##### 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: June 24, 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
 (Former name, former address and former fiscal year, if
changed since last report)
 þ o
  Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-Accelerated Filer 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. Qualitative and Quantitative 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
June 24, 2006 and March 25, 2006
(in 000s)
(Unaudited)
 June 24,
    
    
    March 25,2006
    
    
    2006ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    17,011
    
    
    $
    25,512Accounts receivable, net
    
    
    30,168
    
    
    
    28,761Inventories
    
    
    172,869
    
    
    
    167,030Deferred income taxes
    
    
    6,634
    
    
    
    8,175Income tax receivable
    
    
    1,611
    
    
    
    Prepaid expenses and other
    
    
    9,367
    
    
    
    4,990Total current assets
    
    
    237,660
    
    
    
    234,468PROPERTY, PLANT, EQUIPMENT AND BREEDING STOCK:Land and improvements
    
    
    102,501
    
    
    
    102,501Buildings
    
    
    298,469
    
    
    
    298,292Machinery and equipment
    
    
    299,118
    
    
    
    297,970Breeding stock
    
    
    44,584
    
    
    
    44,868Construction in progress
    
    
    18,381
    
    
    
    10,008763,053
    
    
    
    753,639Less- accumulated depreciation
    
    
    359,783
    
    
    
    348,643Total property, plant, equipment and breeding stock
    
    
    403,270
    
    
    
    404,996GOODWILL
    
    
    75,998
    
    
    
    75,998OTHER LONG-TERM ASSETS:Deferred financing costs, net
    
    
    2,030
    
    
    
    2,137Other
    
    
    13,122
    
    
    
    11,252Total other long-term assets
    
    
    15,152
    
    
    
    13,389Total assets
    
    $
    732,080
    
    
    $
    728,851LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    10,018
    
    
    $
    9,044Accrued expenses
    
    
    42,679
    
    
    
    43,313Dividends payable
    
    
    1,176
    
    
    
    911Due to related party (including dividends payable of $746
and $986)
    
    
    746
    
    
    
    1,008Income tax payable
    
    
    
    
    
    
    3,204Accrued interest
    
    
    989
    
    
    
    997Current maturities of long-term debt and capital leases
    
    
    717
    
    
    
    810Total current liabilities
    
    
    56,325
    
    
    
    59,287LONG-TERM LIABILITIES:Long-term debt and capital leases, less current maturities
    
    
    127,458
    
    
    
    127,542Other long-term liabilities
    
    
    6,270
    
    
    
    6,327Deferred income taxes
    
    
    72,368
    
    
    
    74,975Total long-term liabilities
    
    
    206,096
    
    
    
    208,844Total liabilities
    
    
    262,421
    
    
    
    268,131COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:Common stock
    
    
    320
    
    
    
    316Additional paid-in capital
    
    
    378,645
    
    
    
    378,083Accumulated other comprehensive income, net of tax
    
    
    5,453
    
    
    
    2,748Retained earnings
    
    
    85,241
    
    
    
    79,573Total shareholders equity
    
    
    469,659
    
    
    
    460,720Total liabilities and shareholders equity
    
    $
    732,080
    
    
    $
    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
13 weeks ended June 24, 2006 and June 25, 2005
(in 000s except share and per share data)
(Unaudited)
 13 Weeks EndedJune 24,
    
    
    June 25,2006
    
    
    2005Net sales
    
    $
    206,158
    
    
    $
    245,307Cost of goods sold
    
    
    187,277
    
    
    
    188,240Gross profit
    
    
    18,881
    
    
    
    57,067Selling, general and administrative expenses
    
    
    6,573
    
    
    
    7,433Loss on early extinguishment of debt
    
    
    
    
    
    
    21,707Other income
    
    
    (215
    )
    
    
    (283
    )Operating income
    
    
    12,523
    
    
    
    28,210Interest expense (income):Interest expense
    
    
    1,945
    
    
    
    3,194Interest income
    
    
    (387
    )
    
    
    (130
    )Interest expense, net
    
    
    1,558
    
    
    
    3,064Income before income taxes
    
    
    10,965
    
    
    
    25,146Income tax expense
    
    
    3,376
    
    
    
    9,774Net income
    
    $
    7,589
    
    
    $
    15,372Unrealized gain (loss) on interest rate swap, net of tax
    
    
    2,705
    
    
    
    (1,610
    )Comprehensive income
    
    $
    10,294
    
    
    $
    13,762Earnings per share:Basic
    
    $
    0.24
    
    
    $
    0.50Diluted
    
    $
    0.24
    
    
    $
    0.49Weighted average number of common shares outstanding:Basic
    
    
    31,592,646
    
    
    
    30,928,524Diluted
    
    
    31,817,998
    
    
    
    31,078,513Dividends declared per share
    
    $
    0.06
    
    
    $
    0.06
 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
13 Weeks ended June 24, 2006 and June 25, 2005
(in 000s)
(Unaudited)
 June 24,
    
    
    June 25,2006
    
    
    2005OPERATING ACTIVITIES:Net income
    
    $
    7,589
    
    
    $
    15,372Adjustments to reconcile net income
to net cash provided by operating activities:Depreciation
    
    
    15,393
    
    
    
    14,974Stock-based compensation
    
    
    414
    
    
    
    19Amortization of deferred financing costs
    
    
    107
    
    
    
    164Premium on early extinguishment of debt
    
    
    
    
    
    
    17,762Write-off of deferred financing costs
    
    
    
    
    
    
    3,945Deferred income taxes
    
    
    (2,738
    )
    
    
    3,540Excess tax benefits from share-based payment arrangements
    
    
    (152
    )
    
    
    Net gain on sale of property, plant, equipment and breeding stock
    
    
    (1,370
    )
    
    
    (2,302
    )Changes in operating assets and liabilities, net:Accounts receivable
    
    
    (1,407
    )
    
    
    3,209Inventories
    
    
    (5,839
    )
    
    
    (2,714
    )Prepaid expenses and other assets
    
    
    (4,938
    )
    
    
    1,678Accounts payable, accrued expenses and other liabilities
    
    
    (5,357
    )
    
    
    (11,179
    )Net cash provided by operating activities
    
    
    1,702
    
    
    
    44,468INVESTING ACTIVITIES:Purchases of property, plant, equipment and breeding stock
    
    
    (13,639
    )
    
    
    (13,601
    )Proceeds from disposal of property, plant, equipment and breeding
stock
    
    
    3,750
    
    
    
    4,661Proceeds from sale of joint venture
    
    
    1,608
    
    
    
    Net cash used in investing activities
    
    
    (8,281
    )
    
    
    (8,940
    )FINANCING ACTIVITIES:Checks issued against future deposits
    
    
    
    
    
    
    11,766Excess tax benefits from share-based payment arrangements
    
    
    152
    
    
    
    Dividends paid
    
    
    (1,897
    )
    
    
    Proceeds from revolving debt
    
    
    
    
    
    
    9,520Proceeds from term loan
    
    
    
    
    
    
    125,000Payments for deferred financing costs
    
    
    
    
    
    
    (907
    )Premium on early extinguishment of debt
    
    
    
    
    
    
    (17,762
    )Repayments on long-term debt
    
    
    (177
    )
    
    
    (173,199
    )Net cash used in financing activities
    
    
    (1,922
    )
    
    
    (45,582
    )Net decrease in cash and cash equivalents
    
    
    (8,501
    )
    
    
    (10,054
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    25,512
    
    
    
    10,054CASH AND CASH EQUIVALENTS, end of period
    
    $
    17,011
    
    
    $
    SUPPLEMENTAL DISCLOSURES:Interest paid
    
    $
    1,901
    
    
    $
    7,645Income tax paid
    
    
    10,777
    
    
    
    6,903Noncash operating activities-Fair value of interest rate swap
    
    
    4,376
    
    
    
    (2,636
    )Noncash investing activities-Current liabilities related to purchases of property, plant,
equipment and breeding stock
    
    
    2,407
    
    
    
    Noncash financing activities-Dividend payable
    
    
    1,922
    
    
    
    1,879Conversion 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
 Note 1  Basis of presentation
     Note 2  Stock-based compensation
    4




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13 Weeks EndedJune 24,
    
    
    June 25,2006
    
    
    2005Net income, as reported
    
    $
    7,589
    
    
    $
    15,372Add: Stock-based compensation expense included in
net income, net of related taxes
    
    
    257
    
    
    
    12Less: Total stock-based employee compensation expense
determined under fair value based methods for all
awards, net of related taxes
    
    
    257
    
    
    
    17Pro forma net income
    
    $
    7,589
    
    
    $
    15,367Basic earnings per share, as reported
    
    $
    0.24
    
    
    $
    0.50Basic earnings per share, pro forma
    
    $
    0.24
    
    
    $
    0.50Diluted earnings per share, as reported
    
    $
    0.24
    
    
    $
    0.49Diluted earnings per share, pro forma
    
    $
    0.24
    
    
    $
    0.49
 Employee Stock-Based Incentive Plans
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Note 3  New accounting pronouncements
 ,
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Note 4  Earnings per share
    13 Weeks EndedJune 24,
    
    
    June 25,2006
    
    
    2005Basic Computation:Net income
    
    $
    7,589
    
    
    $
    15,372Weighted average common
shares outstanding
    
    
    31,592,646
    
    
    
    30,928,524Basic earnings per share
    
    $
    0.24
    
    
    $
    0.50Diluted Computation:Net income
    
    $
    7,589
    
    
    $
    15,372Weighted average common
shares outstanding
    
    
    31,592,646
    
    
    
    30,928,524Net effect of dilutive stock
options and warrants based on
the treasury stock method
    
    
    225,352
    
    
    
    149,989Outstanding shares for diluted
earnings per share
    
    
    31,817,998
    
    
    
    31,078,513Diluted earnings per share
    
    $
    0.24
    
    
    $
    0.49
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Note 5  Derivative instruments and hedging activities
    Note 6  Goodwill and intangible assets
  Note 7  Inventories
  June 24, 2006
    
    
    March 25, 2006Hogs
    
    $
    148,090
    
    
    $
    147,391Processed pork products
    
    
    17,519
    
    
    
    13,348Packaging and supplies
    
    
    2,517
    
    
    
    2,248Grain, feed additives and other
    
    
    4,743
    
    
    
    4,043$
    172,869
    
    
    $
    167,030
 Note 8  Segment information
  8




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Pork
    
    Hog
    
    CorporateProcessing
    
    Production
    
    and Other
    
    TotalAs of and for the 13 weeks ended June 24, 2006-Net sales
    
    $
    190,931
    
    
    $
    131,607
    
    
    $
    (116,380
    )
    
    $
    206,158Intersegment sales
    
    
    (551
    )
    
    
    (115,829
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    4,779
    
    
    
    12,809
    
    
    
    (5,065
    )
    
    
    12,523Assets
    
    
    192,674
    
    
    
    475,761
    
    
    
    63,645
    
    
    
    732,080Goodwill
    
    
    25,020
    
    
    
    50,978
    
    
    
    
    
    
    
    75,998For the 13 weeks ended June 25, 2005-Net sales
    
    $
    209,200
    
    
    $
    171,692
    
    
    $
    (135,585
    )
    
    $
    245,307Intersegment sales
    
    
    (658
    )
    
    
    (134,927
    )
    
    
    
    
    
    
    Operating income (loss)
    
    
    3,568
    
    
    
    52,325
    
    
    
    (27,683
    )
    
    
    28,210Year ended 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
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1 4
          10




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Note 10  Litigation
 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.
  11




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Other legal matters
  12




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
     13




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Pork and Hog Prices (June 2003-June 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 (June 2003-June 2006)
 
 
 (1)
    
    Based on the monthly average of daily close prices of the Nearby Corn
Futures quoted by the Chicago Board of Trade. 14




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Soybean Meal $/Ton (June 2003-June 2006)
 
 
 (1)
    
    Based on the monthly average of daily close prices of the Nearby
Soybean Futures quoted by the Chicago Board of Trade.   Results of Operations
 13 Weeks Ended June 24, 2006 Compared to the 13 Weeks Ended June 25, 2005
  15




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For the 13 Weeks Ended
    
    
    Qtr to Qtr ChangeJune 24, 2006
    
    
    June 25, 2005
    
    
    2006 to 2005
    
    
    %(In millions except percentages)Net SalesProcessing
    
    $
    190.9
    
    
    $
    209.2
    
    
    $
    (18.3
    )
    
    
    (8.7
    )%Production
    
    
    131.6
    
    
    
    171.7
    
    
    
    (40.1
    )
    
    
    (23.4
    )%Intersegment
    
    
    (116.3
    )
    
    
    (135.6
    )
    
    
    19.3
    
    
    
    14.2
    %Total Net Sales
    
    $
    206.2
    
    
    $
    245.3
    
    
    $
    (39.1
    )
    
    
    (15.9
    )%Gross ProfitProcessing
    
    $
    6.1
    
    
    $
    4.7
    
    
    $
    1.4
    
    
    
    29.8
    %Production
    
    
    12.8
    
    
    
    52.4
    
    
    
    (39.6
    )
    
    
    (75.6
    )%Total Gross Profit
    
    $
    18.9
    
    
    $
    57.1
    
    
    $
    (38.2
    )
    
    
    (66.9
    )%Operating Income (Loss)Processing
    
    $
    4.8
    
    
    $
    3.6
    
    
    $
    1.2
    
    
    
    33.3
    %Production
    
    
    12.8
    
    
    
    52.3
    
    
    
    (39.5
    )
    
    
    (75.5
    )%$
    17.6
    
    
    $
    55.9
    
    
    $
    (38.3
    )
    
    
    (68.5
    )%Corporate
    
    
    (5.1
    )
    
    
    (6.0
    )
    
    
    0.9
    
    
    
    15.0
    %Loss on early extinguishment of debt
    
    
    
    
    
    
    (21.7
    )
    
    
    21.7
    
    
    
    *Total Operating Income
    
    $
    12.5
    
    
    $
    28.2
    
    
    $
    (15.7
    )
    
    
    (55.7
    )%
 
 *
    
    Not meaningful Consolidated
 Net Sales.
 Gross Profit.
 Selling, General and Administrative Expenses.
 Operating Income.
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Interest Expense, net.
 Income Tax Expense.
 Segment Analysis
 Pork Processing
   Hog Production
   Liquidity and Capital Resources
  17




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1 4 1 4 1 4 1 4 1 4 1 4 1 4
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
    
    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.
   19




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Contractual Cash Obligations
  Critical Accounting Policies
  Inventory valuation of livestock
 Estimates
 Derivative instruments
 Property, plant, equipment and breeding stock
 Impairment of long-lived assets
 20




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Market Risk
    1 4 1 4
 
 Item 3. Qualitative and Quantitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
  21




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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.
  22




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Other legal matters
  
 Item 1A. Risk Factors
  
 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
  
 Item 6. Exhibits
 Exhibit 31.1
    
    Certification of John M. Meyer, Chief Executive Officer, pursuant to Rule
13a-15(e)/15d-15(e).Exhibit 31.2
    
    Certification of Stephen A. Lightstone, Chief Financial Officer, pursuant to Rule
13a-15(e)/15d-15(e).Exhibit 32.1
    
    Certification of John M. Meyer, Chief Executive Officer, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.Exhibit 32.2
  
    Certification of Stephen A. Lightstone, Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
  Premium Standard Farms, Inc.August 3, 2006
    
    /s/ Stephen A. LightstoneDate
    
    Stephen A. LightstoneExecutive Vice President, Chief FinancialOfficer and Treasurer(Principal Financial andAccounting Officer)
 24