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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended: December 28, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 333-64180
PSF Group Holdings, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 43-1818535
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
423 West 8th Street, Suite 200, Kansas City, Missouri 64105
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (816) 472-7675
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the Registrant has (1) filed all
documents and reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of December 28, 2002, there were 100,000 shares of the Registrant's
Class A Common Stock outstanding and 113,301 shares of the Registrant's Class B
Common Stock outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PSF Group Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
December 28, 2002 and March 30, 2002
(in 000's)
(Unaudited)
December 28, March 30,
2002 2002
---------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ 7,182
Accounts receivable, net 24,860 21,332
Inventories 158,752 141,165
Federal income tax receivable 4,281 3,319
Deferred income taxes 15,680 15,680
Prepaid expenses and other 2,175 2,158
---------------------------------
Total current assets 205,748 190,836
PROPERTY, PLANT, EQUIPMENT AND BREEDING STOCK, at cost:
Land and improvements 99,740 95,349
Buildings 292,979 292,154
Machinery and equipment 259,734 251,664
Breeding stock 35,950 38,126
Construction in progress 8,931 16,306
---------------------------------
697,334 693,599
Less- accumulated depreciation 201,536 166,591
---------------------------------
Total property, plant, equipment and breeding stock 495,798 527,008
GOODWILL 75,998 75,998
OTHER LONG-TERM ASSETS:
Deferred financing costs, net 7,521 7,241
Other 5,775 6,556
---------------------------------
Total other long-term assets 13,296 13,797
---------------------------------
Total assets $ 790,840 $ 807,639
=================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks issued against future deposits $ 3,692 $ -
Accounts payable 10,509 8,385
Accrued expenses 28,113 29,494
Due to related party 1,050 1,317
Accrued interest 1,964 4,914
Current maturities of long-term debt and capital leases 7,016 26,629
---------------------------------
Total current liabilities 52,344 70,739
LONG-TERM LIABILITIES:
Long-term debt and capital leases, less current maturities 293,033 246,153
Other long-term liabilities 8,355 8,243
Due to related party - 921
Deferred income taxes 81,293 98,016
---------------------------------
Total long-term liabilities 382,681 353,333
---------------------------------
Total liabilities 435,025 424,072
SHAREHOLDERS' EQUITY:
Common stock 2 2
Additional paid-in capital 373,688 373,673
Accumulated other comprehensive (loss) income, net of tax (403) 345
(Accumulated deficit) Retained earnings (17,472) 9,547
---------------------------------
Total shareholders' equity 355,815 383,567
---------------------------------
Total liabilities and shareholders' equity $ 790,840 $ 807,639
=================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
PSF Group Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
13 and 39 weeks ended December 28, 2002 and December 29, 2001
(in 000's)
(Unaudited)
13 Weeks Ended 39 Weeks Ended
December 28, December 29, December 28, December 29,
2002 2001 2002 2001
------------- ------------ ------------ ---------------
Net sales $ 154,090 $ 173,278 $ 448,874 $ 521,006
Cost of goods sold 163,393 162,272 462,818 442,984
------------- ------------ ------------ ---------------
Gross profit (9,303) 11,006 (13,944) 78,022
Selling, general and administrative expenses 4,530 5,552 13,503 16,796
Other expense (income) 215 (348) (531) (455)
------------- ------------ ------------ ---------------
Operating (loss) income (14,048) 5,802 (26,916) 61,681
Interest expense (income):
Interest expense 6,044 5,116 17,434 17,246
Interest income (38) (95) (129) (363)
------------- ------------ ------------ ---------------
Interest expense, net 6,006 5,021 17,305 16,883
------------- ------------ ------------ ---------------
(Loss) income before income taxes and extraordinary items (20,054) 781 (44,221) 44,798
Income tax (benefit) expense (7,801) (247) (17,202) 17,416
------------- ------------ ------------ ---------------
Net (loss) income before extraordinary items (12,253) 1,028 (27,019) 27,382
Loss on early extinguishment of debt, net of tax - - - 1,315
------------- ------------ ------------ ---------------
Net (loss) income $ (12,253) $ 1,028 $ (27,019) $ 26,067
============= ============ ============ ===============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
PSF Group Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
39 Weeks ended December 28, 2002 and December 29, 2001
(in 000's)
(Unaudited)
December 28, December 29,
2002 2001
------------------------------------
OPERATING ACTIVITIES:
Net (loss) income $ (27,019) $ 26,067
Adjustments to reconcile net (loss) income
to net cash (used in) provided by operating activities:
Depreciation and amortization 46,134 41,132
Amortization of deferred financing costs 1,109 865
Deferred income taxes (16,723) 8,596
Loss (gain) on sale of assets 1,536 (4,220)
Changes in operating assets and liabilities, net:
Accounts receivable (3,528) 2,498
Inventories (17,587) (9,485)
Prepaid expenses and other assets (1,015) 10,013
Accounts payable, accrued expenses and other liabilities (3,269) (3,127)
----------------------------------
Net cash (used in) provided by operating activities (20,362) 72,339
INVESTING ACTIVITIES:
Purchases of property, plant, equipment and breeding stock (24,405) (76,631)
Proceeds from disposal of property, plant, equipment and breeding stock 8,015 11,245
----------------------------------
Net cash used in investing activities (16,390) (65,386)
FINANCING ACTIVITIES:
Checks issued against future deposits 3,692 -
Proceeds from long-term debt - 173,591
Proceeds from (payments on) revolving debt, net 41,229 (4,000)
Deferred financing costs (1,390) (4,749)
Repayments on long-term debt (13,961) (176,196)
----------------------------------
Net cash provided by (used in) financing activities 29,570 (11,354)
Net decrease in cash and cash equivalents (7,182) (4,401)
CASH AND CASH EQUIVALENTS, beginning of period 7,182 8,560
----------------------------------
CASH AND CASH EQUIVALENTS, end of period $ - $ 4,159
==================================
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 17,888 $ 19,337
Income tax paid 5 5,197
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
PSF Group Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 1 - Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the accounting policies described in the
consolidated financial statements and related notes included in PSF Group
Holdings, Inc. and Subsidiaries (the "Company") consolidated financial
statements for the year ended March 30, 2002 filed with the Securities and
Exchange Commission on Form 10-K. It is suggested that this report be read in
conjunction with those consolidated statements. Certain information and note
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The year-end financial statements presented
were derived from the Company's audited financial statements. In the opinion of
management, the accompanying condensed consolidated financial statements reflect
all adjustments necessary for a fair presentation of the financial position of
the Company 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
Statement No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities" requiring that every derivative instrument be recorded in the
balance sheet as either an asset or liability at its fair value, and changes in
a derivative's fair value be recognized in current earnings or other
comprehensive income.
The Company believes that its exchange traded commodity contracts serve as
economic hedges, however, as a result of the extensive record keeping
requirements of SFAS 133, management has elected not to designate and account
for these contracts as hedges. Effective as of April 1, 2001, these contracts
were marked to market through earnings. Changes in the fair value of the
existing commodity contracts and those commodity contracts entered into
subsequent to April 1, 2001 have been recorded in the period in which they
occur. Net gains (losses) recognized during the 39 weeks ended December 28, 2002
and December 29, 2001 in gross profit were $153,000 and ($13,781,000),
respectively. Net losses recognized during the 13 weeks ended December 28, 2002
and December 29, 2001 in gross profit were ($1,686,000) and ($3,307,000),
respectively.
During the year ended March 30, 2002 the Company entered into an interest rate
swap agreement in order to effectively convert the benchmark interest rate on
the $75 million term note from variable to fixed rate debt.
The Company's comprehensive (loss) income includes net (loss) income and the
change in the fair market value of the interest rate swap, net of tax.
Comprehensive (loss) income for the 13 weeks ended December 28, 2002 and
December 29, 2001 was ($12,237,000) and $3,110,000, respectively. Comprehensive
(loss) income for the 39 weeks ended December 28, 2002 and December 29, 2001 was
($27,768,000) and $26,322,000, 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
4
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.
The Company elected early adoption of these rules and recognized the effect of
the new pronouncements in fiscal year 2002. Assessment of the fair value of the
relevant reporting units was completed during the second quarter of fiscal year
2003, resulting in no impairment of recorded goodwill. The effect of
discontinuing goodwill amortization increased income before income taxes by
approximately $685,000 for the 13 weeks ended December 28, 2002 and December 29,
2001 and by approximately $2,055,000 for the 39 weeks ended December 28, 2002
and December 29, 2001.
Asset retirement obligations
On June 30, 2001 the Financial Accounting Standards Board issued its Statement
of Financial Accounting Standards No. 143 (SFAS 143), "Accounting for Asset
Retirement Obligations." SFAS 143 applies to legal obligations associated with
the retirement of long-lived assets that result from the acquisition,
construction, development, and the normal operation of long-lived assets. This
statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. This
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company has not determined the impact, if
any, that the adoption of this new standard will have on its financial
statements.
Impairment of long-lived assets
In August 2001, the Financial Accounting Standards Board issued its Statement of
Financial Accounting Standards No. 144 (SFAS 144), "Accounting for the
Impairment of Long-Lived Assets." SFAS 144 supersedes SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
and the accounting and reporting provisions of APB No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS 144 retains many of the provisions of SFAS 121, but
addresses certain implementation issues associated with that Statement. This
statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001. The statement did not have a material impact
on the financial statements.
Early extinguishment of debt
During April 2002, the Financial Accounting Standards Board issued its Statement
of Financial Accounting Standards No. 145 (SFAS 145), "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds SFAS 4, "Reporting Gains and Losses from
Extinguishment of Debt" and SFAS 44, "Accounting for Intangible Assets of Motor
Carriers." This Statement amends SFAS 13, "Accounting for Leases," so that
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions are accounted for the same way as sale-leaseback
transactions. Additionally, SFAS 13 is amended so that the original lessee under
an operating lease agreement that becomes secondarily liable shall recognize the
fair value of the guarantee obligation. SFAS 145 also stipulates that gains or
losses on extinguishment of debt would have to meet the criteria of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions" to be classified as
an extraordinary item. In addition, extraordinary gains and losses on
extinguishment of debt in prior periods presented would require
reclassification. SFAS 145 is effective for fiscal years beginning after May 15,
2002. The amendment to SFAS 13 is effective for transactions occurring after May
15, 2002. The Company believes that the adoption of this new standard will not
have a material impact on its financial statements.
5
Note 3 - Inventories
Inventories are valued at the lower of cost, determined on a first-in, first-out
(FIFO) basis, or market. Inventories consisted of the following (in thousands):
December 28, 2002 March 30, 2002
----------------- --------------
Hogs $ 141,984 $ 124,449
Processed pork and pork products 10,188 10,704
Packaging and supplies 3,216 2,762
Grain, feed additives and other 3,364 3,250
-------- ---------
$ 158,752 $ 141,165
========== =========
Note 4 - Segment information
The accounting policies for the segments are the same as those described in the
footnotes included in the Company's March 30, 2002 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. Intersegment live hog
sales are based on market prices. The following table presents specific
financial information about each segment as reviewed by the Company's
management. The Corporate and Other classification in the following table
represents unallocated corporate expenses and assets, deferred and current
taxes, the Company's goodwill, interest expense and intersegment elimination (in
thousands):
Pork Hog Corporate
Processing Production and Other Total
---------------- ---------------- ---------------- ----------------
For the 13 weeks ended December 28, 2002-
Net sales $ 142,367 $ 86,307 $ (74,584) $ 154,090
Intersegment sales (1,967) (72,617) - -
Operating income (loss) 14,601 (25,676) (2,973) (14,048)
For the 13 weeks ended December 29, 2001-
Net sales 145,136 108,229 (80,087) 173,278
Intersegment sales (1,159) (78,928) - -
Operating income (loss) 11,989 (1,780) (4,407) 5,802
For the 39 weeks ended December 28, 2002-
Net sales 412,355 261,627 (225,108) 448,874
Intersegment sales (5,249) (219,859) - -
Operating income (loss) 25,383 (43,189) (9,110) (26,916)
For the 39 weeks ended December 29, 2001-
Net sales 462,645 341,591 (283,230) 521,006
Intersegment sales (2,814) (280,416) - -
Operating income (loss) 20,496 54,780 (13,595) 61,681
As of December 28, 2002-
Assets 193,202 509,606 88,032 790,840
As of March 30, 2002-
Assets 199,714 514,787 93,138 807,639
6
Note 5 - Early extinguishment of debt
On June 7, 2001, Premium Standard Farms, Inc., a wholly-owned subsidiary of the
Company, issued $175 million of 9 1/4% senior unsecured notes due 2011 ("9 1/4%
Notes"). 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% senior secured
payment-in-kind notes ("PIK Notes") with the remaining net proceeds used to pay
down the Company's bank credit facility. An extraordinary charge of $2,191,483,
before tax of $876,593, was recorded in the Condensed Consolidated Statement of
Operations for the 13 weeks ended June 30, 2001 resulting from the loss on the
early extinguishment of the PIK Notes. Premium Standard Farms, the Company, and
the Company's other wholly-owned subsidiaries subsequently filed a joint
registration statement on Form S-4 with the Securities and Exchange Commission,
as amended and declared effective on August 14, 2001, to register exchange notes
("Exchange Notes") and the guarantees of the Exchange Notes. The Exchange Notes
have substantially identical terms to the privately placed 9 1/4% Notes, except
that the Exchange Notes are freely tradeable. All of the holders of the
privately placed 9 1/4% Notes tendered their notes for the registered Exchange
Notes.
Note 6 - Amendments to Credit Agreement
Effective June 28, 2002, the Company and its bank group amended the Credit
Agreement to extend the revolving credit facility one year, increase the letter
of credit commitment from $10.0 million to $15.0 million, and amend certain
financial covenants and pricing terms.
Effective September 27, 2002, the Company and its bank group amended the Credit
Agreement to increase the Company's revolving credit facility by $50.0 million
to $150.0 million in total availability subject to a borrowing base calculation,
among other things. The amendment also defers quarterly principal payments on
the Company's term debt for a one year period and amends certain financial
covenants. Obligations under the Credit Agreement are secured by liens on
substantially all of the Company's assets. In addition to customary financial
covenants, the Credit Agreement contains customary restrictions on, among other
things, encumbrance or disposal of assets, acquisitions, additional
indebtedness, capital investment, payment of subordinated debt and construction
of new hog production facilities. In addition to customary fees payable under
credit facilities of this type, amounts borrowed under the Credit Agreement bear
interest at fluctuating rates selected by the Company. These rates are based on
the agent bank's prime rate (the Federal Funds Rate plus one half of one
percent) or LIBOR plus, in each case, an applicable margin, currently ranging
from 1.5% to 3.125%, determined by the Company's leverage ratio. All borrowings
under the revolving credit facility mature on August 21, 2004 and the term debt
matures on August 21, 2005. Financing costs associated with the amendment have
been capitalized and are being amortized over the life of the amended Credit
Agreement.
Note 7 - Litigation
The Company has settled two citizens' action suits which sought to enforce
alleged violations of the Clean Air Act, Clean Water Act and CERCLA against the
Company and ContiGroup Companies, Inc. ("ContiGroup"). In 1998, the Company
engaged in a series of transactions with ContiGroup pursuant to which it
purchased from ContiGroup its North Missouri Farms hog production operations and
ContiGroup purchased a 51.0% ownership interest in the Company (the "1998
ContiGroup transaction"). To the extent that ContiGroup incurred any liability
in this litigation, the Company assumed that liability pursuant to the terms of
the 1998 ContiGroup transaction. The U.S. Environmental Protection Agency (the
"E.P.A.") had intervened in the same action and filed a separate notice of
violation against the Company under the Clean Air Act. This settlement, in the
form of a consent decree ("EPA Consent Decree"), resolved all outstanding issues
of ContiGroup and the Company with the E.P.A. The EPA Consent Decree, built upon
the 1999 consent decree with the State of Missouri referenced below, requires
the Company and ContiGroup to meet certain performance standards, such as a 50
percent reduction in nitrogen concentration of the effluent applied to area
fields over a prescribed time period. Other key elements of the EPA Consent
Decree include: monitoring air emissions from lagoons and barns; compliance with
certain best management
7
practices to reduce the risk of spills; testing of selective lagoons to ensure
integrity; and the payment of a $350,000 civil penalty. The counsel for the
citizen plaintiffs has submitted a petition for recovery of attorneys' fees in
connection with the lawsuits against both the Company and ContiGroup. The
Company believes the majority of these fees have been previously paid and
resolved. The Company believes the resolution of this matter will not have a
material adverse effect upon its financial position or results of operations.
In 1999, the Company settled a suit filed by the Attorney General of the State
of Missouri against the Company and ContiGroup. The Company assumed ContiGroup's
liability in this action in connection with the 1998 ContiGroup transaction. The
settlement required the Company and ContiGroup to enter into a consent judgment
pursuant to which the Company is obligated to invest $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. The Company
is in the fourth year of that five year period and has spent $11.7 million to
satisfy the settlement. In addition, pursuant to the consent judgment the
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.
In addition to the suits discussed above, the Company has received notices of
violations from the Missouri Department of Natural Resources alleging releases
of wastewater. The Company has responded to these notices in an effort to
resolve these matters. The State of Missouri has filed a lawsuit seeking
penalties and injunctive relief for these violations. The Company has filed an
answer, believes it has good defenses, and intends to vigorously defend the
suit.
Two nuisance suits were filed against ContiGroup and the Company during the
second quarter of fiscal year 2003 in the Circuit Court of Jackson County,
Kansas City, Missouri. There are multiple plaintiffs in each suit, who claim to
live near swine farms owned by ContiGroup but under production contracts with
the Company. The primary allegation is that offensive odors from these farms
interfered with the plaintiffs' right to use and have quiet enjoyment of their
respective properties. The Company is obligated by contract to indemnify
ContiGroup for any liabilities arising from this litigation. The Company has
filed an answer, believes it has good defenses to these actions, and intends to
vigorously defend these suits.
In addition, the Company is involved from time to time in routine litigation
incidental to its business. Although no assurance can be given as to the outcome
or expense associated with any of these routine proceedings, the Company
believes that none of such proceedings currently pending should, individually or
in the aggregate, have a material adverse effect on its financial statements.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In this report on Form 10-Q, the terms "we," "us," and "our" refer collectively
to PSF Group Holdings, Inc., Premium Standard Farms, Inc. and their
subsidiaries. Premium Standard Farms, Inc. is a wholly-owned subsidiary of PSF
Group Holdings, Inc. The terms "expect," "anticipate," "may," "believe," "will,"
and similar expressions made with respect to our earnings and outlook for the
future contain some forward-looking information. Naturally, all forward-looking
statements involve risk and uncertainty and actual results or events could be
materially different. Although we believe that our expectations are based on
reasonable assumptions, we can give no assurance that our goals will be
achieved. Important factors that could cause actual results to differ include:
economic conditions generally and in our principal markets; competitive
practices and consolidation in the pork production and processing industries;
the impact of current and future laws, governmental regulations and fiscal
policies affecting our industry and operations, including environmental laws and
regulations, trade embargoes and tariffs; domestic and international
transportation disruptions; food safety; the availability of additional capital
to fund future commitments and expansion and the cost and terms of financing;
outbreaks of disease in our herds; feed ingredient costs; fluctuations in live
hog and wholesale pork prices; customer demands and preferences; and the
occurrence of natural disasters and other occurrences beyond our control. In
light of these risks, uncertainties and assumptions, the forward-looking events
discussed might not occur. Please review our Annual Report on Form 10-K for
other important factors that could cause results to differ materially from those
in any such forward-looking statements. Information in these archived materials
may not be current and may be superceded by more recent information published by
us.
Results of Operations
13 Weeks Ended December 28, 2002 Compared to the 13 Weeks Ended December 29, 2001
The following table presents selected financial information for our
production and processing segments for the 13 weeks ended December 28, 2002 and
December 29, 2001. Net sales, gross profit and operating (loss) income by
segment are also presented as a percentage of their respective totals. The two
columns under quarter-to-quarter change show the dollar and percentage change
from the quarter ended December 28, 2002 to the quarter ended December 29, 2001.
Intersegment sales are based on market prices.
For the 13 Weeks Ended Qtr to Qtr Change
------------------------------------------------------------------ ------------------------------
December 28, 2002 % December 29, 2001 % 2002 to 2001 %
------------------- ------------ ----------------- ----------- ------------- ---------------
(In millions except percentages)
Net Sales
Production $ 86.3 56.0 % $ 108.2 62.4 % $ (21.9) (20.2)%
Processing 142.4 92.4 % 145.2 83.8 % (2.8) (1.9)%
Intersegment (74.6) (48.4)% (80.1) (46.2)% 5.5 -
------------------- ------------ ----------------- ----------- ------------- ---------------
Total Net Sales $ 154.1 100.0 % $ 173.3 100.0 % $ (19.2) (11.1)%
=================== ============ ================= =========== ============= ===============
Gross Profit
Production $ (25.5) 274.2 % $ (1.9) (17.3)% $ (23.6) (1,242.1)%
Processing 16.2 (174.2)% 12.9 117.3 % 3.3 25.6 %
------------------- ------------ ----------------- ----------- ------------- --------------
Total Gross Profit $ (9.3) 100.0 % $ 11.0 100.0 % $ (20.3) (184.5)%
=================== ============ ================= =========== ============= ===============
Operating (Loss) Income
Production $ (25.7) 182.3 % $ (1.8) (31.0)% $ (23.9) (1,327.8)%
Processing 14.6 (103.6)% 12.0 206.9 % 2.6 21.7 %
Corporate (3.0) 21.3 % (4.4) (75.9)% 1.4 31.8 %
------------------- ------------ ----------------- ----------- ------------- ---------------
Total Operating (Loss) Income $ (14.1) 100.0 % $ 5.8 100.0 % $ (19.9) (343.1)%
=================== ============ ================= =========== ============= ===============
9
Consolidated
Net Sales. Net sales decreased by $19.2 million, or 11.1%, to $154.1 million in
the third quarter of fiscal year 2003 from $173.3 million in the comparable
period last year. The decrease was attributed to a decrease in prices of $20.4
million, which was offset by an increase in volume of $1.2 million. Wholesale
pork prices have been severely impacted by an increased supply of pork
industry-wide and the lingering impact of the Russian ban on poultry imported
from the United States, which contributed to excess levels of meat protein in
the domestic market. Although the ban has been lifted, the effects of it as well
as the increase in pork production industry-wide for the year have continued to
have a negative impact on market hog and wholesale pork prices during the third
quarter of fiscal year 2003. For the quarter, industry-wide pork production was
consistent with the same period last year, however, pork cold storage stocks
were still 5% higher compared to the same period ended last year. See Segment
Analysis below for comments on changes in sales by business segment.
Gross Profit. Gross profit decreased by $20.3 million, or 184.5%, to a loss of
$9.3 million in the third quarter of fiscal year 2003 from a profit of $11.0
million in the comparable period last year. The current year gross profit
decrease is primarily the result of lower live hog and pork product prices
during the third quarter of fiscal year 2003 compared to the same period last
year, while cost of sales remained relatively consistent between the same
periods. See Segment Analysis below for comments on changes in gross profit by
business segment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were lower as a percentage of net sales at 2.9% in the
third quarter of fiscal year 2003 compared to 3.2% in the comparable period last
year. In dollar terms, selling, general and administrative expenses decreased by
$1.0 million, or 18.2%, to $4.5 million in the third quarter of fiscal year 2003
from $5.5 million in the comparable period last year. The majority of the
decrease is attributable to a reduction in bonus accruals in the third quarter
of fiscal year 2003 compared to the same period last year.
Operating (Loss) Income. Operating income decreased by $19.9 million, or 343.1%,
to an operating loss of $14.1 million in the third quarter of fiscal year 2003
from an operating income of $5.8 million in the comparable period last year. The
decrease is attributable to the factors mentioned above.
Interest Expense, net. Interest expense, net, increased by $1.0 million, or
20.0%, to $6.0 million in the third quarter of fiscal year 2003 from $5.0
million in the comparable period last year. The increase was caused by an
increase in total interest-bearing debt outstanding and an increase in the
amortization of deferred financing costs charged to interest expense resulting
from recent amendments to the bank debt facilities. See Liquidity and Capital
Resources below for more information.
Income Tax Benefit / Expense. Our effective tax rate was a benefit of 38.9% in
the third quarter of fiscal year 2003 compared to a benefit of 31.6% in the
comparable period last year. The difference was primarily attributable to the
utilization of state income tax credits.
Segment Analysis
Hog Production. Net sales decreased by $21.9 million, or 20.2%, to $86.3 million
in the third quarter of fiscal year 2003 from $108.2 million in the comparable
period last year. The decrease primarily resulted from a 16.5% decrease in net
market hog sales prices coupled with a 4.4% decrease in volume attributable to a
3.3% decrease in hogs marketed and a 1.1% decrease in weight per hog marketed.
Intersegment sales to our pork processing segment transferred at market prices
are eliminated in the Condensed Consolidated Statements of Operations.
Gross profit decreased by $23.6 million, or 1,242.1%, to a loss of
$25.5 million in the third quarter of fiscal year 2003 from a loss of $1.9
million in the comparable period last year. The decrease was
10
primarily the result of hogs produced at a higher negative margin due to the
lower net market hog sales price mentioned above. Hog production costs per
hundredweight were 6.3% higher during the third quarter of fiscal year 2003
compared to the same period last year mainly due to higher feed ingredient
costs, lower values on culled animals and a lower weight per animal marketed.
Operating loss increased by $23.9 million, or 1,327.8%, to an operating
loss of $25.7 million in the third quarter of fiscal year 2003 from an operating
loss of $1.8 million in the comparable period last year. The decrease is
attributed to the factors mentioned above.
Pork Processing. Net sales decreased $2.8 million, or 1.9%, to $142.4 million in
the third quarter of fiscal year 2003 from $145.2 million in the comparable
period last year. The decrease resulted from a 13.8% decrease in pork product
sales prices, partially offset by a 13.8% increase in volume processed compared
to the same period last year. The increase in volume was primarily attributable
to the expansion at the Clinton, North Carolina plant completed in late fiscal
year 2002, which increased capacity from 6,500 hogs per day to 10,000 hogs per
day.
Gross profit increased $3.3 million, or 25.6%, to $16.2 million in the
third quarter of fiscal year 2003 from $12.9 million in the comparable period
last year. Higher margins were achieved by an increase in wholesale pork prices
in relationship to hog prices. The increase in margins were related to the
effects of the industry-wide production of hogs beginning to decrease and were
coupled with higher volume through the plants during the third quarter of fiscal
year 2003 compared to the same period last year. Processing costs per head
decreased 4.5% during the third quarter of fiscal year 2003 compared to the same
period last year, primarily the result of increased efficiencies at the Clinton
plant and higher volumes processed offset slightly by increased depreciation
expense related to the Clinton plant expansion and added emphasis on higher cost
value-added products.
Operating income increased by $2.6 million, or 21.7%, to $14.6 million
in the third quarter of fiscal year 2003 from $12.0 million in the comparable
period last year. The increase was attributed to the factors mentioned above.
39 Weeks Ended December 28, 2002 Compared to the 39 Weeks Ended December 29, 2001
The following table presents selected financial information for our
production and processing segments for the first three quarters ended December
28, 2002 and December 29, 2001. Net sales, gross profit and operating (loss)
income by segment are also presented as a percentage of their respective totals.
The two columns under year-to-year change show the dollar and percentage change
from the first three quarters ended December 28, 2002 to the first three
quarters ended December 29, 2001. Intersegment sales are based on market prices.
For the 39 Weeks Ended Year to Year Change
------------------------------------------------------------------ --------------------------
December 28, 2002 % December 29, 2001 % 2002 to 2001 %
------------------- ------------ ------------------ ----------- ------------- -----------
(In millions except percentages)
Net Sales
Production $ 261.6 58.2 % $ 341.6 65.6 % $ (80.0) (23.4)%
Processing 412.4 91.9 % 462.6 88.8 % (50.2) (10.9)%
Intersegment (225.1) (50.1)% (283.2) (54.4)% 58.1 -
------------------- ------------ ------------------ ----------- ------------- -----------
Total Net Sales $ 448.9 100.0 % $ 521.0 100.0 % $ (72.1) (13.8)%
=================== ============ ================== =========== ============= ===========
Gross Profit
Production $ (43.3) 309.3 % $ 55.1 70.6 % $ (98.4) (178.6)%
Processing 29.3 (209.3)% 22.9 29.4 % 6.4 27.9 %
------------------- ------------ ------------------ ----------- ------------- -----------
Total Gross Profit $ (14.0) 100.0 % $ 78.0 100.0 % $ (92.0) (117.9)%
=================== ============ ================== =========== ============= ===========
Operating (Loss) Income
Production $ (43.2) 160.6 % $ 54.8 88.8 % $ (98.0) (178.8)%
Processing 25.4 (94.4)% 20.5 33.2 % 4.9 23.9 %
Corporate (9.1) 33.8 % (13.6) (22.0)% 4.5 33.1 %
------------------- ------------ ------------------ ----------- ------------- -----------
Total Operating (Loss) Income $ (26.9) 100.0 % $ 61.7 100.0 % $ (88.6) (143.6)%
=================== ============ ================== =========== ============= ===========
11
Consolidated
Net Sales. Net sales decreased by $72.1 million, or 13.8%, to $448.9 million in
the first three quarters of fiscal year 2003 from $521.0 million in the
comparable period last year. The decrease was attributed to a decrease in prices
of $93.2 million, which was offset by an increase in volume of $21.1 million.
Pork prices were severely impacted by several factors, including, an increased
supply of pork industry wide, compounded by an increased supply of all meat
proteins. Much of the increase in meat proteins was attributed to the Russian
ban on poultry imports from the United States, which was lifted before the end
of the second quarter of fiscal year 2003. Although the ban has been lifted, the
effects of it as well as the increase in pork production industry-wide for the
year have continued to have a negative impact on market hog and wholesale pork
prices during fiscal year 2003. See Segment Analysis below for comments on
changes in sales by business segment.
Gross Profit. Gross profit decreased by $92.0 million, or 117.9%, to a loss of
$14.0 million in the first three quarters of fiscal year 2003 from a profit of
$78.0 million in the comparable period last year. The current year gross profit
decrease is primarily the result of lower live hog and pork product prices
during the first three quarters of fiscal year 2003 compared to the same period
last year, coupled with an increase in volume of inputs of $17.9 million and an
increase in cost of inputs of $2.0 million compared to the same period last
year. See Segment Analysis below for comments on changes in gross profit by
business segment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were lower as a percentage of net sales at 3.0% in the
first three quarters of fiscal year 2003 compared to 3.2% in the comparable
period last year. In dollar terms, selling, general and administrative expenses
decreased by $3.3 million, or 19.6%, to $13.5 million in the first three
quarters of fiscal year 2003 from $16.8 million in the comparable period last
year. The majority of the decrease is attributable to legal expenses incurred in
the first three quarters of fiscal year 2002 to settle outstanding litigation
and decreased bonus accruals for the current fiscal year.
Operating (Loss) Income. Operating income decreased by $88.6 million, or 143.6%,
to an operating loss of $26.9 million in the first three quarters of fiscal year
2003 from an operating income of $61.7 million in the comparable period last
year. The decrease is attributable to the factors mentioned above.
Interest Expense, net. Interest expense, net, increased by $0.4 million, or
2.4%, to $17.3 million in the first three quarters of fiscal year 2003 from
$16.9 million in the comparable period last year. The increase was attributed to
an increase in total interest-bearing debt outstanding and increased
amortization of deferred financing costs which are charged to interest expense
related to recent bank credit amendments, offset slightly by lower interest
rates on our variable rate debt. See Liquidity and Capital Resources below for
more information.
Income Tax Benefit / Expense. Our effective tax rate was a benefit of 38.9% in
the first three quarters of fiscal year 2003 compared to an expense of 38.9% in
the comparable period last year.
Segment Analysis
Hog Production. Net sales decreased by $80.0 million, or 23.4%, to $261.6
million in the first three quarters of fiscal year 2003 from $341.6 million in
the comparable period last year. The decrease primarily resulted from a 25.6%
decrease in net market hog sales prices, partially offset by a 3.0% increase in
volume attributable to the effects of our Texas sow herd expansion and
additional contract production. Intersegment sales to our pork processing
segment transferred at market prices are eliminated in the Condensed
Consolidated Statements of Operations.
12
Gross profit decreased by $98.4 million, or 178.6%, to a loss of $43.3
million in the first three quarters of fiscal year 2003 from a gross profit of
$55.1 million in the comparable period last year. The decrease was primarily the
result of a higher volume of hogs produced at a negative margin due to the lower
net market hog sales price mentioned above. Hog production costs per
hundredweight were 3.3% higher during the first three quarters of fiscal year
2003 compared to the same period last year mainly due to higher feed costs,
lower values on culled animals and a lower weight per animal marketed.
Operating income decreased by $98.0 million, or 178.8%, to an operating
loss of $43.2 million in the first three quarters of fiscal year 2003 from an
operating income of $54.8 million in the comparable period last year. The
decrease is attributed to the factors mentioned above.
Pork Processing. Net sales decreased $50.2 million, or 10.9%, to $412.4 million
in the first three quarters of fiscal year 2003 from $462.6 million in the
comparable period last year. The decrease resulted from a 19.7% decrease in pork
product sales prices, partially offset by a 11.0% increase in volume processed
compared to the same period last year. The increase in volume was primarily
attributable to the expansion at the Clinton, North Carolina plant completed in
late fiscal year 2002, which increased capacity from 6,500 hogs per day to
10,000 hogs per day.
Gross profit increased by $6.4 million, or 27.9%, to $29.3 million in
the first three quarters of fiscal year 2003 from $22.9 million in the
comparable period last year. The increase primarily resulted from higher margins
on pork products due to lower market hog prices coupled with higher volume
through the plants. Processing costs increased 3.0% during the first three
quarters of fiscal year 2003 compared to the same period last year, primarily
the result of increased depreciation expense related to the Clinton plant
expansion and added emphasis on higher cost value-added products.
Operating income increased by $4.9 million, or 23.9%, to $25.4 million
in the first three quarters of fiscal year 2003 from $20.5 million in the
comparable period last year. The increase was attributed to the factors
mentioned above.
Liquidity and Capital Resources
Our primary source of financing has been cash flow from operations and
bank borrowings. Our ongoing operations will require the availability of funds
to service debt, fund working capital and make capital expenditures on our
facilities. We expect to finance these activities through cash flow from
operations and from amounts available under our revolving credit facility.
Net cash flow (used in) and provided by operating activities was
($20.4) million and $72.3 million for the first three quarters ended in fiscal
years 2003 and 2002, respectively. The decrease in the first three quarters of
fiscal year 2003 compared to the same period last year was primarily due to a
decrease in net income, the change in deferred taxes and an increase in working
capital requirements partially offset by an increase in non-cash depreciation
charges. Non-cash charges increased in the first three quarters of fiscal year
2003 compared to the same period last year due to incremental depreciation
expense of expansion projects completed and capitalized in fiscal year 2002.
Net cash flow used in investing activities was $16.4 million and $65.4
million for the first three quarters ended in fiscal years 2003 and 2002,
respectively. Net cash used in investing activities consisted of $24.4 million
and $76.6 million for capital expenditures relating to property, plant and
equipment and breeding stock during the first three quarters ended in fiscal
years 2003 and 2002, respectively. The Company received proceeds from disposal
of fixed assets of $8.0 million and $11.2 million during the first three
quarters ended in fiscal years 2003 and 2002, respectively, primarily
representing culled breeding stock. The decrease in capital expenditures is the
result of the completion of expansion projects at our Clinton, North Carolina
plant and our Texas production facilities during fiscal year 2002.
Net cash flow provided by and (used in) financing activities was $29.6
million and ($11.4) million for the first three quarters ended in fiscal years
2003 and 2002, respectively. In the first quarter of fiscal year 2002, Premium
Standard Farms issued $175 million of 9 1/4% senior unsecured notes due 2011("9
1/4%
13
Notes"), which were used to retire $137.9 million of 11% senior secured
payment-in-kind notes ("PIK Notes") on July 7, 2001. An associated 1% prepayment
penalty on these PIK Notes, which was also paid on July 7, 2001, resulted in an
extraordinary charge of $1.3 million, net of taxes. With the remaining proceeds,
we also prepaid $25 million of bank term debt, made a $6.3 million quarterly
payment on bank term debt and paid down $4.0 million on our revolving credit
facility. The 9 1/4% Notes contain customary covenants and are redeemable by
Premium Standard Farms under certain circumstances.
Borrowings are provided under a Credit Agreement that provides for up
to $150 million of revolving credit (with actual credit limit determined monthly
by reference to a borrowing base formula) and a term loan facility with $56.3
million outstanding at December 28, 2002. Effective June 28, 2002, the Credit
Agreement was amended to extend the revolving credit facility one year, increase
the letter of credit commitment from $10 million to $15 million, and amend
certain financial covenants and pricing terms, among other things. Effective
September 27, 2002, the Credit Agreement was amended to increase the revolving
credit facility by $50.0 million to $150.0 million in total availability subject
to a borrowing base calculation, defer quarterly principal payments on the term
debt for one year, and amend certain financial covenants and pricing terms,
among other things. Obligations under the Credit Agreement are secured by liens
on substantially all of our assets. In addition to customary financial
covenants, the Credit Agreement contains customary restrictions on, among other
things, encumbrance or disposal of assets, acquisitions, additional
indebtedness, capital investment, payment of subordinated debt and construction
of new hog production facilities. In addition to customary fees payable under
credit facilities of this type, amounts borrowed under the Credit Agreement bear
interest at fluctuating rates selected by the Company. These rates are based on
the agent bank's prime rate (the Federal Funds Rate plus one half of one
percent) or LIBOR plus, in each case, an applicable margin, currently ranging
from 1.5% to 3.125%, determined by the Company's leverage ratio. All borrowings
under the revolving credit facility mature on August 21, 2004, and all
borrowings under the term debt mature on August 21, 2005.
Total indebtedness at December 28, 2002 was $300.0 million, as compared
to $272.8 million at December 29, 2001. At December 28, 2002, we had $64.5
million outstanding under our revolving credit facility, $10.0 million in
letters of credit and $69.1 million available for borrowing under our revolving
credit facility.
In fiscal 2003, we plan to spend approximately $27 million on capital
expenditures, of which we expect to spend approximately:
o $7 million in upgrades and improvements in our processing
operations;
o $5 million in upgrades and improvements in our production
operations; and
o $15 million in net breedstock purchases.
We have reduced our initial planned capital expenditures by $9 million
in response to current market conditions.
Under our consent decree with the Attorney General of the State of
Missouri we are required to invest $13.3 million in research and development
over the next two years.
We believe that available borrowings under our revolving credit
facility and cash flow from operations will be sufficient to support our working
capital, capital expenditures and debt service requirements for the foreseeable
future. Our ability to generate cash, however, is subject to a certain extent to
general economic, financial, competitive, legislative, regulatory and other
factors beyond our control. We cannot assure you that our business will generate
sufficient cash flow from operations or that future borrowings will be available
under our revolving credit facility in an amount sufficient to enable us to pay
our indebtedness, including the 9 1/4% Notes, or to fund our other liquidity
needs. If we consummate any material acquisitions or expand our operations, we
may need to seek additional sources of funding, which might potentially come
from the issuance of additional equity, debt or the pursuit of joint ventures to
the extent that such options are available.
14
The following table represents a summary of our contractual cash
obligations as of December 28, 2002:
Payments due by period
Contractual Cash Obligations Total Current 1-3 years 4-5 years Thereafter
- ---------------------------- ----- ------- --------- --------- ----------
(in thousands)
Long-Term Debt $ 295,748 $ 6,250 $ 114,498 $ - $175,000
Capital Lease Obligations 4,301 766 1,706 1,662 167
Operating Leases 22,598 5,801 7,893 4,962 3,942
Unconditional Purchase Obligations 22,661 22,661 - - -
Other Long-Term Obligations 1,000 1,000 - - -
---------- ------ ---------- --------- --------
Total Contractual Cash Obligations $ 346,308 $ 36,478 $ 124,097 $ 6,624 $179,109
========== ========= =========== ======== ========
Most of our hogs are raised in facilities that we own. Some of our
hogs, however, are raised under farrowing, nursery, or finishing contracts with
individual farmers. In these relationships, we typically own the livestock and
provide the necessary feed, genetics, and veterinary supplies, while the
contract producer provides the land, facilities, labor, utilities, and other
costs of production. These contracts vary from terms of less than one year to up
to 12 years and the payments are not reflected in the above table. These
payments represented approximately 11 percent of our hog production segment's
cost of goods sold for the first three quarters ended December 28, 2002. All of
these contracts are cancelable by us if the producer fails to perform to an
acceptable level.
Critical Accounting Policies
In preparing the condensed consolidated financial statements in
accordance with generally accepted accounting principles, we are required to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses, and related disclosures at the date of the
condensed consolidated financial statements and during the reporting period.
Actual results may differ from those estimates due to the complexity and
subjectivity of those estimates. Management has identified the accounting
policies it believes to be the most important as inventory valuation of
livestock, contingent liabilities, and accounting for derivative instruments.
Inventory valuation of livestock is calculated based on a standard cost
model for each geographic hog production region. This model is based on the
budgeted costs and inventory projections at each age and phase of the production
cycle, adjusted to actual costs and reduced to the lower of cost or market when
required. Management believes this method for valuing livestock most accurately
represents actual inventory costs. At each balance sheet date management
compares the projected costs to complete current inventory to projected future
revenues. To the extent the estimated cost exceeds projected future revenue an
impairment is recorded.
Contingent liabilities, such as self-insured workers' compensation and
health insurance, bonuses, and legal obligations are estimated based on
information received from third parties and management estimates. These
obligations are provided for when the loss is probable and the amount is
reasonably estimable. Actual settlement costs may vary from estimates we made.
Management believes that any difference in the actual results from the estimates
will not have a material adverse effect upon our financial position or results
of operations.
Derivative instruments are accounted for in accordance with Financial
Standards Board Statement No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." We believe that our exchange traded
commodity contracts serve as economic hedges, however, as a result of the
extensive record keeping requirements of SFAS 133, we mark these exchange traded
contracts to market with the resulting gain or loss recorded in sales for lean
hog contracts or cost of sales for all other commodity
15
contracts. This may result in large fluctuations in our earnings depending on
the volume of commodity contracts and their corresponding volatility.
Market Risk
Our operating results are influenced by fluctuations in the price of
our primary feed components, corn and soybean meal, and by fluctuations in
market hog and wholesale pork sales prices. The cost and supply of feed
components and market hog and wholesale pork sales prices are determined by
constantly changing market forces of supply and demand, which are driven by
matters over which we have no control, including weather, current and projected
worldwide grain stocks and prices, grain export prices and supports, hog
production and governmental agricultural policies. In our hog production segment
we use forward contracts, as well as futures and options contracts, to establish
adequate supplies of future grain requirements, to secure margins and to reduce
the risk of market fluctuations. To secure margins and minimize earnings
volatility in our pork processing segment, we utilize lean hog futures to hedge
future pork product sales. While this may tend to limit our ability to
participate in gains from favorable commodity price fluctuation, it also tends
to minimize earnings volatility and secure future margins. For the first three
quarters ended December 28, 2002, we recognized gains under SFAS 133 of $0.5
million in net sales for gains related to lean hog futures and losses of $0.4
million in costs of goods sold relating to the hedging of feed components. For
open futures contracts, we use a sensitivity analysis technique to evaluate the
effect that changes in the market value of commodities will have on these
commodity derivative instruments. As of December 28, 2002, the potential change
in fair value of open exchange-traded contracts, assuming a 10% change in the
underlying commodity price, was $4.4 million.
We are exposed to changes in interest rates. Our term debt and
revolving credit facility have variable interest rates. Interest rate changes
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. During the fiscal year ended March 30, 2002, we entered into an
interest rate swap agreement to convert the variable base interest rate of our
bank term debt to a fixed rate of 3.0125% plus its spread (currently 3.125% at
December 28, 2002). The swap is accounted for as a cash flow hedge under SFAS
133. During the first three quarters ended December 28, 2002, we recognized a
$0.7 million loss, net of tax, into Accumulated other comprehensive loss for the
change in the market value of the swap.
The 9 1/4% Notes had a fair value of approximately $154.0 million as of
December 28, 2002 based on inter-dealer prices, as compared to the book value of
$175.0 million as of December 28, 2002.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
Please see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Market Risk" above.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Within 90 days prior to the filing date of this report (the "Evaluation
Date"), the Company carried out an evaluation, under the supervision and
with the participation of the Company's management, including the Company's
chief executive officer and its chief financial officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Rule 13a-14 of the Securities Exchange
Act of 1934 (the "Exchange Act"). Based upon that evaluation, the chief
executive officer and chief financial officer concluded that as of the
Evaluation Date, the Company's
16
disclosure controls and procedures (as defined in Rule 13a-14(c) under the
Exchange Act) are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission rules and
forms.
(b) Changes in internal controls.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent
to the date of their most recent evaluation nor were there any significant
deficiencies or material weaknesses in the Company's internal controls.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We have settled two citizens' action suits which sought to enforce
alleged violations of the Clean Air Act, Clean Water Act and CERCLA against us
and ContiGroup Companies, Inc. ("ContiGroup"). In 1998, we engaged in a series
of transactions with ContiGroup pursuant to which we purchased from ContiGroup
its North Missouri Farms hog production operations and ContiGroup purchased a
51.0% ownership interest in us (the "1998 ContiGroup transaction"). To the
extent that ContiGroup incurred any liability in this litigation, we assumed
that liability pursuant to the terms of our 1998 ContiGroup transaction. The
U.S. Environmental Protection Agency (the "E.P.A.") had intervened in our action
and filed a separate notice of violation against us under the Clean Air Act.
This settlement, in the form of a consent decree ("EPA Consent Decree"),
resolved all outstanding issues of ContiGroup and us with the E.P.A. The EPA
Consent Decree, built upon the 1999 consent decree with the State of Missouri
referenced below, requires us and ContiGroup to meet certain performance
standards, such as a 50 percent reduction in nitrogen concentration of the
effluent applied to area fields over a prescribed time period. Other key
elements of the EPA Consent Decree include: monitoring air emissions from
lagoons and barns; compliance with certain best management practices to reduce
the risk of spills; testing of selective lagoons to ensure integrity, and the
payment of a $350,000 civil penalty. The counsel for the citizen plaintiffs has
submitted a petition for recovery of attorneys' fees in connection with the
lawsuits against both us and ContiGroup. We believe the majority of these fees
have been previously paid and resolved. We believe the resolution of this matter
will not have a material adverse effect upon our financial position or results
of operations.
In 1999, we settled a suit filed by the Attorney General of the State
of Missouri against us 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 judgment pursuant to which we
are obligated to invest $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 in the fourth year of
that five year period and have spent $11.7 million to satisfy the settlement. In
addition, pursuant to the consent judgment we and ContiGroup were issued a $1
million civil penalty. Of this, $650,000 has been paid and $350,000 is suspended
pending certain conditions.
In addition to the suits discussed above, we have received notices of
violations from the Missouri Department of Natural Resources alleging releases
of wastewater. We have responded to these notices in an effort to resolve these
matters. The State of Missouri has filed a lawsuit seeking penalties and
injunctive relief for these violations. We have filed an answer, believe we have
good defenses, and intend to vigorously defend this suit.
Two nuisance suits were filed against ContiGroup and us during the
third quarter of fiscal year 2003 in the Circuit Court of Jackson County, Kansas
City, Missouri. There are multiple plaintiffs in each suit, who claim to live
near swine farms owned by ContiGroup but under production contracts with us. The
primary allegation is that offensive odors from these farms interfered with the
plaintiffs' right to use and have quiet enjoyment of their respective
properties. We are obligated by contract to indemnify ContiGroup
17
for any liabilities arising from this litigation. We have filed an answer,
believe we have good defenses to these actions, and intend to vigorously defend
these suits.
In addition, we are involved from time to time in routine litigation
incidental to our business. Although no assurance can be given as to the outcome
or expense associated with any of these routine proceedings, we believe that
none of such proceedings currently pending should, individually or in the
aggregate, have a material adverse effect on our financial statements.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K.
1. A Current Report on Form 8-K was filed with the SEC on
October 1, 2002, to report, under Item 5, an amendment to
the credit agreement, and filing the form of the amendment
under Item 7.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSF GROUP HOLDINGS, INC.
February 11, 2003 /s/ Stephen A. Lightstone
- ----------------- -----------------------------------
Date Stephen A. Lightstone
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
19
CERTIFICATIONS
I, John M. Meyer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PSF Group
Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 11, 2003
/s/ John M. Meyer
-----------------------------------
John M. Meyer
Chief Executive Officer
(Principal Executive Officer)
20
I, Stephen A. Lightstone, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PSF Group
Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 11, 2003
/s/ Stephen A. Lightstone
--------------------------------
Stephen A. Lightstone
Chief Financial Officer
(Principal Financial Officer)
21