 million in 2000. The decrease was the result of lower margins on pork
products due to higher market hog costs partially offset by the incremental
gross profit generated from The Lundy Packing Company.
Operating income decreased by $10.4 million, or 39.0%, to $16.3 million in
2001 from $26.7 million in 2000. The decrease was attributed to the factors
mentioned above, as well as to an increase in selling, general and
administrative expenses of $1.3 million as a result of the acquisition of The
Lundy Packing Company, and a nonrecurring charge in fiscal 2001 of $2.0 million
for certain benefit plan expenses.
Year Ended March 25, 2000 Compared to the 45.5 week Period Ended March 27,
1999
Consolidated
Net Sales. Net sales increased by $69.2 million, or 29.2%, to $306.3
million in 2000 from $237.1 million in 1999. The increase was in part due to
1999 only representing 45.5 weeks of operations subsequent to the purchase by
ContiGroup. This represented $36.5 million of the increase. The remaining $32.7
million increase was the result of higher pork product prices coupled with a
slight increase in the volume of pork products sold.
Cost of Goods Sold. Cost of goods sold increased by $16.1 million, or
6.5%, to $265.9 million in 2000 from $249.8 million in 1999. Cost of goods sold
as a percentage of net sales improved to 86.8% in 2000 from 105.3% in 1999. This
improvement was the result of improving pork product prices, as mentioned above,
as well as lower costs of feed in our hog production segment.
Gross Profit (Loss). Gross profit increased by $52.9 million to $40.3
million in 2000 from a gross loss of $12.6 million in 1999 and increased to
13.2% of net sales in 2000 from (5.3)% in 1999, due to the factors mentioned
above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses improved as a percentage of net sales to 6.2% in 2000
from 8.5% in 1999. In dollar terms, selling, general and administrative expenses
decreased by $1.2 million, or 6.0%, to $18.8 million in 2000 from $20.0 million
in 1999. Both the improvement as a percentage and the decrease in terms of
dollars were primarily due to a decrease in litigation expenses in 2000 compared
to 1999.
Operating Income (Loss). Operating income increased by $49.5 million to
$14.2 million in 2000 from an operating loss of $35.3 million in 1999. The
increase is attributable to the factors mentioned above.
45
50
Interest Expense, net. Interest expense, net, increased by $3.6 million,
or 20.5%, to $21.2 million in 2000 from $17.6 million in 1999. The increase was
primarily caused by an increase in average debt outstanding under our revolving
credit facility.
Income Tax Expense. Our effective tax rate was 24.3% in 2000 and 38.5% in
1999. The decrease in effective rate was the result of the relative impact of
permanent differences between book and tax income.
Segment Analysis
Hog Production. Net sales increased by $63.9 million, or 40.7%, to $220.9
million in 2000 from $157.0 million in 1999. The increase was due to a full year
of operating results in 2000 coupled with an increase in market hog prices.
Intersegment sales to the pork processing segment transferred at market prices
are eliminated in the Consolidated Statements of Operations.
Gross profit (loss) increased by $57.4 million to $11.1 million in 2000
from a gross loss of $46.3 million in 1999. The increase is primarily related to
the increase in market hog prices, which was slightly offset by a full year of
production costs.
Operating income (loss) increased by $52.8 million to $6.1 million in 2000
from an operating loss of $46.7 million in 1999. In 2000 there was a $5.0
million nonrecurring asset impairment charge with the remaining increase
attributed to factors mentioned above.
Pork Processing. Net sales increased by $62.3 million, or 30.5%, to $266.7
million in 2000 from $204.4 million in 1999. The increase was due to a full year
of operating results coupled with an increase in pork product sales due to an
increase in prices and an increase in volume produced.
Gross profit decreased by $4.5 million, or 13.4%, to $29.2 million in 2000
from $33.7 million in 1999. The decrease was the result of slightly lower
margins on pork products due to higher market hog costs.
Operating income decreased by $5.1 million, or 16.0%, to $26.7 million in
2000 from $31.8 million in 1999. The decrease is attributed to the factors
mentioned above, as well as a $0.6 increase in selling, general and
administrative expenses resulting from a full year of operation.
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 expenditures on our liabilities. We
expect to finance these activities through cash flow from operations and from
amounts available under the revolving credit facility.
Net cash flow provided by operating activities was $19.5 million and $20.6
million for the first quarters ended in fiscal years 2002 and 2001,
respectively. The decrease in the first quarter of fiscal year 2002 compared to
the same period last year was primarily the result of working capital
requirements relating to inventory and margin calls on our risk management
program. Non-cash charges helped minimize the working capital requirements.
Non-cash charges increased in the first quarter of fiscal year 2002 compared to
the same period last year due to incremental depreciation expense of acquired
businesses.
Net cash flow provided by (used in) operating activities was $61.7 million,
$55.5 million, and $(7.6) million in 2001, 2000 and 1999, respectively. The
increase in net income in 2001 was offset primarily by increases in working
capital requirements relating to inventory and margin calls on our risk
management program compared to 2000. Non-cash charges helped minimize the
working capital requirements. Non-cash charges increased in 2001 compared to
2000 due to incremental depreciation and amortization expense of acquired
businesses as well as an increase in the deferred income tax provision.
Net cash flow used in investing activities was $22.5 million and $4.4
million for the first quarters ended in fiscal years 2002 and 2001,
respectively. Net cash used in investing activities consisted of $26.2 million
and $6.0 million for capital expenditures relating to property, plant and
equipment and
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breeding stock during the first quarters ended in fiscal years 2002 and 2001,
respectively. The increase is the result of expansion projects at The Lundy
Packing Company and our Texas production facilities.
Net cash flow used in investing activities was $146.0 million, $15.2
million and $17.3 million in 2001, 2000 and 1999, respectively. In 2001, net
cash used in investing activities consisted of $114.4 million for our
acquisition of The Lundy Packing Company and Premium Standard Farms of North
Carolina, as well as capital expenditures of $43.2 million for property, plant
and equipment and breeding stock. In 2000, our net cash used in investing
activities included capital expenditures of $23.7 million for property, plant
and equipment and breeding stock.
Net cash flow used in financing activities was $4.1 million and $18.3
million for the first quarters ended in fiscal years 2002 and 2001,
respectively. As of June 30, 2001, our total debt was $268.9 million. In the
first quarter of fiscal year 2002, we issued $175 million of Senior Unsecured
Notes which were used to retire $137.9 million of 11% Senior Secured Notes
(Partial Pay-In-Kind). An associated 1% prepayment penalty on these notes
resulted in an extraordinary charge of $1.3 million, net of taxes. With the
remaining proceeds, we also paid down $25 million of bank term debt and paid
down our revolving credit facility.
Net cash flow provided by (used in) financing activities was $91.2 million,
$(42.7) million and $(0.2) million in 2001, 2000 and 1999, respectively, In
2001, we borrowed $125.0 million under a new term credit facility to finance the
acquisition of The Lundy Packing Company and Premium Standard Farms of North
Carolina and paid approximately $33.8 million of existing debt.
At June 30, 2001, we also had $81.3 million outstanding under our term loan
facility and $6.0 million in borrowings outstanding, and $7.5 million in letters
of credit under, our revolving credit facility. As a result, we would have been
able to borrow an additional $86.5 million under our revolving credit facility
as of June 30, 2001. All borrowings under the revolving credit facility mature
on August 21, 2003 and all borrowings under the term credit facility mature on
August 21, 2005. For a description of our credit facility, see "Description of
the Credit Agreement."
In fiscal 2002, we expect to spend approximately $88 million on capital
expenditures, of which we expect to spend:
- approximately $34 million in connection with the implementation of
improvements to our Clinton, North Carolina pork processing facility;
- approximately $24 million in connection with our expansion of our Texas
hog production facilities;
- approximately $8 million on investments and research to develop and
implement new technologies for improved waste handling; and
- the rest for continuing improvements of our facilities.
Under our consent decree with the Attorney General of the State of Missouri
we are required to spend $18.3 million on additional investments in research and
development over the next three years.
We believe that available borrowings under our credit facility, available
cash and internally generated funds will be sufficient to support our working
capital, capital expenditures and debt service requirements for the foreseeable
future. Our ability to generate cash, however, is subject to a certain extent to
general economic, financial, competitive, legislative, regulatory and other
factors beyond our control. We cannot assure you that our business will generate
sufficient cash flow from operations or that future borrowings will be available
under our revolving credit facility in an amount sufficient to enable us to pay
our indebtedness, including the notes, or to fund our other liquidity needs. If
we consummate any acquisitions, we may need to raise additional capital. In
addition, it is our long-term plan to add a processing plant to our Texas
operations when justified by market conditions, customer relationships and other
circumstances. If we expand our Texas operations in this manner, we will need to
seek additional sources of funding, which might potentially come from the
issuance of additional equity or the pursuit of joint ventures to the extent
that such options are available.
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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 wholesale
pork prices. The cost and supply of feed components and wholesale pork 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
quarter ended June 30, 2001, we had recognized losses under SFAS 133 of $5.7
million in net sales for losses related to lean hog futures and losses of $3.0
million in costs of goods sold relating to the hedging of feed components. As of
June 30, 2001, we had deposits with brokers for outstanding futures contracts of
$13.1 million, included in prepaid expenses and other current assets. 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 June 30, 2001, the potential change in
fair value of open future contracts, assuming a 10% change in the underlying
commodity price, was $15.8 million.
We are exposed to changes in interest rates. Our term and revolving credit
facilities have 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. 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. As of June 30, 2001, we have $87.3 million of variable rate debt
outstanding. Holding other variables constant, including levels of indebtedness,
a one percentage point increase in interest rates would impact pre-tax earnings
by approximately $0.9 million.
We completed the sale of our 9 1/4% senior notes due 2011 in June, 2001.
The 9 1/4% senior notes due 2011 had a fair value of approximately $172.8
million as of June 30, 2001 and approximately $174.1 million as of August 3,
2001, on the Private Offerings, Resale and Trading through Automated Linkages
(PORTAL) Market, as compared to the book value of $175.0 million as of June 30,
2001.
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BUSINESS
OVERVIEW
We are a leading vertically integrated provider of pork products to the
wholesale and retail, food service and institutional markets in the United
States. By combining modern, efficient production and processing facilities,
sophisticated genetics, and strict control over the variables of health, diet
and environment, we produce value-added premium pork products. We are the second
largest owner of sows in North America, with over 200,000 sows producing
approximately 3.9 million hogs per year in production operations located on over
100,000 acres in Missouri, Texas and North Carolina. We are also the eighth
largest pork processor in the United States, with two plants capable of
processing over 3.7 million hogs per year.
COMPETITIVE STRENGTHS
We believe the following competitive strengths position us to enhance our
growth and profitability:
- Vertically Integrated Production and Processing. We have achieved a
substantial degree of vertical integration of our hog production and
processing operations. We measure our level of vertical integration in
terms of the percentage of hogs processed at our plants that are owned by
us and raised according to our controlled programs. All of the hogs used
by our Milan, Missouri processing plant are sourced from our Missouri and
Texas hog production operations. In fiscal 2001, since our North Carolina
acquisitions, approximately 61% of hogs used by our Clinton, North
Carolina processing plant were supplied by our North Carolina hog
production operations, with the remaining 39% supplied through contracts
with independent producers. In the quarter ended June 30, 2001,
approximately 67% of hogs used by our North Carolina processing plant
were supplied by our North Carolina hog production operations, with the
remaining 33% supplied on a contract basis. Vertical integration gives us
strict control over our process, from a hog's initial genetic makeup to
the pork product ultimately produced and shipped. This is in contrast to
non-integrated or less integrated processors who acquire hogs from a
large number of suppliers with varying production standards and therefore
find it difficult to ensure a consistent and high quality product. This
is a powerful advantage for competing effectively in the rapidly
consolidating pork industry because it allows us to:
- Produce Premium and Specialty Products. By regulating the variables of
genetics, environment, health and diet we can produce a controlled
supply of high quality, consistent pork products along with specialty
products, such as antibiotic free pork and Premium 97 pork (certified
as 97 percent fat-free by the American Heart Association), as well as
KenKo-Ton healthy pork and Mugi Buta barley-fed pork for the Japanese
market. Our products typically command higher prices than commodity
pork products.
- Target Premium Customers. We are able to tailor our production process
to meet the exacting specifications of discriminating customers in our
target market. These customers are willing to pay premium prices for
higher quality products and for the assurance that their standards are
met throughout a traceable production process. Vertical integration
provides the product consistency necessary to satisfy these customers.
- Reduce Our Production Costs and Maximize Value. Vertical integration
allows us to significantly reduce our hog procurement costs and to
streamline our logistics, transportation and production schedules, thus
optimizing asset utilization and reducing our cost structure. We are
also able to capture more of the value of our hogs through our own
processing rather than passing this value on to other processors.
- Reduce Earnings Volatility and Exposure to Market Fluctuations.
Vertical integration provides us with an assured supply of hogs and
strengthens our overall financial performance in periods of
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market price weakness by reducing our exposure to pricing volatility. We
believe this results in more consistent earnings.
- Strong Market Position with Large Scale Operations. We are the second
largest hog producer and the eighth largest pork processor in the United
States. We produce over 3.9 million hogs and process over 3.7 million
hogs annually. Our large-scale integrated operations, geographic
dispersal and strong market position allow us to serve a broad range of
customers in our target market, while maintaining economies of scale and
marketing leverage.
- Efficient, Modern Facilities and Operations. Our Milan, Missouri
processing plant is one of the most modern and technically advanced
facilities of its kind. When construction and renovation are completed on
our recently acquired Clinton, North Carolina processing plant at the end
of fiscal 2002, we believe the plant will be the most advanced facility
of its kind in the United States. Our hog production operations, most of
which were built in the past ten years, incorporate advanced breeding,
farrowing and finishing methods resulting in industry-leading
productivity statistics. According to data compiled by Agrimetrics
Associates, Inc., our costs of production are in the lowest quartile of
all pork producers surveyed. These data also show that we are
consistently among the top processors in terms of return on hogs
processed (which is a function of both price and yield).
- Experienced Management Team. Most of our senior and operational
management personnel have been involved in farm production and/or the
fresh meat industry for most of their business careers. Senior and
operational management members, on average, have over thirteen years of
experience in those areas.
BUSINESS STRATEGY
We are pursuing a strategy designed to increase our revenues and cash flow.
Key elements of our strategy include:
- Further Develop Vertical Integration. We believe our integrated model
will be the proven approach to competing effectively in the rapidly
consolidating pork industry. We have achieved 100% integration of our
Missouri hog production and processing operations and intend to increase
integration in our North Carolina operations. In North Carolina, we are
renovating our recently acquired processing plant, upgrading the genetics
of our breed stock, rationalizing feed manufacturing and increasing
supervision of contract growers in order to put in place a USDA Process
Verified program similar to the program that is in place for our Missouri
operations. Ultimately, we intend to have two fully-integrated
geographically separated pods located in these states, allowing us to
serve the U.S. and international markets cost effectively. When justified
in the future by market conditions, customer relationships and other
circumstances, we also intend to expand our Texas operations to add a
processing plant that will create a third fully integrated pod modeled
upon our Missouri operations.
- Focus on High Quality and Value-Added Products. We intend to continue to
focus on producing high quality and value-added products for
discriminating customers in the retail, food service, export and further
processing markets, and to further differentiate ourselves from commodity
oriented competitors by developing new brands and additional products. As
part of these efforts, and in conjunction with our modernization and
renovation of the Clinton, North Carolina processing plant, we intend to
improve our North Carolina operations to market premium products similar
to those produced by our Milan, Missouri plant, as well as smoked and
processed pork products.
- Expand Production and Processing Capacity. We intend to further expand
hog production at our Texas facilities by adding 10,000 new sows, which
we expect will produce approximately 200,000 new hogs per year beginning
in fiscal year 2003. We believe additional expansion opportunities exist
in Texas. Our Texas production facilities are located on approximately
54,000 acres with adequate space and all environmental and land use
permits required for further expansion in a manner that
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could replicate our Missouri hog production facilities. Due to the
difficulty in obtaining such permits in the current regulatory
environment, we believe our existing permits in Texas provide us a
competitive advantage. We also intend, through modernization and
efficiency efforts, to increase processing capacity at our Clinton, North
Carolina plant from its current 6,500 hogs per day to 8,000 hogs per day
on an eight-hour shift, with additional capacity to process up to 10,000
hogs per day on a ten-hour shift on a seasonal basis.
- Maintain Position as a Low Cost Producer. We strive to produce
high-quality pork products at low cost by combining state-of-the-art hog
production with modern and efficient pork processing. We measure our
production and processing activities continually in an effort to increase
our hog production efficiencies, lower our break-even costs, improve our
processing yields and develop new value-added products.
- Continue Expansion into International Markets. We believe that
international markets offer significant growth opportunities and intend
to continue our efforts to develop sales outside the United States. Over
the past five years, we have established relationships with trading
partners in Japan, China, South Korea, Canada, Mexico, Russia and Taiwan,
and have exported product over that time period to more than twenty
countries. We also believe that our presence in these markets allows us
to achieve higher prices for certain pork products than could be obtained
domestically. In particular, we intend to increase our export volumes to
Japan, as this market ascribes significant value to premium,
process-controlled traceable products. We also intend to actively expand
sales in the South Korean, Chinese and Taiwanese markets.
- Manage Market Risks. We will continue to draw upon the strength of our
risk management team, which collectively has over twenty years experience
in the area. We will continue to monitor daily opportunities to lock in
favorable margins by hedging both feed and energy costs as well as fresh
meat sales.
- Environmental Stewardship. We will continue to be a leader in the pork
industry in researching, developing and implementing new waste handling
and environmental technologies and solutions. Those technologies and
solutions include source reduction, risk reduction, improved manure
treatment, beneficial reuse of waste products (creating value-added
products) and water reuse.
INDUSTRY OVERVIEW
Pork products are the third largest source of meat protein in the United
States and the largest source globally. The market for pork products in the
United States totaled 97.9 million hogs and 18.9 billion pounds of pork in a $33
billion industry in 2000. Demand for pork products in the United States has
historically been relatively stable, with population growth as a primary driver
for increased aggregate demand. However, between 1997 and 1999, per capita
consumption increased from 45.8 pounds to 50.9 pounds per annum according to the
National Pork Producers Council. U.S. exports of pork products have grown
substantially in recent years. Between 1995 and 2000, U.S. exports increased at
an 11.1% compound annual growth rate from 770.0 million pounds to 1.3 billion
pounds. U.S. exports are projected by Sparks Companies, Inc. to increase an
additional 21% in calendar year 2001.
The pork products market is characterized by prices that change daily based
on seasonal consumption patterns and overall supply and demand for pork and
other meats in the United States and abroad. In general, domestic and worldwide
consumer demand for pork products drive pork processors' long-term demand for
hogs, which is filled by hog producers. In order to operate profitably,
processors seek to acquire hogs at the lowest possible costs and to minimize
processing costs by maximizing plant operating rates. As a result, pork
processors' short-term demand for hogs is driven largely by their plants'
processing needs. Pork processing is a competitive, but highly concentrated and
consolidating industry, with the top ten processors representing approximately
87% of total federally inspected industry capacity in 2000. In contrast, hog
production, while also rapidly consolidating, remains highly fragmented, with
nearly 86,000 producers in 2000. As a result, the production capacity and supply
of hogs has historically been driven by the production decisions of thousands of
individual farmers, and has varied substantially.
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There have been periods of time in which hog supply has either exceeded or
fallen short of processors' demand for hogs. Prices for live hogs have then
fluctuated either up or down, often relatively independent of short-term changes
in wholesale pork prices. Generally speaking, in periods of excess supply of
hogs, the profitability of hog producers is reduced while that of processors is
increased due to the reduction in live hog prices. Conversely, in periods of
insufficient supply of hogs, the profitability of hog producers generally
increases while that of processors decreases. These variations in hog supply and
price are often exacerbated by decisions made by hog producers due to their
individual economic circumstances. For example, in periods of high hog prices,
producers tend to expand their production capacity by adding sows to their
herds, often by retaining marketable females, which further constrains
short-term supply. In periods of low hog prices, producers with high production
costs tend to liquidate or reduce their herds by selling their hogs, which
further increases short-term supply. Supply tends to accumulate and results in
larger and more severe supply and price imbalances in these situations because
the lead times for changes in capacity to be reflected in hog production due to
gestation and growing time are relatively long.
Hog prices reached twenty-year lows in calendar years 1998 and 1999 with
average prices of $31.91 and $31.49 per hundred weight for those years. As a
result, producers have remained reluctant to expand despite an improving market
environment. This may also be partially attributed to the increase in industry
consolidation and the overall reduction in the total number of producers, as
well as stricter environmental requirements hindering new and existing farm
construction and expansion. Based on Sparks Companies, Inc. recent analysis of
the USDA Hog and Pig Report released in July 2001, we estimate that live hog
prices will average approximately $45 per hundred weight in 2001, and hog
production is expected to be slightly higher for 2001 as compared to 2000. Pork
product prices in 2001 are expected to increase slightly, with the total amount
of commercial processing in the U.S. estimated at 98.2 million hogs in 2001, as
compared to 97.9 million in 2000.
We expect global consumer demand for pork to continue to increase. Consumer
demand for various protein sources including pork, beef, chicken, fish and other
meats is driven by consumer preferences and the relative prices and quality of
the available products. For example, over the last 15 to 20 years chicken
producers have enhanced the quality and consistency of their product, and as
consumers have increasingly chosen healthier foods, chicken consumption has
steadily increased. In the United States, we expect consumer demand for pork to
continue to grow as a result of new lean pork products which are more attractive
to diet conscious Americans, together with the industry's efforts to heighten
public awareness of pork as an attractive protein source. In fact, according to
the National Pork Producers' Council, as a result of genetic, feeding and
management improvements by pork producers, certain cuts of pork are on average
31% lower in fat, 14% lower in calories and 10% lower in cholesterol than in
1983, and compare favorably with chicken on these measures.
Export sales of U. S. pork have grown for many years, and are projected by
Sparks Companies, Inc. to increase by 21% in calendar year 2001. The impact of
foot-and-mouth disease in Great Britain and Europe may lead to additional
increases in export sales, as customers in Japan and other Asian countries may
reduce their purchases of pork products from those countries and purchase from
U.S. producers instead. Export sales are also driven by high growth areas of the
world, such as Asia and Latin America, where pork is already considered a highly
favored meat. We believe that as hog production becomes more sophisticated and
the overall quality, leanness, and consistency of pork increases, consumer
demand for pork will be enhanced.
Historically, the United States pork industry has been divided into two
segments: pork processing and hog production. As a vertically integrated
supplier of pork products, we operate in both industry segments.
PORK PROCESSING
The U.S. pork processing industry is highly concentrated, with the top ten
processors representing approximately 87% of total federally inspected industry
capacity, and the industry is highly competitive. Although customers in the
retail, institutional, further processing and export markets have different
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product specifications and service requirements, processors generally compete on
the basis of the price and quality of their product. As shown below, pork supply
has increased historically.
Overall pork processing operations have high fixed costs primarily related
to the capital required to build a plant and by labor, energy and other
operating costs, and large daily requirements for hogs to process. In order to
operate profitably, processors attempt to acquire hogs to process at the lowest
possible costs and to minimize processing costs by maximizing plant operating
rates.
The processing industry is geographically concentrated in the hog producing
regions of the U.S., particularly the Midwest and portions of the Southeast. Due
to the high degree of fragmentation of the hog production industry, processing
operations are extremely large relative to the producers that supply them. As a
result, non-integrated processors, on a daily basis, must acquire each day's
supply of hogs through large procurement operations, which include an extensive
network of buyers and buying stations. Because many modern plants process in
excess of 10,000 hogs per day, non-integrated processors must purchase hogs from
a large number of suppliers, many of whom use varying genetics, feeding programs
and growing environments. We believe that this dichotomy between the hog
requirements of processors and the fragmentation and variation of hog production
makes it relatively difficult for non-integrated pork processors to produce
consistent, high quality products.
HOG PRODUCTION
The hog production industry, although consolidating, remains highly
fragmented and can be characterized by large variations in cost of production
and quality of hog produced. Although the number and size of large,
sophisticated producers has increased, a substantial majority of U.S. producers
had one-time inventory on hand of fewer than 1,000 hogs in 1999. In many smaller
hog operations, the hogs are kept outdoors in open lots or in less sophisticated
buildings, bred in an unscientific manner, increasing disease and death risk,
and grown on low-cost feed. As a result, these operations generally are
characterized by fewer hogs per sow per year, higher feed-to-gain conversion
ratios, higher costs of production, lower quality and less consistent hogs
brought to market. In addition, the effects of temperature and climate on
breeding and farrowing encourage outdoor hog producers to breed hogs in the
spring and fall. This results in seasonal production, which may result in lower
prices when these producers bring their hogs to market.
According to the U.S. Department of Agriculture, the number of U.S. hog
producers has declined from approximately one million in 1968 to less than
86,000 at the end of 2000. We believe that as the hog production and pork
processing industry moves to more sophisticated production techniques, the
pressures on marginal producers will intensify. In the last several years a
number of operations have emerged which are based on large-scale scientific and
management-intensive production of hogs. These operations have grown rapidly.
The fifty largest hog producers in the United States marketed approximately 50%
of the total pounds of pork produced in 2000, with the largest single producer
accounting for approximately 14%.
We expect that the hog production industry, which is characterized by large
variations in cost of production and quality of hog produced, will see continued
consolidation and integration, especially coming out of 1998 and 1999, which
were poor years for producers. According to a recent study by the National Pork
Producers Council, 74.3% of the hogs marketed in January 2000 were sold under
some type of contractual agreement with roughly 25.7% sold on a spot basis. This
is an increase from 64% in 1999 and 57% in 1997. The low hog prices of 1999 and
1998 curbed herd expansion and accelerated consolidation.
The U.S. pork industry is very competitive with other leading pork
producing countries. U.S. exports of pork products have grown substantially in
recent years. The Food and Agricultural Policy Research Institute projects that
the U.S. share of world net exports of pork products will more than double
during the period from 2000 to 2010. According to a 1999 study by the George
Morris Centre, the cost of producing a market hog in the U.S. is approximately
two-thirds of the cost in Denmark and the Netherlands. We believe this relative
cost advantage, increasing global trade and the economic impact of
foot-and-mouth disease in the United Kingdom creates a competitive advantage for
U.S. producers including Premium Standard Farms.
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PRODUCTS, MARKETING AND CUSTOMERS
We market our pork products to a variety of wholesale and retail customers
in the U.S. and abroad, including select supermarket chains, meat distributors,
further processors and food service companies. We focus on discriminating
customers in the retail, food service, export and further processing markets. We
primarily market our products as chilled and frozen pork, sold:
- To retailers, retail distributors and wholesalers in the form of chilled
boxed bone-in and boneless loins, tenderloins, hams, picnics, butts,
ribs, marinated and case-ready;
- To further processors in the form of chilled bulk bone-in and boneless
hams, picnics and butts, bellies, trimmings, variety meats and other
products which are used by these customers to make processed pork
products;
- To institutional food customers in the form of chilled and frozen boxed
bone-in and boneless loins, ribs, picnics and butts; and
- To export customers in the form of chilled boneless loins, tenderloins,
frozen hams, shoulders, bellies, as well as offal items.
Our vertical integration and control also allows us to produce specialty
products. These include our antibiotic free pork and Premium 97 pork (certified
as 97 percent fat-free by the American Heart Association), as well as KenKo-Ton
healthy pork and Mugi Buta barley-fed pork for the Japanese market.
Our marketing strategy seeks to capitalize on the quality of the pork
produced by our controlled supply of high-quality consistent hogs and modern
processing operations allowing us to sell fresh and processed pork at prices
that reflect a premium to those received by competitors selling lower quality
products. Our pork processing facilities have been designed to enhance the
realization of this quality by converting standard pork cuts to value-added
products through boning, trimming and other further processing. Furthermore, we
target specialty, export and ethnic markets, in which there is a higher demand
for certain pork products. In order to take advantage of a differentiated
product, we have been certified to use the USDA Process Verified seal in
connection with our Missouri operations. We expect to be certified with respect
to our recently acquired North Carolina operations once our renovations and
improvements to those operations are complete.
Our international marketing efforts are directed toward a number of
countries, but are predominantly focused on Japan, which ascribes significant
value to our premium, process-controlled products. In 2000, we renewed a
three-year contract with our trading partner in the Japanese market. Through
this arrangement, we enjoy relationships with Japan's second largest
manufacturer of ham and Japan's sixth largest ham distributor. In fiscal 2001
and our quarter ended June 30, 2001, our sales to Japanese customers represented
about 6% and 5%, respectively, of our total sales. We expect our sales to Japan
to significantly increase once we receive Process Verified accreditation for our
North Carolina operations. We are using our success in Japan to explore other
opportunities in the export market in Asia, Europe, Mexico and Canada. Sales to
international markets other than Japan accounted for approximately 2% and 3% of
our total sales in fiscal 2001 and our quarter ended June 30, 2001,
respectively.
Though our sales and marketing efforts are primarily focused on sales of
pork products, we are to a lesser extent involved in the related markets for
live hogs, processed meat products and pork by-products. The excess live hogs of
our production facilities are sold to other pork processors. In this respect, we
have a long-term contract with a major pork processor and further-processor, as
well as other processors in the region, who purchase the vast majority of hogs
produced at our Texas facilities. The remainder of our excess hog production is
sold in privately negotiated transactions. With respect to processed meats, our
Clinton, North Carolina plant includes further-processing facilities that
produce products such as cured hams, bacon and sausage. Finally, all of our
facilities sell the by-products of our processing activities to the variety
meat, feed processing and pet food industries.
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PRODUCTION AND PROCESSING OPERATIONS
OVERVIEW
Our production and processing operations are organized as three separate
pods located in Missouri, Texas and North Carolina. Our Missouri and North
Carolina pods each combine hog production farms and processing plants. Our Texas
pod currently has only hog production operations. We eventually plan to add a
pork processing plant in Texas to create a third fully-integrated pod modeled
upon our Missouri operations. The geographic separation of our pods enhances
biosecurity and puts us closer to our customers and feed grain suppliers,
allowing us to minimize shipping costs. Shipping, usually via truck, is
important in a number of aspects of hog production, particularly the delivery of
feed to hog production units, the shipment of feeder pigs to finishing units,
and the shipment of finished hogs to processing plants. To further reduce the
risk of disease and maximize the scheduling and process coordination that our
integrated approach provides, our pods incorporate transportation facilities
served by our own truck fleet for hauling feed and hogs.
HOG PRODUCTION
Our production facilities house herds ranging from 1,100 to 3,300 sows per
unit. On average, a staff of five people is required for 1,100 sows. A typical
production unit consists of four connected buildings, each with a specialized
function -- breeding, gestation, farrowing and nursery.
The production process begins in the breeding barn, where sows are
artificially inseminated. Artificial insemination maximizes breeding efficiency
and productivity and allows us to utilize genetic stock that maximizes our
overall productivity and quality. After four weeks, conception is verified using
ultrasound technology. From the breeding barn, sows are moved to the gestation
barn where they are vaccinated and placed on a special diet. The gestation
period is 114-days. During this period, the sows must receive adequate nutrition
and careful attention to health and disease control in order to maximize the
size and health of their litters. In our gestation buildings, sows are carefully
monitored and individually fed according to body weight. A few days prior to
delivery, sows are moved to the farrowing barn where they give birth to a litter
of over 10 offspring on average. Sows nurse their offspring for three weeks
before they are returned to the breeding barn. At approximately 12 to 15 pounds,
the offspring are moved to the nursery for a six-to-seven week period. This step
requires high levels of nutrition, environmental control and minimization of
disease and health risks. A growing portion of our operations use the
wean-to-finish production method where nursery pigs are transported directly to
a modified grow/finish site, skipping the traditional time spent in a nursery.
In the next phase of production, offspring are transferred in our sanitized
trailers to our grow/finish complexes or contract growers for growth from
approximately 50 pounds to a target market weight of 260 pounds. Our grow/finish
complexes are comprised of temperature-controlled barns, each housing 950 to
1,150 hogs. A manager in charge of the complex is responsible for monitoring hog
welfare and health, as well as equipment. Efficiency in finishing operations is
affected by the health and environment of the hogs and the formulation of the
feed. These factors, as well as the genetics of the hog, can have a substantial
impact on the feed-to-gain conversion ratio (the pounds of feed required to add
a pound of weight) and the average daily gain. Specialized crews support the
complex managers by assisting with loading and unloading hogs, health care, and
sanitation. Hogs generally remain at the grow/finish complexes for 18 to 19
weeks, gaining an average of 1.7 pounds per day, until they reach market weight
and are transported to a processing facility.
Because diet is a critical factor in the efficient production of hogs and
affects the quality of the final products, where possible we have established
our own feed mills. Our Missouri and Texas pods are located in areas with access
to substantial corn and other feed grain production in excess of local demand.
As a result, we can typically access feed grains on a cost-effective basis and
manufacture and deliver feed to our facilities at a lower cost than we can buy
it from commercial feed mills. In North Carolina, where we rely to some extent
on commercial feed mills, we have established toll milling arrangements with
select mills. Due to excess milling capacity in North Carolina, we are generally
able to purchase feed from these
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vendors on terms that help us remain a low cost producer. Our feed mills and
toll milling arrangements allow us to optimize production of our customized
diets to a greater degree than would typical arrangements with third-party feed
mills, which operate on a cost plus basis and provide feeds for many types of
customers and animals. We achieve this through "least cost" formulations based
on available feed ingredients. For example, while corn is the primary ingredient
in hog feed, a large number of other grains, proteins, fats and supplements may
be added, and the content and mix of feed ingredients can be managed to improve
nutrition, feed-to-gain ratios and meat quality. We have five feed mills in
operation aggregating approximately 1.4 million tons of annual capacity.
BIOSECURITY
We seek to reduce the risk of disease transmission through a number of
methods, including geographic separation of, and restricted access to,
production facilities, strict sanitation procedures, high health genetic stock
and constant monitoring and response. All units are restricted access, "shower
in/ shower out" facilities. If it is necessary for a manager or worker to enter
a unit other than their designated unit, a mandatory 24 to 96-hour layover
period is required. Feed purity and truck cleanliness are inspected and
monitored. Operating procedures within the facilities are designed to stop the
spread and lessen the viability of infection agents during all phases of the
production process.
The impact of disease is also controlled through the selection of healthy,
disease-resistant sows and through breeding procedures that help pass along
antibodies to the sow's offspring. When disease is found, treatment is
implemented to lessen its impact on the health-challenged hogs and to prevent
its spread to other facilities. For additional information on the risks
associated with disease, see "Risk Factors."
PORK PROCESSING
We maintain pork processing facilities in Missouri and North Carolina. All
of the hogs used by our Milan, Missouri processing plant come from our Missouri
and Texas hog production operations. During fiscal 2001, since our North
Carolina acquisitions, approximately 61% of hogs used by our Clinton, North
Carolina processing plant were supplied by our North Carolina hog production
operations, with the remaining 39% supplied through contracts with independent
producers. During our quarter ended June 30, 2001, approximately 67% of hogs
used by our North Carolina processing plant were supplied by our North Carolina
hog productions operations, with the remaining 33% supplied on a contract basis.
To ensure the safety and quality of our products, we use the USDA's Hazard
Analysis of Critical Control Points methodology to identify food safety hazards
in our operations. This approach uses a team of technically trained individuals
who are familiar with the processes to be evaluated. Each separate point in the
process is identified and any hazards associated with them are assessed. Methods
for monitoring the quality and safety of products as they move through these
points are then developed and implemented.
The design of the quality management points provide the basis for our
Process Verified Program. In November of 1998, we became the first company in
the pork industry to receive approval for this program from the
USDA-Agricultural Marketing Service. This approval gave accreditation to the
only program which extends from live animal production through processing. While
other pork companies have since received approval of their own Process Verified
programs, we believe ours is the most comprehensive, encompassing live animal
production through processing.
Process Verified is based on ISO-9000 requirements that are adapted for the
livestock industry, and is administered by the USDA Agricultural Marketing
Service, Livestock and Seed Division. We have designated twelve process points
throughout our process to represent our program. These process points are
summarized as follows:
- Every order is traceable to source farms
- Every phase of production is managed using a food safety based control
system, including a strict residue avoidance program where sulfa
antibiotics are not used
- Market hogs are fed a precise grain-based diet from process-controlled
feed mills
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- Quality traits, processing hygiene and environmental systems are
continuously evaluated and improved
- Employee safety and training programs are emphasized and continuously
improved
Our automated processing operations have been designed to achieve the
benefits of vertical integration that are not available to non-integrated hog
producing or pork processing competitors. Some of these benefits are as follows:
- We capture more value from our hogs through processing rather than
passing this value on to other processors
- We streamline logistics, transportation and production schedules to
enhance asset utilization and reduce our cost structure because of the
proximity and integrated management of production and processing
operations
- We improve the realizable value of our hogs through our control over the
key factors (genetics, nutrition and environment) that affect the
leanness and meat quality of each hog
- We believe we provide a higher level of quality and safety assurance to
our customers because of our control of both production and processing
We believe that by controlling our own high quality, consistent hog supply,
we can be among the more efficient processors in the industry and produce a
consistent high-quality product whose value will be recognized in the market.
The design of our Milan, Missouri processing facility reflects four key
objectives:
- Modern equipment and proven technology has been used to build one of the
highest quality facilities in the industry
- The facility design emphasizes worker safety to ensure compliance with
all regulations and to reduce worker injury and turnover
- The facility is designed to produce a product that is appealing to
further processors and consumers and will be brandable. It employs
identification and tracking technology to ensure quality control for the
final pork product
- The facility is designed to reduce waste products and emissions and
dispose of waste in accordance with applicable environmental standards
We are renovating and modernizing our recently acquired North Carolina
plant to meet these objectives, based on the Milan facility. If and when we add
a processing plant to our Texas facilities, that plant will be based on the
model of our Milan facility as well.
MISSOURI
Our Missouri pod has both production and processing operations. The
Missouri production operation, based at Princeton, employs approximately 1,300
people. An 111,000-sow herd produces approximately 2.1 million market hogs per
year. Eighty-two sow units, five nursery units and ninety-one finishing units
are located on farms in Mercer, Putnam, Sullivan, Davies and Gentry counties. In
fiscal 2002, we expect to contract finish approximately 78,000 hogs through
agreements with local farmers. We also have certain grower relationships with
ContiGroup. See "Related Party Transactions."
The Missouri processing facility is located at Milan and employs over 900
people processing 7,100 hogs daily (on an eight hour shift) or about 1.9 million
hogs per year. To ensure the safety and quality of our products, the processing
facility incorporates several innovative systems, including a carbon dioxide
anesthetizing system, which we believe was the first carbon dioxide system of
its kind in use in the United States. This facility also has a large hog holding
area that provides at least four hours of rest to hogs upon arrival. The result
is a less stressful environment for the hogs, which results in better meat
quality.
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NORTH CAROLINA
Our North Carolina pod has both production and processing operations. The
North Carolina production operation, based at Clinton, employs approximately 250
people. A 64,000-sow herd produces approximately 1.4 million market hogs per
year. Nine sow units, three nursery units and four finishing units are located
on farms in various counties throughout the state. Most of the production
operations in North Carolina are conducted on farms that are not owned by us.
Instead, we have contract grower agreements with local farmers who provide the
land, space and labor needed. The hogs themselves are owned by us, are raised
according to our specifications using our genetics, feed and supplies, and are
delivered to our Clinton facility. Since these arrangements allow us to control
the process, from a hog's initial genetic makeup to the pork product ultimately
produced and shipped, we consider them to be a part of our integrated operations
notwithstanding the fact that we do not own the farms themselves.
The North Carolina processing facility is located at Clinton and employs
over 1,200 people processing 6,500 hogs daily (on an eight hour shift) or about
1.8 million hogs per year. When construction and renovation are completed at
this recently acquired facility, we believe the plant will be the most advanced
facility of its kind. To obtain the approximately 700,000 hogs annually used by
the facility that are not supplied by our production operations, we have
established supply arrangements with several external hog suppliers. We are
currently renovating and modernizing the North Carolina facility and, as part of
these efforts, we intend to improve our North Carolina operations in a manner
that will allow us to produce and market premium products from that facility
similar to those produced by our Milan, Missouri plant.
TEXAS
Our Texas pod currently only has production operations. These operations
are headquartered at Dalhart, Texas and employ approximately 280 people. A
24,000-sow herd produces approximately 392,000 market hogs per year.
Twenty-three sow units, six nursery units and eight finishing units are located
on farms in Dallam and Hartley counties. No contract finishing is used in the
Texas pod's production. A small portion of the hogs produced in Texas are
transported to our Milan, Missouri processing facility. The vast majority are
sold under a long-term contract we have with a major processor and further
processor, along with other processors, in the area.
We intend to further expand hog production at our Texas facilities. The
expansion now underway consists of the addition of a new 10,000 sow
farrow-to-finish operation that we expect will produce approximately 200,000 new
hogs per year beginning in fiscal year 2003. We believe additional expansion
opportunities exist in Texas as well. Our Texas production facilities are
located on approximately 54,000 acres with adequate space and all environmental
and land use permits required for further expansion in a manner that will
replicate our Missouri hog production facilities.
RESEARCH AND DEVELOPMENT
We use an applied research strategy which allows rapid and early
implementation of technologies in production, nutrition and processing. This
effort is driven by our technical team, many of whom have advanced degrees in
nutrition, meat science, reproductive physiology and health assurance. This
group also uses an extensive network of outside scientists and other contacts to
enable us to use the latest technology.
We constantly seek to improve the genetics of our production herds and to
produce hogs that are the highest quality commercially available. Our female
breeding stock is purchased from the world's largest hog genetics firm, which
employs extensive research efforts in molecular genetics, biosecurity, food
safety and meat quality. We also have an internal "multiplier" herd, which is
continually improved through the purchase of enhanced genetics and provides an
internal source of a majority of our sows at a substantially reduced cost, and
with greater control.
In addition, we have an agreement for the exclusive use in the United
States of selected male genetic lines of a leading European hog genetics firm.
We routinely evaluate other genotypes to validate and compare them to existing
products. In addition, we conduct intense research trials to further develop
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existing genotypes to meet economic and customer demands for composition and
quality. These arrangements enhance the quality of our genetics and diversify
our genetic sources. We also incorporate careful computer-based monitoring of
the breeding performance of all our breedstock to improve breeding patterns and
remove sub-optimal parents from the herd. These operations are conducted at our
Missouri, Texas and North Carolina genetic improvement facilities.
We also have been a leader in the implementation of new technologies at our
processing facilities. For example, we believe that we were the first U.S.
company to introduce the use of European-designed carbon dioxide anesthesia
systems in pork processing to reduce livestock agitation and increase meat
quality. Specially designed trucks and holding areas also enhance the welfare
and handling of our hogs. In addition, we use extreme chilling technologies to
improve product quality traits like color and texture.
We also are in the second year of a five-year, $25 million, research
program to develop improved waste processing methods and technologies. See
"Litigation."
COMPETITION
The pork industry is highly competitive and we compete with many other pork
processors and hog producers of varying sizes. Our products also compete with a
large number of other protein sources, including beef, chicken, turkey and
seafood. However, our principal competition comes from other large pork
processors. We believe that the principal areas of competition in the pork
industry are price, quality, product distribution and brand loyalty. Some of our
competitors are larger, have correspondingly greater financial and other
resources and enjoy wider recognition for their branded products.
INTELLECTUAL PROPERTY
We hold several trademark and other intellectual property rights. For
example, we have registered the names "Premium Standard Farms," "Premium
Standard Certified," "Fresh from the Farm Taste," "Carolinian," "Lundy's,"
"Tomahawk Farms" and "Gold Banner" with the United States Patent and Trademark
Office. We have also registered "Premium Standard Farms" in some of the foreign
countries to which we sell our products. In addition to trademark protection, we
attempt to protect our unregistered marks and other proprietary information
under trade secret laws, employee and third-party non-disclosure agreements and
other laws and methods of protection. We have also applied with the United
States Patent and Trademark Office for a patent with respect to an animal waste
management system designed for some of our production facilities. That
application is pending.
EMPLOYEES
We have approximately 4,000 employees, of which approximately 2,000 are in
processing, approximately 1,800 are in production and approximately 200 are in
administration. None of our employees are subject to collective bargaining
arrangements, although there can be no assurance that employees will not enter
into such agreements in the future. See "Risk Factors." We generally consider
our employee relations to be good.
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PROPERTIES
We conduct our hog production operations in Missouri, North Carolina and
Texas and our hog processing operations in Missouri and North Carolina. We
believe our facilities are in good condition and adequate to meet our present
needs. Substantially all of our properties are pledged as security for our
obligations under our Credit Agreement. Our principal facilities are located as
follows:
<Table>
<Caption>
NUMBER
LOCATION AND FUNCTION SIZE OR OUTPUT OF FACILITIES
- ------------------------------------------------------------ -------------------- -------------
Missouri:
Sow Units................................................. 1,100 head units 74
2,500 head units 8
Nursery Units............................................. 16,640 head units 2
11,800 head units 1
9,000 head units 1
20,800 head units 1
Finishing Units........................................... 9,200 head units 87
4,200 head units 2
7,700 head units 1
6,900 head units 1
Processing Facility (Milan)............................... 260,000 square feet 1
Genetic Improvement....................................... 780 head units 1
Maintenance Support Facilities............................ 100,000 square feet
Truck Maintenance (Milan)................................. 22,000 square feet
Truck Maintenance (Coffey)................................ 8,700 square feet
Truck Maintenance (Princeton)............................. 42,000 square feet
Feed Mill (Princeton)..................................... 180,000 tons/year
Feed Mill (Coffey)........................................ 180,000 tons/year
Feed Mill (Lucerne)....................................... 600,000 tons/year
Training Facility......................................... 28,500 square feet
Headquarters Office....................................... 12,400 square feet
Gallatin Office........................................... 4,000 square feet
Missouri Production Office (Princeton).................... 38,120 square feet
Developed Land............................................ 45,000 acres*
North Carolina:
Sow Units................................................. 3,400 head units 2
2,400 head units 2
2,000 head unit 1
1,700 head unit 1
1,200 head units 2
Nursery Units............................................. 10,400 head unit** 1
2,940 head unit 1
Finishing Units........................................... 7,920 head unit 1
12,960 head unit** 1
4,320 head unit 1
Feed Mill................................................. 224,000 tons/year 1
Rail Unloading............................................ 200,000 tons/year 1
Production Office and Med Storage (Clinton)............... 11,000 square feet
Truck Maintenance (Tarboro)............................... 10,615 square feet
Developed Land (production)............................... 295 acres
</Table>
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<Table>
<Caption>
NUMBER
LOCATION AND FUNCTION SIZE OR OUTPUT OF FACILITIES
- ------------------------------------------------------------ -------------------- -------------
Developed Land (processing)............................... 105 acres
Undeveloped Land.......................................... 873 acres
Lundy Packing Plant....................................... 601,000 square feet
Lundy construction-in-progress............................ 113,300 square feet 1
Boneless Ham Plant........................................ 32,000 square feet 1
Tomahawk Farms Plant...................................... 47,000 square feet 1
Georgia
Sow Units................................................. 600 head unit 1
Nursery Units............................................. 2,450 head unit 1
Finishing Units........................................... 3,200 head unit 1
Developed Land............................................ 138 acres
Texas:
Sow Units................................................. 1,375 head units 12
2,000 head unit 1
1,100 head units 9
3,300 head unit 1
Nursery Units............................................. 14,000 head units 4
1,500 head unit 1
10,500 head unit 1
Finishing Units........................................... 20,400 head units 5
13,600 head unit 1
4,500 head unit 1
23,800 head unit 1
Wean to Finish Units (under construction)................. 2,088 head units 52
Genetic Improvement....................................... 350 head unit 1
Feed Mill................................................. 180,000 tons/year
Office.................................................... 5,000 square feet
Maintenance Shop (Perico)................................. 8,000 square feet
Maintenance Shop (HP)....................................... 11,400 square feet
LRM Shop.................................................... 12,000 square feet
Transportation Shop......................................... 10,000 square feet
Warehouse (HP, 7 Barns)..................................... 92,600 square feet
Developed Land.............................................. 14,000 acres
Partially Developed Land.................................... 40,000 acres
</Table>
- ---------------
* Of these 45,000 acres, approximately 7,200 acres are owned by ContiGroup but
the facilities located thereon are owned by us. See "Related Party
Transactions."
** Capital lease facilities.
REGULATION
Various federal, state and local laws and regulations apply to our
operations, particularly in the health and environmental areas administered by
the Occupational Safety and Health Administration (OSHA), the United States
Department of Agriculture (USDA), the Food and Drug Administration (FDA), the
federal Environmental Protection Agency (EPA) and corresponding state agencies
such as the Missouri Department of Natural Resources (MDNR), the Texas Natural
Resource Conservation Commission and the North Carolina Department of
Environment and Natural Resources. We anticipate increased
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regulation by these agencies, including the USDA concerning food safety and the
FDA regarding the use of medication in feed.
Current environmental regulations impose standards and limitations on,
among other things, our waste treatment lagoons, water treatment facilities and
new construction projects. Animal waste from our hog production facilities is
anaerobically digested and the resulting fluids are then applied to surrounding
farm land. This process uses lagoons in Missouri and North Carolina and solid
separators and aeration tanks in Texas.
In North Carolina, the use of waste treatment lagoons and spray fields for
the disposal of swine waste has recently become highly controversial. Certain
areas of that state are prone to flooding, as well as exposed to hurricanes from
time to time. Due in part to damage caused to waste lagoons by recent
hurricanes, the state has issued a moratorium on construction of new hog lagoons
and spray fields. It is anticipated that this moratorium will be extended until
such time as more effective technologies are developed to protect the
environment.
On September 29, 2000, we voluntarily entered into an agreement with the
Attorney General of North Carolina. Under this agreement, we committed to
implement "Environmentally Superior Technologies" for the management of swine
waste at our farms within three years after an independent panel has determined
that such technologies are both effective and economically feasible to construct
and operate. "Environmentally Superior Technologies" are generally identified as
waste treatment technologies that meet certain performance standards with
respect to release of materials into the environment. In addition, under the
agreement, we were required to pay $2.5 million to a fund for the development of
such technologies, for environmental enhancement activities and for the defrayal
of costs incurred by the state related thereto. We have met all of our
commitments to date under this agreement and continue to work closely with the
state's designated representative at North Carolina State University in the
development of "Environmentally Superior Technologies." See also "Litigation."
Our North Carolina processing plant has been under scrutiny from the USDA.
During the due diligence process for the acquisition of that plant, we noted
that the plant had a high number of USDA-FSIS Non-Compliance Reports. Since the
acquisition, we have outsourced plant sanitation and pest control functions to
recognized professional service companies. We have also begun the process of
physically renovating the plant to address food safety issues, as well as to
make the plant an efficient modern facility. We believe we have established a
proactive relationship with local USDA personnel to provide an opportunity to
identify and improve plant facility issues which had previously been the primary
source of Non-Compliance Reports. In addition, we have reviewed and revised all
regulatory programs in place for those facilities. As a result, there has
already been a significant reduction in Non-Compliance Reports at the plant
since the acquisition.
Based on information currently available, we believe that the cost of
achieving and maintaining compliance with these health and environmental laws
and regulations will not have a material adverse effect on our business or
financial position. However, future events, such as changes in existing laws and
regulations or enforcement policies, could give rise to additional compliance
costs which could have a material adverse effect on our financial condition.
Several states have enacted "corporate farming laws" that restrict the
ability of corporations to engage in farming activities. Missouri is among these
states, but Texas and North Carolina currently are not. Missouri's corporate
farming law in many cases bars corporations from owning agricultural land and
engaging in farming activities. Our operations have been structured to comply
with the Missouri corporate farming law and its existing exemptions. The
Missouri laws, however, could be subject to challenge or amendment by Missouri
governmental bodies in the future. Further, even with the exemptions, the
corporate farming laws restrict our ability to expand beyond the counties in
which we currently operate.
At the time of ContiGroup's acquisition of its interest in us in 1998,
ContiGroup submitted the proposed ownership structure to the Office of the
Attorney General of the State of Missouri for its review. At that time, the
Office of the Attorney General indicated that it had no objection to our current
structure
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under the corporate farming laws. There can be no assurance, however, that this
position will be maintained in the future as our operations continue and
develop.
LITIGATION
We are a defendant in a citizen's action suit seeking to enforce alleged
violations of the Clean Air Act, Clean Water Act and CERCLA. The same plaintiff
has filed a parallel action against ContiGroup with respect to North Missouri
farms. To the extent that ContiGroup incurs any liability in this suit, we have
assumed that liability pursuant to the terms of our 1998 ContiGroup transaction.
The plaintiffs are seeking injunctive relief, civil penalties and attorneys'
fees. The federal Environmental Protection Agency has also intervened in the
case. We believe we have meritorious defenses, and are defending the action.
We have settled a suit filed by the Attorney General of the State of
Missouri against our company and ContiGroup. 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 judgement pursuant
to which we are obligated to spend $25 million over the course of five years for
researching, installing and operating improved technology to control wastewater,
air and odor emissions from our Missouri farms. We are currently in the third
year of that five year period and have spent $6.7 million to satisfy the
settlement. In addition, pursuant to the consent judgment our company and
ContiGroup were issued a $1 million civil penalty. Of this, $650,000 has been
paid and $350,000 is suspended pending certain conditions.
We were a successor to a nuisance suit brought by neighbors of our northern
Missouri pork operations in which ContiGroup was the defendant. On April 30,
1999, based upon allegations that odors from our operations interfered with the
plaintiffs' use and enjoyment of their properties, the jury returned a verdict
in favor of 52 of the 109 plaintiffs in the amount of $100,000 each for a total
of $5.2 million. ContiGroup appealed the verdict and on May 3, 2001, we
satisfied the judgment.
We have received notices of violation from the federal Environmental
Protection Agency alleging violations of permitting and reporting requirements
under the Clean Air Act that are separate from the agency's intervention in the
citizen's suit discussed above. In addition, separate from the suit discussed
above, we have received notices of violations from the Attorney General of the
State of Missouri alleging releases of wastewater. We have responded to these
notices in an effort to resolve these matters. If we do not successfully resolve
these matters we may be required to obtain additional permits and expend capital
resources to comply with those permits and we may also be subject to fines. We
may receive similar notices in the future.
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.
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MANAGEMENT
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and officers of Premium Standard Farms, PSF Group Holdings, The Lundy Packing
Company, Lundy International, Inc. and Premium Standard Farms of North Carolina,
Inc.:
<Table>
<Caption>
NAME AGE POSITION(S)
- ---- --- -----------
John M. Meyer.................. 39 Chief Executive Officer and Director of Premium
Standard Farms, PSF Group Holdings, The Lundy Packing
Company, Lundy International, Inc., and Premium
Standard Farms of North Carolina, Inc.
Robert W. Manly................ 48 President of Premium Standard Farms and PSF Group
Holdings, President and Director of The Lundy Packing
Company, Lundy International, Inc., and Premium
Standard Farms of North Carolina, Inc.
Stephen A. Lightstone.......... 55 Executive Vice President, Chief Financial Officer and
Treasurer of Premium Standard Farms and PSF Group
Holdings; Executive Vice President, Chief Financial
Officer and Treasurer and Director of The Lundy Packing
Company, Lundy International, Inc., and Premium
Standard Farms of North Carolina, Inc.
J. Michael Townsley............ 41 Senior Vice President, Sales and Marketing of Premium
Standard Farms, The Lundy Packing Company, Lundy
International, Inc., and Premium Standard Farms of
North Carolina, Inc.
David H. James................. 46 Vice President, Production Operations of Premium
Standard Farms, The Lundy Packing Company, Lundy
International, Inc., and Premium Standard Farms of
North Carolina, Inc.
Gerard J. Schulte.............. 51 General Counsel and Secretary of Premium Standard
Farms, PSF Group Holdings, The Lundy Packing Company,
Lundy International, Inc., and Premium Standard Farms
of North Carolina, Inc.
Dennis D. Rippe................ 47 Vice President, Controller and Assistant Secretary of
Premium Standard Farms, PSF Group Holdings, The Lundy
Packing Company, Lundy International, Inc. and Premium
Standard Farms of North Carolina, Inc.
Michael J. Zimmerman........... 50 Chairman of the Board and Director of Premium Standard
Farms and PSF Group Holdings
Ronald E. Justice.............. 56 Director of Premium Standard Farms and PSF Group
Holdings
Dean Mefford................... 60 Director of Premium Standard Farms and PSF Group
Holdings
Mark R. Baker.................. 46 Director of Premium Standard Farms and PSF Group
Holdings
Maurice L. McGill.............. 64 Director of Premium Standard Farms and PSF Group
Holdings
Michael A. Petrick............. 39 Director of Premium Standard Farms and PSF Group
Holdings
Paul J. Fribourg............... 47 Director of Premium Standard Farms and PSF Group
Holdings
Vart K. Adjemian............... 58 Director of Premium Standard Farms and PSF Group
Holdings
John Rakestraw................. 40 Director of Premium Standard Farms
Annabelle Lundy Fetterman...... 80 Director of Premium Standard Farms
</Table>
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John M. Meyer has been a Director and the Chief Executive Officer of
Premium Standard Farms and PSF Group Holdings since May 1998 and a Director and
Chief Executive Officer of The Lundy Packing Company, Lundy International, Inc.
and Premium Standard Farms of North Carolina, Inc., since 2000. Prior to May
1998, he spent 15 years with ContiGroup Companies, most recently as Vice
President and General Manager of ContiGroup's pork division. While with
ContiGroup, Mr. Meyer served in the sales, credit and financial services
functions.
Robert W. Manly has been President of Premium Standard Farms since October
1996. He has been President of PSF Group Holdings since May 1998 and President
and a Director of The Lundy Packing Company, Lundy International, Inc. and
Premium Standard Farms of North Carolina, Inc., since 2000. From April 1986 to
October 1996, Mr. Manly served as Executive Vice President of Smithfield Foods,
Inc. He also served as President and Chief Operating Officer of the Smithfield
Packing Company subsidiary from June 1994 to June 1995. Mr. Manly held the
position of Assistant to the President of IBP, Inc. from January 1981 to April
1986.
Stephen A. Lightstone has been Executive Vice President, Chief Financial
Officer and Treasurer of Premium Standard Farms and PSF Group Holdings since
August 1998 and Vice President, Chief Financial Officer and Treasurer and a
Director of The Lundy Packing Company, Lundy International, Inc. and Premium
Standard Farms of North Carolina, Inc., since 2000. From 1983 to 1998, Mr.
Lightstone was with Payless Cashways, Inc., a building materials retailer, most
recently serving as Senior Vice President, Chief Financial Officer and
Treasurer. Mr. Lightstone was an officer of Payless Cashways, Inc. when it filed
for Chapter 11 bankruptcy in 1997. From 1978 to 1983, Mr. Lightstone was Vice
President -- Finance and Treasurer with Butler Manufacturing Company, a
manufacturer of engineered buildings and construction materials.
J. Michael Townsley has been Senior Vice President, Sales and Marketing of
Premium Standard Farms since April 1997. He has held these same positions at The
Lundy Packing Company, Lundy International, Inc. and Premium Standard Farms of
North Carolina, Inc. since 2000. From 1994 to 1997, Mr. Townsley served as Vice
President Sales and Marketing, Fresh Meat with Smithfield Packing Company, Inc.
Prior to that time, Mr. Townsley spent 11 years with IBP, Inc. in various sales
positions and concluded his career with IBP as Director of Merchandising, Pork
Division.
David H. James is Vice President of Operations of Premium Standard Farms,
The Lundy Packing Company, Lundy International, Inc. and Premium Standard Farms
of North Carolina, Inc., having served in this capacity for Missouri since April
1999, adding North Carolina in August 2000, and adding Texas in March 2001. He
is responsible for all of Premium Standard Farms' hog production. From June 1992
to July 1998, Mr. James served as Regional Manager for the 25,000-sow North
Carolina operation for ContiGroup Companies at which time he joined our Missouri
hog production operations team.
Gerard J. Schulte has been General Counsel and Secretary of Premium
Standard Farms and PSF Group Holdings since July 1998 and of The Lundy Packing
Company, Lundy International, Inc. and Premium Standard Farms of North Carolina,
Inc. since 2000. Mr. Schulte has been Vice President and General Counsel of
ContiIndustries, an operating group of ContiGroup Companies, since 1990.
Dennis D. Rippe has been Vice President, Controller and Assistant Secretary
of Premium Standard Farms since January 1999 and of The Lundy Packing Company,
Lundy International, Inc. and Premium Standard Farms of North Carolina, Inc.
since 2000. Prior to that date, Mr. Rippe had been Vice President Finance and
Administration-Operations (Missouri) of Premium Standard Farms since February
1997. From May 1995 to February 1997, Mr. Rippe was Vice President and
Controller of Premium Standard Farms and was an officer of the company when it
filed for Chapter 11 bankruptcy in 1996.
Michael J. Zimmerman has been Chairman of the Board of Directors of Premium
Standard Farms and PSF Group Holdings since May 1998. Mr. Zimmerman has been
Executive Vice President and Chief Financial Officer of ContiGroup Companies
since 1999. From 1996 to 1999, he served as Senior Vice President -- Investments
and Strategy of ContiGroup Companies and President of its ContiInvestments
subsidiary. Prior to joining ContiGroup in 1996, he was a Managing Director of
Salomon Brothers.
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Ronald E. Justice has been a Director of Premium Standard Farms since
September 1996. He has been a Director of PSF Group Holdings since May 1998.
Prior to his retirement in April 2000, Mr. Justice served as Executive Vice
President of Operations of Consolidated Container Company since September 1998.
Mr. Justice was the Senior Vice President of Operations of Scotts Co. from July
1995 to September 1998 and from August 1992 to July 1995, Mr. Justice was the
Corporate Vice President of Operations at Continental Baking.
Dean Mefford has been a Director of Premium Standard Farms since September
1996. He has been a Director of PSF Group Holdings since May 1998. From January
1999 to February 2001, he served as Chairman of the Board of Doubletime
Corporation and from October 1999 to May 2000 he served as the Interim President
of Ocean Spray Corp. Mr. Mefford served as President and Chief Executive Officer
of Viskase Corporation, a manufacturer of flexible packaging and meat casings,
from 1994 to 1998, and as Corporate Vice President, President, and Chief
Operating Officer of Ralston Purina International from 1988 to 1993.
Mark R. Baker has been a Director of Premium Standard Farms and PSF Group
Holdings since May 1998. Mr. Baker has been Executive Vice President, Chief
Legal Officer and Secretary of ContiGroup Companies since 1999, and from 1998 to
1999, he served as Corporate Senior Vice President, Chief Legal Officer and
Secretary. Prior to joining ContiGroup, Mr. Baker was a partner in the New York
law firm of Dewey Ballantine LLP.
Maurice L. McGill has been a Director of Premium Standard Farms since
September 1996. He has been a Director of PSF Group Holdings since May 1998. Mr.
McGill has served as the President of Wirmac Corp. since 1986 and as a general
partner of McGill Partners since 1989. Mr. McGill has also served as a director
of Bluebonnet Savings Bank since 1990 and Sitek, Inc., now Prodeo Technologies,
Inc., since 1998.
Michael A. Petrick has been a Director of Premium Standard Farms and PSF
Group Holdings since May 1998. He is a Managing Director of Morgan Stanley & Co.
Incorporated, and has been with Morgan Stanley since 1989. Mr. Petrick also
serves as a Director of CHI Energy, Inc., Marvel Enterprises, Inc., TVN
Entertainment Corporation and EarthWatch Incorporated.
Paul J. Fribourg has been a Director of Premium Standard Farms and PSF
Group Holdings since May 1998. He has served as Chairman, President and Chief
Executive Officer of ContiGroup Companies since 1999. From 1997 to 1999, he
served as Chairman, President and Chief Executive Officer of Continental Grain
and, from 1996 to 1997, he served as Chief Operating Officer of Continental
Grain.
Vart K. Adjemian has been a Director of Premium Standard Farms and PSF
Group Holdings since September 1999. Mr. Adjemian has been Executive Vice
President and Chief Operating Officer of ContiGroup Companies since February
2001. From 1999 to February 2001 he served as Executive Vice President of
ContiGroup and as Chief Executive Officer of the ContiIndustries, an operating
group of ContiGroup Companies. From 1998 to 1999, he was Senior Vice President
of ContiGroup Companies, and from 1996 to 1998, he was President of the
Commodity Marketing Group of ContiGroup Companies.
John Rakestraw has been a Director of Premium Standard Farms since February
2001. He had previously served as director of Premium Standard Farms and PSF
Group Holdings between May 1998 and October 1999. Mr. Rakestraw has been
President and Chief Executive Officer of ContiBeef, LLC since 2000 and served as
Vice President and General Manager of the Cattle Feeding Division of ContiGroup
Companies from 1995 to 2000.
Annabelle Lundy Fetterman has been a Director of Premium Standard Farms
since August 2000. From 1985 to August 2000, she served as Chairman of the Board
and Chief Executive Officer of The Lundy Packing Company and was employed by
that company from its inception in 1950.
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COMPENSATION OF DIRECTORS
Premium Standard Farms has agreed to pay each person who is a member of the
Board of Directors $1,000 per meeting, plus reimbursement of reasonable
out-of-pocket expenses incurred in connection with the performance of duties as
a Director. In addition, each director who is not affiliated with ContiGroup
Companies or Morgan Stanley receives $20,000 per year in exchange for his or her
services. Members of the Audit and Compensation Committees of Premium Standard
Farms receive an additional $1,000 per meeting.
Directors of PSF Group Holdings, The Lundy Packing Company, Lundy
International, Inc., and Premium Standard Farms of North Carolina, Inc. receive
no separate compensation for service on those companies' Boards of Directors.
PSF Group Holdings has adopted an Equity Incentive Plan that permits
options, stock appreciation rights, restricted stock, performance units and
performance shares to be granted to the employees, non-employee directors and
consultants of PSF Group Holdings and its affiliates (including Premium Standard
Farms). As of the date of this prospectus, there have been no grants to
non-employee directors of Premium Standard Farms or its affiliates under the
Equity Incentive Plan.
COMMITTEES OF THE BOARD OF DIRECTORS
The Boards of Directors of PSF Group Holdings, The Lundy Packing Company,
Lundy International, Inc., and Premium Standard Farms of North Carolina, Inc.
have not established any committees. The Board of Directors of Premium Standard
Farms has established two committees: a Compensation Committee and an Audit
Committee. Each such committee has two or more members, who serve at the
pleasure of the Board of Directors.
The Compensation Committee is responsible for reviewing and making
recommendations to the Board of Directors with respect to compensation of
executive officers, other compensation matters and awards under the Equity
Incentive Plan. Currently, Messrs. Zimmerman, Fribourg and Mefford serve on the
Compensation Committee.
The Audit Committee is responsible for reviewing our financial statements,
audit reports, internal financial controls and the services performed by Premium
Standard Farms' independent public accountants, and for making recommendations
with respect to those matters to the Board of Directors. Currently, Messrs.
Baker, Adjemian and McGill serve on the Audit Committee.
TERMS OF DIRECTORS AND OFFICERS
Directors of Premium Standard Farms are elected annually by PSF Group
Holdings, as sole stockholder, to hold office for one-year terms and until their
successors are duly elected and qualified. Directors of The Lundy Packing
Company, Lundy International, Inc., and Premium Standard Farms of North
Carolina, Inc. are elected annually by us, as sole shareholder, to hold office
for one-year terms and until their successors are duly elected and qualified.
Officers of Premium Standard Farms, The Lundy Packing Company, Lundy
International, Inc., and Premium Standard Farms of North Carolina, Inc. are
appointed by the companies' respective Boards of Directors and serve at the
pleasure of such Boards.
Directors of PSF Group Holdings are nominated and placed for election at
the annual meeting of members to hold office for a one-year term and until their
successors are duly elected and qualified. There are two classes of Directors.
Four Class A Directors are elected by holders of Class A Common Stock voting as
a separate class. Messrs. Justice, McGill, Mefford and Petrick are the current
Class A Directors. Five Class B Directors are elected by holders of Class B
Common Stock voting as a separate class. Messrs. Baker, Fribourg, Meyer,
Adjemian and Zimmerman are the current Class B Directors.
Officers of PSF Group Holdings are appointed by, and serve at the pleasure
of, the Board of Directors of PSF Group Holdings.
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EXECUTIVE COMPENSATION
The following summary compensation table summarizes compensation
information with respect to the Chief Executive Officer and the four other most
highly compensated executive officers of Premium Standard Farms and its
affiliates for its fiscal year 2001 ended March 31, 2001.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG-TERM COMPENSATION
-----------------------
ANNUAL NUMBER OF
COMPENSATION SECURITIES LONG-TERM
FISCAL ---------------------- UNDERLYING INCENTIVE ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(1) PAYOUTS($) COMPENSATION($)
- ----------------------------- ------ ---------- --------- ---------- ---------- ---------------
John M. Meyer................ 2001 $283,269 $340,600 2,142.86 $471,260 $7,565(2)
Chief Executive Officer
Robert W. Manly.............. 2001 265,385 311,000 1,714.29 428,130 7,517(3)
President
Stephen A. Lightstone........ 2001 245,769 259,000 1,571.43 373,090 7,464(4)
Executive Vice President,
Chief Financial Officer and
Treasurer
J. Michael Townsley.......... 2001 166,916 123,010 571.43 204,820 7,251(5)
Senior Vice President,
Sales and Marketing
David H. James............... 2001 165,289 130,020 571.43 209,820 7,246(6)
Vice President,
Production Operations
</Table>
- ---------------
(1) Options to acquire shares of Class B Common Stock of PSF Group Holdings.
(2) Consists of employer contributions to the 401(k) plan for calendar year 2000
of $6,800 and premiums for group-term life and accidental death and
dismemberment insurance for fiscal year 2001 of $765.
(3) Consists of employer contributions to the 401(k) plan for calendar year 2000
of $6,800 and premiums for group-term life and accidental death and
dismemberment insurance for fiscal year 2001 of $717.
(4) Consists of employer contributions to the 401(k) plan for calendar year 2000
of $6,800 and premiums for group-term life and accidental death and
dismemberment insurance for fiscal year 2001 of $664.
(5) Consists of employer contributions to the 401(k) plan for calendar year 2000
of $6,800 and premium for group-term life and accidental death and
dismemberment insurance for fiscal year 2001 of $451.
(6) Consists of employer contributions to the 401(k) plan for calendar year 2000
of $6,800 and premiums for group-term life and accidental death and
dismemberment insurance for fiscal year 2001 of $446.
The following table sets forth certain information with respect to options
to acquire PSF Group Holdings Class B Common Stock granted to each of the above
named executives during fiscal year 2001:
OPTION GRANTS DURING FISCAL YEAR 2001
<Table>
<Caption>
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN FISCAL EXPIRATION PRICE -----------------------
NAME GRANTED YEAR(2) DATE ($/SH)(3) 5%($) 10%($)
- ----------------------- ---------- ------------- ---------- --------- ---------- ----------
John M. Meyer.......... 2,142.86(1) 27.78% 12/31/05 $1,666.48 $1,118,969 $2,347,182
Robert W. Manly........ 1,714.29(1) 22.22 12/31/05 1,666.48 895,168 1,877,748
Stephen A.
Lightstone........... 1,571.43(1) 20.37 12/31/05 1,666.48 820,569 1,721,266
J. Michael Townsley.... 571.43(1) 7.41 12/31/05 1,666.48 298,389 625,916
David H. James......... 428.57(1) 5.56 12/31/05 1,666.48 223,791 469,434
142.86(4) 1.85 12/31/07 1,666.48 96,920 230,150
</Table>
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- ---------------
(1) Option grant was made on June 2, 2000, and 33% of the shares were vested at
grant, 33% of the shares vested on December 31, 2000, and the remaining
shares will vest on December 31, 2001.
(2) A total of 7,714.29 options were granted in fiscal year 2001.
(3) The exercise price is the value of the stock on the date of grant.
(4) Option grant was made on January 2, 2001, and 33% of the shares will vest on
December 31, 2001, an additional 33% of the shares will vest on December 31,
2002, and the remaining shares will vest on December 31, 2003.
None of the named executive officers exercised any options during fiscal
year 2001. The following table sets forth information regarding exercisable and
unexercisable options held as of March 31, 2001, by each of the named executive
officers:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
<Table>
<Caption>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS AT MARCH 31, 2001(1)
----------------------------
NAME EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------ ----------- -------------
John M. Meyer............................................... 1,414.29 728.57
Robert W. Manly............................................. 1,131.43 582.86
Stephen A. Lightstone....................................... 1,037.14 534.29
J. Michael Townsley......................................... 377.14 194.29
David H. James.............................................. 285.71 285.72
</Table>
- ---------------
(1) All options are options to acquire shares of Class B Common Stock of PSF
Group Holdings.
EQUITY INCENTIVE PLAN
PSF Group Holdings adopted its 1999 Equity Incentive Plan in April 2000.
The plan was established to attract, motivate and retain employees of that
company and its affiliates, including Premium Standard Farms, and to further the
growth and financial success of that company and its affiliates by aligning the
interests of participants with the interests of the company's stockholders.
The plan is administered by a committee of non-employee directors appointed
by the Board. The plan provides for awards in the form of stock options, stock
appreciation rights, restricted stock, performance units and performance shares,
as determined by the committee. All employees and non-employee directors, as
well as certain non-employee advisors and consultants, are eligible to receive
awards under the plan. A total of 15,000 shares of PSF Group Holdings Class A or
Class B Common Stock may be issued pursuant to the plan. Awards vest upon a
change in control of PSF Group Holdings, as defined in the plan.
Options granted under the 1999 Equity Incentive Plan may be either
incentive stock options or nonqualified stock options, as determined by the
committee. No participant can be granted options with respect to more than 3,000
shares in any fiscal year. The terms of any option will be determined by the
committee, but no stock option may be exercised later than 10 years after the
date of grant. The award agreement may provide that PSF Group Holdings has the
right to repurchase the stock if the grantee terminates employment.
The committee may also grant stock appreciation rights, restricted stock,
performance units, or performance shares to eligible individuals, from time to
time, in amounts as it may determine. Each stock appreciation right or
performance share relates to one share of PSF Group Holdings Class A or Class B
Common Stock. No participant can be granted stock appreciation rights covering
more than 3,000 shares in any fiscal year, and no participant can be awarded
more than 3,000 performance shares or restricted shares, or performance units
with an initial value of more than $500,000 in any fiscal year. The value of a
performance unit will be at the discretion of the committee.
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LONG-TERM INCENTIVE PLAN
During our three fiscal years ended March 31, 2001, a long-term incentive
plan was in place for key executives selected by the Compensation Committee.
Those generally eligible for the plan were senior managers with responsibility
for leadership and accountability for long term growth and earnings as
determined by the Compensation Committee. The plan included both a formula-based
incentive pool and a discretionary awards pool. Incentive pool awards were
determined at the plan's inception, and discretionary pool awards were
determined at the end of the performance period. Awards were made in cash.
Participants had the option to defer awards into the Deferred Compensation Plan
discussed below. The plan was administered by the Compensation Committee.
For the four year period commencing April 1, 2001, we established a second
long-term incentive plan. Those generally eligible for the plan are senior
managers with responsibility for leadership and accountability for long-term
growth and earnings as determined by the Compensation Committee. The plan
established both a formula-based incentive pool and a discretionary awards pool.
Incentive pool awards were determined at the plan's inception, and discretionary
pool awards will be determined at the end of the performance period. Awards will
be made in cash. Participants will have the option to defer awards into the
Deferred Compensation Plan discussed below. The plan will be administered by the
Compensation Committee.
DEFERRED COMPENSATION PLAN
The Deferred Compensation Plan for executives was adopted by our Board of
Directors in January 2001. Participation in the plan is restricted to a select
group of management and highly paid employees. Under this plan, participating
executives are allowed to defer payment of compensation awarded as long-term
incentive plan compensation until a date elected by the executive in accordance
with the plan. The plan generally allows payment in the form of a single lump
sum or ten substantially equal annual installments following the date of
payment. A.G. Edwards Trust Company acts as trustee for the plan, which is
administered by the Compensation Committee.
401(K) PLAN
Our 401(k) Plan is a qualified defined contribution plan. Employees may
elect to have contributed to their 401(k) Plan account up to 20% of their
salaries as of the first of the calendar month following 60 days of employment
with Premium Standard Farms. Premium Standard Farms makes matching contributions
of up to 4% of an employee's base pay. Employees may direct the investment of
their Premium Standard Farms' contributions among a group of investment options
selected by Premium Standard Farms.
SEVERANCE PLANS
In addition, we have established an Executive Level Severance Pay Plan
covering our executive employees, which can be terminated by our Board at any
time. The purposes of the Plan is to provide eligible employees with base
severance pay, supplemental severance pay and supplemental severance benefits
for a specified period of time in the event that their employment is
involuntarily terminated other than for good reason. Under the Plan dated
December 1, 1999, those persons serving as Chief Executive Officer, President
and Chief Financial Officer are entitled to receive the following benefits upon
termination of the employment:
- Base severance pay equal to two weeks pay
- Supplemental severance pay equal to fifty weeks of pay
- Continuation of health benefits coverage for fifty-two weeks following
termination.
Severance pay under the Plan is generally payable in a lump sum following
the date of termination. Supplemental severance pay and continuation of health
benefits, however, are conditioned upon the
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employee's execution of a general waiver and release agreement, and supplemental
severance pay will be paid only after execution of that agreement.
SPECIAL EXECUTIVE RETIREMENT PLAN
We have adopted a nonqualified, unfunded special executive retirement plan.
The following table shows the approximate annual retirement benefits that Mr.
Townsley and Mr. James are expected to receive based on their pay and years of
credited service. Mr. Meyer, Mr. Manly and Mr. Lightstone are expected to
receive approximately twice the annual retirement benefits shown below based on
their pay and years of credited service.
SPECIAL EXECUTIVE RETIREMENT PLAN TABLE
<Table>
<Caption>
YEARS OF SERVICE
----------------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------ -------- -------- -------- -------- --------
$125,000 $ 37,500 $ 50,000 $ 62,500 $ 75,000 $ 87,500
150,000 45,000 60,000 75,000 90,000 105,000
175,000 52,500 70,000 87,500 105,000 122,500
200,000 60,000 80,000 100,000 120,000 140,000
225,000 67,500 90,000 112,500 135,000 157,500
250,000 75,000 100,000 125,000 150,000 175,000
300,000 90,000 120,000 150,000 180,000 210,000
400,000 120,000 160,000 200,000 240,000 280,000
</Table>
The benefits in the above table are annual amounts payable in monthly
installments as single life annuities starting at age 62, the plan's normal
retirement age. Benefits are payable as an annuity or a lump sum. Benefits are
based on the executive's final three calendar years' base salary, including
amounts deferred to the 401(k) plan or cafeteria plan. An executive must
complete five years of service after January 1, 2000, to be entitled to a
benefit. Benefits vest upon a change in control of Premium Standard Farms.
Benefits shown above are offset by one-half of the Social Security benefits paid
or payable at age 62 attributable to years of service with us and by any
retirement benefits paid or payable under any ContiGroup qualified defined
benefit pension plan.
Credited service for benefit determination purposes as of March 31, 2001,
is shown below for each of the executive officers named in the summary
compensation table above:
<Table>
<Caption>
YEARS OF
NAME SERVICE
- ------------------------------------------------------------ --------
John M. Meyer............................................... 2
Robert W. Manly............................................. 4
Stephen A. Lightstone....................................... 2
J. Michael Townsley......................................... 3
David H. James.............................................. 2
</Table>
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PRINCIPAL STOCKHOLDERS
All of the issued and outstanding capital stock of Premium Standard Farms
is owned by PSF Group Holdings. We own all of the issued and outstanding capital
stock of The Lundy Packing Company, Lundy International, Inc., and Premium
Standard Farms of North Carolina, Inc.
The following table sets forth certain information regarding ownership of
the common stock of PSF Group Holdings as of the date of this prospectus by (i)
each person who is known by us to own beneficially more than 5% of the
outstanding shares of each class of stock, (ii) each of our directors, (iii)
each of the executive officers set forth in the Summary Compensation table above
and (iv) all of our directors and named executive officers as a group.
<Table>
<Caption>
SHARES BENEFICIALLY OWNED(3)
-----------------------------------
PERCENT PERCENT
TITLE OF CLASS(1) NAME AND ADDRESS OF BENEFICIAL OWNER(2) NUMBER OF CLASS OF TOTAL
- ----------------- --------------------------------------- ----------- -------- --------
Class B Common ContiGroup Companies, Inc. ............ 113,300.64 100.0 53.1
277 Park Avenue
New York, NY 10172
Class A Common Putnam Funds........................... 37,663.89(4) 37.7 17.7
14 Wall Street, Fourth Floor
New York, NY 10005
Class A Common Morgan Stanley Dean Witter & Co. ...... 39,562.4861(5) 34.1 17.2
1221 Avenue of the Americas
New York, NY 10020
Class A Common Oaktree Capital Management, LLC........ 16,387.49(6) 16.4 7.7
550 South Hope Street, 22nd Floor
Los Angeles, CA 90071
Class A Common Prudential Funds....................... 10,795.39(7) 10.8 5.1
c/o State Street Bank & Trust
1 Heritage Drive
Quincy, MA 02171
Class A Common Continental Assurance Company Pension
Investment Fund........................ 7,422.47 7.4 3.5
CNA Plaza, 235
Chicago, IL 60685
Class B Common John M. Meyer.......................... 1,414.29(8) 1.2 *
Class B Common Robert W. Manly........................ 1,131.43(8) * *
Class B Common Stephen A. Lightstone.................. 1,037.14(8) * *
Class B Common J. Michael Townsley.................... 377.14(8) * *
Class B Common David H. James......................... 285.71(8) * *
Michael J. Zimmerman................... 0 * *
Ronald E. Justice...................... 0 * *
Dean Mefford........................... 0 * *
Mark R. Baker.......................... 0 * *
Maurice L. McGill...................... 0 * *
Michael A. Petrick..................... 0 * *
Paul J. Fribourg....................... 0(9) * *
Vart K. Adjemian....................... 0 * *
John Rakestraw......................... 0 * *
Annabelle Lundy Fetterman.............. 0 * *
All directors and executive officers as
a group (17 persons)................... 4,245.71(9) 3.6 1.9
</Table>
- ---------------
* Signifies less than 1%.
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(1) PSF Group Holdings is authorized by its certificate of incorporation to
issue 250,000 shares of Class A Common Stock, 300,000 shares of Class B
Common Stock and 10,000 shares of preferred stock. Each class of stock has a
par value of $1 per share. As of the date of this prospectus, PSF Group
Holdings has issued 100,000 shares of Class A Common Stock, 113,300.64
shares of Class B Common Stock and no shares of preferred stock. Holders of
Class A Common Stock and Class B Common Stock participate equally in all
distributions. With the exception of electing Directors, holders of Class A
Common Stock and Class B Common Stock vote together as a single class on all
matters presented for a stockholder vote. The holders of Class A Common
Stock vote as a separate class to elect four of the nine members of the
Board of Directors of PSF Group Holdings. The holders of Class B Common
Stock vote as a separate class to elect five of the nine members of the
Board of Directors. PSF Group Holdings cannot take a number of actions
without the approval of a "supermajority" of the Board. A "supermajority" is
defined as a majority that includes at least one Director elected by holders
of Class A Common Stock and one Director elected by holders of Class B
Common Stock.
(2) Unless otherwise indicated, the business address of the persons named in the
above table is care of Premium Standard Farms, Inc., 423 West 8th Street,
Suite 200, Kansas City, Missouri 64105.
(3) Unless otherwise indicated, each person has sole investment and voting power
with respect to the shares listed in the table, subject to applicable
community property laws. For purposes of this table, a person or group of
persons is deemed to have "beneficial ownership" of any shares which such
person has the right to acquire within 60 days. For purposes of computing
the percentage of outstanding shares held by each person or group of persons
named above, any security which such person or group of persons has the
right to acquire within 60 days is deemed to be outstanding for the purpose
of computing the percentage ownership for such person or persons, but is not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person. As a result, the denominator used in
calculating the beneficial ownership among our shareholders may differ.
(4) Consists of Class A Common Stock held: (a) by the following Putnam funds:
Asset Allocation Funds -- Balanced Portfolio (128.85), Asset Allocation
Funds -- Growth Portfolio (33.05), Asset Allocation Funds -- Conservative
Portfolio (41.86), Diversified Income Portfolio/Smith Barney/ Travelers
Series Fund (22.03), Capital Management Trust -- PCM Diversified Income Fund
(528.10), Equity Income Fund (11.01), High Yield Advantage Fund (7,071.86),
Global Governmental Income Trust (113.27), Premier Income Trust (2,502.48),
Convertible Opportunities and Income Trust (220.25), High Income Convertible
and Bond Fund (334.30), Master Intermediate Income Trust (715.33), Managed
High Yield Trust (575.79), Diversified Income Trust (9,799.68), Master
Income Trust (1,003.86), Capital Management Trust -- PCM High Yield Fund
(1,578.53), High Yield Trust (11,857.08), Income Fund (440.51), Balanced
Retirement Fund (110.13) and High Yield Managed Trust (354.29), (b) by The
George Fund of Boston (220.25) and (c) by Bost & Co., Nominee for Ameritech
Pension Trust (1.38).
(5) Consists of 23,481.9661 shares of Class A Common Stock and 16,080.52 shares
of Class A Common Stock issuable upon exercise of presently exercisable
warrants but does not include 749.16 shares of Class A Common Stock that
Morgan Stanley Dean Witter & Co. and its affiliates are in the process of
registering in the stock ledger of PSF Group Holdings. The shares of Class A
Common Stock are held by: Morgan Stanley Dean Witter & Co. (21,126.64), the
Morgan Stanley Leveraged Equity Fund II, L.P. (1,056.8054), Morgan Stanley
Capital Investors, L.P. (44.4981), Morgan Stanley Capital Partners III, L.P.
(1,113.1667), MSCP III 892 Investors, L.P. (140.8559). The warrants are held
by Morgan Stanley Leveraged Equity Funds and Morgan Stanley Capital III
Partners.
(6) Consists of shares of Class A Common Stock held by OCM Opportunities Fund,
L.P. (11,210.87), Hare & Co. (4,709.52) and Columbia/HCA Master Retirement
Trust (467.10).
(7) Consists of shares of Class A Common Stock held by Gimlet & Co. (9,517.17),
Deerway & Co. (279.24), Greatwhale & Co. (778.73) and IFTCO (220.25).
(8) Consists of shares of Class B Common Stock issuable upon exercise of
presently exercisable options.
(9) Excludes shares owned by ContiGroup Companies, Inc.
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RELATED PARTY TRANSACTIONS
In 2000, we agreed to pay ContiGroup $5.0 million in consulting fees for
work done in reaching our settlement with the Attorney General of Missouri over
environmental matters. This amount was payable in annual installments of $1
million a year for five years. The first two annual installments were paid in
our fiscal years 2000 and 2001.
On September 22, 2000, we acquired the Carolina Farms hog production
operations of ContiGroup Companies through the purchase of all of the
outstanding stock of Premium Standard Farms of North Carolina. The purchase
price for the stock was $32.3 million, of which half was payable in cash and
half was payable in Class B Common Stock of PSF Group Holdings. This transaction
increased ContiGroup's ownership of PSF Group Holdings from approximately 51
percent to approximately 53.1 percent. We received an opinion of an investment
banking firm stating that the purchase price was fair to us from a financial
point of view.
In connection with our acquisition of The Lundy Packing Company, we entered
into consulting agreements with Annabelle Lundy Fetterman, who is one of our
directors, and members of her family on August 25, 2000. Pursuant to those
agreements, Mrs. Fetterman and her family were entitled to receive a total of
$1.2 million, payable in weekly installments commencing on the date of
agreement, with the last payments due on August 25, 2001. In addition, we lease
farm land and hog production buildings from Goshen Ridge Farms, LLC, a company
owned by Mrs. Fetterman and members of her family, under a capital lease
agreement that existed prior to our acquisition of The Lundy Packing Company.
The capital lease obligation as of June 30, 2001 was $2.5 million.
We have entered into a contract grower agreement with ContiGroup related to
approximately 7,200 acres of farms used in our Missouri operations. Under that
agreement, ContiGroup owns the real property at the farms. ContiGroup serves as
an independent contractor in breeding and growing our hogs to market weight. In
exchange, we pay to ContiGroup a fee for labor and services incurred by
ContiGroup in performing its obligations under the agreement. During the quarter
ended June 30, 2001, the amount paid for obligations under this agreement was
approximately $887,000. For fiscal year 2001, the amount paid for obligations
under this agreement was approximately $3.7 million; for fiscal year 2000, the
amount paid was approximately $3.7 million; and for fiscal year 1999, the amount
paid was approximately $3.2 million. The agreement will generally continue in
effect so long as ContiGroup continues to own an equity interest in our company.
Upon termination of the agreement, we have an option to acquire the real
property at the farms from ContiGroup, which can be assigned to third parties.
We receive the services of Mr. Schulte and other personnel through an
agreement with ContiGroup. Mr. Schulte, as well as other personnel, are
employees of ContiGroup but provide services to us as well as other affiliates
of ContiGroup. Other services from ContiGroup include the assistance of
purchasing and risk management staff, environmental consulting, treasury and
strategic planning. We pay ContiGroup a monthly fee for these services. We
negotiate the fee annually. In addition, we reimburse ContiGroup for a portion
of Mr. Schulte's annual bonus and long-term incentive payment. For the quarter
ended June 30, 2001, the amount paid for all services was $461,000. For fiscal
year 2001, the total amount paid for all services was $2.8 million; for fiscal
year 2000, the total amount paid for all services was $7.4 million; and for
fiscal year 1999, the total amount paid for all services was $12.1 million. We
also provide Mr. Schulte with the use of a rental car, and since in July 2000,
we provide him with an annual allowance of $15,000 for travel and housing.
We make certain services available to ContiGroup in connection with
ContiGroup's pork operations, including management, human resources, hog and
feed production and environmental consulting services. ContiGroup pays us a fee
for these services based on the weight of hogs marketed. For the quarter ended
June 30, 2001, the fee was $48,000. For fiscal year 2001, the fee was $568,000.
Morgan Stanley & Co. Incorporated acted as placement agent for the old
notes. Morgan Stanley Dean Witter & Co. and certain of its affiliates
beneficially own 23,481.9661 shares of Class A Common Stock of PSF Group
Holdings. See "Principal Stockholders." Morgan Stanley Leveraged Equity Funds
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and Morgan Stanley Capital III Partners currently hold 1,608,052 warrants to
purchase 16,080.52 additional shares of Class A Common Stock of PSF Group
Holdings. In addition, Michael A. Petrick, one of the directors of Premium
Standard Farms and PSF Group Holdings is a Managing Director of Morgan Stanley.
DESCRIPTION OF THE CREDIT AGREEMENT
We and our direct and indirect wholly owned subsidiaries (collectively, the
"Borrower") have entered into an amended Credit Agreement (the "Credit
Agreement") with U.S. Bancorp Ag Credit, Inc., as Agent, and certain other
financial institutions (the "Lenders"). A copy of the Credit Agreement may be
obtained from Premium Standard Farms. The Credit Agreement provides for up to a
$100.0 million revolving credit facility (with the actual credit limit
determined monthly by reference to a borrowing base formula) and a $125.0
million term loan facility. Letters of credit may be issued under the revolving
credit facility up to a sublimit of $10.0 million.
INTEREST AND FEES
In addition to customary fees payable under credit facilities of this type,
amounts borrowed under the Credit Agreement bear interest, payable monthly in
arrears, at one of two rates selected by us. The available rates are:
- a "Base Rate" calculated as the greater of (x) the reference rate
determined by U.S. Bank National Association or (y) the Federal Funds
Rate plus one half of one percent, plus in either case an "Applicable
Margin;" or
- a "Eurodollar Rate" calculated as the London interbank offered rate
determined by U.S. Bank, plus an "Applicable Margin."
The "Applicable Margin" is determined by reference to the Borrower's
"Leverage Ratio," which is, for any period of determination, the ratio of
interest bearing debt outstanding at the end of the period over EBITDA (as
defined) for the prior four fiscal quarters. The "Applicable Margin" ranges from
zero to 1.125% for Base Rate Loans, and from 1.50% to 2.625% for Eurodollar Rate
Loans. A non-use fee is likewise assessed for unused credit under the revolving
credit facility.
As of June 30, 2001, the outstanding principal amount under the revolving
credit facility was $6.0 million, the outstanding principal amount under the
term loan facility was $81.3 million and letters of credit in the amount of $7.5
million were outstanding. The unused availability under the revolving credit
facility and interest rate as of that date were $86.5 million and 7.00%,
respectively.
GUARANTEES AND COLLATERAL
PSF Group Holdings unconditionally guarantees the Borrower's obligations
under the Credit Agreement. The obligations are secured by first priority
perfected liens on substantially all of the Borrower's assets.
AMORTIZATION AND PREPAYMENT
During the term of the Credit Agreement, the Borrower is required to make
quarterly payments of principal under the term loan facility in the amount of
$6.25 million. Principal payments under the revolving credit facility are not
required during the term of the Credit Agreement unless the Borrowing Base (as
defined) or the $100.0 million limit is exceeded, in which case the excess must
be repaid within 3 business days. All loans under the Credit Agreement mature on
the earlier of (i) August 21, 2003 (in the case of the revolving credit
facility) or August 21, 2005 (in the case of the term loan facility); or (ii)
the date of termination of the loan commitments, or acceleration, by the Lenders
as a consequence of default.
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Upon notice, the Borrower may prepay any loan at any time in whole or in
part without premium or penalty, subject to payment of any funding losses
incurred by the Lenders upon prepayment of Eurodollar Rate loans. The Borrower
also may terminate the commitments in whole, but not in part, subject to payment
of an early termination fee if the commitments are terminated prior to February
21, 2002.
REPRESENTATIONS AND WARRANTIES AND COVENANTS
The Credit Agreement contains customary representations, warranties and
covenants. The covenants are subject to certain exceptions set forth in the
Credit Agreement, and the Borrower's compliance may be waived by approval of
Lenders having at least 51% of the aggregate amount of the Lenders' "Pro Rata
Percentages" (as defined). Among other things, the covenants require the
Borrower to maintain consolidated Tangible Net Worth (as defined) at certain
levels; minimum levels of consolidated Working Capital (as defined); minimum
levels of rolling four quarter EBITDA; a maximum Leverage Ratio; and a minimum
Cash Interest Coverage Ratio (as defined). The covenants also include provisions
restricting the Borrower's ability to encumber or dispose of its assets; merge
or consolidate with, or acquire substantially all of the assets of, other
entities; incur additional indebtedness; exceed certain levels of capital
investment; pay subordinated debt; and construct new hog production facilities.
EVENTS OF DEFAULT
Events of default under the Credit Agreement include, but are not limited
to: (i) the Borrower's failure to pay principal, interest or other amounts owed
to the Agent or Lenders; (ii) covenant defaults; (iii) a change of control of
Premium Standard Farms; (iv) the inaccuracy of any representation or warranty;
(v) monetary judgment defaults; (vi) events of bankruptcy; and (vii)
cross-defaults to other indebtedness.
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DESCRIPTION OF THE NOTES
The old notes were, and the exchange notes will be, issued under an
Indenture between PSF Group Holdings, Inc., Premium Standard Farms, Inc., The
Lundy Packing Company, Lundy International, Inc., Premium Standard Farms of
North Carolina, Inc., and Wilmington Trust Company. The terms of the exchange
notes are identical in all material respects to the old notes, except that upon
completion of the exchange offer, the exchange notes will be:
- registered under the Securities Act; and
- free of any covenants regarding exchange registration rights.
You can find the definitions of certain capitalized terms used in this
summary under the subheading "-- Definitions." We urge you to read the Indenture
because it, and not this summary, defines your rights as a holder of the notes.
For purposes of this "Description of the Notes," the term "Premium Standard
Farms" means Premium Standard Farms, Inc. and its successors under the
Indenture, in each case excluding its subsidiaries. We use the term "notes" in
this section to refer to the exchange notes and the old notes, in each case
outstanding at any given time and issued under the Indenture.
GENERAL
The notes will be unsecured unsubordinated obligations of Premium Standard
Farms, initially limited to $175.0 million aggregate principal amount. The notes
will mature on June 15, 2011. Subject to the covenants described below under
"-- Covenants" and applicable law, Premium Standard Farms may issue additional
notes ("Additional Notes") under the Indenture. The old notes, the exchange
notes and any Additional Notes would be treated as a single class for all
purposes under the Indenture.
Each note will initially bear interest at the rate per annum shown on the
cover page of this prospectus from June 7, 2001 or from the most recent interest
payment date to which interest has been paid. Interest on the notes will be
payable semiannually on June 15 and December 15 of each year, commencing
December 15, 2001. Interest will be paid to Holders of record at the close of
business on the June 1 or December 1 immediately preceding the Interest Payment
Date. Interest is computed on the basis of a 360-day year of twelve 30-day
months on a U.S. corporate bond basis.
If by December 7, 2001, Premium Standard Farms has not consummated a
registered exchange offer for the old notes or caused a shelf registration
statement with respect to resales of the old notes to be declared effective, the
annual interest rate on the old notes will increase by .5% until the earlier of
(a) the consummation of a registered exchange offer or the effectiveness of a
shelf registration statement and (b) the expiration of the period set forth in
Rule 144(k) under the Securities Act of 1933 with respect to such old notes.
The notes may be exchanged or transferred at the office or agency of
Premium Standard Farms in The Borough of Manhattan, The City of New York.
Initially, Computershare Trust Company of New York, Wall Street Plaza, 88 Pine
Street, New York, New York 10005 will serve as such office. If you give Premium
Standard Farms wire transfer instructions, Premium Standard Farms will pay all
principal, premium and interest on your notes in accordance with your
instructions. If you do not give Premium Standard Farms wire transfer
instructions, payments of principal, premium and interest will be made at the
office or agency of the paying agent which will initially be the Trustee, unless
Premium Standard Farms elects to make interest payments by check mailed to the
Holders.
The notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and multiples of $1,000. See
"-- Book-Entry; Delivery and Form." No service charge will be made for any
registration of transfer or exchange of notes, but Premium Standard Farms may
require payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith.
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OPTIONAL REDEMPTION
Premium Standard Farms may redeem the notes at any time on or after June
15, 2006. The redemption price for the notes (expressed as a percentage of
principal amount), will be as follows, plus accrued interest to the redemption
date:
<Table>
<Caption>
REDEMPTION
IF REDEEMED DURING THE 12-MONTH PERIOD COMMENCING PRICE
- ------------------------------------------------- ----------
June 15, 2006............................................... 104.625%
June 15, 2007............................................... 103.083%
June 15, 2008............................................... 101.542%
June 15, 2009 and thereafter................................ 100.000%
</Table>
In addition, at any time prior to June 15, 2004, Premium Standard Farms may
redeem up to 35% of the principal amount of the notes with the Net Cash Proceeds
received by Premium Standard Farms from one or more sales of its Capital Stock
(other than Disqualified Stock) or a capital contribution to Premium Standard
Farms' common equity at a redemption price (expressed as a percentage of
principal amount) of 109.250%, plus accrued interest to the redemption date;
provided that at least 65% of the aggregate principal amount of notes originally
issued on June 7, 2001 remains outstanding after each such redemption and notice
of any such redemption is mailed within 60 days of each such sale of Capital
Stock or capital contribution.
Premium Standard Farms will give not less than 30 days' nor more than 60
days' notice of any redemption. If less than all of the Notes are to be
redeemed, selection of the notes for redemption will be made by the Trustee:
- in compliance with the requirements of the principal national securities
exchange, if any, on which the notes are listed, or,
- if the notes are not listed on a national securities exchange, by lot or
by such other method as the Trustee in its sole discretion shall deem to
be fair and appropriate.
However, no note of $1,000 in principal amount or less shall be redeemed in
part. If any note is to be redeemed in part only, the notice of redemption
relating to such note will state the portion of the principal amount to be
redeemed. A new note in principal amount equal to the unredeemed portion will be
issued upon cancellation of the original note.
GUARANTEES
Payment of the principal of, premium, if any, and interest on the notes
will be Guaranteed, jointly and severally, on an unsecured unsubordinated basis
by the Initial Subsidiary Guarantors which are the only Restricted Subsidiaries
existing on June 7, 2001, and by PSF Group Holdings. In addition, each future
Restricted Subsidiary, other than a Foreign Subsidiary, will Guarantee the
payment of the principal of, premium if any and interest on the notes. On June
7, 2001, all Subsidiaries of Premium Standard Farms other than L&S Farms were
Restricted Subsidiaries.
The obligations of each Guarantor under its Note Guarantee will be limited
so as not to constitute a fraudulent conveyance under applicable Federal or
state laws. Each Guarantor that makes a payment or distribution under its Note
Guarantee will be entitled to contribution from any other Guarantor.
The Note Guarantee of any Subsidiary Guarantor may be released as provided
under the "Limitation on Issuances of Guarantees by Restricted Subsidiaries"
covenant.
RANKING
The notes will be equal in right of payment with all existing and future
unsubordinated indebtedness of Premium Standard Farms and senior in right of
payment to all future subordinated indebtedness of Premium Standard Farms. The
Note Guarantees will be equal in right of payment with all unsubordinated
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indebtedness of the Guarantors and senior in right of payment to all future
subordinated indebtedness of the Guarantors.
As of June 30, 2001, Premium Standard Farms had $268.9 million of
consolidated indebtedness outstanding, $87.3 million of which was outstanding
under the Credit Agreement. The Credit Agreement is secured by substantially all
of the assets of Premium Standard Farms and its subsidiaries. The notes will be
effectively subordinated to such indebtedness to the extent of such security
interests. As of June 30, 2001, the Guarantors had $4.6 million of indebtedness,
all of which was secured, outstanding other than their Guarantee of the notes
and their obligations under the Credit Agreement.
SINKING FUND
There will be no sinking fund payments for the notes.
COVENANTS
OVERVIEW
In the Indenture, Premium Standard Farms has agreed to covenants that limit
its and its Restricted Subsidiaries' ability, among other things, to:
- incur additional debt;
- pay dividends, acquire shares of capital stock, make payments on
subordinated debt or make investments;
- place limitations on distributions from Restricted Subsidiaries;
- issue or sell capital stock of Restricted Subsidiaries;
- issue guarantees;
- sell or exchange assets;
- enter into transactions with shareholders and affiliates;
- create liens; and
- effect mergers.
In addition, if a Change of Control occurs, each Holder of notes will have
the right to require Premium Standard Farms to repurchase all or a part of the
Holder's notes at a price equal to 101% of their principal amount, plus any
accrued interest to the date of repurchase.
LIMITATION ON INDEBTEDNESS
(a) Premium Standard Farms will not, and will not permit any of its
Restricted Subsidiaries to, Incur any Indebtedness (other than the notes, the
Note Guarantees and other Indebtedness existing on June 7, 2001); provided that
Premium Standard Farms or any Subsidiary Guarantor may Incur Indebtedness, and
any Restricted Subsidiary may Incur Acquired Indebtedness, if, after giving
effect to such Incurrence and the receipt and application of the proceeds
therefrom, the Interest Coverage Ratio would be greater than 2:1.
Notwithstanding the foregoing, Premium Standard Farms and any Restricted
Subsidiary (except as specified below) may Incur each and all of the following:
(1) Indebtedness of Premium Standard Farms or any Subsidiary Guarantor
outstanding at any time in an aggregate principal amount (together with
refinancings thereof) not to exceed the greater of (A) $225 million, less
any amount of such Indebtedness permanently repaid as provided under the
"Limitation on Asset Sales" covenant and (B) the sum of (x) 85% of the
consolidated book value of the accounts receivable of Premium Standard
Farms and its Restricted Subsidiaries (other than any
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Foreign Subsidiaries) plus (y) 80% of the consolidated book value of the
inventory of Premium Standard Farms and its Restricted Subsidiaries (other
than any Foreign Subsidiaries), in each case determined in accordance with
GAAP as of the most recent fiscal quarter for which reports have been filed
with the SEC or provided to the Trustee;
(2) Indebtedness owed (A) to Premium Standard Farms or any Subsidiary
Guarantor or (B) to any other Restricted Subsidiary; provided that (x) any
subsequent event which results in any such Restricted Subsidiary ceasing to
be a Restricted Subsidiary or any subsequent transfer of such Indebtedness
(other than to Premium Standard Farms or another Restricted Subsidiary)
shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness not permitted by this clause (2) and (y) if Premium Standard
Farms or any Subsidiary Guarantor is the obligor on such Indebtedness and
the payee is a Restricted Subsidiary that is not a Subsidiary Guarantor,
such Indebtedness must be expressly subordinated in right of payment to the
notes, in the case of Premium Standard Farms, or the Note Guarantee, in the
case of a Subsidiary Guarantor;
(3) Indebtedness issued in exchange for, or the net proceeds of which
are used to redeem, defease, refinance or refund, then outstanding
Indebtedness (other than Indebtedness outstanding under clause (2) or (5))
and any extensions, renewals and refinancings thereof in an amount not to
exceed the amount so redeemed, defeased, refinanced or refunded (plus
premiums, accrued interest, fees, costs and expenses incurred in connection
with any such exchange, refinancing, redemption, defeasance or refunding);
provided that (a) Indebtedness the proceeds of which are used to redeem,
defease, refinance or refund the notes or Indebtedness that is pari passu
with, or subordinated in right of payment to, the notes or a Note Guarantee
shall only be permitted under this clause (3) if (x) in case the notes are
redeemed, defeased or refinanced in part or the Indebtedness to be
redeemed, defeased or refinanced is pari passu with the notes or a Note
Guarantee, such new Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such new Indebtedness is
outstanding, is expressly made pari passu with, or subordinate in right of
payment to, the remaining notes or a Note Guarantee, or (y) in case the
Indebtedness to be refinanced is subordinated in right of payment to the
notes or a Note Guarantee, such new Indebtedness, by its terms or by the
terms of any agreement or instrument pursuant to which such new
Indebtedness is issued or remains outstanding, is expressly made
subordinate in right of payment to the notes or a Note Guarantee at least
to the extent that the Indebtedness to be redeemed, defeased or refinanced
is subordinated to the notes or a Note Guarantee, (b) such new
Indebtedness, determined as of the date of Incurrence of such new
Indebtedness, does not mature prior to the Stated Maturity of the
Indebtedness to be redeemed, defeased, refinanced or refunded (or, if
earlier the Stated Maturity of the notes), and the Average Life of such new
Indebtedness is at least equal to the remaining Average Life of the
Indebtedness to be refinanced or refunded (or, if less, the remaining
Average Life of the notes) and (c) such new Indebtedness is Incurred by
Premium Standard Farms or a Subsidiary Guarantor or by the Restricted
Subsidiary who is the obligor on the Indebtedness to be refinanced or
refunded;
(4) Indebtedness of Premium Standard Farms, to the extent the net
proceeds thereof are promptly (A) used to purchase notes tendered in an
Offer to Purchase made as a result of a Change in Control in accordance
with the Indenture or (B) deposited to defease the notes as described under
"Defeasance";
(5) Guarantees of the notes and Guarantees of Indebtedness of Premium
Standard Farms or any Subsidiary Guarantor by any Restricted Subsidiary
provided the Guarantee of such Indebtedness is permitted by and made in
accordance with the "Limitation on Issuance of Guarantees by Restricted
Subsidiaries" covenant;
(6) Indebtedness of Premium Standard Farms or any Subsidiary Guarantor
with respect to industrial revenue bonds, pollution control bonds and other
tax favored or tax exempt bonds, and documents or instruments delivered in
connection therewith in an aggregate principal amount outstanding at any
time (together with refinancings thereof) not to exceed $25.0 million;
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(7) Indebtedness of Foreign Subsidiaries outstanding at any time in an
aggregate principal amount (together with refinancings thereof) not to
exceed the sum of (x) 85% of the consolidated book value of the accounts
receivable of the Foreign Subsidiaries of Premium Standard Farms plus (y)
80% of the consolidated book value of the inventory of the Foreign
Subsidiaries of Premium Standard Farms, in each case determined in
accordance with GAAP as of the most recent fiscal quarter for which reports
have been filed with the SEC or provided to the Trustee; and
(8) Indebtedness of Premium Standard Farms, or any Restricted
Subsidiary (in addition to Indebtedness permitted under clauses (1) through
(7) above) in an aggregate principal amount outstanding at any time
(together with refinancings thereof) not to exceed $75.0 million, less any
amount of such Indebtedness permanently repaid as provided under the
"Limitation on Asset Sales" covenant; provided, however, that the aggregate
principal amount of Indebtedness that may be incurred under this clause (8)
by Restricted Subsidiaries that are not Subsidiary Guarantors shall not
exceed $10.0 million;
(b) Notwithstanding any other provision of this "Limitation on
Indebtedness" covenant, the maximum amount of Indebtedness that may be Incurred
pursuant to this "Limitation on Indebtedness" covenant will not be deemed to be
exceeded, with respect to any outstanding Indebtedness, due solely to the result
of fluctuations in the exchange rates of currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (x) Indebtedness Incurred under the
Credit Agreement on or prior to June 7, 2001 shall be treated as Incurred
pursuant to clause (1) of the second paragraph of clause (a) of this "Limitation
on Indebtedness" covenant, (y) Guarantees, Liens or obligations with respect to
letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included and (z) any Liens
granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant shall not be treated as Indebtedness. For
purposes of determining compliance with this "Limitation on Indebtedness"
covenant, in the event that an item of Indebtedness meets the criteria of more
than one of the types of Indebtedness described above (other than Indebtedness
referred to in clause (x) of the preceding sentence), including under the first
paragraph of part (a), Premium Standard Farms, in its sole discretion, shall
classify, and from time to time may reclassify, such item of Indebtedness and
only be required to include the amount of such Indebtedness in one of such
classes.
(d) Premium Standard Farms will not Incur any Indebtedness if such
Indebtedness is subordinate in right of payment to any other Indebtedness unless
such Indebtedness is also subordinate in right of payment to the notes to the
same extent, provided that the foregoing shall not apply to distinctions between
categories of Indebtedness that exist solely by reason of Liens or Guarantees.
LIMITATION ON RESTRICTED PAYMENTS
Premium Standard Farms will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, (1) declare or pay any dividend or make
any distribution on or with respect to its Capital Stock (other than (x)
dividends or distributions payable solely in shares of its Capital Stock (other
than Disqualified Stock) or in options, warrants or other rights to acquire
shares of such Capital Stock and (y) pro rata dividends or distributions on
Common Stock of Restricted Subsidiaries (other than Subsidiary Guarantors) held
by minority stockholders) held by Persons other than Premium Standard Farms or
any of its Restricted Subsidiaries, (2) purchase, call for redemption or redeem,
retire or otherwise acquire for value any shares of Capital Stock of (A) Premium
Standard Farms, any Subsidiary Guarantor or any direct or indirect parent of
Premium Standard Farms (including options, warrants or other rights to acquire
such shares of Capital Stock) held by any Person or (B) a Restricted Subsidiary
other than a Subsidiary Guarantor (including options, warrants or other rights
to acquire such shares of Capital Stock) held by any Affiliate of Premium
Standard Farms or any direct or indirect parent of Premium Standard Farms (other
than a Wholly Owned Restricted Subsidiary) or any holder (or any Affiliate of
such holder) of 5% or more of the Capital Stock of Premium Standard Farms or any
direct or indirect parent of
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Premium Standard Farms, (3) make any voluntary or optional principal payment, or
voluntary or optional redemption, repurchase, defeasance, or other acquisition
or retirement for value, of Indebtedness of Premium Standard Farms that is
subordinated in right of payment to the notes or any Indebtedness of a
Subsidiary Guarantor that is subordinated in right of payment to a Note
Guarantee or (4) make any Investment, other than a Permitted Investment, in any
Person (such payments or any other actions described in clauses (1) through (4)
above being collectively "Restricted Payments") if, at the time of, and after
giving effect to, the proposed Restricted Payment:
(A) a Default or Event of Default shall have occurred and be
continuing,
(B) Premium Standard Farms could not Incur at least $1.00 of
additional Indebtedness under the first paragraph of part (a) of the
"Limitation on Indebtedness" covenant or
(C) the aggregate amount of all Restricted Payments made after June 7,
2001 shall exceed the sum of
(1) 50% of the aggregate amount of the Adjusted Consolidated Net
Income (or, if the Adjusted Consolidated Net Income is a loss, minus
100% of the amount of such loss) accrued on a cumulative basis during
the period (taken as one accounting period) beginning on the first day
of the fiscal quarter immediately following June 7, 2001 and ending on
the last day of the last fiscal quarter preceding the Transaction Date
for which reports have been filed with the SEC or provided to the
Trustee plus
(2) the aggregate Net Cash Proceeds received by Premium Standard
Farms after June 7, 2001 as a capital contribution or from the issuance
and sale of its Capital Stock (other than Disqualified Stock) to a
Person who is not a Subsidiary of Premium Standard Farms, including an
issuance or sale permitted by the Indenture of Indebtedness of Premium
Standard Farms for cash subsequent to June 7, 2001 upon the conversion
of such Indebtedness into Capital Stock (other than Disqualified Stock)
of Premium Standard Farms, or from the issuance to a Person who is not a
Subsidiary of Premium Standard Farms of any options, warrants or other
rights to acquire Capital Stock of Premium Standard Farms (in each case,
exclusive of any Disqualified Stock or any options, warrants or other
rights that are redeemable at the option of the holder, or are required
to be redeemed, prior to the Stated Maturity of the notes) plus
(3) an amount equal to the net reduction in Investments (other than
Permitted Investments) in any Person resulting from payments of interest
on Indebtedness, dividends, repayments of loans or advances, or other
transfers of assets, in each case to Premium Standard Farms or any
Restricted Subsidiary or from the Net Cash Proceeds from the sale of any
such Investment (except, in each case, to the extent any such payment or
proceeds are included in the calculation of Adjusted Consolidated Net
Income), from the release of any Guarantee or from redesignations of
Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each
case as provided in the definition of "Investments"), not to exceed, in
each case, the amount of Investments previously made by Premium Standard
Farms or any Restricted Subsidiary in such Person or Unrestricted
Subsidiary.
The foregoing provision shall not be violated by reason of:
(1) the payment of any dividend, distribution or redemption of any
Capital Stock within 60 days after the related date of declaration or
call for redemption if, at said date of declaration or call for
redemption, such payment or redemption would comply with the preceding
paragraph;
(2) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of
payment to the notes or any Note Guarantee including premium, if any,
and accrued interest, fees, costs and expenses with the proceeds of, or
in exchange for, Indebtedness Incurred under clause (3) of the second
paragraph of part (a) of the "Limitation on Indebtedness" covenant;
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(3) the repurchase, redemption or other acquisition of Capital
Stock of Premium Standard Farms, a Subsidiary Guarantor or any direct or
indirect parent of Premium Standard Farms (or options, warrants or other
rights to acquire such Capital Stock) in exchange for, or out of the
proceeds of a capital contribution or a substantially concurrent
offering of, shares of Capital Stock (other than Disqualified Stock) of
Premium Standard Farms (or options, warrants or other rights to acquire
such Capital Stock); provided that such options, warrants or other
rights are not redeemable at the option of the holder, or required to be
redeemed, prior to the Stated Maturity of the notes;
(4) the making of any principal payment or the repurchase,
redemption, retirement, defeasance or other acquisition for value of
Indebtedness which is subordinated in right of payment to the notes or
any Note Guarantee in exchange for, or out of the proceeds of a capital
contribution or a substantially concurrent offering of, shares of the
Capital Stock (other than Disqualified Stock) of Premium Standard Farms
(or options, warrants or other rights to acquire such Capital Stock);
provided that such options, warrants or other rights are not redeemable
at the option of the holder, or required to be redeemed, prior to the
Stated Maturity of the notes;
(5) payments or distributions, to dissenting stockholders pursuant
to applicable law, pursuant to or in connection with a consolidation,
merger or transfer of assets of (i) Premium Standard Farms, that
complies with the provisions of the Indenture applicable to mergers,
consolidations and transfers of all or substantially all of the property
and assets of Premium Standard Farms and (ii) any Subsidiary Guarantor,
that complies with the provisions of the Indenture applicable to mergers
and consolidations of such Subsidiary Guarantor; provided, in the case
of this clause (ii), that immediately after giving effect to such merger
or consolidation, on a pro forma basis, such Subsidiary Guarantor or the
surviving person, as the case may be, shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of such
Subsidiary Guarantor immediately prior to such merger or consolidation,
without giving effect to any capital contributions by Premium Standard
Farms or any Restricted Subsidiary made in anticipation of such merger
or consolidation to satisfy this clause (ii);
(6) Investments acquired as a capital contribution to, or in
exchange for, or out of, or the payment of any dividend from, the
proceeds of a substantially concurrent offering of, Capital Stock (other
than Disqualified Stock) of, Premium Standard Farms;
(7) the repurchase of Capital Stock deemed to occur upon the
exercise of options or warrants if such Capital Stock represents all or
a portion of the exercise price thereof;
(8) payment of dividends, other distribution or other amounts by
Premium Standard Farms to PSF Group Holdings in amounts required for PSF
Group Holdings to pay fees required to maintain its existence and
provide for all other operating costs of PSF Group Holdings, including,
without limitation, in respect of director fees and expenses,
administrative, legal and accounting services provided by third parties
and other costs and expenses of being a public company, including all
costs and expenses with respect to filings with the SEC of up to
$500,000 per fiscal year;
(9) the payment of dividends or other distributions by Premium
Standard Farms to PSF Group Holdings in amounts required to pay the tax
obligations of PSF Group Holdings attributable to Premium Standard Farms
and its Subsidiaries determined as if Premium Standard Farms and its
Subsidiaries had filed a separate consolidated, combined or unitary
return for the relevant taxing jurisdiction; provided that (x) the
amount of dividends paid pursuant to this clause (9) to enable PSF Group
Holdings to pay federal and state income taxes (and franchise taxes
based on income) at any time shall not exceed the amount of such federal
and state income taxes (and franchise taxes based on income) actually
owing by PSF Group Holdings at such time to the respective tax
authorities for the respective period and (y) any refunds received by
PSF Group Holdings or any of its Subsidiaries shall promptly be returned
by PSF Group
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Holdings to Premium Standard Farms through a capital contribution or
purchase of Capital Stock (other than Disqualified Stock) of Premium
Standard Farms;
(10) the purchase, repurchase, acquisition, cancellation or other
retirement for value by Premium Standard Farms or any Restricted
Subsidiary of, or dividends, distributions or advances to PSF Group
Holdings to allow PSF Group Holdings to purchase, repurchase, acquire,
cancel or otherwise retire for value Capital Stock (including options,
warrants or other rights to acquire such Capital Stock) of PSF Group
Holdings or Premium Standard Farms from employees of PSF Group Holdings,
Premium Standard Farms or any Restricted Subsidiary upon the death,
disability, retirement or termination of employment of such employees or
to the extent required pursuant to employee benefit plans, employment
agreements or other arrangements with employees in an aggregate amount
not to exceed (a) $3.0 million in any calendar year (with up to two
years in unused amounts being carried over to any succeeding year) or
(b) $15.0 million in the aggregate; or
(11) Restricted Payments in an aggregate amount not to exceed $10.0
million;
provided that, except in the case of clauses (1) and (3), no Default or Event of
Default shall have occurred and be continuing or occur as a consequence of the
actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (2), (9) or (10)
thereof, an exchange of Capital Stock for Capital Stock or Indebtedness referred
to in clause (3) or (4) thereof and an Investment acquired as a capital
contribution or in exchange for Capital Stock referred to in clause (6)
thereof), and the Net Cash Proceeds from any issuance of Capital Stock referred
to in clauses (3), (4) or (6), shall be included in calculating whether the
conditions of clause (C) of the first paragraph of this "Limitation on
Restricted Payments" covenant have been met with respect to any subsequent
Restricted Payments. In the event the proceeds of an issuance of Capital Stock
of Premium Standard Farms are used for the redemption, repurchase or other
acquisition of the notes, or Indebtedness that is pari passu with the notes or
any Note Guarantee, then the Net Cash Proceeds of such issuance shall be
included in clause (C) of the first paragraph of this "Limitation on Restricted
Payments" covenant only to the extent such proceeds are not used for such
redemption, repurchase or other acquisition of Indebtedness.
For purposes of determining compliance with this "Limitation on Restricted
Payments" covenant, (x) the amount, if other than in cash, of any Restricted
Payment shall be determined in good faith by the Board of Directors, whose
determination shall be conclusive and evidenced by a Board Resolution and (y) in
the event that a Restricted Payment meets the criteria of more than one of the
types of Restricted Payments described in the above clauses, including the first
paragraph of this "Limitation on Restricted Payments" covenant, Premium Standard
Farms, in its sole discretion, may order and classify, and from time to time may
reclassify, such Restricted Payment if it would have been permitted at the time
such Restricted Payment was made and at the time of such reclassification.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
Premium Standard Farms will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or suffer to exist or become effective
any consensual encumbrance or restriction of any kind on the ability of any
Restricted Subsidiary to (1) pay dividends or make any other distributions
permitted by applicable law on any Capital Stock of such Restricted Subsidiary
owned by Premium Standard Farms or any other Restricted Subsidiary, (2) pay any
Indebtedness owed to Premium Standard Farms or any other Restricted Subsidiary,
(3) make loans or advances to Premium Standard Farms or any other Restricted
Subsidiary or (4) transfer any of its property or assets to Premium Standard
Farms or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions:
(1) existing on June 7, 2001 under the Credit Agreement, the
Indenture, the notes or any other agreements in effect on June 7, 2001, and
any amendments, extensions, refinancings, renewals or
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replacements of such agreements; provided that the encumbrances and
restrictions in any such amendments, extensions, refinancings, renewals or
replacements taken as a whole are no less favorable in any material respect
to the Holders than those encumbrances or restrictions that are then in
effect and that are being amended, extended, refinanced, renewed or
replaced;
(2) existing under or by reason of applicable law;
(3) existing with respect to any Person or the property or assets of
such Person acquired by Premium Standard Farms or any Restricted
Subsidiary, existing at the time of such acquisition and not incurred in
contemplation thereof, which encumbrances or restrictions are not
applicable to any Person or the property or assets of any Person other than
such Person or the property or assets of such Person so acquired and any
amendments, extensions, refinancings, renewals or replacements of thereof;
provided that the encumbrances and restrictions in any such amendments,
extensions, refinancings, renewals or replacements taken as a whole are no
less favorable in any material respect to the Holders than those
encumbrances or restrictions that are then in effect and that are being
amended, extended, refinanced, renewed or replaced;
(4) in the case of clause (4) of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant:
(A) that restrict in a customary manner the subletting, assignment
or transfer of any property or asset that is a lease, license,
conveyance or contract or similar property or asset,
(B) existing by virtue of any transfer of, agreement to transfer,
option or right with respect to, or Lien on, any property or assets of
Premium Standard Farms or any Restricted Subsidiary not otherwise
prohibited by the Indenture or
(C) arising or agreed to in the ordinary course of business, not
relating to any Indebtedness, and that do not, individually or in the
aggregate, detract from the value of property or assets of Premium
Standard Farms or any Restricted Subsidiary in any manner material to
Premium Standard Farms or any Restricted Subsidiary;
(5) with respect to a Restricted Subsidiary and imposed pursuant to an
agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock of, or property and assets of, such
Restricted Subsidiary;
(6) customary provisions with respect to the disposition or
distribution of assets or property in joint venture agreements, assets sale
agreements, stock sale agreements and other similar agreements entered into
in the ordinary course of business; or
(7) with respect to a Foreign Subsidiary and imposed pursuant to any
agreement or instrument governing Indebtedness (whether or not outstanding)
of such Foreign Subsidiary permitted to be Incurred under the "Limitation
on Indebtedness" covenant so long as (1) such encumbrance or restriction is
not applicable to any Person or the property or assets of any Person other
than such Foreign Subsidiary or the property or assets of such Foreign
Subsidiary and its Foreign Subsidiaries and (2) not more than 20% of such
Foreign Subsidiary's assets are located in the United States.
Nothing contained in this "Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries" covenant shall prevent Premium Standard Farms
or any Restricted Subsidiary from (1) creating, incurring, assuming or suffering
to exist any Liens otherwise permitted in the "Limitation on Liens" covenant or
(2) restricting the sale or other disposition of property or assets of Premium
Standard Farms or any of its Restricted Subsidiaries that secure Indebtedness of
Premium Standard Farms or any of its Restricted Subsidiaries.
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LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
Premium Standard Farms will not sell, and will not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell, any shares of Capital
Stock of a Restricted Subsidiary (including options, warrants or other rights to
purchase shares of such Capital Stock) except:
(1) to Premium Standard Farms or a Wholly Owned Restricted Subsidiary;
(2) issuances of director's qualifying shares or sales to foreign
nationals of shares of Capital Stock of Foreign Subsidiaries, to the extent
required by applicable law;
(3) if, immediately after giving effect to such issuance or sale, such
Restricted Subsidiary would no longer constitute a Restricted Subsidiary
and any Investment in such Person remaining after giving effect to such
issuance or sale would have been permitted to be made under the "Limitation
on Restricted Payments" covenant if made on the date of such issuance or
sale; or
(4) sales of Common Stock (including options, warrants or other rights
to purchase shares of such Common Stock) of a Restricted Subsidiary by
Premium Standard Farms or a Restricted Subsidiary, provided that Premium
Standard Farms or such Restricted Subsidiary applies the Net Cash Proceeds
of any such sale in accordance with clause (A) or (B) of the "Limitation on
Asset Sales" covenant.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
Premium Standard Farms will cause each Restricted Subsidiary other than a
Foreign Subsidiary to execute and deliver a supplemental indenture to the
Indenture providing for an unsubordinated Guarantee (a "Subsidiary Guarantee")
of payment of the notes by such Restricted Subsidiary.
Premium Standard Farms will not permit any Foreign Subsidiary, directly or
indirectly, to Guarantee any Indebtedness ("Guaranteed Indebtedness") of Premium
Standard Farms or any Subsidiary Guarantor, unless (a) such Foreign Subsidiary
simultaneously executes and delivers a Subsidiary Guarantee and (b) such Foreign
Subsidiary waives and will not in any manner whatsoever claim or take the
benefit or advantage of, any rights of reimbursement, indemnity or subrogation
or any other rights against Premium Standard Farms or any other Restricted
Subsidiary as a result of any payment by such Foreign Subsidiary under its
Subsidiary Guarantee until the notes have been paid in full. If the Guaranteed
Indebtedness is (A) pari passu in right of payment with the notes or any
Subsidiary Guarantee, then the Guarantee of such Guaranteed Indebtedness shall
be pari passu in right of payment with, or subordinated to, the Subsidiary
Guarantee or (B) subordinated in right of payment to the notes or any Subsidiary
Guarantee, then the Guarantee of such Guaranteed Indebtedness shall be
subordinated in right of payment to the Subsidiary Guarantee at least to the
extent that the Guaranteed Indebtedness is subordinated to the notes or any
Subsidiary Guarantee.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (1) any sale, exchange or transfer
(including by way of merger or consolidation), to any Person not an Affiliate of
Premium Standard Farms, of all of Premium Standard Farms' and each Restricted
Subsidiary's Capital Stock in, or all or substantially all the assets of, such
Restricted Subsidiary (which sale, exchange or transfer is not prohibited by the
Indenture) or upon the designation of such Restricted Subsidiary as an
Unrestricted Subsidiary in accordance with the terms of the Indenture; or (2)
solely in the case of a Subsidiary Guarantee by a Foreign Subsidiary issued in
connection with the immediately preceding paragraph, the release or discharge of
the Guarantee which resulted in the creation of such Subsidiary Guarantee,
except a discharge or release by or as a result of payment under such Guarantee.
LIMITATION ON TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES
Premium Standard Farms will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, enter into, renew or extend any
transaction (including, without limitation, the purchase, sale,
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lease or exchange of property or assets, or the rendering of any service) with
any holder (or any Affiliate of such holder) of 5% or more of any class of
Capital Stock of Premium Standard Farms or PSF Group Holdings or with any
Affiliate of Premium Standard Farms or any Restricted Subsidiary, except upon
fair and reasonable terms no less favorable to Premium Standard Farms or such
Restricted Subsidiary than could be obtained, at the time of such transaction
or, if such transaction is pursuant to a written agreement, at the time of the
execution of the agreement providing therefor, in a comparable arm's-length
transaction with a Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to:
(1) transactions (A) approved by a majority of the disinterested
members of the Board of Directors of Premium Standard Farms or (B) for
which Premium Standard Farms or a Restricted Subsidiary delivers to the
Trustee a written opinion of an investment banking, accounting, valuation
or appraisal firm of recognized standing stating that the transaction is
fair to Premium Standard Farms or such Restricted Subsidiary from a
financial point of view;
(2) any transaction solely between (a) Premium Standard Farms and any
of its Wholly Owned Restricted Subsidiaries or solely among Wholly Owned
Restricted Subsidiaries and (b) Premium Standard Farms and any of its other
Restricted Subsidiaries or solely among other Restricted Subsidiaries in
the ordinary course of business; provided that solely for the purposes of
this clause (b) no Affiliate of Premium Standard Farms (other than its
Restricted Subsidiaries) owns any Capital Stock of any such Restricted
Subsidiary;
(3) the payment of reasonable and customary compensation to directors
of Premium Standard Farms who are not employees of Premium Standard Farms
and reasonable indemnification arrangements entered into by Premium
Standard Farms;
(4) any payments or other transactions pursuant to any tax-sharing
agreement between Premium Standard Farms and any other Person with which
Premium Standard Farms files a consolidated tax return or with which
Premium Standard Farms is part of a consolidated group for tax purposes;
(5) any sale of shares of Capital Stock (other than Disqualified
Stock) of Premium Standard Farms;
(6) any Restricted Payments not prohibited by the "Limitation on
Restricted Payments" covenant;
(7) the payment of fees to Morgan Stanley & Co. Incorporated or its
Affiliates for financial, advisory, consulting, commercial banking or
investment banking services and related expenses that the Board of
Directors deems advisable or appropriate (including, without limitation,
the payment of any underwriting discounts or commissions or placement
agency fees in connection with the issuance and sale of securities);
(8) the payment of reasonable fees to ContiGroup for legal, hedging
and other services in an aggregate amount not to exceed $1.0 million in any
fiscal year;
(9) the payment to ContiGroup for consulting fees for work done in
reaching a settlement of certain environmental matters in an aggregate
amount not to exceed $3.5 million; or
(10) the reimbursement for reasonable expenses incurred by ContiGroup
in connection with contract grower services provided in accordance with
past practice.
Notwithstanding the foregoing, any transaction or series of related transactions
covered by the first paragraph of this "Limitation on Transactions with
Shareholders and Affiliates" covenant and not covered by clauses (2) through
(10) of this paragraph, (a) the aggregate amount of which exceeds $2.0 million
in value, must be approved or determined to be fair in the manner provided for
in clause (1)(A) or (B) above and (b) the aggregate amount of which exceeds
$10.0 million in value, must be determined to be fair in the manner provided for
in clause (1)(B) above.
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LIMITATION ON LIENS
Premium Standard Farms will not, and will not permit any Restricted
Subsidiary to, create, incur, assume or suffer to exist any Lien on any of its
assets or properties of any character, or any shares of Capital Stock or
Indebtedness of any Restricted Subsidiary, without making effective provision
for all of the notes and all other amounts due under the Indenture to be
directly secured equally and ratably with (or, if the obligation or liability to
be secured by such Lien is subordinated in right of payment to the notes, prior
to) the obligation or liability secured by such Lien.
The foregoing limitation does not apply to:
(1) Liens existing on June 7, 2001, including Liens securing
obligations under the Credit Agreement;
(2) Liens granted after June 7, 2001 on any assets or Capital Stock of
Premium Standard Farms or its Restricted Subsidiaries created in favor of
the Trustee for its benefit and for the benefit of the Holders;
(3) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to Premium Standard Farms or a Wholly
Owned Restricted Subsidiary to secure Indebtedness owing to Premium
Standard Farms or such other Restricted Subsidiary;
(4) Liens securing Indebtedness which is Incurred to refinance secured
Indebtedness which is permitted to be Incurred under clause (3) of the
second paragraph of the "Limitation on Indebtedness" covenant; provided
that such Liens do not extend to or cover any property or assets of Premium
Standard Farms or any Restricted Subsidiary other than the property or
assets securing the Indebtedness being refinanced; or
(5) Liens to secure Indebtedness (including Indebtedness under the
Credit Agreement) Incurred under clause (1) or (8) of the second paragraph
of the "Limitation on Indebtedness" covenant;
(6) Liens (including extensions and renewals thereof) upon real or
personal property (including Capital Stock) acquired or constructed after
June 7, 2001; provided that (a) such Lien is created solely for the purpose
of securing Indebtedness Incurred, in accordance with the "Limitation on
Indebtedness" covenant, to finance or refinance the cost (including the
cost of improvement or construction) of the item of property or assets
subject thereto and such Lien is created prior to, at the time of or within
six months after the later of the acquisition, the completion of
construction or the commencement of full operation of such property (b) the
principal amount of the Indebtedness secured by such Lien does not exceed
100% of such cost (including transaction costs relating to such purchase,
construction or improvement) and (c) any such Lien shall not extend to or
cover any property or assets other than such item of property or assets and
any improvements on such item;
(7) Liens on cash set aside at the time of the Incurrence of any
Indebtedness, or government securities purchased with such cash, in either
case to the extent that such cash or government securities pre-fund the
payment of interest on such Indebtedness and are held in a collateral or
escrow account or similar arrangement to be applied for such purpose; or
(8) Permitted Liens.
LIMITATION ON SALE-LEASEBACK TRANSACTIONS
Premium Standard Farms will not, and will not permit any Restricted
Subsidiary to, enter into any sale-leaseback transaction involving any of its
assets or properties, whether now owned or hereafter acquired, whereby Premium
Standard Farms or a Restricted Subsidiary sells or transfers such assets or
properties more than six months after acquiring or completion of construction of
such assets or properties and then or thereafter leases such assets or
properties or any part thereof or any other assets or properties
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which Premium Standard Farms or such Restricted Subsidiary, as the case may be,
intends to use for substantially the same purpose or purposes as the assets or
properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if:
(1) the lease is for a period, including renewal rights, of not in
excess of three years;
(2) the lease secures or relates to industrial revenue bonds,
pollution control bonds or other tax favored or tax exempt bonds;
(3) the transaction is solely between Premium Standard Farms and any
Wholly Owned Restricted Subsidiary or solely between Wholly Owned
Restricted Subsidiaries;
(4) Premium Standard Farms or such Restricted Subsidiary, within 12
months after the sale or transfer of any assets or properties is completed,
applies an amount not less than the net proceeds received from such sale in
accordance with clause (A) or (B) of the second paragraph of the
"Limitation on Asset Sales" covenant; or
(5) the lease secures or relates to any vehicle; provided that the
aggregate fair market value of such vehicles subject to such lease does not
exceed $15.0 million.
LIMITATION ON ASSET SALES
Premium Standard Farms will not, and will not permit any Restricted
Subsidiary to, consummate any Asset Sale, unless (1) the consideration received
by Premium Standard Farms or such Restricted Subsidiary is at least equal to the
fair market value of the assets sold or disposed of and (2) at least 75% of the
consideration received consists of (a) cash or Temporary Cash Investments, (b)
the assumption of unsubordinated Indebtedness of Premium Standard Farms or any
Subsidiary Guarantor or Indebtedness of any other Restricted Subsidiary (in each
case, other than Indebtedness owed to Premium Standard Farms or any Affiliate of
Premium Standard Farms), provided that Premium Standard Farms, such Subsidiary
Guarantor or such other Restricted Subsidiary is irrevocably and unconditionally
released from all liability under such Indebtedness, (c) Replacement Assets. For
the purposes of this covenant only, cash shall include any securities, notes or
other obligations received by Premium Standard Farms or any such Restricted
Subsidiary that are converted, sold or exchanged by Premium Standard Farms or
any such Restricted Subsidiary into cash within 90 days of the related Asset
Sale to the extent of the cash received in that conversion.
In the event and to the extent that the Net Cash Proceeds received by
Premium Standard Farms or any of its Restricted Subsidiaries from one or more
Asset Sales occurring on or after June 7, 2001 in any period of 12 consecutive
months exceed 10% of Adjusted Consolidated Net Tangible Assets (determined as of
the date closest to the commencement of such 12-month period for which a
consolidated balance sheet of Premium Standard Farms and its Subsidiaries has
been filed with the SEC or provided to the Trustee), then Premium Standard Farms
shall or shall cause the relevant Restricted Subsidiary to:
(1) within twelve months after the date Net Cash Proceeds so received
exceed 10% of Adjusted Consolidated Net Tangible Assets,
(A) apply an amount equal to such excess Net Cash Proceeds to
permanently repay unsubordinated Indebtedness of Premium Standard Farms
or any Subsidiary Guarantor or Indebtedness of any other Restricted
Subsidiary, in each case owing to a Person other than Premium Standard
Farms or any Affiliate of Premium Standard Farms, or
(B) invest an equal amount, or the amount not so applied pursuant
to clause (A) (or enter into a definitive agreement committing to so
invest within 12 months after the date of such agreement), in
Replacement Assets, and
(2) apply (no later than the end of the 12-month period referred to in
clause (1)) such excess Net Cash Proceeds (to the extent not applied
pursuant to clause (1) as extended in accordance with
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any definitive agreement referred to in subclause (B)) as provided in the
following paragraphs of this "Limitation on Asset Sales" covenant.
The amount of such excess Net Cash Proceeds required to be applied (or to be
committed to be applied) during such 12-month period as set forth in clause (1)
of the preceding sentence and not applied as so required by the end of such
period shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $10.0 million, Premium
Standard Farms must commence, not later than the fifteenth Business Day of such
month, and consummate an Offer to Purchase from the Holders (and if required by
the terms of any Indebtedness that is pari passu with the notes ("Pari Passu
Indebtedness"), from the holders of such Pari Passu Indebtedness) on a pro rata
basis an aggregate principal amount of notes (and Pari Passu Indebtedness) equal
to the Excess Proceeds on such date, at a purchase price equal to 100% of their
principal amount, plus, in each case, accrued interest (if any) to the Payment
Date. If any Excess Proceeds remain after consummation of an Offer to Purchase,
Premium Standard Farms or any Restricted Subsidiary may use such Excess Proceeds
for any purpose not otherwise prohibited by the Indenture.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
Premium Standard Farms must commence, within 30 days after the occurrence
of a Change of Control, and consummate an Offer to Purchase for all notes then
outstanding, at a purchase price equal to 101% of their principal amount, plus
accrued interest (if any) to the Payment Date.
There can be no assurance that Premium Standard Farms will have sufficient
funds available at the time of any Change of Control to make any debt payment
(including repurchases of notes) required by the foregoing covenant (as well as
may be contained in other securities or Indebtedness of Premium Standard Farms
which might be outstanding at the time).
The above covenant requiring Premium Standard Farms to repurchase the notes
will, unless consents are obtained, require Premium Standard Farms to repay all
indebtedness then outstanding which by its terms would prohibit such note
repurchase, either prior to or concurrently with such note repurchase.
Premium Standard Farms will not be required to make an Offer to Purchase
upon the occurrence of a Change of Control, if a third party makes an offer to
purchase the notes in the manner, at the times and price and otherwise in
compliance with the requirements of the Indenture applicable to an Offer to
Purchase for a Change of Control and purchases all notes validly tendered and
not withdrawn in such offer to purchase.
SEC REPORTS AND REPORTS TO HOLDERS
At all times from and after the earlier of (1) the date of the commencement
of an Exchange Offer or the effectiveness of the Shelf Registration Statement
(the "Registration") and (2) the date that is six months after June 7, 2001, in
either case, whether or not Premium Standard Farms is then required to file
reports with the SEC, Premium Standard Farms shall file with the SEC all such
reports and other information as it would be required to file with the SEC by
Section 13(a) or 15(d) under the Securities Exchange Act of 1934 if it were
subject thereto. Premium Standard Farms shall supply to the Trustee and to each
Holder who so requests or shall supply to the Trustee for forwarding to each
such Holder, without cost to such Holder, copies of such reports and other
information. In addition, at all times prior to the earlier of the date of the
Registration and December 7, 2001, Premium Standard Farms shall, at its cost,
deliver to the Trustee and each Holder who so requests quarterly and annual
reports substantially equivalent to those which would be required by the
Exchange Act. In addition, at all times prior to the Registration, upon the
request of any Holder or any prospective purchaser of the notes designated by a
Holder, Premium Standard Farms shall supply to such Holder or such prospective
purchaser the information required under Rule 144A under the Securities Act.
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Notwithstanding the foregoing so long as PSF Group Holdings guarantees the
notes, the reports, information and other documents required to be filed and
provided as described above shall be those of PSF Group Holdings, rather than
Premium Standard Farms, so long as such filings would satisfy the SEC's
requirements.
EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the
Indenture:
(a) default in the payment of principal of (or premium, if any, on)
any note when the same becomes due and payable at maturity, upon
acceleration, redemption or otherwise;
(b) default in the payment of interest on any note when the same
becomes due and payable, and such default continues for a period of 30
days;
(c) (i) default in the performance or breach of the provisions of the
Indenture applicable to (A) mergers, consolidations and transfers of all or
substantially all of the assets of Premium Standard Farms or PSF Group
Holdings or (B) mergers or consolidations of any Subsidiary Guarantor or
(ii) the failure by Premium Standard Farms to make or consummate an Offer
to Purchase in accordance with the "Limitation on Asset Sales" or
"Repurchase of Notes upon a Change of Control" covenant;
(d) Premium Standard Farms, any Subsidiary Guarantor or PSF Group
Holdings defaults in the performance of or breaches any other covenant or
agreement in the Indenture or under the Notes (other than a default
specified in clause (a), (b) or (c) above) and such default or breach
continues for a period of 30 consecutive days after written notice by the
Trustee or the Holders of 25% or more in aggregate principal amount of the
notes;
(e) there occurs with respect to any issue or issues of Indebtedness
of Premium Standard Farms, any Subsidiary Guarantor, PSF Group Holdings or
any Significant Subsidiary having an outstanding principal amount of $7.5
million or more in the aggregate for all such issues of all such Persons,
whether such Indebtedness now exists or shall hereafter be created, (A) an
event of default that has caused the holder thereof to declare such
Indebtedness to be due and payable prior to its Stated Maturity and such
Indebtedness has not been discharged in full or such acceleration has not
been rescinded or annulled within 30 days of such acceleration and/or (B)
the failure to make a principal payment at the final (but not any interim)
fixed maturity and such defaulted payment shall not have been made, waived
or extended within 30 days of such payment default;
(f) final judgments or orders (not covered by insurance) for the
payment of money in excess of $7.5 million in the aggregate for all such
final judgments or orders against all such Persons (treating any
deductibles, self-insurance or retention as not so covered) shall be
rendered against Premium Standard Farms, any Subsidiary Guarantor, PSF
Group Holdings or any Significant Subsidiary and shall not be paid or
discharged, and there shall be any period of 30 consecutive days following
entry of the final judgment or order that causes the aggregate amount for
all such final judgments or orders outstanding and not paid or discharged
against all such Persons to exceed $7.5 million during which a stay of
enforcement of such final judgment or order, by reason of a pending appeal
or otherwise, shall not be in effect;
(g) a court having jurisdiction in the premises enters a decree or
order for (A) relief in respect of Premium Standard Farms, any Subsidiary
Guarantor, PSF Group Holdings or any Significant Subsidiary in an
involuntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, (B) appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official
of Premium Standard Farms, any Subsidiary Guarantor, PSF Group Holdings or
any Significant Subsidiary or for all or substantially all of the property
and assets of Premium Standard Farms, any Subsidiary Guarantor, PSF Group
Holdings or any Significant Subsidiary or (C) the winding up or liquidation
of the affairs of Premium Standard Farms, any
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Subsidiary Guarantor, PSF Group Holdings or any Significant Subsidiary and,
in each case, such decree or order shall remain unstayed and in effect for
a period of 60 consecutive days;
(h) Premium Standard Farms, any Subsidiary Guarantor, PSF Group
Holdings or any Significant Subsidiary (A) commences a voluntary case under
any applicable bankruptcy, insolvency or other similar law now or hereafter
in effect, or consents to the entry of an order for relief in an
involuntary case under any such law, (B) consents to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of Premium Standard Farms, any Subsidiary
Guarantor, PSF Group Holdings or any Significant Subsidiary or for all or
substantially all of the property and assets of Premium Standard Farms, any
Subsidiary Guarantor, PSF Group Holdings or any Significant Subsidiary or
(C) effects any general assignment for the benefit of creditors; or
(i) any Guarantor repudiates its obligations under its Note Guarantee
or, except as permitted by the Indenture, any Note Guarantee is determined
to be unenforceable or invalid or shall for any reason cease to be in full
force and effect.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to Premium Standard Farms) occurs and
is continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount of the notes, then outstanding, by written notice to
Premium Standard Farms (and to the Trustee if such notice is given by the
Holders), may, and the Trustee at the request of such Holders shall, declare the
principal of, premium, if any, and accrued interest on the notes to be
immediately due and payable. Upon a declaration of acceleration, such principal
of, premium, if any, and accrued interest shall be immediately due and payable.
In the event of a declaration of acceleration because an Event of Default set
forth in clause (e) above has occurred and is continuing, such declaration of
acceleration shall be automatically rescinded and annulled if the event of
default triggering such Event of Default pursuant to clause (e) shall be
remedied or cured by Premium Standard Farms, PSF Group Holdings, any Subsidiary
Guarantor or the relevant Significant Subsidiary or waived by the holders of the
relevant Indebtedness within 60 days after the declaration of acceleration with
respect thereto. If an Event of Default specified in clause (g) or (h) above
occurs with respect to Premium Standard Farms or any Guarantor, the principal
of, premium, if any, and accrued interest on the notes then outstanding shall
automatically become and be immediately due and payable without any declaration
or other act on the part of the Trustee or any Holder. The Holders of at least a
majority in principal amount of the outstanding notes by written notice to
Premium Standard Farms and to the Trustee, may waive all past defaults and
rescind and annul a declaration of acceleration and its consequences if (x) all
existing Events of Default, other than the nonpayment of the principal of,
premium, if any, and interest on the notes that have become due solely by such
declaration of acceleration, have been cured or waived and (y) the rescission
would not conflict with any judgment or decree of a court of competent
jurisdiction. For information as to the waiver of defaults, see "-- Modification
and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of notes. A Holder
may not pursue any remedy with respect to the Indenture or the notes unless:
(1) the Holder gives the Trustee written notice of a continuing Event
of Default;
(2) the Holders of at least 25% in aggregate principal amount of
outstanding notes make a written request to the Trustee to pursue the
remedy;
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(3) such Holder or Holders offer the Trustee indemnity satisfactory to
the Trustee against any costs, liability or expense;
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and
(5) during such 60-day period, the Holders of a majority in aggregate
principal amount of the outstanding notes do not give the Trustee a
direction that is inconsistent with the request.
However, such limitations do not apply to the right of any Holder of a note
to receive payment of the principal of, premium, if any, or interest on, such
note or to bring suit for the enforcement of any such payment, on or after the
due date expressed in the notes, which right shall not be impaired or affected
without the consent of the Holder.
Officers of Premium Standard Farms must certify, on or before a date not
more than 90 days after the end of each fiscal year, that a review has been
conducted of the activities of Premium Standard Farms and its Restricted
Subsidiaries and Premium Standard Farms' and its Restricted Subsidiaries'
performance under the Indenture and that Premium Standard Farms has fulfilled
all obligations thereunder, or, if there has been a default in the fulfillment
of any such obligation, specifying each such default and the nature and status
thereof. Premium Standard Farms will also be obligated to notify the Trustee of
any default or defaults in the performance of any covenants or agreements under
the Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Neither Premium Standard Farms nor PSF Group Holdings will consolidate
with, merge with or into, or sell, convey, transfer, lease or otherwise dispose
of all or substantially all of its property and assets (as an entirety or
substantially an entirety in one transaction or a series of related
transactions) to, any Person or permit any Person to merge with or into it
unless:
(1) it shall be the continuing Person, or the Person (if other than
it) formed by such consolidation or into which it is merged or that
acquired or leased such property and assets of (the "Surviving Person")
shall be a corporation organized and validly existing under the laws of the
United States of America or any jurisdiction thereof and shall expressly
assume, by a supplemental indenture, executed and delivered to the Trustee,
all of Premium Standard Farms' or PSF Group Holdings' obligations, as the
case may be, under the Indenture and the notes;
(2) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing;
(3) if such transaction involves Premium Standard Farms, immediately
after giving effect to such transaction on a pro forma basis, Premium
Standard Farms or the Surviving Person, as the case may be, shall have a
Consolidated Net Worth equal to or greater than the Consolidated Net Worth
of Premium Standard Farms immediately prior to such transaction;
(4) if such transaction involves Premium Standard Farms, immediately
after giving effect to such transaction on a pro forma basis Premium
Standard Farms, or the Surviving Person, as the case may be, could Incur at
least $1.00 of Indebtedness under the first paragraph of the "Limitation on
Indebtedness" covenant; provided that this clause (4) shall not apply to a
consolidation, merger or sale of all (but not less than all) of the assets
of Premium Standard Farms if all Liens and Indebtedness of Premium Standard
Farms or the Surviving Person, as the case may be, and its Restricted
Subsidiaries outstanding immediately after such transaction would have been
permitted (and all such Liens and Indebtedness, other than Liens and
Indebtedness of Premium Standard Farms and its Restricted Subsidiaries
outstanding immediately prior to the transaction, shall be deemed to have
been Incurred) for all purposes of the Indenture;
(5) it delivers to the Trustee an Officers' Certificate (if such
transaction involves Premium Standard Farms, attaching the arithmetic
computations to demonstrate compliance with clauses (3) and (4)) and
Opinion of Counsel, in each case stating that such consolidation, merger or
transfer
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and such supplemental indenture complies with this provision and that all
conditions precedent provided for herein relating to such transaction have
been complied with; and
(6) each Guarantor, unless such Guarantor is the Person entering into
such transaction under this "Consolidation, Merger and Sale of Assets",
shall have by amendment to its Note Guarantee confirmed that its Note
Guarantee shall apply to the obligations of Premium Standard Farms or the
Surviving Person in accordance with the notes and the Indenture;
provided, however, that clauses (3) and (4) above do not apply (i) if in the
good faith determination of the Board of Directors of Premium Standard Farms,
whose determination shall be evidenced by a Board Resolution, the principal
purpose of such transaction is to change the state of incorporation of Premium
Standard Farms and any such transaction shall not have as one of its purposes
the evasion of the foregoing limitations, or (ii) to any transaction solely
between Premium Standard Farms and any Wholly Owned Restricted Subsidiary.
Each Guarantor (other than any Subsidiary Guarantor whose Note Guarantee is
to be released in accordance with the terms of the Indenture) will not, and
Premium Standard Farms will not cause or permit any Subsidiary Guarantor to,
consolidate with or merge with or into any Person other than Premium Standard
Farms or any other Subsidiary Guarantor unless:
(1) the entity formed by or surviving any such consolidated or merger
(if other than the Subsidiary Guarantor) is a corporation organized and
existing under the laws of the United States or any State thereof or the
District of Columbia;
(2) such entity assumes by supplemental indenture all of the
obligations of the Subsidiary Guarantor on its Note Guarantee;
(3) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing; and
(4) immediately after giving effect to such transaction and the use of
any net proceeds therefrom on a pro forma basis, Premium Standard Farms
could satisfy the provisions of clause (4) of the first paragraph of this
covenant.
DEFEASANCE
Defeasance and Discharge. The Indenture will provide that Premium Standard
Farms will be deemed to have paid and will be discharged from any and all
obligations in respect of the notes on the 123rd day after the deposit referred
to below, and the provisions of the Indenture will no longer be in effect with
respect to the notes (except for, among other matters, certain obligations to
register the transfer or exchange of the notes, to replace stolen, lost or
mutilated notes, to maintain paying agencies and to hold monies for payment in
trust) if, among other things:
(A) Premium Standard Farms has deposited with the Trustee, in trust,
money and/or U.S. Government Obligations that through the payment of
interest and principal in respect thereof in accordance with their terms
will provide money in an amount sufficient to pay the principal of,
premium, if any, and accrued interest on the notes on the Stated Maturity
of such payments in accordance with the terms of the Indenture and the
notes,
(B) Premium Standard Farms has delivered to the Trustee (1) either (x)
an Opinion of Counsel to the effect that Holders will not recognize income,
gain or loss for federal income tax purposes as a result of Premium
Standard Farms' exercise of its option under this "Defeasance" provision
and will be subject to federal income tax on the same amount and in the
same manner and at the same times as would have been the case if such
deposit, defeasance and discharge had not occurred, which Opinion of
Counsel must be based upon (and accompanied by a copy of) a ruling of the
Internal Revenue Service to the same effect unless there has been a change
in applicable federal income tax law after June 7, 2001 such that a ruling
is no longer required or (y) a ruling directed to the Trustee received from
the Internal Revenue Service to the same effect as the aforementioned
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Opinion of Counsel and (2) an Opinion of Counsel to the effect that the
creation of the defeasance trust does not violate the Investment Company
Act of 1940 and after the passage of 123 days following the deposit, the
trust fund will not be subject to the effect of Section 547 of the United
States Bankruptcy Code or Section 15 of the New York Debtor and Creditor
Law,
(C) immediately after giving effect to such deposit on a pro forma
basis, no Event of Default, or event that after the giving of notice or
lapse of time or both would become an Event of Default, shall have occurred
and be continuing on the date of such deposit or during the period ending
on the 123rd day after the date of such deposit, and such deposit shall not
result in a breach or violation of, or constitute a default under, any
other agreement or instrument to which Premium Standard Farms or any of its
Subsidiaries is a party or by which Premium Standard Farms or any of its
Subsidiaries is bound and
(D) if at such time the notes are listed on a national securities
exchange, Premium Standard Farms has delivered to the Trustee an Opinion of
Counsel to the effect that the notes will not be delisted as a result of
such deposit, defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further will provide that the provisions of the Indenture will no
longer be in effect with respect to clauses (3) and (4) under "Consolidation,
Merger and Sale of Assets" and all the covenants described herein under
"Covenants," clause (c) under "Events of Default" with respect to such clauses
(3) and (4) under "Consolidation, Merger and Sale of Assets," clause (d) under
"Events of Default" with respect to such other covenants and clauses (e) and (f)
under "Events of Default" shall be deemed not to be Events of Default upon,
among other things, the deposit with the Trustee, in trust, of money and/or U.S.
Government Obligations that through the payment of interest and principal in
respect thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on the
notes on the Stated Maturity of such payments in accordance with the terms of
the Indenture and the notes, the satisfaction of the provisions described in
clauses (B)(2), (C) and (D) of the preceding paragraph and the delivery by
Premium Standard Farms to the Trustee of an Opinion of Counsel to the effect
that, among other things, the Holders will not recognize income, gain or loss
for federal income tax purposes as a result of such deposit and defeasance of
certain covenants and Events of Default and will be subject to federal income
tax on the same amount and in the same manner and at the same times as would
have been the case if such deposit and defeasance had not occurred.
Defeasance and Certain Other Events of Default. In the event Premium
Standard Farms exercises its option to omit compliance with certain covenants
and provisions of the Indenture with respect to the notes as described in the
immediately preceding paragraph and the notes are declared due and payable
because of the occurrence of an Event of Default that remains applicable, the
amount of money and/or U.S. Government Obligations on deposit with the Trustee
will be sufficient to pay amounts due on the notes at the time of their Stated
Maturity but may not be sufficient to pay amounts due on the notes at the time
of the acceleration resulting from such Event of Default. However, Premium
Standard Farms will remain liable for such payments and each Note Guarantee with
respect to such payments will remain in effect.
MODIFICATION AND WAIVER
The Indenture may be amended, without the consent of any Holder, to:
(1) cure any ambiguity, defect or inconsistency in the Indenture;
(2) comply with the provisions described under "Consolidation, Merger
and Sale of Assets" or "Limitation on Issuances of Guarantees by Restricted
Subsidiaries";
(3) comply with any requirements of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act;
(4) evidence and provide for the acceptance of appointment by a
successor Trustee; or
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(5) make any change that, in the good faith opinion of the Board of
Directors, does not materially and adversely affect the rights of any
Holder.
Modifications and amendments of the Indenture may be made by Premium
Standard Farms and the Trustee with the consent of the Holders of not less than
a majority in aggregate principal amount of the outstanding notes; provided,
however, that no such modification or amendment may, without the consent of each
Holder affected thereby:
(1) change the Stated Maturity of the principal of, or any installment
of interest on, any note,
(2) reduce the principal amount of, or premium, if any, or interest
on, any note,
(3) change the optional redemption dates or optional redemption prices
of the notes from that stated under the caption "Optional Redemption,"
(4) change the place or currency of payment of principal of, or
premium, if any, or interest on, any note,
(5) impair the right to institute suit for the enforcement of any
payment on or after the Stated Maturity (or, in the case of a redemption,
on or after the Redemption Date) of any note,
(6) waive a default in the payment of principal of, premium, if any,
or interest on the notes,
(7) release any Guarantor from its Note Guarantee, except as provided
in the Indenture, or
(8) reduce the percentage or aggregate principal amount of outstanding
notes the consent of whose Holders is necessary for waiver of compliance
with certain provisions of the Indenture or for waiver of certain defaults.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
No recourse for the payment of the principal of, premium, if any, or
interest on any of the notes or for any claim based thereon or otherwise in
respect thereof, and no recourse under or upon any obligation, covenant or
agreement of Premium Standard Farms or PSF Group Holdings in the Indenture, or
in any of the notes or because of the creation of any Indebtedness represented
thereby, shall be had against any incorporator, stockholder, officer, director,
employee or controlling person of Premium Standard Farms or PSF Group Holdings
or of any successor Person thereof. Each Holder, by accepting the notes, waives
and releases all such liability. The waiver and release are part of the
consideration for the issuance of the notes. Such waiver may not be effective to
waive liabilities under the federal securities laws.
CONCERNING THE TRUSTEE
Except during the continuance of a Default, the Trustee will not be liable,
except for the performance of such duties as are specifically set forth in the
Indenture. If an Event of Default has occurred and is continuing, the Trustee
will use the same degree of care and skill in its exercise of the rights and
powers vested in it under the Indenture as a prudent person would exercise under
the circumstances in the conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights of
the Trustee, should it become a creditor of Premium Standard Farms, to obtain
payment of claims in certain cases or to realize on certain property received by
it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions; provided, however, that if it
acquires any conflicting interest, it must eliminate such conflict or resign.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the notes will be issued in fully registered
form without interest coupons. Notes sold in offshore transactions in reliance
on Regulation S under the Securities Act will initially be
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represented by one or more temporary global notes in definitive, fully
registered form without interest coupons (each a "Temporary Regulation S Global
Note") and will be deposited with the Trustee as custodian for, and registered
in the name of a nominee of, The Depository Trust Company ("DTC") for the
accounts of Euroclear and Clearstream. The Temporary Regulation S Global Note
will be exchangeable for one or more permanent global notes (each a "Permanent
Regulation S Global Note"; and together with the Temporary Regulation S Global
Notes, the "Regulation S Global Note") upon certification that the beneficial
interests in such global note are owned by non-U.S. persons.
Notes sold in reliance on Rule 144A will be represented by one or more
permanent global notes in definitive, fully registered form without interest
coupons (each a "Restricted Global Note"; and together with the Regulation S
Global Notes, the "Global Notes") and will be deposited with the Trustee as
custodian for, and registered in the name of a nominee of, DTC.
Notes transferred to institutional "accredited investors" as defined in
Rule 501(a)(1), (2), (3) or (7) under the Securities Act (an "Institutional
Accredited Investor") who are not qualified institutional buyers ("Non-Global
Purchasers") will be in registered form without interest coupons ("Certificated
Notes"). Upon the transfer of Certificated Notes initially issued to a
Non-Global Purchaser to a qualified institutional buyer or in accordance with
Regulation S, such Certificated Notes will, unless the relevant Global Note has
previously been exchanged in whole for Certificated Notes, be exchanged for an
interest in a Global Note.
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Note will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants). Qualified institutional buyers may hold their
interests in a Restricted Global Note directly through DTC if they are
participants in such system, or indirectly through organizations which are
participants in such system.
Investors may hold their interests in a Regulation S Global Note directly
through Euroclear or Clearstream, if they are participants in such systems, or
indirectly through organizations that are participants in such system. Investors
may also hold such interests through organizations other than Euroclear or
Clearstream that are participants in the DTC system. Euroclear and Clearstream
will hold interests in the Regulation S Global Notes on behalf of their
participants through DTC.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the notes represented by such Global Note for all
purposes under the Indenture and the notes. No beneficial owner of an interest
in a Global Note will be able to transfer that interest except in accordance
with DTC's applicable procedures, in addition to those provided for under the
Indenture and, if applicable, those of Euroclear and Clearstream.
Payments of the principal of, and interest on, a Global Note will be made
to DTC or its nominee, as the case may be, as the registered owner thereof.
Neither Premium Standard Farms, PSF Group Holdings, the Trustee nor any Paying
Agent will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in a
Global Note or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
Premium Standard Farms expects that DTC or its nominee, upon receipt of any
payment of principal or interest in respect of a Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note as
shown on the records of DTC or its nominee. Premium Standard Farms also expects
that payments by participants to owners of beneficial interests in such Global
Note held through such participants will be governed by standing instructions
and customary practices, as is now the case with securities held for the
accounts of customers registered in the names of nominees for such customers.
Such payments will be the responsibility of such participants.
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Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear and Clearstream will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
Premium Standard Farms expects that DTC will take any action permitted to
be taken by a holder of notes (including the presentation of notes for exchange
as described below) only at the direction of one or more participants to whose
account the DTC interests in a Global Note is credited and only in respect of
such portion of the aggregate principal amount of notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the notes, DTC will exchange the applicable Global
Note for Certificated Notes, which it will distribute to its participants and
which may be legended as set forth under the heading "Transfer Restrictions."
Premium Standard Farms understands that: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Indirect access to the DTC system is
available to others such as banks, brokers, dealers and trust companies and
certain other organizations that clear through or maintain a custodial
relationship with a participant, either directly or indirectly ("indirect
participants").
Although DTC, Euroclear and Clearstream are expected to follow the
foregoing procedures in order to facilitate transfers of interests in a Global
Note among participants of DTC, Euroclear and Clearstream, they are under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither Premium Standard Farms nor
the Trustee will have any responsibility for the performance by DTC, Euroclear
or Clearstream or their respective participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Notes and a successor depositary is not appointed by Premium Standard
Farms within 90 days, Premium Standard Farms will issue Certificated Notes,
which may bear the legend referred to under "Transfer Restrictions," in exchange
for the Global Notes. Holders of an interest in a Global Note may receive
Certificated Notes, which may bear the legend referred to under "Transfer
Restrictions," in accordance with the DTC's rules and procedures in addition to
those provided for under the Indenture.
DEFINITIONS
Set forth below are defined terms used in the covenants and other
provisions of the Indenture. Reference is made to the Indenture for other
capitalized terms used in this "Description of the Notes" for which no
definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or Indebtedness of a Restricted
Subsidiary assumed in connection with an Asset Acquisition by such Restricted
Subsidiary; provided such Indebtedness was not Incurred in connection with or in
contemplation of such Person becoming a Restricted Subsidiary or such Asset
Acquisition.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of Premium Standard Farms and its Restricted Subsidiaries for
such period determined in conformity with GAAP; provided that the following
items shall be excluded in computing Adjusted Consolidated Net Income (without
duplication):
(1) the net income (or loss) of any Person that is not a Restricted
Subsidiary, except to the extent of the amount of dividends or other
distributions actually paid to Premium Standard Farms or any of its
Restricted Subsidiaries;
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(2) the net income (or loss) of any Person accrued prior to the date
it becomes a Restricted Subsidiary or is merged into or consolidated with
Premium Standard Farms or any of its Restricted Subsidiaries or all or
substantially all of the property and assets of such Person are acquired by
Premium Standard Farms or any of its Restricted Subsidiaries;
(3) the net income of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted by
the operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary;
(4) any gains or losses (on an after-tax basis) attributable to sales
of assets outside the ordinary course of business of Premium Standard Farms
and its Restricted Subsidiaries;
(5) solely for purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of the first paragraph of
the "Limitation on Restricted Payments" covenant, any amount paid or
accrued as dividends on Preferred Stock of Premium Standard Farms owned by
Persons other than Premium Standard Farms and any of its Restricted
Subsidiaries; and
(6) all extraordinary gains and, solely for purposes of calculating
the Interest Coverage Ratio, extraordinary losses.
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of Premium Standard Farms and its Restricted Subsidiaries (less
applicable depreciation, amortization and other valuation reserves), except to
the extent resulting from write-ups of capital assets (excluding write-ups in
connection with accounting for acquisitions in conformity with GAAP), after
deducting therefrom (1) all current liabilities of Premium Standard Farms and
its Restricted Subsidiaries (excluding intercompany items) and (2) all goodwill,
trade names, trademarks, patents, unamortized debt discount and expense and
other like intangibles, all as set forth on the most recent quarterly or annual
consolidated balance sheet of Premium Standard Farms and its Restricted
Subsidiaries, prepared in conformity with GAAP and filed with the SEC or
provided to the Trustee.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (1) an investment by Premium Standard Farms or
any of its Restricted Subsidiaries in any other Person pursuant to which such
Person shall become a Restricted Subsidiary or shall be merged into or
consolidated with Premium Standard Farms or any of its Restricted Subsidiaries;
provided that such Person's primary business is, in the judgment of the Board of
Directors of Premium Standard Farms, related, ancillary or complementary to the
businesses of Premium Standard Farms and its Restricted Subsidiaries on the date
of such investment or (2) an acquisition by Premium Standard Farms or any of its
Restricted Subsidiaries of the property and assets of any Person other than
Premium Standard Farms or any of its Restricted Subsidiaries that constitute
substantially all of a division or line of business of such Person; provided
that the property and assets acquired are, in the judgment of the Board of
Directors of Premium Standard Farms, related, ancillary or complementary to the
businesses of Premium Standard Farms and its Restricted Subsidiaries on the date
of such acquisition.
"Asset Disposition" means the sale or other disposition by Premium Standard
Farms or any of its Restricted Subsidiaries (other than to Premium Standard
Farms or another Restricted Subsidiary) of (1) all or substantially all of the
Capital Stock of any Restricted Subsidiary or (2) all or substantially all of
the assets that constitute a division or line of business of Premium Standard
Farms or any of its Restricted Subsidiaries.
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"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transaction) in one transaction
or a series of related transactions by Premium Standard Farms or any of its
Restricted Subsidiaries to any Person other than Premium Standard Farms or any
of its Restricted Subsidiaries of:
(1) all or any of the Capital Stock of any Restricted Subsidiary,
(2) all or substantially all of the property and assets of an
operating unit or business of Premium Standard Farms or any of its
Restricted Subsidiaries, or
(3) any other property and assets (other than the Capital Stock or
other Investment in an Unrestricted Subsidiary) of Premium Standard Farms
or any of its Restricted Subsidiaries outside the ordinary course of
business of Premium Standard Farms or such Restricted Subsidiary, and,
in each case, that is not governed by the provisions of the Indenture applicable
to mergers, consolidations and sales of assets of Premium Standard Farms;
provided that "Asset Sale" shall not include:
(a) sales or other dispositions of inventory, receivables and other
current assets,
(b) sales, transfers or other dispositions of assets constituting a
Permitted Investment or Restricted Payment permitted to be made under the
"Limitation on Restricted Payments" covenant,
(c) sales, transfers or other dispositions of assets with a fair
market value not in excess of $1.0 million in any transaction or series of
related transactions, or
(d) any sale, transfer, assignment or other disposition of any
property equipment that has become damaged, worn out, obsolete or otherwise
unsuitable for use in connection with the business of Premium Standard
Farms or its Restricted Subsidiaries.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (1) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (2) the sum of all such principal payments.
"Board of Directors" means, with respect to any Person, the Board of
Directors of such Person or any duly authorized committee of such Board of
Directors.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on June 7,
2001 or issued thereafter, including, without limitation, all Common Stock and
Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means such time as:
(1) a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act) other than the Existing Stockholders and
their Affiliates becomes the ultimate "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act) of more than 50% of the total voting
power of the Voting Stock of Premium Standard Farms, on a fully diluted
basis; or
(2) a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act) other than the Existing Stockholders and
their Affiliates becomes the ultimate "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act) of more than 50% of the total voting
power of the Voting Stock of PSF Group Holdings, on a fully diluted basis;
or
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(3) individuals who on June 7, 2001 constitute the Board of Directors
of Premium Standard Farms or PSF Group Holdings (together with any new
directors whose election by the Board of Directors of Premium Standard
Farms or PSF Group Holdings, as the case may be, or whose nomination by the
Board of Directors of Premium Standard Farms or PSF Group Holdings, as the
case may be, for election by Premium Standard Farms' or PSF Group Holdings'
stockholders, as the case may be, was approved by a vote of at least a
majority of the members of the Board of Directors of Premium Standard Farms
or PSF Group Holdings, as the case may be, then in office who either were
members of the Board of Directors of Premium Standard Farms or PSF Group
Holdings, as the case may be, on June 7, 2001 or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the members of the Board of Directors of Premium
Standard Farms or PSF Group Holdings, as the case may be, then in office.
"Commodity Agreement" means any forward contract, commodity swap agreement,
commodity option agreement or other similar agreement or arrangement.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income:
(1) Consolidated Interest Expense,
(2) income taxes,
(3) depreciation expense,
(4) amortization expense,
(5) non-recurring fees and expenses incurred in connection with the
consummation of any acquisition in an aggregate amount not to exceed 5% of
the total consideration of such acquisition and
(6) all other non-cash items reducing Adjusted Consolidated Net Income
(other than items that will require cash payments and for which an accrual
or reserve is, or is required by GAAP to be, made), less all non-cash items
increasing Adjusted Consolidated Net Income, all as determined on a
consolidated basis for Premium Standard Farms and its Restricted
Subsidiaries in conformity with GAAP;
provided that, if any Restricted Subsidiary is not a Wholly Owned Restricted
Subsidiary, Consolidated EBITDA shall be reduced (to the extent not otherwise
reduced in accordance with GAAP) by an amount equal to (A) the amount of the
Adjusted Consolidated Net Income attributable to such Restricted Subsidiary
multiplied by (B) the percentage ownership interest in the income of such
Restricted Subsidiary not owned on the last day of such period by Premium
Standard Farms or any of its Restricted Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements (provided that
if Interest Rate Agreements result in net benefits rather than costs, such
benefits shall be credited in determining Consolidated Interest Expense unless,
pursuant to GAAP, such net benefits are otherwise reflected in Consolidated Net
Income); and Indebtedness that is Guaranteed or secured by Premium Standard
Farms or any of its Restricted Subsidiaries) and all but the principal component
of rentals in respect of Capitalized Lease Obligations paid, accrued or
scheduled to be paid or to be accrued by Premium Standard Farms and its
Restricted Subsidiaries during such period; excluding, however, (1) any amount
of such interest of any Restricted Subsidiary if the net income of such
Restricted Subsidiary is excluded in the calculation of Adjusted Consolidated
Net Income pursuant to clause (3) of the definition thereof (but only in the
same proportion as the net income of such Restricted Subsidiary is excluded from
the calculation of Adjusted Consolidated Net Income pursuant to clause (3) of
the definition thereof) and (2) any premiums, fees and expenses (and any
amortization thereof) payable in
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connection with the offering of the Notes, all as determined on a consolidated
basis (without taking into account Unrestricted Subsidiaries) in conformity with
GAAP.
"Consolidated Net Worth" means with respect to any Person, at any date of
determination, stockholders' equity as set forth on the most recently available
quarterly or annual consolidated balance sheet of such Person and its Restricted
Subsidiaries (which shall be as of a date not more than 90 days prior to the
date of such computation, and which shall not take into account Unrestricted
Subsidiaries), plus, to the extent not included, any Preferred Stock of such
Person, less any amounts attributable to Disqualified Stock or any equity
security convertible into or exchangeable for Indebtedness, the cost of treasury
stock and the principal amount of any promissory notes receivable from the sale
of the Capital Stock of such Person or any of its Restricted Subsidiaries, each
item to be determined in conformity with GAAP (excluding the effects of foreign
currency exchange adjustments under Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 52).
"ContiGroup" means ContiGroup Companies, Inc., a Delaware corporation.
"Credit Agreement" means the Credit Agreement between the Company, the
lenders party thereto and U.S. Bancorp AG Credit, Inc. (formerly FBS Credit,
Inc.), as Agent, dated August 27, 1997, together with all agreements,
instruments and documents executed or delivered pursuant thereto and in
connection therewith, in each case as amended, supplemented, extended, renewed,
replaced (by one or more credit facilities or debt instruments supplemental
thereto) or otherwise modified from time to time including, without limitation,
any agreement increasing the amount of, extending the maturity of, refinancing
(in whole or in part) or otherwise restructuring (including, but not limited to,
by the inclusion of additional or different lenders thereunder, additional
borrowers or guarantors thereof or by the addition of collateral or other credit
enhancement to support the obligations thereunder) all or any portion of the
Indebtedness under such agreement or any successor agreement or agreements
(regardless of when incurred).
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (1) required to be redeemed prior to
the Stated Maturity of the Notes, (2) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (3) convertible into or exchangeable for Capital Stock referred
to in clause (1) or (2) above or Indebtedness having a scheduled maturity prior
to the Stated Maturity of the Notes; provided that any Capital Stock that would
not constitute Disqualified Stock but for provisions thereof giving holders
thereof the right to require such Person to repurchase or redeem such Capital
Stock upon the occurrence of an "asset sale" or "change of control" occurring
prior to the Stated Maturity of the Notes shall not constitute Disqualified
Stock if the "asset sale" or "change of control" provisions applicable to such
Capital Stock are no more favorable to the holders of such Capital Stock than
the provisions contained in "Limitation on Asset Sales" and "Repurchase of Notes
upon a Change of Control" covenants and such Capital Stock specifically provides
that such Person will not repurchase or redeem any such stock pursuant to such
provision prior to Premium Standard Farms' repurchase of such notes as are
required to be repurchased pursuant to the "Limitation on Asset Sales" and
"Repurchase of Notes upon a Change of Control" covenants.
"Existing Stockholders" means (1) PSF Group Holdings, (2) ContiGroup, (3)
Mary Ann Fribourg, (4) each of the five children of Michel Fribourg and (5) any
lineal descendants of any of the five children of Michel Fribourg; provided that
any such descendant shall only be deemed to be an "Existing Stockholder" to the
extent such descendant acquired beneficial ownership of stock of Premium
Standard Farms or PSF Group Holdings directly or indirectly from Mary Ann
Fribourg or any of the five children of Michel Fribourg.
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"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution.
"Foreign Subsidiary" means any Restricted Subsidiary of Premium Standard
Farms that is an entity which is a controlled foreign corporation under Section
957 of the Internal Revenue Code.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of June 7, 2001, including, without limitation, those
set forth in the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the Indenture shall be
made without giving effect to (1) the amortization of any expenses incurred in
connection with the offering of the notes and (2) except as otherwise provided,
the amortization of any amounts required or permitted by Accounting Principles
Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (1) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (2) entered into for purposes of
assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Guarantor" means collectively, PSF Group Holdings and each Subsidiary
Guarantor.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness;
provided that (1) any Indebtedness of a Person existing at the time such Person
becomes a Restricted Subsidiary will be deemed to be incurred by such Restricted
Subsidiary at the time it becomes a Restricted Subsidiary and (2) neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication):
(1) all indebtedness of such Person for borrowed money;
(2) all obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments (other than, in the case of Premium
Standard Farms and the Subsidiary Guarantors, any non-negotiable bonds,
debentures or notes or similar instruments of Premium Standard Farms or any
Subsidiary Guarantor issued to its insurance carriers in lieu of
maintenance of policy reserves in connection with workers' compensation and
liability insurance programs of Premium Standard Farms or any Subsidiary
Guarantor);
(3) all obligations of such Person in respect of letters of credit or
other similar instruments (including reimbursement obligations with respect
thereto, but excluding obligations with respect to letters of credit
(including trade letters of credit) securing obligations (other than
obligations described in (1) or (2) above or (5), (6) or (7) below) entered
into in the ordinary course of business of such Person to the extent such
letters of credit are not drawn upon or, if drawn upon, to
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the extent such drawing is reimbursed no later than the third Business Day
following receipt by such Person of a demand for reimbursement);
(4) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services, which purchase price is due more
than six months after the date of placing such property in service or
taking delivery and title thereto or the completion of such services,
except Trade Payables;
(5) all Capitalized Lease Obligations;
(6) all Indebtedness of other Persons secured by a Lien on any asset
of such Person, whether or not such Indebtedness is assumed by such Person;
provided that the amount of such Indebtedness shall be the lesser of (A)
the fair market value of such asset at such date of determination and (B)
the amount of such Indebtedness;
(7) all Indebtedness of other Persons Guaranteed by such Person to the
extent such Indebtedness is Guaranteed by such Person; and
(8) to the extent not otherwise included in this definition,
obligations under Commodity Agreements, Currency Agreements and Interest
Rate Agreements (other than Commodity Agreements, Currency Agreements and
Interest Rate Agreements designed solely to protect Premium Standard Farms
or its Restricted Subsidiaries against fluctuations in commodity prices,
foreign currency exchange rates or interest rates and that do not increase
the Indebtedness of the obligor outstanding at any time other than as a
result of fluctuations in commodity prices, foreign currency exchange rates
or interest rates or by reason of fees, indemnities and compensation
payable thereunder).
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and,
with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation, assuming such
contingency had occurred on such date provided
(A) that the amount outstanding at any time of any Indebtedness issued
with original issue discount is the face amount of such Indebtedness less
the remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in conformity with GAAP,
(B) that money borrowed and set aside at the time of the Incurrence of
any Indebtedness in order to pre-fund the payment of the interest on such
Indebtedness shall not be deemed to be "Indebtedness" so long as such money
is held to secure the payment of such interest; provided that the release
of such money to make such interest payments shall not constitute an
Incurrence of Indebtedness and
(C) that Indebtedness shall not include:
(x) any liability for federal, state, local or other taxes,
(y) performance, surety or appeal bonds provided in the ordinary
course of business or
(z) agreements providing for indemnification, adjustment of
purchase price or similar obligations, or Guarantees or letters of
credit, surety bonds or performance bonds securing any obligations of
Premium Standard Farms or any of its Restricted Subsidiaries pursuant to
such agreements, in any case Incurred in connection with the disposition
of any business, assets or Restricted Subsidiary (other than Guarantees
of Indebtedness Incurred by any Person acquiring all or any portion of
such business, assets or Restricted Subsidiary for the purpose of
financing such acquisition), so long as the principal amount does not
exceed the gross proceeds actually received by Premium Standard Farms or
any Restricted Subsidiary in connection with such disposition.
"Initial Subsidiary Guarantors" means The Lundy Packing Company, Premium
Standard Farms of North Carolina, Inc. and Lundy International, Inc.
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"Interest Coverage Ratio" means, on any Transaction Date, the ratio of (1)
the aggregate amount of Consolidated EBITDA for the then most recent four fiscal
quarters prior to such Transaction Date for which reports have been filed with
the SEC or provided to the Trustee (the "Four Quarter Period") to (2) the
aggregate Consolidated Interest Expense during such Four Quarter Period. In
making the foregoing calculation:
(A) pro forma effect shall be given to any Indebtedness Incurred or
repaid during the period (the "Reference Period") commencing on the first
day of the Four Quarter Period and ending on the Transaction Date (other
than Indebtedness Incurred or repaid under a revolving credit or similar
arrangement to the extent of the commitment thereunder (or under any
predecessor revolving credit or similar arrangement) in effect on the last
day of such Four Quarter Period unless any portion of such Indebtedness is
projected, in the reasonable judgment of the senior management of Premium
Standard Farms, to remain outstanding for a period in excess of 12 months
from the date of the Incurrence thereof), in each case as if such
Indebtedness had been Incurred or repaid on the first day of such Reference
Period;
(B) Consolidated Interest Expense attributable to interest on any
Indebtedness (whether existing or being Incurred) computed on a pro forma
basis and bearing a floating interest rate shall be computed as if the rate
in effect on the Transaction Date (taking into account any Interest Rate
Agreement applicable to such Indebtedness if such Interest Rate Agreement
has a remaining term in excess of 12 months or, if shorter, at least equal
to the remaining term of such Indebtedness) had been the applicable rate
for the entire period;
(C) pro forma effect shall be given to Asset Dispositions and Asset
Acquisitions (including giving pro forma effect to the application of
proceeds of any Asset Disposition) that occur during such Reference Period
as if they had occurred and such proceeds had been applied on the first day
of such Reference Period; and
(D) pro forma effect shall be given to asset dispositions and asset
acquisitions (including giving pro forma effect to the application of
proceeds of any asset disposition) that have been made by any Person that
has become a Restricted Subsidiary or has been merged with or into Premium
Standard Farms or any Restricted Subsidiary during such Reference Period
and that would have constituted Asset Dispositions or Asset Acquisitions
had such transactions occurred when such Person was a Restricted Subsidiary
as if such asset dispositions or asset acquisitions were Asset Dispositions
or Asset Acquisitions that occurred on the first day of such Reference
Period;
provided that to the extent that clause (C) or (D) of this sentence requires
that pro forma effect be given to an Asset Acquisition or Asset Disposition,
such pro forma calculation shall be based upon the four full fiscal quarters
immediately preceding the Transaction Date of the Person, or division or line of
business of the Person, that is acquired or disposed for which financial
information is available.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers or suppliers in the
ordinary course of business that are, in conformity with GAAP, recorded as
accounts receivable, prepaid expenses or deposits on the balance sheet of
Premium Standard Farms or its Restricted Subsidiaries and endorsements for
collection or deposit arising in the ordinary course of business) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, such Person and shall include (1) the designation
of a Restricted Subsidiary as an Unrestricted Subsidiary and (2) the retention
of the Capital Stock (or any other Investment) by Premium Standard Farms or any
of its Restricted
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Subsidiaries, of (or in) any Person that has ceased to be a Restricted
Subsidiary, including without limitation, by reason of any transaction permitted
by clause (3) or (4) of the "Limitation on the Issuance and Sale of Capital
Stock of Restricted Subsidiaries" covenant. For purposes of the definition of
"Unrestricted Subsidiary" and the "Limitation on Restricted Payments" covenant,
(a) the amount of or a reduction in an Investment shall be equal to the fair
market value thereof at the time such Investment is made or reduced and (b) in
the event Premium Standard Farms or a Restricted Subsidiary makes an Investment
by transferring assets to any Person and as part of such transaction receives
Net Cash Proceeds, the amount of such Investment shall be the fair market value
of the assets less the amount of Net Cash Proceeds so received, provided the Net
Cash Proceeds are applied in accordance with clause (A) or (B) of the
"Limitation on Asset Sales" covenant.
"L&H Farms" means L&H Farms, LLC, a North Carolina limited liability
company.
"L&S Farms" means L&S Farms, a North Carolina general partnership.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means:
(a) with respect to any Asset Sale, the proceeds of such Asset Sale in
the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal,
but not interest, component thereof) when received in the form of cash or
cash equivalents and proceeds from the conversion of other property
received when converted to cash or cash equivalents, net of
(1) brokerage commissions and other fees and expenses (including
fees and expenses of counsel and investment bankers) related to such
Asset Sale;
(2) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without
regard to the consolidated results of operations of Premium Standard
Farms and its Restricted Subsidiaries, taken as a whole;
(3) payments made to repay Indebtedness or any other obligation
outstanding at the time of such Asset Sale that either (x) is secured by
a Lien on the property or assets sold or (y) is required to be paid as a
result of such sale;
(4) all distributions and other payments required to be made to
minority interest holders in any Restricted Subsidiary as a result of
such Asset Sale, provided that such distributions and payments are made
to such holders on a pro rata basis based on such holder's interest in
such Restricted Subsidiary; and
(5) appropriate amounts to be provided by Premium Standard Farms or
any Restricted Subsidiary as a reserve against any liabilities
associated with such Asset Sale, including, without limitation, pension
and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as determined in
conformity with GAAP; and
(b) with respect to a capital contribution or any issuance or sale of
Capital Stock, the proceeds of such issuance or sale in the form of cash or
cash equivalents, including payments in respect of deferred payment
obligations (to the extent corresponding to the principal, but not
interest, component thereof) when received in the form of cash or cash
equivalents and proceeds from the conversion of other property received
when converted to cash or cash equivalents, net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees incurred in connection
with such issuance or sale and net of taxes paid or payable as a result
thereof.
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"Note Guarantee" means any Guarantee of the obligations of Premium Standard
Farms under the Indenture and the notes by any Guarantor.
"Offer to Purchase" means an offer to purchase notes by Premium Standard
Farms from the Holders commenced by mailing a notice to the Trustee and each
Holder stating:
(1) the covenant pursuant to which the offer is being made and that
all notes validly tendered will be accepted for payment on a pro rata
basis;
(2) the purchase price and the date of purchase (which shall be a
Business Day no earlier than 30 days nor later than 60 days from the date
such notice is mailed) (the "Payment Date");
(3) that any note not tendered will continue to accrue interest
pursuant to its terms;
(4) that, unless Premium Standard Farms defaults in the payment of the
purchase price, any note accepted for payment pursuant to the Offer to
Purchase shall cease to accrue interest on and after the Payment Date;
(5) that Holders electing to have a note purchased pursuant to the
Offer to Purchase will be required to surrender the note, together with the
form entitled "Option of the Holder to Elect Purchase" on the reverse side
of the note completed, to the Paying Agent at the address specified in the
notice prior to the close of business on the Business Day immediately
preceding the Payment Date;
(6) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such notes purchased; and
(7) that Holders whose notes are being purchased only in part will be
issued new notes equal in principal amount to the unpurchased portion of
the notes surrendered; provided that each note purchased and each new note
issued shall be in a principal amount of $1,000 or integral multiples of
$1,000.
On the Payment Date, Premium Standard Farms shall (a) accept for payment on
a pro rata basis notes or portions thereof tendered pursuant to an Offer to
Purchase; (b) deposit with the Paying Agent money sufficient to pay the purchase
price of all notes or portions thereof so accepted; and (c) deliver, or cause to
be delivered, to the Trustee all notes or portions thereof so accepted together
with an Officers' Certificate specifying the notes or portions thereof accepted
for payment by Premium Standard Farms. The Paying Agent shall promptly mail to
the Holders of notes so accepted payment in an amount equal to the purchase
price, and the Trustee shall promptly authenticate and mail to such Holders a
new note equal in principal amount to any unpurchased portion of the note
surrendered; provided that each note purchased and each new note issued shall be
in a principal amount of $1,000 or integral multiples of $1,000. Premium
Standard Farms will publicly announce the results of an Offer to Purchase as
soon as practicable after the Payment Date. The Trustee shall act as the Paying
Agent for an Offer to Purchase. Premium Standard Farms will comply with Rule
14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable, in the event
that Premium Standard Farms is required to repurchase notes pursuant to an Offer
to Purchase.
"Permitted Investment" means:
(1) an Investment in Premium Standard Farms or a Subsidiary Guarantor
or a Person which will, upon the making of such Investment, become a
Subsidiary Guarantor or be merged or consolidated with or into or transfer
or convey all or substantially all its assets to, Premium Standard Farms or
a Subsidiary Guarantor; provided that such person's primary business is
related, ancillary or complementary to the businesses of Premium Standard
Farms and its Restricted Subsidiaries on the date of such Investment;
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(2) Temporary Cash Investments;
(3) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP;
(4) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to Premium Standard
Farms or any Restricted Subsidiary pursuant to a work-out or similar
arrangement or proceeding or in satisfaction of judgments or pursuant to
any plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of a debtor;
(5) an Investment in an Unrestricted Subsidiary consisting solely of
an Investment in another Unrestricted Subsidiary;
(6) Commodity Agreements, Interest Rate Agreements and Currency
Agreements designed solely to protect Premium Standard Farms or its
Restricted Subsidiaries against fluctuations in commodity prices, interest
rates or foreign currency exchange rates;
(7) loans and advances to employees and officers of Premium Standard
Farms and its Restricted Subsidiaries in an amount not to exceed $2.0
million outstanding at any time;
(8) Investments existing on June 7, 2001; and
(9) Investments having an aggregate fair market value (measured on the
date each such Investment was made and without giving effect to subsequent
changes in value), in an aggregate amount not to exceed 5% of Adjusted
Consolidated Net Tangible Assets (determined as of the date of the last
fiscal quarter for which a consolidated balance sheet of Premium Standard
Farms and its Subsidiaries has been filed with the SEC or provided to the
Trustee) at any time outstanding plus the net reduction in Investments made
pursuant to this clause (9) resulting from distributions on or repayments
of such Investments or from the Net Cash Proceeds from the sale or other
disposition of any such Investment (except in each case to the extent of
any gain on such sale or disposition that would be included in the
calculation of Adjusted Consolidated Net Income for purposes of clause
(C)(1) of the "Limitation on Restricted Payments" covenant) or from such
Person becoming a Restricted Subsidiary (valued in each case as provided in
the definition of "Investments") or the release of any guarantee; provided
that the net reduction in any Investment shall not exceed the amount of
such Investment.
"Permitted Liens" means:
(1) Liens for taxes, assessments, governmental charges or claims that
are not yet delinquent or are being contested in good faith by appropriate
legal proceedings promptly instituted and diligently conducted and for
which a reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made;
(2) statutory and common law Liens of landlords and carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen, agisters or
other similar Liens arising in the ordinary course of business (including
construction of facilities) and with respect to amounts not yet delinquent
or being contested in good faith by appropriate legal proceedings promptly
instituted and diligently conducted and for which a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made;
(3) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security and other similar legislation;
(4) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligations, bankers'
acceptances, surety and appeal bonds, government contracts, performance and
return-of-money bonds, warranty obligations and other obligations of a
similar nature incurred in the ordinary course of business (including to
facilitate the purchase, shipment or storage of inventory or goods but
exclusive of obligations for the payment of borrowed money);
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(5) easements, rights-of-way, municipal and zoning ordinances and
similar charges, encumbrances, title defects or other irregularities that
do not materially interfere with the ordinary course of business of Premium
Standard Farms or any of its Restricted Subsidiaries;
(6) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of Premium Standard Farms
and its Restricted Subsidiaries, taken as a whole;
(7) Liens encumbering property or assets under construction arising
from progress or partial payments by a customer of Premium Standard Farms
or its Restricted Subsidiaries relating to such property or assets;
(8) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease;
(9) Liens arising from filing Uniform Commercial Code financing
statements regarding leases or consignments;
(10) Liens on property of, or on shares of Capital Stock or
Indebtedness of, any Person existing at the time such Person becomes, or
becomes a part of, any Restricted Subsidiary; provided that such Liens do
not extend to or cover any property or assets of Premium Standard Farms or
any Restricted Subsidiary other than the property or assets acquired;
(11) Liens in favor of Premium Standard Farms or any Restricted
Subsidiary;
(12) Liens arising from the rendering of a final judgment or order
against Premium Standard Farms or any Restricted Subsidiary that does not
give rise to an Event of Default;
(13) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof;
(14) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(15) Liens encumbering customary initial deposits and margin deposits,
and other Liens that are within the general parameters customary in the
industry and incurred in the ordinary course of business, in each case,
securing Indebtedness under Commodity Agreements, Interest Rate Agreements
and Currency Agreements designed solely to protect Premium Standard Farms
or any of its Restricted Subsidiaries from fluctuations in interest rates,
currencies or the price of commodities;
(16) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into by
Premium Standard Farms or any of its Restricted Subsidiaries in the
ordinary course of business;
(17) Liens on shares of Capital Stock of any Unrestricted Subsidiary
to secure Indebtedness of such Unrestricted Subsidiary;
(18) Liens on or sales of receivables and the proceeds thereof;
(19) Liens securing obligations to a trustee pursuant to the
compensation and indemnity provisions of any indenture and Liens securing
compensation and indemnity obligations to a trustee or agent with respect
to any security interest granted in connection with any Indebtedness
permitted under the terms of the Indenture; and
(20) Liens on property or assets used to defease Indebtedness that was
not incurred in violation of the Indenture.
"PSF Group Holdings" means PSF Group Holdings Inc., a Delaware corporation
and its successors.
"Replacement Assets" means, on any date, property or assets (other than
current assets) of a nature or type or that are used in a business (or an
Investment in a company having property or assets of a
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nature or type, or engaged in a business) similar or related to the nature or
type of the property and assets of, or the business of, Premium Standard Farms
and its Restricted Subsidiaries existing on such date.
"Restricted Subsidiary" means any Subsidiary of Premium Standard Farms
other than an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Group, a division of The McGraw-Hill
Companies, and its successors.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (1) for the most
recent fiscal year of Premium Standard Farms, accounted for more than 10% of the
consolidated revenues of Premium Standard Farms and its Restricted Subsidiaries
or (2) as of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of Premium Standard Farms and its Restricted Subsidiaries,
all as set forth on the most recently available consolidated financial
statements of Premium Standard Farms for such fiscal year.
"Stated Maturity" means, (1) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (2) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
"Subsidiary Guarantor" means any Initial Subsidiary Guarantor and any other
Restricted Subsidiary which Guarantees Premium Standard Farms' obligations under
the Indenture.
"Temporary Cash Investment" means any of the following:
(1) direct obligations of the United States of America or any agency
thereof or obligations fully and unconditionally guaranteed by the United
States of America or any agency thereof;
(2) time deposit accounts, certificates of deposit and money market
deposits maturing within one year of the date of acquisition thereof or
demand deposits issued by a bank or trust company which is organized under
the laws of the United States of America, any state thereof or any foreign
country recognized by the United States of America, and which bank or trust
company has capital, surplus and undivided profits aggregating in excess of
$100 million (or the foreign currency equivalent thereof) and has
outstanding debt which is rated "A" (or such similar equivalent rating) or
higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act) or any money
market fund sponsored by a registered broker dealer or mutual fund
distributor;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with a bank or trust company meeting the qualifications described in
clause (2) above;
(4) commercial paper, maturing not more than one year after the date
of acquisition, issued by a corporation (other than an Affiliate of Premium
Standard Farms) organized and in existence under the laws of the United
States of America, any state thereof or any foreign country recognized by
the United States of America with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to Moody's or
"A-1" (or higher) according to S&P;
(5) securities with maturities of one year or less from the date of
acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by S&P or Moody's;
(6) any mutual fund that has at least 95% of its assets continuously
invested in investments of the types described in clauses (1) through (5)
above; and
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(7) in the case of Foreign Subsidiaries, in short term investments
comparable to the foregoing.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness, the date such Indebtedness is to be Incurred and, with respect to
any Restricted Payment, the date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means (1) L&S Farms, (2) any other Subsidiary of
Premium Standard Farms that at the time of determination shall be designated an
Unrestricted Subsidiary by the Board of Directors in the manner provided below,
and (3) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may
designate any Restricted Subsidiary (including any newly acquired or newly
formed Subsidiary of Premium Standard Farms) to be an Unrestricted Subsidiary
unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on
any property of, Premium Standard Farms or any Restricted Subsidiary; provided
that (A) any Guarantee by Premium Standard Farms or any Restricted Subsidiary of
any Indebtedness of the Subsidiary being so designated shall be deemed an
"Incurrence" of such Indebtedness and an "Investment" by Premium Standard Farms
or such Restricted Subsidiary (or both, if applicable) at the time of such
designation; (B) either (I) the Subsidiary to be so designated has total assets
of $1,000 or less or (II) if such Subsidiary has assets greater than $1,000,
such designation would be permitted under the "Limitation on Restricted
Payments" covenant; and (C) if applicable, the Incurrence of Indebtedness and
the Investment referred to in clause (A) of this proviso would be permitted
under the "Limitation on Indebtedness" and "Limitation on Restricted Payments"
covenants. The Board of Directors may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided that (a) no Default or Event of Default
shall have occurred and be continuing at the time of or after giving effect to
such designation and (b) all Liens and Indebtedness of such Unrestricted
Subsidiary outstanding immediately after such designation would, if Incurred at
such time, have been permitted to be Incurred (and shall be deemed to have been
Incurred) for all purposes of the Indenture. Any such designation by the Board
of Directors shall be evidenced to the Trustee by promptly filing with the
Trustee a copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"U.S. Government Obligations" means securities that are (1) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (2) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case, are
not callable or redeemable at the option of the issuer thereof at any time prior
to the Stated Maturity of the notes, and shall also include a depository receipt
issued by a bank or trust company as custodian with respect to any such U.S.
Government Obligation or a specific payment of interest on or principal of any
such U.S. Government Obligation held by such custodian for the account of the
holder of a depository receipt; provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from any amount received by the custodian in
respect of the U.S. Government Obligation or the specific payment of interest on
or principal of the U.S. Government Obligation evidenced by such depository
receipt.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
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IMPORTANT UNITED STATES FEDERAL TAX CONSEQUENCES
The following discussion is a summary of the material United States federal
income tax consequences relevant to the purchase, ownership and disposition of
the notes, but does not purport to be a complete analysis of all potential tax
effects. The discussion is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), United States Treasury Regulations issued thereunder,
Internal Revenue Service rulings and pronouncements and judicial decisions now
in effect, all of which are subject to change at any time. Any such change may
be applied retroactively in a manner that could adversely affect a holder of the
notes. This discussion does not address all of the United States federal income
tax consequences that may be relevant to a holder in light of such holder's
particular circumstances or to holders subject to special rules, such as certain
financial institutions, U.S. expatriates, insurance companies, dealers in
securities or currencies, traders in securities, holders whose functional
currency is not the U.S. dollar, tax-exempt organizations and persons holding
the notes as part of a "straddle," "hedge," "conversion transaction" or other
integrated transaction. In addition, this discussion is limited to persons
purchasing the notes for cash at original issue and at their "issue price"
within the meaning of Section 1273 of the Code (i.e., the first price at which a
substantial amount of notes are sold to the public for cash). Moreover, the
effect of any applicable state, local or foreign tax laws is not discussed. The
discussion deals only with notes held as "capital assets" within the meaning of
Section 1221 of the Code.
As used herein, "United States Holder" means a beneficial owner of the
notes who or that is:
- An individual that is a citizen or resident of the United States,
including an alien individual who is a lawful permanent resident of the
United States or meets the "substantial presence" test under Section
7701(b) of the Code;
- A corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States, any state thereof or
the District of Columbia;
- An estate, the income of which is subject to United States federal income
tax regardless of its source; or
- A trust, if a United States court can exercise primary supervision over
the administration of the trust and one or more United States persons can
control all substantial trust decisions, or, if the trust was in
existence on August 20, 1996, has elected to continue to be treated as
United States person.
We have not sought and will not seek any rulings from the Internal Revenue
Service (the "IRS") with respect to the matters discussed below. There can be no
assurance that the IRS will not take a different position concerning the tax
consequences of the purchase, ownership or disposition of the notes or that any
such position would not be sustained. If a partnership or other entity taxable
as a partnership holds the notes, the tax treatment of a partner will generally
depend on the status of the partner and the activities of the partnership.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO
THE APPLICATION OF THE TAX CONSEQUENCES DISCUSSED BELOW TO THEIR PARTICULAR
SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX
LAWS, INCLUDING GIFT AND ESTATE TAX LAWS.
UNITED STATES HOLDERS
INTEREST
Payments of stated interest on the notes generally will be taxable to a
United States Holder as ordinary income at the time that such payments are
received or accrued, in accordance with such United States Holder's method of
accounting for United States federal income tax purposes.
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SALE OR OTHER TAXABLE DISPOSITION OF THE NOTES
A United States Holder will recognize gain or loss on the sale, redemption,
retirement or other taxable disposition of a note equal to the difference
between the amount realized upon the disposition (less a portion allocable to
any accrued and unpaid interest, which will be taxable as ordinary income) and
the United States Holder's adjusted tax basis in the note. A United States
Holder's adjusted basis in a note generally will be the United States Holder's
cost therefor, less any principal payments received by such holder. This gain or
loss generally will be a capital gain or loss, and will be a long-term capital
gain or loss if the United States Holder has held the note for more than one
year. Otherwise, such gain or loss will be a short-term capital gain or loss.
EXCHANGE OFFER AND LIQUIDATED DAMAGES
The exchange of the old notes for the exchange notes will not constitute a
taxable exchange. As a result, (1) a United States Holder will not recognize a
taxable gain or loss as a result of exchanging such holder's old notes; (2) the
holding period of the exchange notes received will include the holding period of
the old notes exchanged therefor; and (3) the adjusted tax basis of the exchange
notes received will be the same as the adjusted tax basis of the old notes
exchanged therefore immediately before such exchange.
BACKUP WITHHOLDING
A United States Holder may be subject to a 31% backup withholding tax when
such holder receives interest and principal payments on the notes held or upon
the proceeds received upon the sale or other disposition of such notes. Certain
holders (including, among others, corporations and certain tax-exempt
organizations) are generally not subject to backup withholding. A United States
Holder will be subject to this backup withholding tax if such holder is not
otherwise exempt and such holder:
- fails to furnish its taxpayer identification number ("TIN"), which, for
an individual, is ordinarily his or her social security number;
- furnishes an incorrect TIN;
- is notified by the IRS that it has failed to properly report payments of
interest or dividends; or
- fails to certify, under penalties of perjury, that it has furnished a
correct TIN and that the IRS has not notified the United States Holder
that it is subject to backup withholding.
United States Holders should consult their personal tax advisor regarding
their qualification for an exemption from backup withholding and the procedures
for obtaining such an exemption, if applicable. The backup withholding tax is
not an additional tax and taxpayers may use amounts withheld as a credit against
their United States federal income tax liability, which may entitle them to a
refund, as long as they timely provide certain information to the IRS.
NON-UNITED STATES HOLDERS
DEFINITION OF NON-UNITED STATES HOLDERS; INTEREST PAYMENTS AND GAINS FROM
DISPOSITIONS
A non-United States Holder is a beneficial owner of the notes who is not a
United States Holder.
Interest paid to a non-United States Holder will not be subject to United
States federal withholding tax of 30% (or, if applicable, a lower treaty rate)
provided that:
- such holder does not directly or indirectly, actually or constructively
own 10% or more of the total combined voting power of all of our classes
of stock;
- such holder is not a controlled foreign corporation that is related to us
through stock ownership and is not a bank that received such notes on an
extension of credit made pursuant to a loan agreement entered into in the
ordinary course of its trade or business; and
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- either (1) the non-United States Holder certifies in a statement provided
to us or our paying agent, under penalties of perjury, that it is not a
"United States person" within the meaning of the Code and provides its
name or address, or (2) a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary
course of its trade or business and holds the notes on behalf of the
non-United States Holder certifies to us or our paying agent under
penalties of perjury that it, or the financial institution between it and
the non-United States Holder, has received from the non-United States
Holder a statement, under penalties of perjury, that such holder is not a
"United States person" and provides us or our paying agent with a copy of
such statement.
The certification requirement described above may require a non-United
States Holder that provides an IRS form, or that claims the benefit of an income
tax treaty, to also provide its United States taxpayer identification number.
The applicable regulations generally also require, in the case of a note held by
a foreign partnership, that
- the certification described above be provided by the partners; and
- the partnership provide certain information.
Further, a look-through rule will apply in the case of tiered partnerships.
Special rules are applicable to intermediaries. Prospective investors should
consult their tax advisors regarding the certification requirements for
non-United States persons.
A non-United States Holder will generally not be subject to United States
federal income tax or withholding tax on gain recognized on the sale, exchange,
redemption, retirement or other disposition of a note. However, a non-United
States Holder may be subject to tax on such gain if such holder is an individual
who was present in the United States for 183 days or more in the taxable year of
the disposition and certain other conditions are met, in which case such holder
may have to pay a United States federal income tax of 30% (or, if applicable, a
lower treaty rate) on such gain.
If interest or gain from a disposition of the notes is effectively
connected with a non-United States Holder's conduct of a United States trade or
business, and if an income tax treaty applies and the non-United States Holder
maintains a United States "permanent establishment" to which the interest or
gain is generally attributable, the non-United States Holder may be subject to
United States federal income tax on the interest or gain on a net basis in the
same manner as if it were a United States Holder. If interest income received
with respect to the notes is taxable on a net basis, the 30% withholding tax
described above will not apply (assuming an appropriate certification is
provided). A foreign corporation that is a holder of a note also may be subject
to a branch profits tax equal to 30% of its effectively connected earnings and
profits for the taxable year, subject to certain adjustments, unless it
qualifies for a lower rate under an applicable income tax treaty. For this
purpose, interest on a note or gain recognized on the disposition of a note will
be included in earnings and profits if the interest or gain is effectively
connected with the conduct by the foreign corporation of a trade or business in
the United States.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding and information reporting will not apply to payments
made by us or our paying agents, in their capacities as such, to a non-United
States Holder of a note if the holder has provided the required certification
that it is not a United States person as described above, provided that neither
we nor our paying agent has actual knowledge, or reason to know, that the holder
is a United States person. Payments of the proceeds from a disposition by a
non-United States Holder of a note made to or through a foreign office of a
broker will not be subject to information reporting or backup withholding,
except that information reporting (but generally not backup withholding) may
apply to those payments if the broker is:
- A United States person;
- A controlled foreign corporation for United States federal income tax
purposes;
114
119
- A foreign person 50% or more of whose gross income is effectively
connected with a United States trade or business for a specified
three-year period; or
- A foreign partnership, if at any time during its tax year, one or more of
its partners are United States persons, as defined in Treasury
regulations, who in the aggregate hold more than 50% of the income or
capital interest in the partnership or if, at any time during its tax
year, the foreign partnership is engaged in a United States trade or
business.
Payment of the proceeds from a disposition by a non-United States Holder of
a note made to or through the United States office of a broker is generally
subject to information reporting and backup withholding unless the holder or
beneficial owner certifies as to its taxpayer identification number or otherwise
establishes an exemption from information reporting and backup withholding and
the broker has no actual knowledge, or reason to know, that the holder or
beneficial owner is not entitled to an exemption.
Non-United States Holders should consult their own tax advisors regarding
application of backup withholding in their particular circumstance and the
availability of and procedure for obtaining an exemption from backup withholding
under current Treasury regulations. Any amounts withheld under the backup
withholding rules from a payment to a non-United States Holder will be allowed
as a credit against the holder's United States federal income tax liability and
may entitle the holder to a refund, provided the required information is
furnished timely to the IRS.
115
120
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus together with
any resale of those exchange notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in the resales of
exchange notes received in exchange for old notes where those old notes were
acquired as a result of market-making activities or other trading activities. We
have agreed that for a period of up to 180 days after the expiration date, we
will make this prospectus, as amended or supplemented, available to any
broker-dealer that requests it in the letter of transmittal for use in any such
resale.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers or any other persons. Exchange notes received by broker-dealers
for their own account pursuant to the exchange offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the exchange notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
exchange notes. Any broker-dealer that resells exchange notes that of those
exchange notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of exchange notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incident to our performance of, or
compliance with, the registration rights agreement and will indemnify the
holders of old notes including any broker-dealers, and certain parties related
to such holders, against certain types of liabilities, including liabilities
under the Securities Act.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for us by
Blackwell Sanders Peper Martin LLP, Kansas City, Missouri.
INDEPENDENT AUDITORS
The consolidated financial statements for PSF Group Holdings from inception
(May 13, 1998, the date of the ContiGroup acquisition) through March 31, 2001
included in this prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as stated in their report appearing herein. The
consolidated financial statements of The Lundy Packing Company as of and for
each of the three years in the period ended July 1, 2000 included in this
prospectus have been audited by KPMG LLP, independent public accountants, as
stated in their report appearing herein.
116
121
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
PSF GROUP HOLDINGS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheet as of June
30, 2001............................................... F-2
Unaudited Condensed Consolidated Statements of Operations
for the three months ended June 30, 2001 and June 24,
2000................................................... F-3
Unaudited Condensed Consolidated Statements of Cash Flows
for the three months ended June 30, 2001 and June 24,
2000................................................... F-4
Notes to Unaudited Condensed Consolidated Financial
Statements for the three months ended June 30, 2001.... F-5
Report of Independent Public Accountants.................. F-7
Consolidated Balance Sheets as of March 31, 2001 and March
25, 2000............................................... F-8
Consolidated Statements of Operations for the years ended
March 31, 2001 and March 25, 2000 and the period from
May 13, 1998 through March 27, 1999.................... F-9
Consolidated Statements of Shareholders' Equity for the
years ended March 31, 2001 and March 25, 2000 and the
period from May 13, 1998 through March 27, 1999........ F-10
Consolidated Statements of Cash Flows for the years ended
March 31, 2001 and March 25, 2000 and the period from
May 13, 1998 through March 27, 1999.................... F-11
Notes to the Consolidated Financial Statements............ F-12
THE LUNDY PACKING COMPANY AND SUBSIDIARIES
Independent Auditors' Report.............................. F-25
Consolidated Balance Sheets as of July 1, 2000 and July 3,
1999................................................... F-26
Consolidated Statements of Operations for the years ended
July 1, 2000, July 3, 1999 and June 27, 1998........... F-28
Consolidated Statements of Stockholders' Equity for the
years ended July 1, 2000, July 3, 1999 and June 27,
1998................................................... F-29
Consolidated Statements of Cash Flows for the years ended
July 1, 2000, July 3, 1999 and June 27, 1998........... F-30
Notes to the Consolidated Financial Statements............ F-32
</Table>
F-1
122
PSF GROUP HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2001
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<Table>
<Caption>
JUNE 30,
2001
--------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,428
Accounts receivable, net.................................. 25,833
Inventories............................................... 133,158
Federal income tax receivable............................. 3,024
Deferred tax benefit...................................... 17,678
Prepaid expenses and other................................ 5,180
--------
Total current assets.............................. 186,301
PROPERTY, PLANT, EQUIPMENT AND BREEDING STOCK, at cost:
Land and improvements..................................... 90,619
Buildings................................................. 255,706
Machinery and equipment................................... 217,128
Breeding stock............................................ 36,399
Construction in progress.................................. 40,349
--------
640,201
Less -- accumulated depreciation.......................... 132,732
--------
Total property, plant, equipment and breeding
stock............................................. 507,469
GOODWILL.................................................... 75,998
OTHER LONG-TERM ASSETS:
Federal income tax receivable............................. 1,192
Deferred financing costs, net............................. 6,491
Other..................................................... 6,178
--------
Total other long-term assets...................... 13,861
Total assets...................................... $783,629
========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 9,982
Accrued expenses.......................................... 32,541
Due to related party...................................... 1,617
Accrued interest.......................................... 5,793
Current maturities of long-term debt and capital leases... 26,009
--------
Total current liabilities......................... 75,942
LONG-TERM LIABILITIES:
Long-term debt and capital leases, less current
maturities............................................. 242,918
Other long-term liabilities............................... 5,783
Due to related party...................................... 1,768
Deferred income taxes..................................... 93,807
--------
Total long-term liabilities....................... 344,276
--------
Total liabilities................................. 420,218
SHAREHOLDERS' EQUITY:
Common stock.............................................. 213
Additional paid-in capital................................ 373,447
Accumulated other comprehensive income.................... (3,529)
Accumulated deficit....................................... (6,720)
--------
Total shareholders' equity........................ 363,411
Total liabilities and shareholders' equity........ $783,629
========
</Table>
The accompanying notes are an integral part of this condensed consolidated
balance sheet.
F-2
123
PSF GROUP HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND JUNE 24, 2000
(IN THOUSANDS)
<Table>
<Caption>
JUNE 30, JUNE 24,
2001 2000
-------- --------
NET SALES................................................... $171,162 $87,920
COST OF GOODS SOLD.......................................... 141,376 63,683
-------- -------
Gross profit.............................................. 29,786 24,237
OPERATING EXPENSES:
Selling, general and administrative expenses.............. 5,636 3,451
Amortization expense...................................... -- 580
Other (income) expense.................................... (28) (436)
-------- -------
Operating income....................................... 24,178 20,642
INTEREST EXPENSE (INCOME):
Interest expense.......................................... 6,926 4,609
Interest income........................................... (130) (4)
-------- -------
Interest expense, net................................ 6,796 4,605
-------- -------
Earnings before income taxes......................... 17,382 16,037
Income tax expense........................................ 6,969 6,519
-------- -------
Net Income before extraordinary items....................... 10,413 9,518
Loss on early extinguishment of debt, net of tax..... 1,315 --
-------- -------
Net income.................................................. 9,098 9,518
======== =======
</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-3
124
PSF GROUP HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND JUNE 24, 2000
(IN THOUSANDS)
<Table>
<Caption>
JUNE 30, JUNE 24,
2001 2000
--------- --------
OPERATING ACTIVITIES:
Net income................................................ $ 9,098 $ 9,518
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 13,791 10,991
Deferred income taxes.................................. 3,739 6,419
Gain on sale of assets................................. (1,688) (999)
Changes in operating assets and liabilities, net:
Accounts receivable.................................. (84) (666)
Inventories.......................................... (5,331) (4,623)
Prepaid expenses and other assets.................... 3,991 (1,014)
Accounts payable, accrued expenses and other
liabilities......................................... (4,060) 928
--------- --------
Net cash provided by operating activities......... 19,456 20,554
INVESTING ACTIVITIES:
Purchases of property, plant, equipment and breeding
stock.................................................. (26,208) (6,044)
Proceeds from disposal of fixed assets.................... 3,724 1,653
--------- --------
Net cash used in investing activities............. (22,484) (4,391)
FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. 173,591 --
Debt issuance costs....................................... (4,408) --
Repayments on long-term debt.............................. (173,287) (18,295)
--------- --------
Net cash used in financing activities............. (4,104) (18,295)
Net decrease in cash and cash equivalents......... (7,132) (2,132)
CASH AND CASH EQUIVALENTS, beginning of period.............. 8,560 1,654
--------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 1,428 $ (478)
========= ========
SUPPLEMENTAL DISCLOSURES:
Interest paid............................................. $ 4,741 $ 787
Income tax paid........................................... 75 41
</Table>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-4
125
PSF GROUP HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2001
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 financial statements for the year ended March 31, 2001, except as
described in Note 2. It is suggested that those consolidated statements be read
in conjunction with this report. Certain information and note disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles 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 consolidated
financial statements reflect all adjustments necessary for a fair presentation
of the financial position of PSF Group Holdings and the results of its
operations.
NOTE 2 -- NEW ACCOUNTING PRONOUNCEMENTS
Derivative Instruments and hedging Activities
On April 1, 2001, the company adopted Financial Accounting Standards Board
Statements No. 133 (SFAS 133), "Accounting for Derivative Instruments and
Hedging Activities" requiring 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 current derivative instruments are economic
hedges, however, as a result of the extensive record keeping requirements of
SFAS 133, management has elected not to designate and account for these
derivatives as hedges. Effective as of April 1, 2001, these instruments are
marked to market through earnings. On April 1, the company recorded a transition
adjustment reflecting an unrealized loss on derivatives contracts of
approximately $7,300,000 as a liability and a decrease to shareholders' equity
(other comprehensive income) of $4,380,000, net of $2,920,000 of deferred taxes.
At June 30, 2001, the Company recorded $1,388,000 of this liability as a charge
to gross profit as the related contracts expired during the first quarter. The
remaining transition adjustment of approximately $5,900,000 will be recorded as
a reduction to gross profit during fiscal 2002. Changes in the fair value of the
existing contracts and those contracts entered into subsequent to April 1, 2001
will be recorded in the period in which they occur. Losses recognized during the
first quarter and recorded in gross profit were $7,300,996.
The Company's comprehensive income for the three months ended June 30, 2001
includes net income and the remaining amount of the transition adjustment
discussed above, net of tax. Comprehensive income for the first quarter ended
June 30, 2001 and June 24, 2000 was $5,569,000 and $9,518,000, respectively.
Business Combination, Goodwill, and Intangible Assets
On June 30, 2001, the Financial Accounting Standards Board issued its
Statements of Financial Accounting Standards Nos. 141 (SFAS 141), "Business
Combinations" and 142 (SFAS 142), "Goodwill and Intangible Assets," which
establish reporting and accounting standards for business combinations, goodwill
and intangible assets. SFAS 141 requires all business combinations after June
30, 2001 to be accounted for using the purchase method. Under SFAS 142,
companies will no longer amortize goodwill over the estimated useful life.
Goodwill will be assessed each year for impairment by applying a fair value
based test. Intangible assets should be separately recognized if the benefit of
the intangible assets is obtained through contractual or other legal rights.
The company has elected early adoption of these rules and will recognize
the effect of the new pronouncements, if any, in fiscal year 2002. Assessment of
the fair value of the recorded goodwill will be completed by September 30, 2001.
The effect of discontinuing goodwill amortization increased income before income
taxes by approximately $655,000 during the first quarter of fiscal 2002.
F-5
126
PSF GROUP HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS ENDED JUNE 30, 2001
NOTE 3 -- EARLY EXTINGUISHMENT OF DEBT
On June 4, 2001, the Company issued $175,000,000 of senior unsecured notes
maturing in 2011. A portion of the net proceeds from the private placement debt
offering was used to redeem all $137.9 million principal amount of the 11
percent senior secured PIK notes with the remaining net proceeds used to pay
down its bank credit facility. In June 2001, the Company gave a required
thirty-day notice to the holders of the PIK notes and established and funded a
trust to be used to retire this outstanding debt. An extraordinary charge of
$2,191,483 net of tax of $876,593 was recorded in the Condensed Consolidated
Statement of Operations for the three months ended June 30, 2001 resulting from
the loss on the early extinguishment of the PIK notes. Net interest expense for
the thirty-day period that funds were held in the trust of $488,000, net of tax,
has been included in net income for three months ended June 30, 2001.
NOTE 4 -- INVENTORIES
Inventories are valued at the lower of cost, determined on a first-in,
first-out (FIFO) basis, or market. Inventories consist of the following at June
30, 2001 and March 31, 2001 (in thousands):
<Table>
<Caption>
JUNE 30, 2001 MARCH 31, 2001
------------- --------------
Hogs..................................................... $119,207 $112,998
Processed pork and pork products......................... 8,665 9,420
Packaging and supplies................................... 2,443 2,131
Grain, feed additives and other.......................... 2,843 3,278
-------- --------
$133,158 $127,827
</Table>
NOTE 5 -- SEGMENT INFORMATION
<Table>
<Caption>
PORK HOG CORPORATE
PROCESSING PRODUCTION AND OTHER TOTAL
---------- ---------- --------- --------
(IN THOUSANDS)
Quarter Ending June 30, 2001-
Net Sales..................................... 159,958 113,775 -- 273,733
Intersegment Sales............................ (617) (101,954) -- (102,571)
Operating Income(Loss)........................ 2,497 26,334 (4,653) 24,178
Assets........................................ 184,725 513,395 85,509 783,629
Quarter Ending June 24, 2000-
Net Sales..................................... 76,963 69,439 -- 146,402
Intersegment Sales............................ (418) (58,064) -- (58,482)
Operating Income(Loss)........................ 2,726 21,307 (3,391) 20,642
Year Ending March 31, 2001-
Assets........................................ 179,126 502,371 91,943 773,440
</Table>
The accounting policies for the segments are the same as those described in
the footnotes included in the Company's March 31, 2001 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, 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.
F-6
127
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
PSF Group Holdings, Inc.
We have audited the accompanying consolidated balance sheets of PSF Group
Holdings, Inc. (a Delaware corporation) and Subsidiaries (the Company), as of
March 31, 2001 and March 25, 2000, and the related consolidated statements of
operations, shareholders' equity and cash flows for the years ended March 31,
2001 and March 25, 2000, and the period from May 13, 1998 through March 27,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PSF Group Holdings, Inc. and
Subsidiaries, as of March 31, 2001 and March 25, 2000, and the results of their
operations and their cash flows for the years then ended and the period from May
13, 1998 through March 27, 1999, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Kansas City, Missouri
May 11, 2001
F-7
128
PSF GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND MARCH 25, 2000
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<Table>
<Caption>
2001 2000
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 8,560 $ 1,654
Accounts receivable, less allowance of $664 and $183 in
2001 and 2000, respectively............................. 25,749 12,453
Inventories............................................... 127,827 67,598
Federal income tax receivable............................. 2,954 --
Deferred income taxes..................................... 14,448 15,404
Prepaid expenses and other................................ 12,753 959
-------- --------
Total current assets............................... 192,291 98,068
PROPERTY, PLANT, EQUIPMENT AND BREEDING STOCK, at cost:
Land and improvements..................................... 89,364 82,969
Buildings................................................. 255,196 214,089
Machinery and equipment................................... 215,598 179,139
Breeding stock............................................ 34,542 20,156
Construction in progress.................................. 23,437 10,271
-------- --------
618,137 506,624
Less--Accumulated depreciation............................ 121,255 78,962
-------- --------
Total property, plant, equipment and breeding
stock............................................. 496,882 427,662
GOODWILL, net of accumulated amortization of $6,242 and
$3,805 in 2001 and 2000, respectively..................... 75,998 57,398
OTHER LONG-TERM ASSETS:
Federal income tax receivable............................. 1,192 476
Other..................................................... 7,077 894
-------- --------
Total other long-term assets....................... 8,269 1,370
-------- --------
Total assets....................................... $773,440 $584,498
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 8,243 $ 4,012
Accrued expenses.......................................... 32,313 17,714
Due to related party...................................... 2,063 828
Accrued interest.......................................... 3,865 1,456
Current maturities of long-term debt and capital leases... 26,043 22,360
-------- --------
Total current liabilities.......................... 72,527 46,370
LONG-TERM LIABILITIES:
Long-term debt and capital leases, less current
maturities.............................................. 241,173 153,637
Other long-term liabilities............................... 13,296 5,100
Due to related party...................................... 1,769 2,549
Deferred income taxes..................................... 86,838 57,174
-------- --------
Total long-term liabilities........................ 343,076 218,460
-------- --------
Total liabilities.................................. 415,603 264,830
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value, 10,000 shares authorized,
no shares issued or outstanding......................... -- --
Class A common stock, $1 par value; 250,000 shares
authorized, 100,000 shares issued and outstanding....... 100 100
Class B common stock, $1 par value; 300,000 shares
authorized, 113,301 and 104,082 shares issued and
outstanding, respectively............................... 113 104
Additional paid-in capital................................ 373,442 357,296
Accumulated deficit....................................... (15,818) (37,832)
-------- --------
Total shareholders' equity......................... 357,837 319,668
-------- --------
Total liabilities and shareholders' equity......... $773,440 $584,498
======== ========
</Table>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-8
129
PSF GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED
MARCH 31, 2001 AND MARCH 25, 2000,
AND THE PERIOD FROM MAY 13, 1998 THROUGH MARCH 27, 1999
(IN THOUSANDS)
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
NET SALES.................................................. $540,576 $306,266 $237,090
COST OF GOODS SOLD......................................... 456,184 265,929 249,757
-------- -------- --------
Gross profit (loss).............................. 84,392 40,337 (12,667)
OPERATING EXPENSES:
Selling, general and administrative expenses............. 19,413 18,830 20,027
Impairment of fixed assets............................... -- 5,000 --
Amortization expense..................................... 3,180 2,320 1,945
Other expense (income)................................... 1,210 (47) 682
-------- -------- --------
Total operating expenses......................... 23,803 26,103 22,654
-------- -------- --------
Operating income (loss).......................... 60,589 14,234 (35,321)
INTEREST (EXPENSE) INCOME:
Interest expense......................................... (24,141) (21,265) (17,883)
Interest income.......................................... 933 45 282
-------- -------- --------
Interest expense, net............................ (23,208) (21,220) (17,601)
-------- -------- --------
Earnings (losses) before income taxes............ 37,381 (6,986) (52,922)
INCOME TAX BENEFIT (EXPENSE):
Current tax provision.................................... 1,458 (175) --
Deferred tax provision................................... (16,825) 1,874 20,377
-------- -------- --------
Income tax (expense) benefit..................... (15,367) 1,699 20,377
-------- -------- --------
Net income (loss)................................ $ 22,014 $ (5,287) $(32,545)
======== ======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
130
PSF GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED
MARCH 31, 2001 AND MARCH 25, 2000,
AND THE PERIOD FROM MAY 13, 1998 THROUGH MARCH 27, 1999
(IN THOUSANDS)
<Table>
<Caption>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------ ---------- ----------- --------
BALANCE, May 13, 1998..................... $204 $357,296 $ -- $357,500
Net loss................................ -- -- (32,545) (32,545)
---- -------- -------- --------
BALANCE, March 27, 1999................... 204 357,296 (32,545) 324,955
Net loss................................ -- -- (5,287) (5,287)
---- -------- -------- --------
BALANCE, March 25, 2000................... 204 357,296 (37,832) 319,668
Issuance of common stock................ 9 16,146 -- 16,155
Net income.............................. -- -- 22,014 22,014
---- -------- -------- --------
BALANCE, March 31, 2001................... $213 $373,442 $(15,818) $357,837
==== ======== ======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
131
PSF GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED
MARCH 31, 2001 AND MARCH 25, 2000,
AND THE PERIOD FROM MAY 13, 1998 THROUGH MARCH 27, 1999
(IN THOUSANDS)
<Table>
<Caption>
2001 2000 1999
--------- -------- --------
OPERATING ACTIVITIES:
Net income (loss)....................................... $ 22,014 $ (5,287) $(32,545)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities--
Depreciation and amortization........................ 51,703 43,293 37,651
Deferred income taxes................................ 16,825 (1,874) (20,377)
Impairment of fixed assets........................... -- 5,000 --
(Gain) loss on sale of fixed assets.................. (3,763) (1,433) 2,787
Senior note interest paid-in-kind.................... -- 7,189 6,814
Changes in operating assets and liabilities, net-
Accounts receivable................................ (2,084) (3,392) 2,357
Inventories........................................ (6,463) 3,569 9,385
Prepaid expenses and other assets.................. (15,978) 7,623 3,446
Accounts payable, accrued expenses and other
liabilities..................................... (575) 834 (17,138)
--------- -------- --------
Net cash provided by (used in) operating
activities.................................... 61,679 55,522 (7,620)
INVESTING ACTIVITIES:
Acquisition of Lundy, net of cash acquired.............. (98,206) -- --
Acquisition of PSFNC, net of cash acquired.............. (16,239) -- --
Purchases of property, plant, equipment and breeding
stock................................................ (43,224) (23,669) (22,126)
Proceeds from disposal of fixed assets.................. 11,677 8,427 4,804
--------- -------- --------
Net cash used in investing activities........... (145,992) (15,242) (17,322)
FINANCING ACTIVITIES:
Proceeds from long-term debt............................ 125,000 795 11,056
Repayments on long-term debt............................ (33,781) (43,472) (11,283)
--------- -------- --------
Net cash provided by (used in) financing
activities.................................... 91,219 (42,677) (227)
--------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................... 6,906 (2,397) (25,169)
CASH AND CASH EQUIVALENTS, beginning of period............ 1,654 4,051 29,220
--------- -------- --------
CASH AND CASH EQUIVALENTS, end of period.................. $ 8,560 $ 1,654 $ 4,051
========= ======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid........................................... $ 21,980 $ 12,610 $ 12,598
Income tax (paid) received.............................. (716) 7,499 3,590
Noncash financing activity--Increase to senior note
principal for interest paid-in-kind.................. -- 7,189 6,814
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
132
PSF GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001, MARCH 25, 2000 AND MARCH 27, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS
PSF Group Holdings, Inc. (Group) is incorporated in the state of Delaware.
Group has a wholly owned subsidiary, Premium Standard Farms, Inc. (PSF, Inc.).
PSF, Inc., and its subsidiaries are an integrated business engaged principally
in the business of hog production and pork processing and sell to domestic and
international markets. Group and PSF, Inc., are collectively referred to as the
Company which succeeded the Continental Grain Company North Missouri Pork
Operations and PSF Holdings L.L.C. (Holdings) on May 13, 1998, pursuant to the
stock purchase transaction described in Note 2.
FISCAL YEAR-END
The Company's fiscal year is the 52 or 53-week period, which ends on the
last Saturday in March. The accompanying consolidated statements of operations,
cash flows and changes in shareholders' equity include activity from the period
of March 26, 2000, through March 31, 2001 (53 weeks), the period March 28, 1999,
through March 25, 2000 (52 weeks), and the period from May 13, 1998, through
March 27, 1999 (45.5 weeks).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Group and its
majority-owned subsidiaries. Entities in which the Company has ownership of 20
percent to 50 percent are accounted for using the equity method. All significant
intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
REVENUE RECOGNITION
Revenues from product sales are recorded when title of the goods are
transferred to the customer, generally upon shipment. Net sales reflect units
shipped at selling prices reduced by certain sales allowances.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents. The carrying value of cash
equivalents approximates market value.
INVENTORIES
Inventories are valued at the lower of cost, determined on a first-in,
first-out (FIFO) basis, or market.
F-12
133
PSF GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Inventories consist of the following at March 31 and March 25 (in
thousands):
<Table>
<Caption>
2001 2000
-------- -------
Hogs.................................................... $112,998 $61,976
Processed pork and pork products........................ 9,420 2,699
Packaging and supplies.................................. 2,131 621
Grain, feed additives and other......................... 3,278 2,302
-------- -------
$127,827 $67,598
======== =======
</Table>
PROPERTY, PLANT, EQUIPMENT AND BREEDING STOCK
Depreciation of property, plant, equipment and breeding stock is computed
using the straight-line method over the estimated useful lives of the assets as
follows:
<Table>
<Caption>
YEARS
--------
Land improvements.......................................... 15 to 20
Buildings.................................................. 20 to 40
Machinery and equipment.................................... 3 to 10
Breeding stock............................................. 3
</Table>
Property, plant and equipment leases have been capitalized and included in
the property, plant and equipment accounts. Maintenance, repairs and minor
renewals are charged to operations while major renewals and improvements are
capitalized.
Depreciation expense relating to the Company's fixed assets and breedstock
amounted to $48,523,000, $40,975,000 and $35,775,000 for the periods ended March
31, 2001, March 25, 2000 and March 27, 1999, respectively.
IMPAIRMENT OF FIXED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying value of the asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying value of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying value or fair value less costs to sell.
During fiscal 2000, certain assets under construction which were originally
being constructed for an expansion in Texas were determined to be unrecoverable
due to a change in expansion plans. An impairment loss of $5,000,000 was
recorded in the consolidated statements of operations.
PRICE-RISK MANAGEMENT INSTRUMENTS
The Company uses price-risk management techniques to enhance sales and
reduce the effect of adverse price changes on the Company's profitability. The
Company's price-risk management and hedging activities currently are utilized in
the areas of forward sales and hog production margin management. Gains and
losses on these instruments designated as hedges, which qualify when there is
high correlation between changes in the value of the instrument and changes in
the value of the hedged commodity, are deferred and recorded in revenue or cost
of sales when the anticipated transactions are fulfilled. Commodity instruments
that do not qualify as hedges for financial reporting purposes are marked to
market and included in revenue or cost of sales in the consolidated statements
of operations.
F-13
134
PSF GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For the periods ended March 31, 2001, March 25, 2000 and March 27, 1999,
realized gains (losses) on commodity contracts recognized in revenue and cost of
sales were $1,720,000, ($2,150,000) and ($2,406,000) respectively. At March 31,
2001, and March 25, 2000, net deferred realized hedging gains (losses) on
commodity contracts included in inventory on the consolidated balance sheets
were $135,000 and ($58,000), respectively. At March 31, 2001 and March 25, 2000,
the unrealized gains (losses) on outstanding commodity contracts were
($7,406,000) and $53,000, respectively.
SELF-INSURANCE PROGRAMS
The Company is self-insured for certain levels of general and vehicle
liability, workers' compensation and health care coverage. The cost of these
self-insurance programs is accrued based upon estimated settlements for known
and anticipated claims incurred through the balance sheet date. Any resulting
adjustments to previously recorded reserves are reflected in current operating
results.
INCOME TAXES
The Company uses the liability method of accounting for income taxes. Under
this method, deferred income tax assets and liabilities are determined based on
the difference between financial reporting and income tax basis of assets and
liabilities using the enacted marginal tax rates. Deferred income tax expenses
or credits are based on changes in the asset or liability from period to period.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of long-term debt and capital leases is determined using
valuation techniques that consider cash flows discounted at current market rates
for debt with similar terms and maturities. At March 31, 2001 and March 25,
2000, the fair value of the Company's debt was $270,200,000 and $170,274,000,
respectively, with a carrying value of $267,216,000 and $175,997,000,
respectively.
Accounts receivable, accounts payable and cash equivalents are carried at
historical cost which approximates fair value.
GOODWILL
Costs in excess of net assets acquired are amortized on a straight-line
basis over a period of 30 years. The carrying value of goodwill is reviewed at
each balance sheet date to determine if facts and circumstances suggest that it
may be impaired. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the business units'
undiscounted cash flows over the remaining life of the goodwill in measuring
whether goodwill is recoverable.
RISK FACTORS
There are certain risk factors that can materially impact the Company's
business, financial condition and results of operations. These risks include
sensitivity to pork and hog prices, sensitivity to grain commodity prices,
environmental factors and legislation, changes in herd productivity and feed
efficiency, impact of disease, international market risks, competition,
restrictions under corporate farming laws, dependence on favorable labor
relations, pork product contamination and product liability claims, distribution
channels and consumer preferences.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 and 2000 consolidated
financial statements to conform to the 2001 presentation.
F-14
135
PSF GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. BUSINESS ACQUISITIONS
On May 13, 1998, ContiGroup Companies, Inc. (CGC or ContiGroup), formerly
known as Continental Grain Company purchased 51 percent ownership in PSF, Inc.
for $182,325,000. In exchange, PSF, Inc. purchased the North Missouri Farms hog
production operations owned by ContiGroup for $75,000,000. The proceeds from the
Agreement were distributed to the holders of the 10,000,000 outstanding units of
Holdings. The Agreement also called for both CGC and Holdings to contribute
their interests in PSF, Inc., to Group, which had been newly formed. Concurrent
with the contributions from CGC and Holdings, Holdings was merged into Group.
All Holdings operations were continued by the Company.
This transaction was accounted for as a reverse acquisition in accordance
with Accounting Principles Board (APB) Opinion No. 16. The former CGC North
Missouri Pork Operations have been considered the acquirer (or predecessor) for
accounting purposes, and as such, their assets have been transferred to the
Company's opening balance sheet at their previous carrying value. The former
Holdings' assets have been written up to their fair values under the purchase
accounting method. Excess purchase price over the fair value of net assets
acquired of $61,204,000 has been recorded as goodwill and is being amortized
over 30 years.
On August 25, 2000, the Company completed the stock acquisition of The
Lundy Packing Company (Lundy) and its affiliated companies for $67,200,000 in
cash and the assumption of approximately $31,000,000 in debt. Lundy is located
in Clinton, North Carolina, and operates a 6,500 head per day processing plant
and owns approximately 41,000 sows, the offspring of which are finished in a
combination of company-owned, contract and joint venture facilities.
On September 22, 2000, the Company completed the stock acquisition of
Premium Standard Farms of North Carolina, Inc. (PSFNC) for total purchase price
of $32,300,000, of which $16,150,000 was payable in cash and $16,150,000 was
payable by delivery of 9,219 shares of Class B common stock. A fairness opinion
was received from a third party related to the value of the transaction. PSFNC
was formerly a division of CGC and owned approximately 25,000 sows, the
offspring of which are finished in company-owned, contract and joint venture
facilities. This stock issuance increased CGC's ownership in Group from 51
percent to 53.1 percent. Subsequent to the PSFNC acquisition, Lundy contributed
its production operations to PSFNC.
Both the Lundy and PSFNC transactions were accounted for under the purchase
accounting method with the corresponding assets and liabilities written to fair
value. Excess purchase price over the fair value of net assets acquired of
$21,036,000 for the transactions have been recorded as goodwill and is being
amortized over 30 years.
PRO FORMA OPERATING RESULTS
The following unaudited pro forma financial information assumes that both
the Lundy and PSFNC acquisitions described above occurred at the beginning of
each of the respective periods (in thousands):
<Table>
<Caption>
UNAUDITED YEAR-END
----------------------
MARCH 31, MARCH 31,
2001 2000
--------- ---------
Net sales........................................... $680,076 $616,911
Net income (loss)................................... 19,260 (19,124)
</Table>
The pro forma results are not necessarily indicative of the actual results
that would have been obtained had the acquisitions been made at the beginning of
the respective periods or of results which may occur in the future.
F-15
136
PSF GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. SHAREHOLDERS' EQUITY
COMMON STOCK
There are two classes of common stock, which Group can issue. Class A
common stock was issued to the holders of the outstanding units of Holdings.
Class B common stock was issued to CGC. Class A holders have the sole right to
vote in the election or for removal, without cause, of four Class A directors.
Class B holders have the sole right to vote in the election or for removal,
without cause, of five Class B directors. All distributions, dividends and
liquidation preferences are equal between the two classes of stock.
COMMON REVERSE STOCK SPLIT
On September 16, 1999, the shareholders of Group approved an amendment
effecting a one-for-one hundred reverse stock split. The accompanying
consolidated statements have been retroactively adjusted to reflect the reverse
stock split.
PREFERRED STOCK
The Company has authorized 10,000 shares at $1 par value of preferred
stock. No shares have been issued or are outstanding. Terms of the preferred
stock including voting rights, dividend preference and other limitations or
restrictions have yet to be assigned.
STOCKHOLDER WARRANTS
The Company has warrants outstanding entitling the holders to purchase
2,048,192 shares of common stock of Group. Subsequent to the reverse stock
split, these warrants now entitle the holders to purchase 20,481.92 shares of
Class A common stock at an exercise price of $2,205 per share. As of March 31,
2001, all warrants were exercisable and none have been exercised. All
unexercised warrants expire on September 17, 2006. Warrant holders are entitled
to certain registration rights associated with their ownership.
STOCK-BASED COMPENSATION
In 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 7,714 shares of class B common stock at an
exercise price of $1,666.48 per share. The options granted have a three-year
vesting period and expire 7 years from the beginning of the respective vesting
periods (7,000 shares expire December 31, 2005, and 714 shares expire December
31, 2007). No options have been exercised as of March 31, 2001.
The Company records stock compensation in accordance with Accounting
Principles Board Opinion No. 25 (APB 25). The fair value of stock options
granted was calculated using the minimum value method as defined in the
Statement of Financial Accounting Standards No. 123 (SFAS 123). Under SFAS 123,
the pro forma net income is disclosed as if it reflected the estimated fair
value of options as compensation at the date of grant or issue. For the year
ended March 31, 2001, our pro forma net income would have been decreased by
approximately $2,683,000.
F-16
137
PSF GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. ACCRUED EXPENSES
Accrued expenses are comprised of the following at March 31 and March 25
(in thousands):
<Table>
<Caption>
2001 2000
------- -------
Salaries and benefits payable............................ $12,901 $10,216
Workers' compensation payable............................ 4,429 1,436
Grain and feed........................................... 2,068 1,269
Claims reserves.......................................... 1,738 1,898
Accrued payables and other............................... 11,177 2,895
------- -------
$32,313 $17,714
======= =======
</Table>
5. LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt consists of the following at March 31 and March 25 (in
thousands):
<Table>
<Caption>
2001 2000
-------- --------
Senior secured notes, due on September 17, 2003,
interest (partial pay-in-kind (PIK)) at 11%, payable
semiannually......................................... $137,894 $137,894
Revolving loan, due August 21, 2003, interest at
variable rate (8.25% at March 31, 2001).............. 10,000 17,205
Term loan, due in quarterly installments of $6,250,000,
balance due on August 21, 2005, interest based on
LIBOR rates plus 1.875% (ranging from 8.125% through
8.625% at March 31, 2001)............................ 112,500 19,250
Note payable, due December 31, 2002, interest at prime
rate plus 1.5% per annum (9.5% at March 31, 2001).... 1,335 --
Capital leases......................................... 5,487 1,648
-------- --------
Total debt and capital leases................ 267,216 175,997
Less- Current portion.................................. 26,043 22,360
-------- --------
Long-term debt and capital leases............ $241,173 $153,637
======== ========
</Table>
Future maturities of long-term debt and capital leases are as follows (in
thousands):
<Table>
<Caption>
FISCAL YEAR
-----------
2002.................................................... $ 26,043
2003.................................................... 174,530
2004.................................................... 25,762
2005.................................................... 25,826
2006.................................................... 13,407
Thereafter.............................................. 1,648
--------
$267,216
========
</Table>
The Company has a credit agreement that includes a term loan and revolving
loans. The revolving loans are not to exceed $100,000,000 of total borrowings.
The credit agreement provides for up to $10,000,000 in letters of credit. Fees
of 2 percent per annum are paid quarterly only on outstanding letter-of-credit
amounts. At March 31, 2001 and March 25, 2000, the Company had $7,495,000 and
$3,900,000 outstanding letters of credit, respectively. Interest rates on the
revolving loan are based on a formula that either uses the U.S. bank's reference
rate or a LIBOR rate, whichever results in the lower rate.
F-17
138
PSF GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The bank credit agreement is secured by virtually all of the Company's
assets. The amount available under the revolving loan facility is determined by
a borrowing base formula determined from the sum of eligible accounts receivable
and a formula value for inventory based on current book value. The Company
amended the credit agreement in fiscal 2001. The borrowing base at March 31,
2001 and March 25, 2000, was approximately $100,000,000 and $80,709,000,
respectively, and accordingly, unused available borrowing was $82,505,000 and
$59,604,000, respectively (net of outstanding letters of credit and revolving
loans). The agreement contains various restrictive covenants which, among
others, substantially limit additional borrowings, prohibit payment of dividends
and restrict capital additions and sale of assets. The amendment also contains
covenants regarding earnings before interest, taxes, depreciation and
amortization (EBITDA) and a fixed cash interest coverage ratio. Annual EBITDA,
as defined in the bank credit agreement (calculated on a rolling four-quarter
basis), cannot be less than $80,000,000 through March 31, 2001. As of March 31,
2001, the cash interest coverage ratio (calculated on a rolling 12-month basis)
as of the end of each fiscal quarter cannot be less than a 2.5-to-1 ratio. As of
March 31, 2001, the Company was in compliance with all restrictive debt
covenants relating to the agreement.
The 11 percent senior secured notes were issued at an initial amount of
$117,500,000. The notes require certain prepayment premiums. The notes are
secured by a secondary interest, subordinated to the bank credit agreement, in
virtually all of the Company's assets. Pursuant to the new amendment to the
Company's credit agreement, interest on the notes is payable through issuance of
additional notes in principal amounts equal to the interest due. During the year
ended March 25, 2000, $7,188,758 of accrued interest was paid in kind through
the issuance of additional notes. During the year ended March 31, 2001, no
accrued interest was paid in kind through the issuance of additional notes. The
terms of these additional notes are identical to the senior secured notes. The
note indenture contains covenants that either mirror or are less restrictive
than those of the bank credit agreement.
SUBSEQUENT DEBT OFFERING
In fiscal year 2002, the Company plans to offer to sell $175,000,000 of
senior unsecured notes maturing in 2011. The Company intends to use the funds of
this offering to retire the 11 percent senior secured PIK notes and $25,000,000
principal amount of its bank term loan. A prepayment penalty of 1 percent will
be assessed on the prepayment of the PIK notes prior to September 1, 2001.
Morgan Stanley & Co. Incorporated and certain funds owned, controlled and
managed by it and its affiliates, beneficially own approximately 17.2 percent of
the outstanding common stock of Group and is represented on the board of
directors. Morgan Stanley & Co. Incorporated is acting as a placement agent for
this offering.
In connection with PSF, Inc.'s offer to sell $175,000,000 of senior
unsecured notes, its parent, Group, and PSF, Inc.'s wholly owned subsidiaries
will fully and unconditionally guarantee PSF, Inc.'s obligation to pay principal
and interest on these notes. Supplemental consolidating financial information is
not presented as the parent company has no independent assets or operations and
less than 3 percent of the total assets exist in non-guarantor subsidiaries.
F-18
139
PSF GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
A reconciliation of statutory federal income tax and income tax expense is
shown below (in thousands):
<Table>
<Caption>
2001 2000 1999
-------- ------ -------
Amount based on federal statutory rate................ $(13,083) $2,445 $18,523
State income taxes, net of federal.................... (1,503) 211 2,485
Other................................................. (781) (957) (631)
-------- ------ -------
Income tax (expense) benefit........................ $(15,367) $1,699 $20,377
======== ====== =======
</Table>
Components of the net deferred tax balances at March 31 and March 25, are
as follows (in thousands):
<Table>
<Caption>
2001 2000
--------- --------
Net current deferred tax assets--
Claims reserves..................................... $ 120 $ 549
Goodwill............................................ 1,537 --
Inventory........................................... 953 681
Other reserves...................................... 11,838 2,174
Net operating loss carryforwards.................... -- 12,000
--------- --------
Net current deferred tax assets.................. $ 14,448 $ 15,404
========= ========
Net long-term deferred tax liabilities--
Fixed asset......................................... $(105,631) $(89,194)
Net operating loss carryforwards.................... 11,026 18,901
Construction in progress............................ 9,160 5,560
Goodwill............................................ -- 1,900
Claims reserve...................................... -- 2,040
Other............................................... (1,393) 3,619
--------- --------
Net long-term deferred tax liability............. $ (86,838) $(57,174)
========= ========
</Table>
At March 31, 2001, the Company's net operating loss carryforwards (gross)
will expire as follows: $1,761,470 in 2018, $20,981,259 in 2019 and $4,821,083
in 2020. The Company believes that its future taxable income will be sufficient
for full realization of the deferred tax assets.
7. INVESTMENTS IN PARTNERSHIPS
The Company's wholly owned subsidiary, Lundy, has a 50 percent ownership
interest in the L&H Farms partnership. The L&H Farms partnership is in the
business of breeding and raising hogs. The Company accounts for the earnings and
losses of the partnership using the equity method of accounting. As of March 31,
2001, the investment in the L&H Farms partnership was $1,251,000, included in
other long-term assets in the consolidated balance sheets. The Company's share
of the partnership's earnings was $340,000 from August 25, 2000 (date of Lundy
acquisition) through March 31, 2001. These amounts are included in other
operating expense in the consolidated statements of operations.
In addition, Lundy has a 60 percent ownership in L&S Farms LLC, a limited
liability company, in the business of breeding and raising hogs. The Company
accounts for this partnership under the full consolidation method. Minority
interest of $99,000 was charged to other income, net. The minority interest
F-19
140
PSF GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
obligation of $281,000 is recorded in other long-term liabilities. Lundy has
guaranteed $1,335,000 of bank borrowings of its L&S Farms subsidiary that bears
interest at prime plus 1.5 percent (9.5 percent at March 31, 2001). Lundy has
guaranteed a portion of the bank borrowings of a hog production operation owned
by the partner in the L&S Farms partnership. The maximum amount guaranteed is
$2,000,000 and expires on the earlier of July 15, 2002, or the date the bank
borrowing has been reduced to $3,000,000 or less.
8. RELATED PARTIES
The Company has contracted with ContiGroup to provide certain services
pursuant to an amended and restated services agreement and a contract grower
finish agreement. Under these agreements ContiGroup provides purchasing
assistance, legal services, employee benefits, payroll, and grow finishing
services to the Company. For periods ended March 31, 2001, March 25, 2000 and
March 27, 1999, the total amount of these expenses and other related-party
expenses with CGC were $6,523,000, $11,098,000 and $15,314,000, respectively. At
March 31, 2001 and March 25, 2000, the Company recorded amounts due to related
party for these purchases of $415,000 and $110,000, respectively, included in
the consolidated balance sheets.
The Company provides ContiGroup management and human resources services
with respect to pork operations, hog and feed production services and
environmental and other business consulting services. The total charges for the
periods ended March 31, 2001, March 25, 2000 and March 27, 1999, amounted to
$568,000, $977,000 and $782,000, respectively. At March 31, 2001 and at March
25, 2000, a receivable relating to the management fees from ContiGroup in the
amount of $12,000 and $149,000, respectively, was recorded.
During fiscal 2000, an agreement was entered into with CGC to pay
$5,000,000, $1,000,000 annually for five years, in consulting fees to CGC for
work done in the settlement agreement with the attorney general of Missouri
(Note 11). The Company paid the first two of five annual installments in fiscal
years 2000 and 2001, respectively. The Company discounted the liability at its
current borrowing rate and as of March 31, 2001, has recorded a liability of
$2,549,000, of which $780,000 is classified as current. Liabilities are
reflected in the due to related party in the consolidated balance sheets.
The amount due to related party in the March 31, 2001 consolidated balance
sheet includes $868,000 payable to former owners of Lundy, one of which is
currently a board member of PSF, Inc. In addition, the Company leases farmland
and hog production buildings from this board member under a capital lease
agreement that existed prior to the acquisition. The capital lease obligation as
of March 31, 2001, was $2,529,000 and is included in long-term debt and capital
leases in the consolidated balance sheet.
9. COMMITMENTS
The Company enters into forward grain purchase contracts with market risk
in the ordinary course of business. In the opinion of management, settlement of
such commitments, which were open at March 31, 2001, March 25, 2000 and March
27, 1999, will have no adverse impact on the financial position or results of
operations of the Company.
The Company utilizes forward contracts, as well as futures and options
contracts, to establish adequate supplies of future grain purchasing
requirements and minimize the risk of market fluctuations. These contracts may
result in off-balance-sheet market risk, which is dependent on fluctuations in
the grain, hog and pork commodity markets. Market risk resulting from a position
in a particular contract may be offset by other on or off-balance-sheet
transactions. The Company continually monitors its overall
F-20
141
PSF GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
market position. Gross contract or notional amounts of futures, options and
forward contracts in place as of March 31 and March 25 are as follows (in
thousands):
<Table>
<Caption>
2001 2000
-------- -------
Forward contracts to purchase grain..................... $ 7,538 $ 2,860
Futures contracts--
corn.................................................. 34,929 8,266
soybean meal.......................................... 6,721 --
lean hogs............................................. 65,376 21,212
-------- -------
Total......................................... $114,564 $32,338
======== =======
</Table>
The Company leases rolling stock and certain equipment under noncancelable
operating leases. Rental expense under operating leases was approximately
$3,656,000, $2,650,000 and $2,030,000 in the periods ended March 31, 2001, March
25, 2000 and March 27, 1999, respectively. Future minimum rental commitments at
March 31, 2001, are as follows (in thousands):
<Table>
2002........................................................ $3,549
2003........................................................ 2,545
2004........................................................ 1,266
2005........................................................ 443
2006........................................................ 208
Thereafter.................................................. 143
------
$8,154
======
</Table>
10. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan covering substantially all employees meeting
certain minimum service requirements. The plan allows all qualifying employees
to contribute up to 20 percent of employee compensation limited to the tax
deferred contribution allowable by the Internal Revenue Code. The Company
matches 100 percent of the employee's contribution up to 3 percent of employee
compensation and 50 percent of the employee's next 2 percent of employee
compensation, for a maximum company match of 4 percent of employee compensation.
Effective January 1, 2000, the Company amended its 401(k) plan from a three-year
cliff-vesting period to a 100 percent immediate vesting. Employer contribution
expense related to the plan was approximately $1,407,000, $873,000 and $407,000
for the periods ended March 31, 2001, March 25, 2000 and March 27, 1999,
respectively.
During the three fiscal years ended March 31, 2001, a long-term incentive
plan with performance thresholds tied to EBITDA was in place for key executives
selected by the compensation committee. As of March 31, 2001, the Company has
recorded $3,106,000 in accrued expense toward the long-term incentive plan. The
Company expensed $2,106,000 and $1,000,000 in the periods ended March 31, 2001
and March 25, 2000, respectively. Payment is expected in fiscal year 2002.
The Company has adopted a nonqualified, unfunded special executive
retirement plan as of January 1, 2000, for certain key executives. The Company
expensed and accrued $354,000 in fiscal 2001 related to this plan.
F-21
142
PSF GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. LITIGATION
ENVIRONMENTAL MATTERS
The Company is a defendant in a citizens' action suit seeking to enforce
alleged violations of the Clean Air Act, Clean Water Act and CERCLA. The same
plaintiff has filed a parallel action against CGC from which any liability is
also an assumed liability of the Company pursuant to the May 13, 1998,
transaction. The plaintiffs are seeking injunctive relief, civil penalties and
attorneys' fees. The Environmental Protection Agency has also intervened in the
case. The Company has accrued a liability for the anticipated settlement and
legal fees associated therewith, which is included in accrued liabilities.
The Company settled a suit filed by the attorney general of Missouri
against the Company and CGC. Any liability of CGC from this action was an
assumed liability of the Company pursuant to the May 13, 1998, transaction. The
settlement required the Company and CGC to enter into a consent judgement
pursuant to which the Company is required to spend $25 million over the course
of five years for researching, installing and operating improved technology to
control wastewater, air and odor emissions from its Missouri farms. As of March
31, 2001, the Company is nearing the end of the second year of the settlement
period and has spent in total, approximately $6,700,000.
The Company was a successor to a nuisance suit brought by neighbors of its
northern Missouri pork operations in which CGC was the defendant. On April 30,
1999, the jury returned a verdict in favor of 52 of the 109 plaintiffs in the
amount of $100,000 each for a total of $5,200,000. CGC appealed the verdict and
on May 3, 2001, the Company satisfied the judgment. At March 31, 2001, the
Company has accrued a liability for the verdict and interest.
OTHER LEGAL MATTERS
The Company is subject to various other legal proceedings related to the
normal conduct of its business. In the opinion of management, none of these
actions are expected to result in a judgment having a material adverse effect on
the consolidated financial statements of the Company.
12. SEGMENT INFORMATION
The Company operates a vertically integrated business with two operating
segments, Pork Processing and Hog Production. The Pork Processing segment sells
fresh and value-added pork products to food retailers, distributors,
wholesalers, further processors, pharmaceutical and animal feed manufacturers in
both domestic and international markets. The Hog Production segment supplies a
majority of the live hogs used in the Pork Processing segment and sells the
excess production to other hog processing operations. Intersegment live hog
sales are based on market prices. The following tables present specific
financial information about each segment as reviewed by the Company's
management. The Corporate and Other classification in the following tables
represent unallocated corporate expenses and assets, deferred taxes and income
tax expense, Group's goodwill and goodwill amortization, interest expense and
intersegment elimination (in thousands):
<Table>
<Caption>
PORK HOG CORPORATE
PROCESSING PRODUCTION AND OTHER TOTAL
---------- ---------- --------- --------
Fiscal 2001--
Net sales................................ $475,673 $359,149 $(294,246) $540,576
Intersegment sales....................... (1,857) (292,389) -- --
Operating income......................... 16,276 62,681 (18,368) 60,589
Asset.................................... 179,126 502,371 91,943 773,440
Depreciation and amortization............ 9,476 38,715 3,512 51,703
Capital expenditure...................... 12,213 30,343 668 43,224
</Table>
F-22
143
PSF GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<Table>
<Caption>
PORK HOG CORPORATE
PROCESSING PRODUCTION AND OTHER TOTAL
---------- ---------- --------- --------
Fiscal 2000--
Net sales................................ 266,680 220,876 (181,290) 306,266
Intersegment sales....................... (2,293) (178,997) -- --
Operating income......................... 26,668 6,082 (18,516) 14,234
Assets................................... 89,489 419,414 75,595 584,498
Depreciation and amortization............ 6,694 33,842 2,757 43,293
Capital expenditures..................... 1,568 21,108 993 23,669
Fiscal 1999--
Net sales................................ 204,377 157,048 (124,335) 237,090
Intersegment sales....................... (1,699) (122,636) -- --
Operating income......................... 31,774 (46,717) (20,378) (35,321)
Assets................................... 92,183 445,182 80,090 617,455
Depreciation and amortization............ 5,289 29,755 2,607 37,651
Capital expenditure...................... 4,878 12,741 4,507 22,126
</Table>
GEOGRAPHIC INFORMATION
No individual foreign country accounts for 10 percent or more of sales to
external customers. The following table provides a geographic summary of the
Company's net sales based on the location of product delivery (in thousands):
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
United States...................................... $496,461 $275,444 $219,172
Far East........................................... 33,815 28,405 15,750
Europe and Russia.................................. 1,758 276 337
Canada............................................. 7,056 1,199 457
Mexico and South America........................... 1,486 942 1,374
-------- -------- --------
Totals................................... $540,576 $306,266 $237,090
======== ======== ========
</Table>
All of the Company's assets are located within the United States.
13. NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as amended,
establishes accounting and reporting standards for derivative instruments and
hedging activities requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that the
company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. The Company has adopted SFAS 133, as
amended, effective April 1, 2001.
The Company believes that its current derivative instruments are economic
hedges, however, as a result of the extensive record keeping requirements of
SFAS 133, management has elected not to
F-23
144
PSF GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
designate and account for these derivatives as hedges. Accordingly, these
instruments will be marked to market through earnings. Upon adoption on April 1,
2001, the company will record an unrealized loss of approximately $7,300,000 as
a liability and a decrease to shareholders' equity of $4,380,000, net of
$2,920,000 of deferred taxes. The $7,300,000 liability will be recorded into
costs of goods sold as the related contracts expire. Changes in the fair value
of the existing contracts and those contracts entered into subsequent to April
1, 2001 will be recorded in the period in which they occur.
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED IN THOUSANDS):
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
------- -------- -------- --------
2001--
Net Sales...................................... $87,920 $111,912 $168,958 $171,786
Gross profit................................... 24,237 25,187 15,190 19,778
Net income.................................. 9,519 9,081 1,414 2,000
2000--
Net Sales...................................... 70,833 71,906 82,136 81,391
Gross profit................................... 6,666 8,711 9,061 15,899
Net income (loss)........................... (1,636) (1,414) (6,365) 4,128
</Table>
F-24
145
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Lundy Packing Company:
We have audited the accompanying consolidated balance sheets of The Lundy
Packing Company and subsidiaries as of July 1, 2000 and July 3, 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended July 1, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Lundy
Packing Company and subsidiaries as of July 1, 2000 and July 3, 1999 and the
results of their operations and their cash flows for each of the years in the
three-year period ended July 1, 2000 in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Raleigh, North Carolina
August 11, 2000
F-25
146
THE LUNDY PACKING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 1, 2000 AND JULY 3, 1999
<Table>
<Caption>
2000 1999
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents (note 2)........................ $ 67,342 8,201,519
Accounts receivable....................................... 10,657,695 9,039,895
Investments............................................... 6,455 6,455
Inventories (notes 3, 8 and 11)........................... 38,387,673 20,565,494
Prepaid expenses.......................................... 642,702 99,636
Due from officers (note 4)................................ 4,658,331 --
Cash surrender value of life insurance.................... 926,746 --
Refundable income taxes................................... 1,536,917 609,997
Deferred income taxes (note 5)............................ 1,372,727 1,580,210
------------ -----------
Total current assets.............................. 58,256,588 40,103,206
------------ -----------
Property, plant and equipment, at cost (notes 7 and 8):
Land...................................................... 3,828,755 3,828,755
Land improvements......................................... 2,168,245 2,155,595
Buildings................................................. 28,200,843 27,967,017
Machinery and equipment................................... 56,016,608 54,700,068
Trucks and trailers....................................... 8,548,042 9,258,334
Office furniture and equipment............................ 1,912,642 1,849,623
Breeding stock............................................ 9,033,474 8,178,666
Construction in progress.................................. 1,234,986 744,671
------------ -----------
110,943,595 108,682,729
Less accumulated depreciation............................. 63,591,709 59,051,234
------------ -----------
Net property, plant and equipment.................... 47,351,886 49,631,495
------------ -----------
Other assets:
Note receivable from related party (note 9)............... 121,554 128,706
Due from officers (note 4)................................ -- 4,243,820
Cash surrender value of life insurance.................... -- 1,224,786
Investment in partnerships (note 9)....................... 1,086,290 478,613
Other..................................................... 78,913 96,162
------------ -----------
Total other assets................................ 1,286,757 6,172,087
------------ -----------
$106,895,231 95,906,788
============ ===========
</Table>
See accompanying notes to consolidated financial statements.
F-26
147
THE LUNDY PACKING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
<Table>
<Caption>
2000 1999
------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 9,757,520 4,524,172
Current installments of notes payable and long-term debt
(note 8)............................................... 12,312,114 13,811,117
Capital lease obligations--current (note 7)............... 514,713 471,690
Income taxes payable...................................... -- --
------------ ----------
22,584,347 18,806,979
Accrued liabilities:
Salaries and wages..................................... 2,930,893 3,512,363
Other expenses......................................... 3,719,093 2,035,430
------------ ----------
Total accrued liabilities......................... 6,649,986 5,547,793
------------ ----------
Total current liabilities......................... 29,234,333 24,354,772
------------ ----------
Deferred income taxes (note 5).............................. 3,070,652 3,120,135
Accrued employees' sick leave............................... 3,344,515 3,376,869
Notes payable and long-term debt (note 8)................... 19,483,613 9,398,519
Capital lease obligations--long-term (note 7)............... 4,542,908 5,065,540
Other long-term liabilities (note 10)....................... 2,635,091 2,171,730
------------ ----------
Total liabilities................................. 62,311,112 47,487,565
------------ ----------
Stockholders' equity:
Common stock of $2 par value per share. Authorized
2,625,000 shares; issued 1,291,233 shares.............. 2,582,466 2,582,466
Additional paid-in capital................................ 2,571,480 2,571,480
Retained earnings......................................... 71,141,244 74,836,608
------------ ----------
76,295,190 79,990,554
Less cost of shares in treasury, 647,537, 645,893 and
636,143 shares in 2000, 1999 and 1998, respectively.... 31,711,071 31,571,331
------------ ----------
Net stockholders' equity............................. 44,584,119 48,419,223
------------ ----------
Commitments and contingencies (notes 7, 9 and 12)
$106,895,231 95,906,788
============ ==========
</Table>
See accompanying notes to consolidated financial statements.
F-27
148
THE LUNDY PACKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 1, 2000, JULY 3, 1999, AND JUNE 27, 1998
<Table>
<Caption>
2000 1999 1998
------------ ------------ ------------
Net sales........................................ $273,970,876 251,011,704 303,933,471
Cost of goods sold (note 11):.................... 210,284,187 183,248,564 241,587,744
------------ ------------ ------------
Gross margin................................ 63,686,689 67,763,140 62,545,727
Operating expenses............................... 68,322,260 64,939,459 60,361,418
------------ ------------ ------------
Operating income (loss)..................... (4,635,571) 2,823,681 2,184,309
Other income (expense), net (notes 6 and 9)...... (598,454) 254,474 2,082,120
------------ ------------ ------------
Earnings (loss) before income taxes......... (5,234,025) 3,078,155 4,266,429
Income tax expense (benefit) (note 5)............ (1,829,000) 1,087,000 1,415,000
------------ ------------ ------------
Net income (loss)........................... $ (3,405,025) 1,991,155 2,851,429
============ ============ ============
</Table>
See accompanying notes to consolidated financial statements.
F-28
149
THE LUNDY PACKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JULY 1, 2000, JULY 3, 1999, AND JUNE 27, 1998
<Table>
<Caption>
2000 1999 1998
------------ ----------- -----------
Common stock, no change during the three years..... $ 2,582,466 2,582,466 2,582,466
------------ ----------- -----------
Additional paid-in capital, no change during the
three years...................................... 2,571,480 2,571,480 2,571,480
------------ ----------- -----------
Retained earnings:
Amount at beginning of year...................... 74,836,608 73,233,021 70,679,995
Net income (loss)................................ (3,405,025) 1,991,155 2,851,429
Dividends ($.45, $.60 and $.45 per share in 2000,
1999 and 1998, respectively).................. (290,339) (387,568) (298,403)
------------ ----------- -----------
71,141,244 74,836,608 73,233,021
------------ ----------- -----------
Treasury stock, at cost:
Amount at beginning of year (645,893, 636,143 and
625,869 shares in 2000, 1999 and 1998,
respectively)................................. (31,571,331) (30,637,430) (29,762,432)
Shares acquired, net (1,644, 9,750 and 10,274
shares in 2000, 1999 and 1998,
respectively)................................. (139,740) (933,901) (874,998)
------------ ----------- -----------
Amount at end of year (647,537, 645,893 and
636,143 shares in 2000, 1999 and 1998,
respectively)................................. (31,711,071) (31,571,331) (30,637,430)
------------ ----------- -----------
Net stockholders' equity...................... $ 44,584,119 48,419,223 47,749,537
============ =========== ===========
</Table>
See accompanying notes to consolidated financial statements.
F-29
150
THE LUNDY PACKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 1, 2000, JULY 3, 1999, AND JUNE 27, 1998
<Table>
<Caption>
2000 1999 1998
------------ ----------- -----------
Cash flows from operating activities:
Net income (loss).................................... $ (3,405,025) 1,991,155 2,851,429
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation...................................... 7,921,042 6,079,435 5,275,767
Amortization...................................... -- 10,531 15,221
Loss (gain) on property abandoned or sold......... 22,166 (260,299) 42,767
Gain from insurance recovery for property
destroyed
by fire......................................... -- -- (982,355)
Decrease (increase) in cash surrender value of
life insurance.................................. 298,040 (91,885) (3,775)
Deferred income taxes............................. 158,000 (354,000) (1,131,000)
Equity share of loss (income) of partnerships..... (607,677) 349,055 234,604
Changes in assets and liabilities:
Decrease (increase) in accounts receivable...... (1,617,800) 2,300,955 2,240,149
Increase in inventories......................... (17,822,179) (1,213,571) (307,088)
Decrease (increase) in prepaid expenses......... (543,066) (13,876) 9,743
Decrease (increase) in refundable income
taxes........................................ (926,920) (609,997) 696,000
Increase (decrease) in accounts payable......... 5,233,348 (23,035) (387,182)
Increase (decrease) in income taxes payable..... -- (1,235,717) 1,235,717
Increase (decrease) in accrued sick leave....... (32,354) 46,792 (36,857)
Increase in accrued liabilities................. 1,102,193 763,152 1,292,255
Increase in other long-term liabilities......... 306,409 334,580 10,624
Decrease (increase) in other assets............. 17,249 (14,497) 20,403
------------ ----------- -----------
Total adjustments............................ (6,491,549) 6,067,623 8,224,993
------------ ----------- -----------
Net cash provided (used) by operating
activities................................. (9,896,574) 8,058,778 11,076,422
------------ ----------- -----------
Cash flows from investing activities:
Proceeds from sale of assets......................... 3,150,348 893,286 1,381,520
Insurance recovery on property destroyed by fire..... -- -- 982,355
Purchases of property, plant and equipment........... (8,813,947) (15,550,753) (7,330,608)
Capital investment in partnership.................... -- (70,000) --
Distributions from partnerships...................... -- -- 680,000
Repayment of note receivable from related party...... 7,152 14,415 31,424
Increase in due from officers........................ (414,511) (530,021) (530,022)
Increase (decrease) in minority interest............. 156,952 (16,632) --
------------ ----------- -----------
Net cash used by investing activities........ (5,914,006) (15,259,705) (4,785,331)
------------ ----------- -----------
See accompanying notes to consolidated financial
statements.
</Table>
F-30
151
THE LUNDY PACKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<Table>
<Caption>
2000 1999 1998
------------ ----------- -----------
Cash flows from financing activities:
Purchase of treasury stock........................... $ (139,740) (933,901) (874,998)
Payments of capital lease obligations................ (479,609) (288,977) (73,150)
Repayment of notes payable and long-term debt........ (2,252,383) (23,710,291) (13,008,222)
Proceeds from notes payable and long-term debt....... 10,838,474 32,466,696 14,921,707
Dividends paid....................................... (290,339) (387,568) (298,403)
------------ ----------- -----------
Net cash provided by financing activities.... 7,676,403 7,145,959 666,934
------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents................................ (8,134,177) (54,968) 6,958,025
Cash and cash equivalents at beginning of year......... 8,201,519 8,256,487 1,298,462
------------ ----------- -----------
Cash and cash equivalents at end of year............... $ 67,342 8,201,519 8,256,487
============ =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest.......................................... $ 2,608,224 1,180,714 901,460
============ =========== ===========
Income taxes...................................... $ 18,967 2,489,467 1,925,668
============ =========== ===========
Supplemental disclosures of investing activities:
During 1999, the Company incurred a capital lease
obligation of $3,849,357 for machinery and
equipment.
Assets and liabilities of L&S Farms prior to
consolidation in 1999:
Inventory......................................... $ -- 1,009,270 --
Property, plant and equipment, net................ -- 1,533,041 --
Accounts payable.................................. -- 448,836 --
Accrued liabilities............................... -- 120,228 --
Notes payable..................................... -- 1,988,275 --
At consolidation, the Company owed $10,419 to the
minority interest in L&S Farms.
During 1998, the Company incurred a capital lease
obligation of $2,050,000 for swine farms facility.
</Table>
See accompanying notes to consolidated financial statements.
F-31
152
THE LUNDY PACKING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 1, 2000, JULY 3, 1999, AND JUNE 27, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Lundy Packing Company is a vertically integrated packer and processor
of pork products distributed along the eastern United States. The Company
produces a variety of high quality products that are marketed to retail chains,
distributors and food service operators.
The Company's fiscal year ends on the Saturday closest to June 30. The
fiscal year ended July 1, 2000, the fiscal year ended July 3, 1999, and the
fiscal year ended June 27, 1998 each consisted of fifty-two weeks.
The accounting principles that affect the more significant elements of the
financial statements are summarized below.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of The Lundy
Packing Company and its wholly-owned subsidiaries, Tomahawk Farms, Inc.,
Boneless Hams, Inc., Gold Banner Meats, Inc., Dogwood Farms, Inc., Dogwood Farms
II, LLC, and Lundy International, Inc. (collectively referred to as the
"Company"). All significant intercompany transactions and balances have been
eliminated in consolidation.
During December 1998, Lundy International contributed additional capital in
its partnership of L&S Farms. As a result of the additional capital
contribution, Lundy International's ownership in L&S Farms increased from 50% to
60%. As a result of the increased ownership, L&S Farms has been consolidated
into Lundy International.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
balance sheet date and the reported amounts of income and expenses for the
periods presented. Actual results could differ from those estimates.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents and classifies such
accounts as cash.
(c) Depreciation
The Company depreciates property, plant and equipment using declining
balance and straight-line methods over the following estimated useful lives:
<Table>
<Caption>
YEARS
--------
Land improvements........................................... 12 to 15
Buildings................................................... 10 to 40
Machinery and equipment..................................... 5 to 12
Trucks and trailers......................................... 4 to 7
Office furniture and equipment.............................. 5 to 12
Breeding stock.............................................. 3
</Table>
F-32
153
THE LUNDY PACKING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(d) Inventories
Inventories of supplies, livestock, and dressed hogs are valued at the
lower of cost (first-in, first-out) or market. Meat products are stated at net
selling price (see note 12).
(e) Accounts Receivable
The Company writes off receivables when amounts are determined to be
uncollectible. In the opinion of management, all uncollectible amounts have been
written off.
(f) Investments
Investments consist of silver coins valued at cost, which approximates
market value.
(g) Income Taxes
The Company accounts for income taxes using the asset and liability method,
whereby deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled.
(h) Employee Benefits
The Company sponsors The Lundy Packing Company Employee Stock Ownership and
Savings Plan, a defined contribution plan established for the benefit of the
eligible employees of The Lundy Packing Company. An employee who is at least age
21 and completes one year of service (12 consecutive months of employment with
1,000 hours of service during such 12-month period) is eligible to enter the
Plan on January 1st or July 1st subsequent to completion of the service
requirement.
Effective April 1, 1997, the Plan was restated from an ESOP only plan to a
plan that consists of two portions--an ESOP portion and a Savings portion. The
ESOP primarily acquires shares of The Lundy Packing Company's common stock.
Under the ESOP, the Company may make an annual contribution for the benefit of
eligible employees. The amount of the contribution is at the discretion of the
Board of Directors of the Company. No contributions were made to the ESOP
portion in 2000, 1999, and 1998.
The Savings portion of the Plan is pursuant to Section 401(k) of the
Internal Revenue Code. The Company matches, at the discretion of the Board of
Directors of the Company, a percentage of employee contributions to the Plan up
to a certain percentage of the employee's annual base salary. For the Plan years
ended June 30, 2000, 1999, and 1998 the Company matched 50% of the first 2% of
the employee's annual base salary and 25% of the next 3%. The Company
contributed approximately $164,000, $147,000, and $147,000 to the Savings
portion of the Plan in 2000, 1999, and 1998 respectively.
Upon retirement, disability or death, Plan members or their estates are
entitled to receive the shares of stock and other income and contributions
credited to their accounts during their years of service. Shares of stock
distributed under the Plan may not be sold or transferred without first being
offered to the Plan and the Company.
The Company provides sick pay benefits for substantially all employees. The
benefit is accrued at the rate of one week's salary each year for each employee
who has completed at least one year of service prior to a fiscal year-end.
Employees are fully vested in the amount accrued at the time the provisions are
made.
F-33
154
THE LUNDY PACKING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On June 28, 1998, the Company adopted Statement of Financial Accounting
Standards No. 132 ("SFAS No. 132"), Employers' Disclosures about Pension and
Other Postretirement Benefits. SFAS No. 132 revises employers' disclosures about
pension and other postretirement benefit plans. SFAS No. 132 does not change the
method of accounting for such plans, but does impact the financial statement
disclosures made pursuant to such plans.
The Company sponsors a defined benefit health care and life insurance plan
for retirees and employees. The Company measures the cost of its obligation
based on its best estimate. The net periodic costs are recognized as employees
render the necessary service to earn the postretirement benefits.
(i) Deferred Compensation
The Company has agreements with certain officers which provide that during
each of the fifteen years after the termination of employment because of
retirement, death or disability, each officer is to be paid deferred
compensation. The deferred compensation is being accrued over the active term of
employment of the officers.
(j) Investments in Debt Securities
Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities," requires segregation of the
investment portfolio, with all debt securities classified as held to maturity,
available for sale or held for trading purposes. Investment securities held to
maturity are stated at cost adjusted for accretion of discount. Accreted
discounts are included in interest income.
All of the Company's investment securities are classified as held to
maturity because the Company has the ability and the positive intent to hold its
investment securities until maturity. As a result, the Company's investments in
debt securities are stated at amortized cost.
(k) Reclassifications
Certain accounts in the 1999 and 1998 financial statements have been
reclassified to conform to the 2000 presentation. These reclassifications have
no effect on net income or stockholders' equity as previously reported.
(2) INVESTMENTS IN DEBT SECURITIES
The Company has invested in various government-guaranteed, interest-bearing
obligations. Since the investments are held to maturity, the Company carries
these investments at amortized cost. These investments have maturities of three
months or less at the time of purchase and, therefore, are classified as cash
equivalents. The Company's policy is to hold the investments until maturity. At
July 1, 2000, the Company did not hold any investments in debt securities. The
following presents the aggregate cost and fair value of these investments held
at July 3, 1999:
<Table>
<Caption>
JULY 3, 1999
-----------------------
COST MARKET
---------- ---------
U.S. Treasury Bills......................................... $4,942,875 5,000,000
========== =========
</Table>
F-34
155
THE LUNDY PACKING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) INVENTORIES
Inventories include:
<Table>
<Caption>
2000 1999
----------- ----------
Processed and in-process meat products..................... $ 3,486,077 2,902,460
Livestock.................................................. 33,079,645 15,006,250
Packaging and processing supplies.......................... 1,821,951 2,656,784
----------- ----------
$38,387,673 20,565,494
=========== ==========
</Table>
(4) DUE FROM OFFICERS
At July 1, 2000 and July 3, 1999 non-interest bearing advances were due
from certain officers of the Company in the amount of $4,658,331 and $4,243,820,
respectively. These advances were used to purchase life insurance policies that
insure the life of another officer. The officers who received the advances are
the owners and beneficiaries of the policies, but the cash surrender value of
the policies ($3,991,794 at July 1, 2000) has been assigned to the Company as
collateral for the loans. The advances are due upon the termination of the
policies. Subsequent to July 1, 2000, the policies were terminated by the
officers and the outstanding due from officers amount at July 1, 2000 was paid
in full.
(5) INCOME TAXES
Components of the provision (benefit) for income taxes are:
<Table>
<Caption>
2000 1999 1998
----------- --------- ----------
Current income tax expense (benefit):
Federal...................................... $(2,005,000) 1,385,000 2,431,000
State........................................ 18,000 56,000 115,000
----------- --------- ----------
(1,987,000) 1,441,000 2,546,000
----------- --------- ----------
Deferred income tax expense (benefit):
Federal...................................... 329,000 (372,000) (945,000)
State........................................ (171,000) 18,000 (186,000)
----------- --------- ----------
158,000 (354,000) (1,131,000)
----------- --------- ----------
$(1,829,000) 1,087,000 1,415,000
=========== ========= ==========
</Table>
The principal items that result in gross deferred tax assets totaling
approximately $3,273,000 at July 1, 2000 and $3,818,000 at July 3, 1999 are
differences in capitalization of certain costs related to inventories for tax
purposes, sick leave, deferred compensation and the obligation for
postretirement benefits other than pensions which will be deducted for tax
purposes when paid.
The principal items that result in gross deferred tax liabilities totaling
approximately $4,969,000 at July 1, 2000 and $5,357,000 at July 3, 1999 are
differences in depreciation and inventory valuation for financial statement and
tax purposes and deferred gains for tax purposes resulting from involuntary
conversion of assets destroyed by fire.
F-35
156
THE LUNDY PACKING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The difference between the "expected" federal income tax expense (benefit)
computed at the statutory rate of 34% and the actual income tax expense is as
follows:
<Table>
<Caption>
2000 1999 1998
-------------------- ------------------ ------------------
AMOUNT % AMOUNT % AMOUNT %
----------- ------ ---------- ----- ---------- -----
Federal income tax expense
(benefit) at the statutory
rate......................... $(1,780,000) (34.0)% $1,047,000 34.0% $1,451,000 34.0%
State income tax expense
(benefit) net of federal tax
effect....................... (101,000) (1.9)% 49,000 1.6% (47,000) (1.1)%
Other.......................... 52,000 1.0% (9,000) (0.3)% 11,000 0.3%
----------- ------ ---------- ----- ---------- -----
Actual income tax expense
(benefit).................... $(1,829,000) (34.9)% $1,087,000 35.3% $1,415,000 33.2%
=========== ====== ========== ===== ========== =====
</Table>
As of July 1, 2000, the Company had aggregate state net economic loss
carryforwards of approximately $13,638,000 available to offset future earnings
of certain subsidiaries. The carryforwards expire in varying amounts from 2000
through 2005. The valuation allowance related to state income tax carryforwards
at July 1, 2000 totaled approximately $471,000, an increase of $43,000 from the
amount at July 3, 1999.
(6) OTHER INCOME, NET OF OTHER DEDUCTIONS
Other income, net of other deductions, includes interest income of $8,978,
$988,631, and $357,092 in 2000, 1999, and 1998 respectively, and interest
expense of $2,495,829, $1,979,107, and $1,028,237 in 2000, 1999 and 1998,
respectively.
(7) LEASES
The Company has entered into capital lease obligations for certain
machinery and equipment as well as certain farm land, finishing floors, lagoons
and related physical facilities for periods up to 10 years. Assets held under
capital lease obligations are included in property and equipment and amounted to
$4,700,919, net of accumulated amortization of $1,198,438 at July 1, 2000 and
$5,360,270, net of accumulated amortization of $539,087 at July 3, 1999.
At July 1, 2000, the minimum annual lease payments under noncancellable
leases are as follows:
<Table>
<Caption>
FISCAL YEAR ENDING
- ------------------
2001........................................................ $ 995,311
2002........................................................ 995,311
2003........................................................ 995,311
2004........................................................ 995,311
2005........................................................ 995,311
Thereafter.................................................. 2,198,147
-----------
Total minimum lease payments................................ 7,174,702
Less amount representing interest........................... (2,117,081)
-----------
Total obligations under capital lease....................... 5,057,621
Less current portion of capital lease obligation............ 514,713
-----------
Long-term obligation........................................ $ 4,542,908
===========
</Table>
F-36
157
THE LUNDY PACKING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has entered into noncancelable operating leases for certain
vehicles. Rent expense related to the operating leases for the years ended July
1, 2000, July 3, 1999 and June 27, 1998 was $1,024,688, $443,716 and $376,557,
respectively. Future minimum annual lease payments are as follows:
<Table>
<Caption>
FISCAL YEAR ENDING
- ------------------
2001........................................................ $1,065,262
2002........................................................ 1,065,262
2003........................................................ 677,555
2004........................................................ 321,212
----------
$3,129,291
==========
</Table>
(8) NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following:
<Table>
<Caption>
2000 1999
----------- ----------
Note payable under an unsecured line of credit to a Bank,
advances available up to a maximum of $10,000,000,
interest at LIBOR plus 2.5% (9.15% at July 1, 2000)
interest payable monthly and principal payable on
December 31, 2000........................................ $10,000,000 --
Note payable under an unsecured line of credit to a bank,
advances available up to a maximum of $3,000,000,
interest at prime (9.50% at July 1, 2000) interest
payable monthly and principal payable on October 20,
2000..................................................... 838,474 --
Note payable to a bank, interest at prime, with an average
cap of 9.00% for a five year period, principal and
interest of $41,000, payable monthly until final payment
on April 10, 2004, collateralized by inventory, property,
plant and equipment of L&S Farms (net book value of
approximately $2,920,500 at July 1, 2000)................ 1,556,517 1,876,305
Note payable under a secured line of credit to a bank,
advances available up to a maximum of $11,000,000,
interest at LIBOR plus 1.9% (8.55% at July 1, 2000)
interest payable monthly and principal payable on
November 30, 2001, secured by assets of Dogwood Farms,
Inc. and Dogwood Farms II, LLC........................... 9,982,609 11,000,000
Note payable under a secured line of credit to a
bank,advances up to a maximum of $7,000,000, interest at
LIBOR plus 1.9% (8.55% at July 1, 2000), monthly
principal payments of $61,275 until final payment on
March 7, 2008, secured by assets of Dogwood Farms, Inc.
and Dogwood Farms II, LLC................................ 5,718,127 6,333,328
Note payable under a secured line of credit to a bank,
interest at LIBOR plus 1.9%, 59 monthly principal
payments of $33,333 plus interest, with a final payment
of all unpaid principal and accrued interest due on
September 7, 2004, secured by assets of the Dogwood
Farms, Inc. and Dogwood Farms, II........................ 3,700,000 4,000,000
----------- ----------
31,795,727 23,209,636
Less current installments.................................. 12,312,114 13,811,117
----------- ----------
$19,483,613 9,398,519
=========== ==========
</Table>
F-37
158
THE LUNDY PACKING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Notes payable and long-term debt mature as follows:
<Table>
<Caption>
FISCAL YEAR ENDING
- ------------------
2001........................................................ $12,312,114
2002........................................................ 1,512,792
2003........................................................ 11,958,594
2004........................................................ 1,135,300
2005........................................................ 1,135,300
Thereafter.................................................. 3,741,627
-----------
$31,795,727
===========
</Table>
The loan agreements contain certain covenants and restrictions of Dogwood
Farms, Inc. and Dogwood Farms II, LLC relating to among other things, the
inability to declare dividends and incur any new loans and the maintenance of
certain financial ratios. At July 1, 2000, the Company was in compliance with
all loan covenants.
The carrying amounts of on-balance-sheet financial instruments, which are
cash, trade and notes receivables, accounts payable, accrued expenses and short
and long-term borrowings, approximate their fair values.
(9) INVESTMENT IN PARTNERSHIPS
The Company has a fifty percent ownership of two separate partnerships, L&H
Farms, LLC and Quality Pork, Inc., which are in the business of breeding and
raising hogs. The Company accounts for the earnings and losses of the
partnerships using the equity method of accounting. The Company's share of the
partnerships' earnings was $607,677 and $181,523 for the years ended July 1,
2000 and July 3, 1999, respectively. These amounts are included in other income,
net of other deductions in the consolidated statements of operations.
During 1998 the Company owned fifty percent of L&S Farms, a partnership, in
the business of breeding and raising hogs. The Company accounted for the
earnings and losses of the partnership using the equity method of accounting.
The Company's share of the partnership's losses in 1998 was $248,989. In 1999,
the Company made an additional $70,000 capital contribution to the partnership,
increasing its ownership to sixty percent. Partnership losses prior to the
capital contribution were accounted for using the equity method of accounting
and amounted to $530,578. These earnings are included in other income, net of
other deductions, in the consolidated statement of operations. Subsequent to the
contribution, the Company accounted for earnings and losses under the full
consolidation method.
The Company has guaranteed $208,331 of the bank borrowings of one of its
investee partnerships at July 1, 2000.
The Company has a note receivable from a partner in one of the partnerships
that bears interest at prime plus 1% (10.50% at July 1, 2000), and at July 1,
2000, July 3, 1999, and June 27,1998 the outstanding balances were $121,554,
$128,706, and $143,121, respectively.
(10) RETIREMENT BENEFITS
The Company provides certain health care and life insurance benefits for
retired employees. The Company's postretirement health care plan is not funded.
F-38
159
THE LUNDY PACKING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The status of the Plan at July 1, 2000 and July 3, 1999 was as follows:
<Table>
<Caption>
2000 1999
---------- ---------
Postretirement benefit obligation........................... $ 958,661 1,302,952
Unrecognized prior service cost............................. (54,657) (61,489)
Unrecognized net gain....................................... 470,592 198,461
---------- ---------
Accrued postretirement benefit cost......................... $1,374,596 1,439,924
========== =========
Weighted-average assumption:
Discount rate............................................. 7.75% 7.75%
</Table>
For measurement purposes, a 9%, 7%, and 8% annual rate of increase in the
per capita cost of covered health care benefits was assumed for 2000, 1999, and
1998, respectively, declining gradually to 5.5% per year by 2006 and remaining
at that level thereafter.
The components of net periodic expense for postretirement benefits in 2000,
1999, and 1998 were as follows:
<Table>
<Caption>
2000 1999 1998
-------- ------- -------
Service cost......................................... $ 50,376 88,749 50,422
Interest cost........................................ 70,788 78,651 91,514
Amortization of transition obligation................ 6,832 6,832 6,832
Amortization of gain................................. (41,526) -- --
-------- ------- -------
Net periodic postretirement benefit cost............. $ 86,470 174,232 148,768
======== ======= =======
</Table>
Assumed health care cost trend rates can have a significant effect on the
amounts reported for the health care plan. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
<Table>
<Caption>
1-PERCENTAGE- 1-PERCENTAGE-
POINT POINT
INCREASE DECREASE
------------- -------------
Effect on total of service and interest cost
components.......................................... $ 7,519 (6,813)
Effect on postretirement benefit obligation........... 53,745 (48,921)
</Table>
(11) MARKET CONDITIONS
The Company's costs to produce market swine, as well as the estimated costs
to complete market swine in inventory may individually exceed market sales
prices periodically during the year. Market prices of the total livestock
inventory exceeded the estimated costs to produce total livestock inventory at
July 1, 2000, but did not as of July 3, 1999 and June 27, 1998. Based on market
prices and production costs at July 3, 1999 and June 27, 1998, the Company
reduced the valuation of livestock by approximately $875,000 and 1,967,000,
respectively, on a consolidated basis.
(12) CONTINGENCY
The Company is a party as plaintiff or defendant to various legal actions
pending at July 1, 2000 which arose during the normal course of business. In the
opinion of management and legal counsel, final disposition of these actions will
not have a material effect on the Company's financial position or results of
operations.
F-39
160
THE LUNDY PACKING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company utilizes third-party insurance subject to varying retention
levels or self insurance. Such self insurance relates to losses and liabilities
primarily associated with workers' compensation claims and general, health care
and vehicle liability. Losses are accrued for as incurred based upon third-party
estimates. During the year the Company incurred claims exceeding predetermined
retention levels. The Company has appropriately accrued for these claims up to
the stated retention levels.
(13) SUBSEQUENT EVENTS
On August 9, 2000, the shareholders of the Company approved an Acquisition
Agreement as of July 12, 2000 with PSF Acquisition Corp., a wholly-owned
subsidiary of Premium Standard Farms, Inc., whereby the Company will become a
wholly-owned subsidiary of Premium Standard Farms, Inc. Under the Acquisition
Agreement the aggregate consideration to be paid to the Company's shareholders
is the difference of $68,000,000 less the amount of the Company's outstanding
capital lease obligations and indebtedness in excess of $37,892,648 and certain
expenses incurred by the Company in connection with the acquisition in excess of
$1,500,000.
F-40
161
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
PSF GROUP HOLDINGS, INC.
PREMIUM STANDARD FARMS, INC. AND
PREMIUM STANDARD FARMS OF NORTH CAROLINA, INC.
As permitted by the Delaware General Corporation Law (DGCL), the
certificate of incorporation and by-laws of each of PSF Group Holdings, Inc.,
Premium Standard Farms, Inc. and Premium Standard Farms of North Carolina, Inc.
(collectively the "Delaware Registrants") grant directors and officers certain
immunities from liability and rights to indemnification. Directors and officers
are not personally liable to a Delaware Registrant or its stockholders for
monetary damages for breach of fiduciary duty except to the extent that
exculpation from liability is not permitted under the DGCL at the time liability
is determined.
In addition, the certificate of incorporation requires each Delaware
Registrant to indemnify directors and officers to the maximum extent permitted
under the DGCL for costs incurred and amounts paid in connection with legal
proceedings related to service as an officer, director or agent of such Delaware
Registrant or affiliated entities. Each Delaware Registrant must also advance
funds to officers, directors and agents for their use in their defense in those
proceedings.
Finally, the by-laws of each of the Delaware Registrants provide that the
corporation may purchase and maintain insurance on behalf of an individual who
is or was a director, officer, employee or agent of such corporation against
certain liabilities incurred by such persons, whether or not the corporation is
otherwise authorized under the DGCL to indemnify such party. Premium Standard
Farms, Inc. currently maintains directors' and officers' insurance policies
covering directors and officers of the Delaware Registrants.
THE LUNDY PACKING COMPANY AND LUNDY INTERNATIONAL, INC.
As permitted by the North Carolina Business Corporation Act (NCBCA), the
articles of incorporation and by-laws of each of The Lundy Packing Company and
Lundy International, Inc. (collectively, the "North Carolina Registrants") grant
directors and officers certain immunities from liability and rights to
indemnification. Pursuant to its articles of incorporation, directors and
officers of The Lundy Packing Company are not personally liable to The Lundy
Packing Company or its stockholders for monetary damages for breach of fiduciary
duty except to the extent that exculpation from liability is not permitted under
the NCBCA at the time liability is determined.
In addition, the by-laws of each of the North Carolina Registrants
generally require them to indemnify directors and officers to the maximum extent
permitted under the NCBCA for costs incurred and amounts paid in connection with
legal proceedings related to service as an officer, director or agent of the
corporation or its affiliated entities. With respect to directors and officers
serving prior to August 25, 2000, however, the North Carolina Registrants will
indemnify any person seeking indemnification in connection with a proceeding
initiated by such person only if such proceeding was authorized by the
corporation's Board of Directors. In addition, the North Carolina Registrants
are not required to indemnify certain directors and officers who served prior to
August 25, 2000 for specified third party claims relating to the activities of
the North Carolina Registrants prior to August 25, 2000. Each of the North
Carolina Registrants must also advance funds to officers, directors and agents
for their use in their defense in proceedings for which indemnification is
available.
Finally, the by-laws of each of the North Carolina Registrants provide that
the corporation may purchase and maintain insurance on behalf of an individual
who is or was a director, officer, employee or agent of such corporation against
certain liabilities incurred by such persons, whether or not the corporation is
otherwise authorized under the NCBCA to indemnify such party. Premium Standard
Farms,
II-1
162
Inc. currently maintains directors' and officers' insurance policies covering
directors and officers of the North Carolina Registrants.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed with this registration statement.
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
1.1* Placement Agreement, dated June 4, 2001, among PSF Group
Holdings, Premium Standard Farms, Inc., The Lundy Packing
Company, Lundy International, Inc., Premium Standard Farms
of North Carolina, Inc., Morgan Stanley & Co. Incorporated
and J.P. Morgan Securities, Inc.
2.1* Articles of Merger of PSF Acquisition Corp. into The Lundy
Packing Company, filed August 25, 2000.
2.2* Stock Purchase Agreement, dated September 22, 2000, by and
among Premium Standard Farms, Inc., PSF Group Holdings, Inc.
and ContiGroup Companies, Inc. (see Exhibit 10.10)
3.1(a)* Certificate of Incorporation of PSF Group Holdings, Inc.,
filed May 8, 1998.
3.1(b)* Certificate of Amendment of Certificate of Incorporation of
PSF Group Holdings, Inc., filed September 16, 1994.
3.2(a)* Certificate of Incorporation of Premium Standard Farms,
Inc., filed August 16, 1996.
3.2(b)* Certificate of Correction of Certificate of Incorporation of
Premium Standard Farms, Inc., filed August 26, 1996
3.3* Articles of Incorporation of The Lundy Packing Company,
filed August 25, 2000 (see Exhibit 2.1).
3.4* Articles of Incorporation of Lundy International, Inc.,
filed September 17, 1981.
3.5* Certificate of Incorporation of Premium Standard Farms of
North Carolina, Inc., filed September 12, 2000.
3.6* Amended and Restated By-laws of PSF Group Holdings, Inc.
3.7* Amended and Restated By-laws of Premium Standard Farms, Inc.
3.8* Restated By-laws of The Lundy Packing Company.
3.9* Restated By-laws of Lundy International, Inc.
3.10* Restated By-laws of Premium Standard Farms of North
Carolina, Inc.
4.1(a)* Indenture, dated as of June 4, 2001, among Premium Standard
Farms, Inc., PSF Group Holdings, Inc., The Lundy Packing
Company, Lundy International, Inc., Premium Standard Farms
of North Carolina, Inc., and Wilmington Trust Company.
4.1(b)* Specimen certificate of 9 1/4% Senior Notes due 2011.
4.2* Registration Rights Agreement, dated June 4, 2001, among PSF
Group Holdings, Inc., Premium Standard Farms, Inc., The
Lundy Packing Company, Lundy International, Inc., Premium
Standard Farms of North Carolina, Inc., Morgan Stanley & Co.
Incorporated and J.P. Morgan Securities Inc.
4.3(a)* Credit Agreement, dated August 27, 1997, by and between
Premium Standard Farms, Inc. and FBS Ag Credit, Inc., as
Agent for Itself and Certain Other Lenders.
4.3(b)* First Amendment to Credit Agreement dated May 13, 1998.
4.3(c)* Second Amendment to Credit Agreement, dated February 26,
1999.
4.3(d)* Third Amendment to Credit Agreement, dated August 1, 2000.
4.3(e)* Fourth Amendment to Credit Agreement, dated August 21, 2000.
4.3(f)* Fifth Amendment to Credit Agreement, dated September 22,
2000.
</Table>
II-2
163
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
4.3(g)* Guaranty Agreement, dated May 13, 1998, by and between PSF
Group Holdings, Inc. and U.S. Bancorp Ag Credit, Inc. as
Agent for Itself and Certain Other Lenders.
5.1* Opinion of Blackwell Sanders Peper Martin LLP
10.1* PSF Group Holdings, Inc. 1999 Equity Incentive Plan, dated
December 1, 1999.
10.2(a)* Premium Standard Farms, Inc. Long-Term Incentive Plan,
effective April 1, 1998 through March 31, 2001.
10.2(b) Premium Standard Farms, Inc. Long-Term Incentive Plan,
effective April 1, 2001 through March 31, 2005.
10.3* Premium Standard Farms, Inc. Executive Level Severance Plan,
dated December 1, 1999.
10.4* Premium Standard Farms, Inc. Vice President Level Severance
Plan, dated December 1, 1999.
10.5* Premium Standard Farms, Inc. Special Executive Retirement
Plan, dated January 1, 2000.
10.6(a)* Premium Standard Farms, Inc. Deferred Compensation Plan,
dated December 29, 2000.
10.6(b)* Amendment Number One to the Premium Standard Farms Deferred
Compensation Plan, dated June 8, 2001.
10.7* Consulting Agreement, dated August 25, 2000, by and between
The Lundy Packing Company and Annabelle Lundy Fetterman.
10.8* Services Agreement, dated October, 1998, by and between
Premium Standard Farms, Inc. and Continental Grain Company.
10.9* Consulting Agreement, dated December 9, 1999, by and between
ContiGroup Companies, Inc. and Premium Standard Farms, Inc.
10.10* Stock Purchase Agreement, dated September 22, 2000, by and
among Premium Standard Farms, Inc., PSF Group Holdings, Inc.
and ContiGroup Companies, Inc.
10.11* Market Hog Contract Grower Agreement, dated May 13, 1998, by
and between Continental Grain Company and CGC Asset
Acquisition Corp.
12.1 Statement regarding Computation of Ratio of Earnings to
Fixed Charges.
21.1* Subsidiaries of the Registrants.
23.1 Consent of Blackwell Sanders Peper Martin LLP (see Exhibit
5.1)
23.2 Consent of Arthur Andersen LLP
23.3 Consent of KPMG LLP
24.1* Power of Attorney
25.1* Statement of Eligibility and Qualification on Form T-1 of
Wilmington Trust Company (with respect to the 9 1/4% senior
notes due 2011).
25.2* Statement of Eligibility and Qualification on Form T-1 of
Wilmington Trust Company (with respect to the guarantees).
99.1* Form of Letter from Premium Standard Farms, Inc. to
Registered Holders and Depository Trust Company
Participants.
99.2* Form of Letter of Transmittal.
99.3* Form of Notice of Guaranteed Delivery.
99.4* Form of Instructions From Beneficial Owners to Registered
Holders and Depository Trust Company Participants.
</Table>
II-3
164
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
99.5* Form of Letter to Clients.
99.6* Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.
</Table>
- ---------------
* Previously Filed.
(b) The following financial statement schedule is filed with this
registration statement:
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ITEM 22. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by final adjudication of
such issue.
(b) The undersigned co-registrants hereby undertake to respond to requests
for information that is incorporated by reference into this prospectus pursuant
to Items 4, 10(b), 11, or 13 of Form S-4, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This undertaking also includes documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(c) The undersigned co-registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
165
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
each of the co-registrants has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Kansas City, State of Missouri, on August 10, 2001.
PSF GROUP HOLDINGS, INC.
By: /s/ JOHN M. MEYER
------------------------------------
John M. Meyer,
Chief Executive Officer
II-5
166
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
each of the co-registrants has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Kansas City, State of Missouri, on August 10, 2001.
PREMIUM STANDARD FARMS, INC.
By: /s/ JOHN M. MEYER
------------------------------------
John M. Meyer,
Chief Executive Officer
II-6
167
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
each of the co-registrants has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Kansas City, State of Missouri, on August 10, 2001.
THE LUNDY PACKING COMPANY
By: /s/ JOHN M. MEYER
------------------------------------
John M. Meyer,
Chief Executive Officer
II-7
168
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
each of the co-registrants has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Kansas City, State of Missouri, on August 10, 2001.
LUNDY INTERNATIONAL, INC.
By: /s/ JOHN M. MEYER
------------------------------------
John M. Meyer,
Chief Executive Officer
II-8
169
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
each of the co-registrants has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Kansas City, State of Missouri, on August 10, 2001.
PREMIUM STANDARD FARMS OF NORTH
CAROLINA, INC.
By: /s/ JOHN M. MEYER
------------------------------------
John M. Meyer,
Chief Executive Officer
II-9
170
PSF GROUP HOLDINGS, INC.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Chief Executive Officer and Director August 10, 2001
- ---------------------------------------------
John M. Meyer
* Chief Financial Officer August 10, 2001
- ---------------------------------------------
Stephen A. Lightstone
* Director August 10, 2001
- ---------------------------------------------
Michael J. Zimmerman
Director
- ---------------------------------------------
Ronald E. Justice
Director
- ---------------------------------------------
Dean Mefford
* Director August 10, 2001
- ---------------------------------------------
Mark R. Baker
* Director August 10, 2001
- ---------------------------------------------
Maurice L. McGill
Director
- ---------------------------------------------
Michael A. Petrick
* Director August 10, 2001
- ---------------------------------------------
Paul J. Fribourg
* Director August 10, 2001
- ---------------------------------------------
Vart. K. Adjemian
*By: /s/ STEPHEN A. LIGHTSTONE
---------------------------------------
Stephen A. Lightstone
Attorney-in-Fact
</Table>
II-10
171
PREMIUM STANDARD FARMS, INC.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Chief Executive Officer and Director August 10, 2001
- ---------------------------------------------
John M. Meyer
* Chief Financial Officer August 10, 2001
- ---------------------------------------------
Stephen A. Lightstone
* Director August 10, 2001
- ---------------------------------------------
Michael J. Zimmerman
Director
- ---------------------------------------------
Ronald E. Justice
* Director August 10, 2001
- ---------------------------------------------
Dean Mefford
* Director August 10, 2001
- ---------------------------------------------
Mark R. Baker
* Director August 10, 2001
- ---------------------------------------------
Maurice L. McGill
Director
- ---------------------------------------------
Michael A. Petrick
* Director August 10, 2001
- ---------------------------------------------
Paul J. Fribourg
* Director August 10, 2001
- ---------------------------------------------
Vart. K. Adjemian
Director
- ---------------------------------------------
John Rakestraw
* Director August 10, 2001
- ---------------------------------------------
Annabelle Lundy Fetterman
*By: /s/ STEPHEN A. LIGHTSTONE
- ---------------------------------------------
Stephen A. Lightstone
Attorney-in-Fact
</Table>
II-11
172
THE LUNDY PACKING COMPANY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Chief Executive Officer and Director August 10, 2001
- ---------------------------------------------
John M. Meyer
* Chief Financial Officer and Director August 10, 2001
- ---------------------------------------------
Stephen A. Lightstone
* Director August 10, 2001
- ---------------------------------------------
Robert W. Manly
*By: /s/ STEPHEN A. LIGHTSTONE
- ---------------------------------------------
Stephen A. Lightstone,
Attorney-in-Fact
</Table>
II-12
173
LUNDY INTERNATIONAL, INC.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Chief Executive Officer and Director August 10, 2001
- ---------------------------------------------
John M. Meyer
* Chief Financial Officer and Director August 10, 2001
- ---------------------------------------------
Stephen A. Lightstone
* Director August 10, 2001
- ---------------------------------------------
Robert W. Manly
*By: /s/ STEPHEN A. LIGHTSTONE
---------------------------------------
Stephen A. Lightstone,
Attorney-in-Fact
</Table>
II-13
174
PREMIUM STANDARD FARMS OF NORTH CAROLINA, INC.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Chief Executive Officer and Director August 10, 2001
- ---------------------------------------------
John M. Meyer
* Chief Financial Officer and Director August 10, 2001
- ---------------------------------------------
Stephen A. Lightstone
* Director August 10, 2001
- ---------------------------------------------
Robert W. Manly
*By: /s/ STEPHEN A. LIGHTSTONE
---------------------------------------
Stephen A. Lightstone,
Attorney-in-Fact
</Table>
II-14
175
FINANCIAL STATEMENT SCHEDULE INDEX
<Table>
<Caption>
DESCRIPTION PAGE
----------- -----
Report of Independent Public Accountants.................... II-17
Schedule II -- Valuation and Qualifying Accounts............ II-18
</Table>
II-15
176
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of PSF Group Holdings, Inc.:
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of PSF Group Holdings,
Inc. (the Company) included in this registration statement and have issued our
report thereon dated May 11, 2001. Our audit was made for the purpose of forming
an opinion on the basic financial statements taken as a whole. The schedule of
valuation and qualifying accounts is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic consolidated financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic consolidated financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
Kansas City, Missouri
May 11, 2001
II-16
177
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
BALANCE AT CHARGED BALANCE AT
BEGINNING TO LESS: END
DESCRIPTION OF YEAR EARNINGS OTHER DEDUCTION OF YEAR
- ----------- ---------- -------- ----- --------- ----------
Allowance for Losses on Accounts Receivable:
2001............................................ 183.5 180.2 416.9 117.0 663.6
2000............................................ 135.9 48.1 -- 0.5 183.5
1999............................................ 138.5 39.8 -- 42.4 135.9
</Table>
II-17