##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: December 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




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. 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-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION    Table of Contents  
 PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Premium Standard Farms, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
December 23, 2006 and March 25, 2006
(in 000s)
(Unaudited)
 December 23,
    
    
    March 25,2006
    
    
    2006ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    5,933
    
    
    $
    25,512Accounts receivable, net
    
    
    32,120
    
    
    
    28,761Inventories
    
    
    176,110
    
    
    
    167,030Deferred income taxes
    
    
    7,886
    
    
    
    8,175Income tax receivable
    
    
    1,174
    
    
    
    Prepaid expenses and other
    
    
    7,254
    
    
    
    4,990Total current assets
    
    
    230,477
    
    
    
    234,468PROPERTY, PLANT, EQUIPMENT AND BREEDING STOCK:Land and improvements
    
    
    102,671
    
    
    
    102,501Buildings
    
    
    299,212
    
    
    
    298,292Machinery and equipment
    
    
    304,597
    
    
    
    297,970Breeding stock
    
    
    46,095
    
    
    
    44,868Construction in progress
    
    
    40,244
    
    
    
    10,008792,819
    
    
    
    753,639Less- accumulated depreciation
    
    
    376,250
    
    
    
    348,643Total property, plant, equipment and breeding stock
    
    
    416,569
    
    
    
    404,996GOODWILL
    
    
    75,998
    
    
    
    75,998OTHER LONG-TERM ASSETS:Deferred financing costs, net
    
    
    1,815
    
    
    
    2,137Other
    
    
    9,412
    
    
    
    11,252Total other long-term assets
    
    
    11,227
    
    
    
    13,389Total assets
    
    $
    734,271
    
    
    $
    728,851LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    8,307
    
    
    $
    9,044Accrued expenses
    
    
    51,303
    
    
    
    43,313Dividends payable
    
    
    1,173
    
    
    
    911Due to related party (including dividends payable of $746
and $986)
    
    
    812
    
    
    
    1,008Income tax payable
    
    
    
    
    
    
    3,204Accrued interest
    
    
    945
    
    
    
    997Current maturities of long-term debt and capital leases
    
    
    1,781
    
    
    
    810Total current liabilities
    
    
    64,321
    
    
    
    59,287LONG-TERM LIABILITIES:Long-term debt and capital leases, less current maturities
    
    
    123,955
    
    
    
    127,542Other long-term liabilities
    
    
    6,454
    
    
    
    6,327Deferred income taxes
    
    
    69,075
    
    
    
    74,975Total long-term liabilities
    
    
    199,484
    
    
    
    208,844Total liabilities
    
    
    263,805
    
    
    
    268,131COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:Common stock
    
    
    320
    
    
    
    316Additional paid-in capital
    
    
    379,479
    
    
    
    378,083Accumulated other comprehensive income, net of tax
    
    
    2,059
    
    
    
    2,748Retained earnings
    
    
    88,608
    
    
    
    79,573Total shareholders equity
    
    
    470,466
    
    
    
    460,720Total liabilities and shareholders equity
    
    $
    734,271
    
    
    $
    728,851
 The accompanying notes are an integral part of the condensed consolidated financial statements.
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Premium Standard Farms, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
13 and 39 weeks ended December 23, 2006 and December 24, 2005
(in 000s except share and per share data)
(Unaudited)
 13 Weeks Ended
    
    
    39 Weeks EndedDecember 23,
    
    
    December 24,
    
    
    December 23,
    
    
    December 24,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    224,317
    
    
    $
    242,899
    
    
    $
    650,872
    
    
    $
    701,437Cost of goods sold
    
    
    209,681
    
    
    
    212,306
    
    
    
    592,719
    
    
    
    586,897Gross profit
    
    
    14,636
    
    
    
    30,593
    
    
    
    58,153
    
    
    
    114,540Selling, general and administrative expenses
    
    
    9,118
    
    
    
    7,332
    
    
    
    31,302
    
    
    
    20,451Loss on early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    92
    
    
    
    21,707Other income
    
    
    (111
    )
    
    
    (197
    )
    
    
    (590
    )
    
    
    (553
    )Operating income
    
    
    5,629
    
    
    
    23,458
    
    
    
    27,349
    
    
    
    72,935Interest expense (income):Interest expense
    
    
    1,543
    
    
    
    2,089
    
    
    
    5,246
    
    
    
    7,379Interest income
    
    
    (294
    )
    
    
    (91
    )
    
    
    (1,005
    )
    
    
    (243
    )Interest expense, net
    
    
    1,249
    
    
    
    1,998
    
    
    
    4,241
    
    
    
    7,136Income before income taxes
    
    
    4,380
    
    
    
    21,460
    
    
    
    23,108
    
    
    
    65,799Income tax expense
    
    
    1,445
    
    
    
    7,706
    
    
    
    8,314
    
    
    
    24,443Net income
    
    $
    2,935
    
    
    $
    13,754
    
    
    $
    14,794
    
    
    $
    41,356Unrealized (loss) gain on interest rate swap, net of tax
    
    
    (181
    )
    
    
    1,202
    
    
    
    (689
    )
    
    
    1,413Comprehensive income
    
    $
    2,754
    
    
    $
    14,956
    
    
    $
    14,105
    
    
    $
    42,769Earnings per share:Basic
    
    $
    0.09
    
    
    $
    0.44
    
    
    $
    0.47
    
    
    $
    1.34Diluted
    
    $
    0.09
    
    
    $
    0.44
    
    
    $
    0.46
    
    
    $
    1.32Weighted average number of common shares outstanding:Basic
    
    
    31,662,033
    
    
    
    31,067,575
    
    
    
    31,634,394
    
    
    
    30,974,874Diluted
    
    
    31,871,130
    
    
    
    31,602,256
    
    
    
    31,852,052
    
    
    
    31,273,279Dividends declared per share
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.18
    
    
    $
    0.18
 The accompanying notes are an integral part of the condensed consolidated financial statements.
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Premium Standard Farms, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
39 Weeks ended December 23, 2006 and December 24, 2005
(in 000s)
(Unaudited)
 December 23,
    
    
    December 24,2006
    
    
    2005OPERATING ACTIVITIES:Net income
    
    $
    14,794
    
    
    $
    41,356Adjustments to reconcile net income
to net cash provided by operating activities:Depreciation
    
    
    40,813
    
    
    
    45,373Stock-based compensation
    
    
    1,224
    
    
    
    741Amortization of deferred financing costs
    
    
    322
    
    
    
    377Premium on early extinguishment of debt
    
    
    92
    
    
    
    17,762Write-off of deferred financing costs
    
    
    
    
    
    
    3,945Deferred income taxes
    
    
    (5,164
    )
    
    
    (2,907
    )Excess tax benefits from share-based payment arrangements
    
    
    (154
    )
    
    
    (1,690
    )Net gain on sale of property, plant, equipment and breeding stock
    
    
    (5,601
    )
    
    
    (5,903
    )Changes in operating assets and liabilities, net:Accounts receivable
    
    
    (3,359
    )
    
    
    (3,227
    )Inventories
    
    
    (9,079
    )
    
    
    (4,390
    )Prepaid expenses and other assets
    
    
    (4,197
    )
    
    
    67Accounts payable, accrued expenses and other liabilities
    
    
    2,876
    
    
    
    (8,073
    )Net cash provided by operating activities
    
    
    32,567
    
    
    
    83,431INVESTING ACTIVITIES:Purchases of property, plant, equipment and breeding stock
    
    
    (57,984
    )
    
    
    (36,728
    )Proceeds from disposal of property, plant, equipment and breeding stock
    
    
    12,493
    
    
    
    12,879Proceeds from sale of joint venture
    
    
    1,637
    
    
    
    Net cash used in investing activities
    
    
    (43,854
    )
    
    
    (23,849
    )FINANCING ACTIVITIES:Checks issued against future deposits
    
    
    
    
    
    
    3,806Excess tax benefits from share-based payment arrangements
    
    
    154
    
    
    
    1,690Dividends paid
    
    
    (5,737
    )
    
    
    (3,758
    )Proceeds from revolving debt
    
    
    
    
    
    
    Proceeds from term loan
    
    
    
    
    
    
    125,000Repayments on senior unsecured notes
    
    
    (2,000
    )
    
    
    Payments for deferred financing costs
    
    
    
    
    
    
    (953
    )Premium on early extinguishment of debt
    
    
    (92
    )
    
    
    (17,762
    )Repayments on long-term debt
    
    
    (617
    )
    
    
    (173,598
    )Net cash used in financing activities
    
    
    (8,292
    )
    
    
    (65,575
    )Net decrease in cash and cash equivalents
    
    
    (19,579
    )
    
    
    (5,993
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    25,512
    
    
    
    10,054CASH AND CASH EQUIVALENTS, end of period
    
    $
    5,933
    
    
    $
    4,061SUPPLEMENTAL DISCLOSURES:Interest paid
    
    $
    5,604
    
    
    $
    11,040Income tax paid
    
    
    17,702
    
    
    
    27,718Noncash operating activities-Fair value of interest rate swap
    
    
    3,311
    
    
    
    2,317Noncash investing activities-Current liabilities related to purchases of property, plant,
equipment and breeding stock
    
    
    1,293
    
    
    
    Noncash financing activities-Dividend payable
    
    
    1,918
    
    
    
    1,897Conversion of incentive plan to restricted stock
    
    
    
    
    
    
    1,829
 The accompanying notes are an integral part of the condensed consolidated financial statements.
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Premium Standard Farms, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
 Note 1  Basis of presentation
      Note 2  Stock-based compensation
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39 Weeks EndedDecember 24,2005Net income, as reported
    
    $
    41,356Add: Stock-based compensation expense included in
net income, net of related taxes
    
    
    452Less: Total stock-based employee compensation expense
determined under fair value based methods for all
awards, net of related taxes
    
    
    534Pro forma net income
    
    $
    41,274Basic earnings per share, as reported
    
    $
    1.34Basic earnings per share, pro forma
    
    $
    1.33Diluted earnings per share, as reported
    
    $
    1.32Diluted earnings per share, pro forma
    
    $
    1.32
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Employee Stock-Based Incentive Plans
            6




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




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13 Weeks Ended
    
    
    39 Weeks EndedDecember 23,
    
    
    December 24,
    
    
    December 23,
    
    
    December 24,2006
    
    
    2005
    
    
    2006
    
    
    2005Basic Computation:Net income
    
    $
    2,935
    
    
    $
    13,754
    
    
    $
    14,794
    
    
    $
    41,356Weighted average common
shares outstanding
    
    
    31,662,033
    
    
    
    31,067,575
    
    
    
    31,634,394
    
    
    
    30,974,874Basic earnings per share
    
    $
    0.09
    
    
    $
    0.44
    
    
    $
    0.47
    
    
    $
    1.34Diluted Computation:Net income
    
    $
    2,935
    
    
    $
    13,754
    
    
    $
    14,794
    
    
    $
    41,356Weighted average common
shares outstanding
    
    
    31,662,033
    
    
    
    31,067,575
    
    
    
    31,634,394
    
    
    
    30,974,874Net effect of dilutive stock
options and warrants based on
the treasury stock method
    
    
    209,097
    
    
    
    534,681
    
    
    
    217,658
    
    
    
    298,405Outstanding shares for diluted
earnings per share
    
    
    31,871,130
    
    
    
    31,602,256
    
    
    
    31,852,052
    
    
    
    31,273,279Diluted earnings per share
    
    $
    0.09
    
    
    $
    0.44
    
    
    $
    0.46
    
    
    $
    1.32
 Note 5  Derivative instruments and hedging activities
    8




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Note 6  Goodwill and intangible assets
  Note 7  Inventories
  December 23, 2006
    
    
    March 25, 2006Hogs
    
    $
    152,215
    
    
    $
    147,391Processed pork products
    
    
    15,500
    
    
    
    13,348Packaging and supplies
    
    
    3,124
    
    
    
    2,248Grain, feed additives and other
    
    
    5,271
    
    
    
    4,043$
    176,110
    
    
    $
    167,030
 Note 8  Segment information
  9




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Pork
    
    Hog
    
    CorporateProcessing
    
    Production
    
    and Other
    
    TotalFor the 13 weeks ended December 23, 2006-Net sales
    
    $
    205,745
    
    
    $
    137,241
    
    
    $
    (118,669
    )
    
    $
    224,317Intersegment sales
    
    
    (675
    )
    
    
    (117,994
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    7,100
    
    
    
    5,960
    
    
    
    (7,431
    )
    
    
    5,629For the 13 weeks ended December 24, 2005-Net sales
    
    $
    222,256
    
    
    $
    151,216
    
    
    $
    (130,573
    )
    
    $
    242,899Intersegment sales
    
    
    (597
    )
    
    
    (129,976
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    6,290
    
    
    
    22,695
    
    
    
    (5,527
    )
    
    
    23,458As of and for the 39 weeks ended December 23, 2006-Net sales
    
    $
    601,264
    
    
    $
    412,096
    
    
    $
    (362,488
    )
    
    $
    650,872Intersegment sales
    
    
    (1,782
    )
    
    
    (360,706
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    10,631
    
    
    
    43,406
    
    
    
    (26,688
    )
    
    
    27,349Assets
    
    
    208,251
    
    
    
    495,738
    
    
    
    30,282
    
    
    
    734,271Goodwill
    
    
    25,020
    
    
    
    50,978
    
    
    
    
    
    
    
    75,998For the 39 weeks ended December 24, 2005-Net sales
    
    $
    626,690
    
    
    $
    467,766
    
    
    $
    (393,019
    )
    
    $
    701,437Intersegment sales
    
    
    (1,752
    )
    
    
    (391,267
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    12,158
    
    
    
    98,441
    
    
    
    (37,664
    )
    
    
    72,935Year 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
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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. Herrold
 12




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




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Pork and Hog Prices (December 2003-December 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 (December 2003-December 2006)
 
 
 (1)
    
    Based on the monthly average of daily close prices of the Nearby Corn
Futures quoted by the Chicago Board of Trade. 15




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Soybean Meal $/Ton (December 2003-December 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




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Results of Operations
 13 Weeks Ended December 23, 2006 Compared to the 13 Weeks Ended December 24, 2005
  17




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For the 13 Weeks Ended
    
    
    Qtr to Qtr ChangeDecember 23, 2006
    
    
    December 24, 2005
    
    
    2006 to 2005
    
    
    %(In millions except percentages)Net SalesProcessing
    
    $
    205.8
    
    
    $
    222.3
    
    
    $
    (16.5
    )
    
    
    (7.4
    )%Production
    
    
    137.2
    
    
    
    151.2
    
    
    
    (14.0
    )
    
    
    (9.3
    )%Intersegment
    
    
    (118.7
    )
    
    
    (130.6
    )
    
    
    11.9
    
    
    
    9.1
    %Total Net Sales
    
    $
    224.3
    
    
    $
    242.9
    
    
    $
    (18.6
    )
    
    
    (7.7
    )%Gross ProfitProcessing
    
    $
    8.6
    
    
    $
    8.0
    
    
    $
    0.6
    
    
    
    7.5
    %Production
    
    
    6.0
    
    
    
    22.6
    
    
    
    (16.6
    )
    
    
    (73.5
    )%Total Gross Profit
    
    $
    14.6
    
    
    $
    30.6
    
    
    $
    (16.0
    )
    
    
    (52.3
    )%Operating Income (Loss)Processing
    
    $
    7.1
    
    
    $
    6.3
    
    
    $
    0.8
    
    
    
    12.7
    %Production
    
    
    5.9
    
    
    
    22.7
    
    
    
    (16.8
    )
    
    
    (74.0
    )%Corporate
    
    
    (7.4
    )
    
    
    (5.5
    )
    
    
    (1.9
    )
    
    
    (34.5
    )%Total Operating Income
    
    $
    5.6
    
    
    $
    23.5
    
    
    $
    (17.9
    )
    
    
    (76.2
    )%
 Consolidated
 Net Sales.
 Gross Profit.
 Selling, General and Administrative Expenses.
 Operating Income.
 Interest Expense, net.
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Income Tax Expense.
 Segment Analysis
 Pork Processing
   Hog Production
   39 Weeks Ended December 23, 2006 Compared to the 39 Weeks Ended December 24, 2005
  19




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For the 39 Weeks Ended
    
    
    Year to Year ChangeDecember 23, 2006
    
    
    December 24, 2005
    
    
    2006 to 2005
    
    
    %(In millions except percentages)Net SalesProcessing
    
    $
    601.3
    
    
    $
    626.7
    
    
    $
    (25.4
    )
    
    
    (4.1
    )%Production
    
    
    412.1
    
    
    
    467.7
    
    
    
    (55.6
    )
    
    
    (11.9
    )%Intersegment
    
    
    (362.5
    )
    
    
    (393.0
    )
    
    
    30.5
    
    
    
    7.8
    %Total Net Sales
    
    $
    650.9
    
    
    $
    701.4
    
    
    $
    (50.5
    )
    
    
    (7.2
    )%Gross ProfitProcessing
    
    $
    14.8
    
    
    $
    16.1
    
    
    $
    (1.3
    )
    
    
    (8.1
    )%Production
    
    
    43.4
    
    
    
    98.4
    
    
    
    (55.0
    )
    
    
    (55.9
    )%Total Gross Profit
    
    $
    58.2
    
    
    $
    114.5
    
    
    $
    (56.3
    )
    
    
    (49.2
    )%Operating Income (Loss)Processing
    
    $
    10.6
    
    
    $
    12.2
    
    
    $
    (1.6
    )
    
    
    (13.1
    )%Production
    
    
    43.4
    
    
    
    98.4
    
    
    
    (55.0
    )
    
    
    (55.9
    )%Corporate
    
    
    (26.6
    )
    
    
    (16.0
    )
    
    
    (10.6
    )
    
    
    (66.3
    )%Loss on early extinguishment of debt
    
    
    (0.1
    )
    
    
    (21.7
    )
    
    
    21.6
    
    
    
    *Total Operating Income
    
    $
    27.3
    
    
    $
    72.9
    
    
    $
    (45.6
    )
    
    
    (62.6
    )%
 
 *
    
    Not meaningful Consolidated
 Net Sales.
 Gross Profit.
 Selling, General and Administrative Expenses.
 Operating Income.
 Interest Expense, net.
 20




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##### Table of Contents



Income Tax Expense.
 Segment Analysis
 Pork Processing
   Hog Production
   Liquidity and Capital Resources
  21




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1 4 1 4 1 4 1 4 1 4 1 4 1 4
      22




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##### 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.
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##### 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
 Market Risk
  24




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
  25




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##### 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. Herrold
 26




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##### Table of Contents



Other legal matters
  
 Item 1A. Risk Factors
  The following risk factors from our Annual Report on Form 10-K for the fiscal year ended March
25, 2006 have 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.
  Governmental authorities may take action prohibiting meat packers from owning livestock, which
could adversely affect our business and threaten the efficiency of our vertically integrated
operations.
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##### Table of Contents



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.
  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.
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##### Table of Contents



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.
  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 approximately $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
  
 Item 5. Other Information
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##### Table of Contents



Item 6. Exhibits
 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.
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##### Table of Contents



SIGNATURES
  Premium Standard Farms, Inc.February 1,
2007
    
    
    
    /s/ Stephen A. LightstoneDate
    
    
    
    Stephen A. LightstoneExecutive Vice President, Chief FinancialOfficer and Treasurer(Principal Financial andAccounting Officer)
 31