##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: September 23, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission file number: 000-51347
 Premium Standard Farms, Inc.
  Delaware
    
    43-1755411State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization805 Pennsylvania, Suite 200, Kansas City, Missouri
    
    64105(Address of principal executive office)
    
    (Zip Code)
  Not Applicable
 
 
 þ o
  o þ o
 o þ




---



TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures about Market RiskItem 4. Controls and ProceduresPART II  OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURESEX-10.23: DESCRIPTION OF INCREMENTAL PERFORMANCE BONUS PLANEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION    Table of Contents  
 PART I
 FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Premium
Standard Farms, Inc. and SubsidiariesCondensed Consolidated
Balance Sheets

September 23, 2006 and March 25, 2006
(in 000s)
(Unaudited)
 September 23,
    
    March 25,2006
    
    2006ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    16,471
    
    
    $
    25,512Accounts receivable, net
    
    
    30,039
    
    
    
    28,761Inventories
    
    
    172,642
    
    
    
    167,030Deferred income taxes
    
    
    7,873
    
    
    
    8,175Income tax receivable
    
    
    4,039
    
    
    
    Prepaid expenses and other
    
    
    10,782
    
    
    
    4,990Total current assets
    
    
    241,846
    
    
    
    234,468PROPERTY, PLANT, EQUIPMENT AND BREEDING STOCK:Land and improvements
    
    
    102,606
    
    
    
    102,501Buildings
    
    
    298,772
    
    
    
    298,292Machinery and equipment
    
    
    300,605
    
    
    
    297,970Breeding stock
    
    
    45,680
    
    
    
    44,868Construction in progress
    
    
    29,343
    
    
    
    10,008777,006
    
    
    
    753,639Less- accumulated depreciation
    
    
    368,705
    
    
    
    348,643Total property, plant, equipment and breeding stock
    
    
    408,301
    
    
    
    404,996GOODWILL
    
    
    75,998
    
    
    
    75,998OTHER LONG-TERM ASSETS:Deferred financing costs, net
    
    
    1,922
    
    
    
    2,137Other
    
    
    8,682
    
    
    
    11,252Total other long-term assets
    
    
    10,604
    
    
    
    13,389Total assets
    
    $
    736,749
    
    
    $
    728,851LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    8,151
    
    
    $
    9,044Accrued expenses
    
    
    53,566
    
    
    
    43,313Dividends payable
    
    
    1,173
    
    
    
    911Due to related party (including dividends payable of $746
and $986)
    
    
    837
    
    
    
    1,008Income tax payable
    
    
    
    
    
    
    3,204Accrued interest
    
    
    964
    
    
    
    997Current maturities of long-term debt and capital leases
    
    
    624
    
    
    
    810Total current liabilities
    
    
    65,315
    
    
    
    59,287LONG-TERM LIABILITIES:Long-term debt and capital leases, less current maturities
    
    
    125,333
    
    
    
    127,542Other long-term liabilities
    
    
    6,291
    
    
    
    6,327Deferred income taxes
    
    
    70,704
    
    
    
    74,975Total long-term liabilities
    
    
    202,328
    
    
    
    208,844Total liabilities
    
    
    267,643
    
    
    
    268,131COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:Common stock
    
    
    319
    
    
    
    316Additional paid-in capital
    
    
    378,954
    
    
    
    378,083Accumulated other comprehensive income, net of tax
    
    
    2,241
    
    
    
    2,748Retained earnings
    
    
    87,592
    
    
    
    79,573Total shareholders equity
    
    
    469,106
    
    
    
    460,720Total liabilities and shareholders equity
    
    $
    736,749
    
    
    $
    728,851
 The accompanying notes are an integral part of the condensed consolidated financial statements.
 1




---



##### Table of Contents



Premium Standard Farms, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
13 and 26 weeks ended September 23, 2006 and September 24, 2005
(in 000s except share and per share data)
(Unaudited)
 13 Weeks Ended
    
    
    26 Weeks EndedSeptember 23,
    
    
    September 24,
    
    
    September 23,
    
    
    September 24,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    220,396
    
    
    $
    213,231
    
    
    $
    426,554
    
    
    $
    458,538Cost of goods sold
    
    
    195,760
    
    
    
    186,350
    
    
    
    383,037
    
    
    
    374,590Gross profit
    
    
    24,636
    
    
    
    26,881
    
    
    
    43,517
    
    
    
    83,948Selling, general and administrative expenses
    
    
    15,612
    
    
    
    5,686
    
    
    
    22,184
    
    
    
    13,119Loss on early extinguishment of debt
    
    
    92
    
    
    
    
    
    
    
    92
    
    
    
    21,707Other income
    
    
    (264
    )
    
    
    (72
    )
    
    
    (479
    )
    
    
    (356
    )Operating income
    
    
    9,196
    
    
    
    21,267
    
    
    
    21,720
    
    
    
    49,478Interest expense (income):Interest expense
    
    
    1,759
    
    
    
    2,096
    
    
    
    3,704
    
    
    
    5,291Interest income
    
    
    (325
    )
    
    
    (21
    )
    
    
    (712
    )
    
    
    (152
    )Interest expense, net
    
    
    1,434
    
    
    
    2,075
    
    
    
    2,992
    
    
    
    5,139Income before income taxes
    
    
    7,762
    
    
    
    19,192
    
    
    
    18,728
    
    
    
    44,339Income tax expense
    
    
    3,493
    
    
    
    6,962
    
    
    
    6,869
    
    
    
    16,737Net income
    
    $
    4,269
    
    
    $
    12,230
    
    
    $
    11,859
    
    
    $
    27,602Unrealized (loss) gain on interest rate swap, net of tax
    
    
    (3,212
    )
    
    
    1,822
    
    
    
    (507
    )
    
    
    212Comprehensive income
    
    $
    1,057
    
    
    $
    14,052
    
    
    $
    11,352
    
    
    $
    27,814Earnings per share:Basic
    
    $
    0.13
    
    
    $
    0.40
    
    
    $
    0.38
    
    
    $
    0.89Diluted
    
    $
    0.13
    
    
    $
    0.39
    
    
    $
    0.37
    
    
    $
    0.88Weighted average number of common shares outstanding:Basic
    
    
    31,648,502
    
    
    
    30,928,524
    
    
    
    31,620,574
    
    
    
    30,928,524Diluted
    
    
    31,837,590
    
    
    
    31,332,313
    
    
    
    31,822,175
    
    
    
    31,236,245Dividends declared per share
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.12
    
    
    $
    0.12
 The accompanying notes are an integral part of the condensed consolidated financial statements.
 2




---



##### Table of Contents



Premium Standard Farms, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
26 Weeks ended September 23, 2006 and September 24, 2005
(in 000s)
(Unaudited)
 September 23,
    
    September 24,2006
    
    2005OPERATING ACTIVITIES:Net income
    
    $
    11,859
    
    
    $
    27,602Adjustments to reconcile net income
to net cash provided by operating activities:Depreciation
    
    
    28,607
    
    
    
    30,030Stock-based compensation
    
    
    700
    
    
    
    319Amortization of deferred financing costs
    
    
    214
    
    
    
    270Premium on early extinguishment of debt
    
    
    92
    
    
    
    17,762Write-off of deferred financing costs
    
    
    
    
    
    
    3,945Deferred income taxes
    
    
    (3,633
    )
    
    
    2,243Excess tax benefits from share-based payment arrangements
    
    
    (154
    )
    
    
    Net gain on sale of property, plant, equipment and breeding stock
    
    
    (3,425
    )
    
    
    (3,923
    )Changes in operating assets and liabilities, net:Accounts receivable
    
    
    (1,278
    )
    
    
    (450
    )Inventories
    
    
    (5,612
    )
    
    
    (11,082
    )Prepaid expenses and other assets
    
    
    (9,568
    )
    
    
    571Accounts payable, accrued expenses and other liabilities
    
    
    4,882
    
    
    
    (10,855
    )Net cash provided by operating activities
    
    
    22,684
    
    
    
    56,432INVESTING ACTIVITIES:Purchases of property, plant, equipment and breeding stock
    
    
    (35,267
    )
    
    
    (25,010
    )Proceeds from disposal of property, plant, equipment and breeding
stock
    
    
    8,056
    
    
    
    8,484Proceeds from sale of joint venture
    
    
    1,637
    
    
    
    Net cash used in investing activities
    
    
    (25,574
    )
    
    
    (16,526
    )FINANCING ACTIVITIES:Checks issued against future deposits
    
    
    
    
    
    
    10,716Excess tax benefits from share-based payment arrangements
    
    
    154
    
    
    
    Dividends paid
    
    
    (3,819
    )
    
    
    (1,879
    )Proceeds from revolving debt
    
    
    
    
    
    
    11,838Proceeds from term loan
    
    
    
    
    
    
    125,000Repayments on senior unsecured notes
    
    
    (2,000
    )
    
    
    Payments for deferred financing costs
    
    
    
    
    
    
    (921
    )Premium on early extinguishment of debt
    
    
    (92
    )
    
    
    (17,762
    )Repayments on long-term debt
    
    
    (394
    )
    
    
    (173,363
    )Net cash used in financing activities
    
    
    (6,151
    )
    
    
    (46,371
    )Net decrease in cash and cash equivalents
    
    
    (9,041
    )
    
    
    (6,465
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    25,512
    
    
    
    10,054CASH AND CASH EQUIVALENTS, end of period
    
    $
    16,471
    
    
    $
    3,589SUPPLEMENTAL DISCLOSURES:Interest paid
    
    $
    3,963
    
    
    $
    8,980Income tax paid
    
    
    17,577
    
    
    
    15,108Noncash operating activities-Fair value of interest rate swap
    
    
    (844
    )
    
    
    347Noncash investing activities-Current liabilities related to purchases of property, plant,
equipment and breeding stock
    
    
    1,274
    
    
    
    Noncash financing activities-Dividend payable
    
    
    1,918
    
    
    
    1,879Conversion of incentive plan to restricted stock
    
    
    
    
    
    
    1,829
 The accompanying notes are an integral part of the condensed
consolidated financial statements.
 3




---



##### Table of Contents



Premium Standard Farms, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
 Note 1  Basis of presentation
      Note 2  Stock-based compensation
   4




---



##### Table of Contents



13 Weeks Ended
    
    
    26 Weeks EndedSeptember 23,
    
    
    September 24,
    
    
    September 23,
    
    
    September 24,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income, as reported
    
    $
    4,269
    
    
    $
    12,230
    
    
    $
    11,859
    
    
    $
    27,602Add: Stock-based compensation expense included in
net income, net of related taxes
    
    
    178
    
    
    
    183
    
    
    
    435
    
    
    
    195Less: Total stock-based employee compensation expense
determined under fair value based methods for all
awards, net of related taxes
    
    
    178
    
    
    
    260
    
    
    
    435
    
    
    
    278Pro forma net income
    
    $
    4,269
    
    
    $
    12,153
    
    
    $
    11,859
    
    
    $
    27,519Basic earnings per share, as reported
    
    $
    0.13
    
    
    $
    0.40
    
    
    $
    0.38
    
    
    $
    0.89Basic earnings per share, pro forma
    
    $
    0.13
    
    
    $
    0.39
    
    
    $
    0.38
    
    
    $
    0.89Diluted earnings per share, as reported
    
    $
    0.13
    
    
    $
    0.39
    
    
    $
    0.37
    
    
    $
    0.88Diluted earnings per share, pro forma
    
    $
    0.13
    
    
    $
    0.39
    
    
    $
    0.37
    
    
    $
    0.88
 5




---



##### Table of Contents



Employee Stock-Based Incentive Plans
            6




---



##### Table of Contents



Note 3  New accounting pronouncements
 ,
   Note 4  Earnings per share
    7




---



##### Table of Contents



13 Weeks Ended
    
    
    26 Weeks EndedSeptember 23,
    
    
    September 24,
    
    
    September 23,
    
    
    September 24,2006
    
    
    2005
    
    
    2006
    
    
    2005Basic Computation:Net income
    
    $
    4,269
    
    
    $
    12,230
    
    
    $
    11,859
    
    
    $
    27,602Weighted average common
shares outstanding
    
    
    31,648,502
    
    
    
    30,928,524
    
    
    
    31,620,574
    
    
    
    30,928,524Basic earnings per share
    
    $
    0.13
    
    
    $
    0.40
    
    
    $
    0.38
    
    
    $
    0.89Diluted Computation:Net income
    
    $
    4,269
    
    
    $
    12,230
    
    
    $
    11,859
    
    
    $
    27,602Weighted average common
shares outstanding
    
    
    31,648,502
    
    
    
    30,928,524
    
    
    
    31,620,574
    
    
    
    30,928,524Net effect of dilutive stock
options and warrants based on
the treasury stock method
    
    
    189,088
    
    
    
    403,789
    
    
    
    201,601
    
    
    
    307,721Outstanding shares for diluted
earnings per share
    
    
    31,837,590
    
    
    
    31,332,313
    
    
    
    31,822,175
    
    
    
    31,236,245Diluted earnings per share
    
    $
    0.13
    
    
    $
    0.39
    
    
    $
    0.37
    
    
    $
    0.88
 Note 5  Derivative instruments and hedging activities
    8




---



##### Table of Contents



Note 6  Goodwill and intangible assets
  Note 7  Inventories
  September 23, 2006
    
    
    March 25, 2006Hogs
    
    $
    149,227
    
    
    $
    147,391Processed pork products
    
    
    16,010
    
    
    
    13,348Packaging and supplies
    
    
    2,743
    
    
    
    2,248Grain, feed additives and other
    
    
    4,662
    
    
    
    4,043$
    172,642
    
    
    $
    167,030
 Note 8  Segment information
  9




---



##### Table of Contents



Pork
    
    Hog
    
    CorporateProcessing
    
    Production
    
    and Other
    
    TotalFor the 13 weeks ended September 23, 2006-Net sales
    
    $
    204,587
    
    
    $
    143,248
    
    
    $
    (127,439
    )
    
    $
    220,396Intersegment sales
    
    
    (556
    )
    
    
    (126,883
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    (1,248
    )
    
    
    24,637
    
    
    
    (14,193
    )
    
    
    9,196For the 13 weeks ended September 24, 2005-Net sales
    
    $
    195,234
    
    
    $
    144,857
    
    
    $
    (126,860
    )
    
    $
    213,231Intersegment sales
    
    
    (496
    )
    
    
    (126,364
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    2,300
    
    
    
    23,420
    
    
    
    (4,453
    )
    
    
    21,267As of and for the 26 weeks ended September 23, 2006-Net sales
    
    $
    395,518
    
    
    $
    274,855
    
    
    $
    (243,819
    )
    
    $
    426,554Intersegment sales
    
    
    (1,107
    )
    
    
    (242,712
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    3,531
    
    
    
    37,446
    
    
    
    (19,257
    )
    
    
    21,720Assets
    
    
    197,587
    
    
    
    491,681
    
    
    
    47,481
    
    
    
    736,749Goodwill
    
    
    25,020
    
    
    
    50,978
    
    
    
    
    
    
    
    75,998For the 26 weeks ended September 24, 2005-Net sales
    
    $
    404,434
    
    
    $
    316,549
    
    
    $
    (262,445
    )
    
    $
    458,538Intersegment sales
    
    
    (1,154
    )
    
    
    (261,291
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    5,868
    
    
    
    75,745
    
    
    
    (32,135
    )
    
    
    49,478Year ending March 25, 2006-Assets
    
    
    184,997
    
    
    
    494,308
    
    
    
    49,546
    
    
    
    728,851Goodwill
    
    
    25,020
    
    
    
    50,978
    
    
    
    
    
    
    
    75,998
 Note 9  Debt Tender and Amendment to Credit Agreement
   
    
    the contemplated initial public offering of shares of common stock by certain holders thereof,
    
    the merger of PSF Group Holdings, Inc., the parent, with and into the Company, and
    
    the Tender Offer for the 9 1/4% Notes as described below.
  1 4 1 4 1 4 1 4 1 4 1 4 1 4
 10




---



##### Table of Contents



11




---



##### Table of Contents



Note 10  Litigation
   Steven Adwell, et al. vs. PSF, et
al. Michael Adwell, et al. vs. PSF, et al.
 Fred Torrey, et
al. vs. PSF, et al Doyle Bounds, et al. vs. PSF, et al. Vernon Hanes et al. v. Premium Standard Farms, Inc. et al. Steve Hanes et al. v.
Premium Standard Farms, Inc., et al William J. Engel, III, et al. vs. PSF, et al
 Daniel Herrold, et al. and Others Similarly Situated v. ContiGroup Companies,
Inc, Premium Standard Farms, Inc., and PSF Group Holdings, Inc.
   12




---



##### Table of Contents



13




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
     14




---



##### Table of Contents



Pork and Hog Prices (September 2003-September 2006)
 
 
 (1)
    
    Average monthly price based on the market price of lean hogs, as
published by the Chicago Mercantile Exchange.(2)
    
    Average monthly price based on the 200# cutout pricing method, a
standard measure for determining current market prices of pork primal
cuts that is published by the USDA. Effective in January, 2006 the
USDA began reporting a new pork cutout, which replaces the previous
composite pork cutout. The USDA has provided back data which shows
that, on average, the new cutout calculation is valued approximately
$2 per cwt above the previous cutout.
 Corn $/Bushel (September 2003-September 2006)
 
 
 (1)
    
    Based on the monthly average of daily close prices of the Nearby Corn
Futures quoted by the Chicago Board of Trade.
 15




---



##### Table of Contents



Soybean Meal $/Ton (September 2003-September 2006)
 
 
 (1)
    
    Based on the monthly average of daily close prices of the Nearby
Soybean Futures quoted by the Chicago Board of Trade.
   Recent Developments
  16




---



##### Table of Contents



Results of Operations
 13 Weeks Ended September 23, 2006 Compared to the 13 Weeks Ended September 24, 2005
  For the 13 Weeks Ended
    
    
    Qtr to Qtr ChangeSeptember 23, 2006
    
    
    September 24, 2005
    
    
    2006 to 2005
    
    
    %(In millions except percentages)Net SalesProcessing
    
    $
    204.6
    
    
    $
    195.2
    
    
    $
    9.4
    
    
    
    4.8
    %Production
    
    
    143.2
    
    
    
    144.9
    
    
    
    (1.7
    )
    
    
    (1.2
    )%Intersegment
    
    
    (127.4
    )
    
    
    (126.9
    )
    
    
    (0.5
    )
    
    
    (0.4
    )%Total Net Sales
    
    $
    220.4
    
    
    $
    213.2
    
    
    $
    7.2
    
    
    
    3.4
    %Gross ProfitProcessing
    
    $
    0.1
    
    
    $
    3.4
    
    
    $
    (3.3
    )
    
    
    (97.1
    )%Production
    
    
    24.5
    
    
    
    23.5
    
    
    
    1.0
    
    
    
    4.3
    %Total Gross Profit
    
    $
    24.6
    
    
    $
    26.9
    
    
    $
    (2.3
    )
    
    
    (8.6
    )%Operating Income (Loss)Processing
    
    $
    (1.2
    )
    
    $
    2.3
    
    
    $
    (3.5
    )
    
    
    (152.2
    )%Production
    
    
    24.6
    
    
    
    23.4
    
    
    
    1.2
    
    
    
    5.1
    %Corporate
    
    
    (14.1
    )
    
    
    (4.4
    )
    
    
    (9.7
    )
    
    
    (220.5
    )%Loss on early extinguishment of debt
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.1
    )
    
    
    *Total Operating Income
    
    $
    9.2
    
    
    $
    21.3
    
    
    $
    (12.1
    )
    
    
    (56.8
    )%
 
 *
    
    Not meaningful Consolidated
 Net Sales.
 Gross Profit.
 17




---



##### Table of Contents



Selling, General and Administrative Expenses.
 Operating Income.
 Interest Expense, net.
 Income Tax Expense.
 Segment Analysis
 Pork Processing
   Hog Production
  18




---



##### Table of Contents



26 Weeks Ended September 23, 2006 Compared to the 26 Weeks Ended September 24, 2005
  For the 26 Weeks Ended
    
    
    Year to Year ChangeSeptember 23, 2006
    
    
    September 24, 2005
    
    
    2006 to 2005
    
    
    %(In millions except percentages)Net SalesProcessing
    
    $
    395.5
    
    
    $
    404.4
    
    
    $
    (8.9
    )
    
    
    (2.2
    )%Production
    
    
    274.9
    
    
    
    316.5
    
    
    
    (41.6
    )
    
    
    (13.1
    )%Intersegment
    
    
    (243.8
    )
    
    
    (262.4
    )
    
    
    18.6
    
    
    
    7.1
    %Total Net Sales
    
    $
    426.6
    
    
    $
    458.5
    
    
    $
    (31.9
    )
    
    
    (7.0
    )%Gross ProfitProcessing
    
    $
    6.2
    
    
    $
    8.1
    
    
    $
    (1.9
    )
    
    
    (23.5
    )%Production
    
    
    37.3
    
    
    
    75.8
    
    
    
    (38.5
    )
    
    
    (50.8
    )%Total Gross Profit
    
    $
    43.5
    
    
    $
    83.9
    
    
    $
    (40.4
    )
    
    
    (48.2
    )%Operating Income (Loss)Processing
    
    $
    3.5
    
    
    $
    5.9
    
    
    $
    (2.4
    )
    
    
    (40.7
    )%Production
    
    
    37.4
    
    
    
    75.7
    
    
    
    (38.3
    )
    
    
    (50.6
    )%Corporate
    
    
    (19.1
    )
    
    
    (10.4
    )
    
    
    (8.7
    )
    
    
    (83.7
    )%Loss on early extinguishment of debt
    
    
    (0.1
    )
    
    
    (21.7
    )
    
    
    21.6
    
    
    
    
    *Total Operating Income
    
    $
    21.7
    
    
    $
    49.5
    
    
    $
    (27.8
    )
    
    
    (56.2
    )%
 
 *
    
    Not meaningful Consolidated
 Net Sales.
 Gross Profit.
 Selling, General and Administrative Expenses.
 19




---



##### Table of Contents



Operating Income.
 Interest Expense, net.
 Income Tax Expense.
 Segment Analysis
 Pork Processing
   Hog Production
   20




---



##### Table of Contents



Liquidity and Capital Resources
     1 4 1 4 1 4 1 4 1 4 1 4 1 4
     21




---



##### Table of Contents




    
    Approximately $45 to $48 million in upgrades and improvements in our processing
operations;
    
    Approximately $13 to $15 million in upgrades and improvements in our production
operations, and investments to develop and implement new technologies for improved
waste handling; and
    
    Approximately $7 million in net breedstock purchases.
   22




---



##### Table of Contents



Contractual Cash Obligations
  Critical Accounting Policies
  Inventory valuation of livestock
 Estimates
 Derivative instruments
 Property, plant, equipment and breeding stock
 Impairment of long-lived assets
 23




---



##### Table of Contents



Market Risk
    
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
  24




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Environmental matters
   Steven Adwell, et al. vs. PSF, et al. Michael Adwell, et al. vs. PSF, et al.
 Fred Torrey, et
al. vs. PSF, et al Doyle Bounds, et al. vs. PSF, et al. Vernon Hanes et al. v. Premium Standard Farms, Inc. et al. Steve Hanes et al. v.
Premium Standard Farms, Inc., et al William J. Engel, III, et al. vs. PSF, et al
 Daniel Herrold, et al. and Others Similarly Situated v. ContiGroup Companies,
Inc, Premium Standard Farms, Inc., and PSF Group Holdings, Inc.
  25




---



##### Table of Contents



Other legal matters
  
 Item 1A. Risk Factors
  The following risk factor from our Annual Report on Form 10-K for the fiscal year ended March
25, 2006 has been updated:
 The nature of our operations exposes us to the risk of environmental claims, including nuisance
claims by neighboring property owners. We are a defendant in several nuisance lawsuits. If these
lawsuits are adversely determined, they could harm our business.
  Risks Related to the Pending Merger Transaction
 Because the market price of Smithfield common stock will fluctuate, stockholders of the Company
cannot be sure of the market value of the shares of Smithfield common stock that they will receive
upon completion of the merger until completion of the merger.
  26




---



##### Table of Contents



Obtaining required approvals and satisfying closing conditions may delay or prevent completion of
the merger.
  The failure to successfully integrate the Companys business and operations in the expected time
frame following the merger may adversely affect Smithfields future results.
  The market price for Smithfield common stock may be affected by factors different from those
affecting the shares of the Company.
  The shares of Smithfield common stock to be received by the Companys stockholders as a result of
the merger will have different rights from the shares of common stock of the Company.
  27




---



##### Table of Contents



Failure to complete the merger will subject the Company to financial risks and could cause its
stock price to decline.
  
    
    As a result of investors expectations regarding the merger, the Companys stock price
may decline to the extent that its shares are trading at a higher level than they might
have been in the absence of the merger agreement;
    
    Under the merger agreement, the Company could be required to pay Smithfield a
termination fee of up to $27.4 million (including up to $6.0 million as reimbursement of
expenses relating to the merger), if the merger agreement is terminated in certain
circumstances involving a takeover proposal by a third party or a change in the Companys
board of directors recommendation of the merger to its stockholders. These fees could
deter another interested party from seeking to negotiate such a transaction with the
Company after termination;
    
    Costs related to the merger, such as legal and accounting fees and a portion of the
Companys investment banking fees, must be paid even if the merger is not completed;
    
    The benefits that the Company expects that its stockholders would realize from the
merger would not be realized, and the Company may have foregone attractive business
opportunities as a result of the covenants in the merger agreement; and
    
    The diversion of management attention and the possible disruption of the Companys
relationships with employees, customers and suppliers between the signing of the merger
agreement and its termination, might make it difficult for the Company to regain its
financial and market position if the merger does not occur.
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
    VotesDirector Nominee
    
    Votes For
    
    Withheld
    
    Non-VotesMollie H. Carter
    
    
    29,943,074
    
    
    
    126,827
    
    
    
    Maurice L. McGill
    
    
    29,858,775
    
    
    
    211,126
    
    
    
    Michael J. Zimmerman
    
    
    24,632,314
    
    
    
    5,437,587
    
    
    
    
 28




---



##### Table of Contents



Votes For
    
    Against
    
    Withheld
    
    Abstentions
    
    Non-Votes30,056,137
    
    
    2,900
    
    
    
    10,864
    
    
    
    
    
    
    
    
 
 Item 5. Other Information
  
 Item 6. Exhibits
 Exhibit 10.23
    
    Description of Incremental Performance Bonus Plan.Exhibit 31.1
    
    Certification of John M. Meyer, Chief Executive Officer, pursuant to
Rule 13a-14(a)/15d-14(a).Exhibit 31.2
    
    Certification of Stephen A. Lightstone, Chief Financial Officer,
pursuant to Rule 13a-14(a)/15d-14(a).Exhibit 32.1
    
    Certification of John M. Meyer, Chief Executive Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.Exhibit 32.2
    
    Certification of Stephen A. Lightstone, Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 29




---



##### Table of Contents



SIGNATURES
  Premium Standard Farms, Inc.November 2, 2006
    
    /s/ Stephen A. LightstoneDate
    
    Stephen A. LightstoneExecutive Vice President, Chief FinancialOfficer and Treasurer(Principal Financial andAccounting Officer)
 30