UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


Form 10-K

(Mark one)

þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934

                For the fiscal year ended August 26, 2006

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 27, 2005

or

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
            SECURITIES EXCHANGE ACT OF 1934

                For the transition period from __________ to __________ .

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 333-115164

U.S. PREMIUM BEEF, LLC

(Exact name of registrant as specified in its charter)

DELAWARE

20-1576986

(State or other jurisdiction of

(I.R.S. employer
incorporation or organization)

(I.R.S. employer
identification number)

12200 North Ambassador Drive,
Kansas City,
, MO 64163
(Address of principal executive offices)

Telephone: (866) 877-2525
(Registrant'sRegistrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yesþ  No o

Indicate by check mark whether the registrant (1) has filed all 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. Yesxþ Noo

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.xþ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, (as definedor a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). YesAct.

Large Accelerated Filer o       NoAccelerated Filer  xo       Non-Accelerated Filer  þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso  Noxþ

The Registrant'sRegistrant’s equity is not traded on any exchange or other public market; however, there have been private transactions. The aggregate value of the interest held by non-affiliates approximates $47.3$75.3 million, based on the weighted average of the last sales approved. As of November 21, 2005,October 28, 2006, there were 691,845735,505 Class A units and 691,845735,505 Class B units outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        None


1



TABLE OF CONTENTS

PART I.

Page
No.

Item 1.

Business.

4

Item 2.

1A.

Properties.

Risk Factors

26

14

Item 3.

2.

Legal Proceedings.

Properties.

27

23

Item 3.

Legal Proceedings.23
Item 4.

Submission of Matters to a Vote of Security Holders.

27

23

PART II.

Item 5.Market for Registrant'sRegistrant’s Common Equity, Related Stockholder Matters
And Issuer Purchases of Equity Securities.

27

24

Item 6.

Selected Financial Data.

28

25
Item 7.Management'sManagement’s Discussion and Analysis of Financial Condition and
Results of Operation.

30

27

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

43

38

Item 8.

Financial Statements and Supplementary Data.

44

39
Item 9.Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

45

39

Item 9A.

Controls and Procedures.

45

40

Item 9B.

Other Information.

45

40
 

PART III.

Item 10.

Directors and Executive Officers of the Registrant.

45

40

Item 11.

Executive Compensation.

49

43

Item 12.

Security Ownership of Certain Beneficial Owners and Management
and Related
Unitholder Matters

Matters.

52

46

Item 13.

Certain Relationships and Related Transactions.

53

46

Item 14.

Principal AccountantAccounting Fees and Services.

54

48
 

PART IV.

Item 15.

Exhibits, and Financial Statement Schedules.

55

48

Signatures

62

59

2




MARKET AND INDUSTRY DATA AND FORECASTS

Market data and certain industry forecasts used throughout this report were obtained from internal surveys, market research, consultant surveys, publicly available information and industry publications and surveys. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Similarly, internal surveys, industry forecasts and market research, which we believe to be reliable, based upon our management'smanagement’s knowledge of the industry, have not been independently verified. Forecasts are particularly likely to be inaccurate, especially over long periods of time. In addition, we do not know what assumptions regarding general economic growth were used in preparing the forecasts we cite.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This report contains "forward-looking“forward-looking statements," which are subject to a number of risks and uncertainties, many of which are beyond our control. Forward-looking statements are typically identified by the words "believe," "expect," "anticipate," "intend," "estimate"“believe,” “expect,” “anticipate,” “intend,” “estimate” and similar expressions. Actual results could differ materially from those contemplated by these forward-looking statements as a result of many factors, including economic conditions generally and in our principal markets, the availability and prices of live cattle and commodities, food safety, livestock disease, including the identification of cattle with BSE, competitive practices and consolidation in the cattle production and processing industries, actions of domestic or foreign governments, hedging risk, changes in interest rates and foreign currency exchange rates, consumer demand and preferences, the cost of compliance with environmental and health laws, loss of key customers or suppliers, loss of key employees, labor relations and consolidation among our customers. In light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward-looking information contained in this report will in fact transpire. Readers are cautioned not to place undue reliance on these forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statements. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. Please review the Item 1A.Risk Factors, included in Item 1. Business in this report, for other important factors that could cause actual results to differ materially from those in any such forward-looking statements.

Unless the context indicates or otherwise requires, the terms "the Company"“the Company”, "we"“we”, "our"“our” and "us"“us” refer to U.S. Premium Beef, LLC (formerly known as U.S. Premium Beef, Ltd.) and its consolidated subsidiaries. As used in this report, the term "NBP"“NBP” refers to National Beef Packing Company, LLC (formerly known as Farmland National Beef Packing Company, LP (FNB)), a Delaware limited liability company and "USPB"“USPB” refers to U.S. Premium Beef, LLC (formerly known U.S. Premium Beef, Ltd.) prior to consolidation. As used in this report, the terms "FYE"“FYE” and "fiscal“fiscal year ended"ended” refer to our fiscal year, which ends on the last Saturday in August.

3




PART I

ITEM 1. BUSINESS

BUSINESS OF U.S. PREMIUM BEEF, LLC.LLC

Overview

U.S. Premium Beef (USPB) was organized in July 1996 as a Kansas cooperative by a steering committee of cattle producers. USPB'sUSPB’s goal is to provide market access and improve the marketing and processing of beef products requiring higher quality cattle for wholesale and retail customers and consumers while providing higher returns to cattle producers. USPB operates an integrated cattle processing and beef marketing enterprise where consumer and processor demands and requirements are implemented through changes in genetics, feeding and management. U.S. Premium Beef'sBeef’s unitholders benefit from its supplier alliance with National Beef Packing Co., LLC (NBP) through (i) premiums received in excess of cash market prices for higher quality cattle, (ii) allocations of profits and losses and potential distributions, (iii) potential unit price appreciation, and (iv) information that permits unitholders to make informed production decisions.

On June 12, 2003, U.S. Premium Beef entered into an agreement with Farmland Industries, Inc. (Farmland) to acquire all of the partnership interests in Farmland National Beef Packing Company (FNB) held by Farmland. USPB formed NB Acquisition, LLC (NB Acquisition) to consummate the acquisition. To finance the acquisition, USPB, NBPCo Holdings, LLC (NBPCo Holdings) and certain members of FNB'sFNB’s management team purchased equity in NB Acquisition for $46.0 million in cash. FNB issued $160.0 million of Senior Notes (Senior Notes), amended its credit facility and transferred a portion of the proceeds of the offering of the Senior Notes and borrowings under its amended credit facility to NB Acquisition. Subsequently, NB Acquisition merged into FNB, and FNB then converted into a limited liability company under Delaware law and became known as National Beef Packing Company, LLC (NBP). These transactions (the Acquisition) closed on August 6, 2003.

Effective August 29, 2004, the cooperative restructured into a limited liability company (the Conversion). The business of USPB, the cooperative, is being continued in the limited liability company (LLC) form of business organization.

     On June 1, 2006, U.S. Premium Beef’s majority owned subsidiary, NBP, completed the acquisition of substantially all of the assets of Brawley Beef, LLC (Brawley Beef). Brawley Beef was an alliance of cattle producers in Arizona and California who supplied its beef processing facility in Brawley, California.

U.S. Premium Beef, NBPCo Holdings and NBP management each hold Class A and Class B interests in NBP. In addition, members of NBP management will be issued a fixed number of additional Class A and Class C interests in NBP in lieu of cash payments owed under existing employment arrangements. USPB holds approximately 53.2%54.8% of the Class B interests, as well as Class A interests with an aggregate face amount of approximately $88.8$94.7 million, NBPCo Holdings owns approximately 20.2%19.5% of the Class B interests, as well as Class A interests with an aggregate face amount of approximately $31.6$31.5 million, and members of NBP management own approximately 26.6%25.7% of the Class B interests, as well as Class A interests with an aggregate face amount of approximately $1.5 million. After a specified period following the completionearlier of the Acquisition,occurrence of specified major liquidity transaction, change of control or in August 2008, certain members of NBP management will be issued a fixed number of additional Class A interests with an aggregate face amount of approximately $9.1 million and Class C interests with an aggregate face amount of approximately $0.9 million in lieu of cash payments owed under prior or existing employment arrangements pursuant to deferred compensation agreements entered into in connection with the Acquisition.ownership changes that occurred on August 6, 2003

Products and Production

USPB provides an integrated cattle production, processing and marketing system for the benefit of its owners and associates. As the basis of that system, USPB'sUSPB’s owners have a guaranteed right plusan obligation (on a one head per Class A unit per year basis) to deliver cattle to USPB, pursuant to the Uniform Delivery and Marketing Agreement (See (seeCattle Delivery Arrangements). Cattle delivered to USPB are then delivered to NBP for processing and subsequent product distribution and marketing. Shortly after the cattle are processed, cattle suppliers receive, at no extra charge, reliable individual animal carcass data previously considered proprietary by many processors. This carcass data assists producers in refining production methodologies, thereby improving the product quality and subsequently enhancing the return to the producer investor.

4




We believe the primary advantage of USPB'sUSPB’s ownership in NBP centers around USPB'sUSPB’s ability to provide NBP with a consistent supply of quality beef from a verified source, allowing NBP to target higher margin value-added markets. Consumers have historically demonstrated their willingness and desire to buy branded products that offer better value in other consumer product markets, with the Certified Angus Beef® product line being an example in the beef industry.

Cattle Producers'Producers’ Uniform Delivery and Marketing Agreements

USPB purchases allfacilitates the delivery of its cattle requirements from its owners and associates.associates to NBP. Under the cooperative structure, each share of common stock held by a shareholder entitled and obligated that shareholder to deliver one head of cattle per year to the cooperative. Each shareholder was required to enter into a Uniform Delivery and Marketing Agreement with the cooperative whereby the shareholder was committed to supply a designated number of cattle on an annual basis to be delivered during the delivery periods set forth in the delivery agreement. In the LLC structure, each Class A unit held by a unitholder entitles and obligates that unitholder to deliver one head of cattle per year to USPB. Each delivery agreement is for a term of 10 years, with the term of the cooperative'scooperative’s agreements continuing following the Conversion. These arrangements are described in greater detail inCattle Delivery Arrangements.

Company Background

USPB was originally organized as a tax exempt cooperative within the meaning of Section 521(b)(l) of the Internal Revenue Code. The cooperative began operations on December 1, 1997, when the cooperative acquired its initial interest in Farmland National Beef, now known as National Beef Packing Company, LLC. In connection with the cooperative'scooperative’s purchase of its interest in Farmland National Beef, the cooperative obtainedowns the right and becameis subject to the obligation to deliver cattle annually to NBP relative to: (i) USPB'sUSPB’s ownership in NBP and (ii) the number of cattle processed annually by NBP. That arrangement continues following the conversion of the cooperative into the LLC. Under that arrangement, USPB has delivered nearly five and one half million head of cattle to NBP for processing since it commenced deliveries.

On August 6, 2003, USPB became the majority owner in NBP.

On August 18, 2004, the shareholders of U.S. Premium Beef, Ltd. approved the conversion of the cooperative into a Delaware LLC. Under the new ownership structure, each share of common stock of the cooperative was converted to one unit of Class A interest and one unit of Class B interest. Immediately following the Conversion, there were 691,845 units of Class A interests and 691,845 units of Class B interests. For a period to be determined by the board of directors, each Class A unit will be linked to its corresponding Class B unit and each pair of linked units must, if transferred, be transferred together. Patronage Refunds for Reinvestment in the cooperative were carried over at their face amount into the LLC as Patronage Notices.

     On June 1, 2006, U.S. Premium Beef’s majority owned subsidiary, NBP, completed the acquisition of substantially all of the assets of Brawley Beef. As a result of the acquisition, USPB issued 44,160 new Class A units and 44,160 new Class B units to Brawley Beef in exchange for 44,160 limited partnership units in National Beef California (NBC), a subsidiary of NBP. USPB then exchanged the limited partnership units with NBP for a higher ownership percentage in NBP. After the acquisition, Brawley Beef, LLC changed its name to Desert Beef, LLC.

Holders of USPB Class A units are entitled to a pro rata share of 33% of the profits and losses; to receive distributions of USPB'sUSPB’s net cash flow when declared by the board of directors; to participate in the distribution of USPB'sUSPB’s assets if it dissolves or liquidates after payment of the Patronage Notices, and, if the holder is a member, to vote on matters submitted to a vote of USPB'sUSPB’s members. Holders of USPB Class A units are committed under Uniform Delivery and Marketing Agreements to deliver one head of cattle to USPB annually for each unit held.


Holders of USPB Class B units are entitled to a pro rata share of 67% of the profits and losses; to receive distributions of USPB'sUSPB’s net cash flow when declared by the board of directors; to participate in the distribution of USPB'sUSPB’s assets if it dissolves or liquidates after the payment of the Patronage Notices, and, if the holder is a member, to vote on matters submitted to a vote of USPB'sUSPB’s members. Holders of USPB Class B units have no cattle delivery commitment.

Patronage Notices do not constitute units or membership interests in USPB, and holders will not be unitholders or members of USPB by virtue of holding Patronage Notices. As was the case in the cooperative, Patronage Notices will be paid by USPB at such time and in such amounts as may be determined by the board of directors in its sole and absolute discretion. Upon liquidation, holders of Patronage Notices will be paid before holders of Class A and Class B linked units. Patronage Notices carry no other or additional rights.

5



Employees

USPB has nine employees. USPB'sUSPB’s governance and strategic oversight responsibilities with NBP and the complexity of USPB'sUSPB’s obligations under its various contracts with NBP require USPB to retain the services of key senior management personnel with the experience, skill and expertise necessary to manage an enterprise competitive with other sophisticated participants in the beef and meat industries. Each employee is compensated through the payment of a base salary with management being eligible for incentive bonuses. In addition, each employee is eligible to participate in benefits programs maintained by USPB. These programs include group medical insurance, accidental death and dismemberment insurance and similar programs.

USPB's     USPB’s employees are not unionized and USPB believes that its relationship with its employees is good.

Governmental Regulation and Environmental Matters

The Company is subject to federal and state regulations relating to grading of animals, quality control, labeling, sanitary control and waste disposal. However, as many of the Company'sCompany’s operational activities are conducted through its majority-owned subsidiary, NBP, and as USPB does not directly operate any processing facilities itself, the significant efforts with respect to governmental and environmental regulation are conducted by NBP. SeeBusiness of National Beef Packing Company, LLC - Government Regulation and Environmental Matters.

Sales, Marketing and Customers

USPB'sUSPB’s sole customer is its majority-owned subsidiary, NBP. The ultimate customers of and the market for the products resulting from the processing of cattle supplied by USPB'sUSPB’s members are described inBusiness of National Beef Packing Company, LLC - Description of Business Segments.

Beef Industry, Markets and Competition

As indicated above, USPB'sUSPB’s business activities are focused on supplyingfacilitating the delivery of cattle produced by its owners and associates to USPB'sUSPB’s majority-owned subsidiary, NBP. Information regarding the beef industry, the market for beef and beef products and competition within the beef industry are described inBusiness of National Beef Packing Company, LLC - Industry Overview.

Intellectual Property

USPB owns little intellectual property because USPB'sUSPB’s sales are transacted through NBP. However, USPB maintains a trademark on a U.S. Premium Beef logo that it uses periodically on certain, selected products.


Research and Development

USPB does not conduct any research and development activities independent of the activities of NBP.

CATTLE DELIVERY ARRANGEMENTS

Cattle Producers'Producers’ Uniform Delivery and Marketing Agreements and Payments to Owners and Associates for Cattle

USPB purchases allfacilitates the delivery of its cattle requirements from its owners and associates.associates to NBP. Under the cooperative structure, each share of common stock held by a shareholder entitled and obligated that shareholder to deliver one head of cattle per year to the cooperative. Each shareholder was required to enter into a Uniform Delivery and Marketing Agreement with the cooperative whereby the shareholder was committed to supply a designated number of cattle on an annual basis to be delivered during the delivery periods set forth in the delivery agreement. In the LLC structure, following the conversion from a cooperative, each Class A unit held by a unitholder entitles and obligates that unitholder to deliver one head of cattle per year to USPB. Each delivery agreement is for a term of 10 years, with the terms of the cooperative'scooperative’s agreement continuing following the Conversion.

     

6



Cattle delivered to USPB by its owners and associates are delivered by USPB to NBP for processing (with the effect that NBP is USPB'sUSPB’s sole customer). The resulting beef and beef products are marketed by NBP. Each owner or associate is paid for the cattle delivered to USPB based on a market-based purchase price that is subject to the agreements between USPB and NBP.

Pursuant to the Uniform Delivery and Marketing Agreement, payment for cattle is based on the individual carcass quality of cattle delivered to the Company. In addition to the payments described in this section, the cooperative paid patronage dividends from its taxable income, in accordance with its bylaws. Such patronage dividends were based on the cooperative'scooperative’s taxable income and were distributed to the cooperative'scooperative’s shareholders and associate members in proportion to the number of cattle delivered to the cooperative by its shareholders and associate members. As a result, the patronage dividends received by the cooperative'scooperative’s shareholders and associate members reflectreflected the benefits and profits, if any, obtained from value-added marketing of the beef and beef products created from the cattle delivered to the cooperative for processing. As a limited liability company, allocations of profits and losses and potential distributions are not tied to cattle delivery, but rather to the number of units held and the respective rights of the Class A and Class B units.

BUSINESS OF NATIONAL BEEF PACKING COMPANY, LLC

General

NBP is the fourth largest beef processing company in the United States, accounting for 12.3%12.5% of the United States fed cattle processed in its FYE 2005.2006. NBP processes, packages and delivers fresh beef for sale to customers in the United States and international markets. NBP'sNBP’s products include boxed beef and beef by-products, such as hides and offal. In addition, NBP sells value-added beef products including branded boxed beef, case-ready beef and pork, chilled and frozen export beef and portion control beef. NBP markets products to retailers, distributors, food service providers and the United States military. In FYE 2005,2006, NBP processed in excess of three million fed cattle at its facilities and generated total net sales of $4.3$4.6 billion. NBP'sNBP’s relationship with U.S. Premium Beef facilitates a vertically integrated business model and provides NBP with a significant portion of the high-quality cattle used in its boxed beef and value-added products.

Steven D. Hunt, one of NBP'sNBP’s three managers and the Chief Executive Officer of U.S. Premium Beef, has over 2325 years of experience in the beef industry. Mr. Hunt has been an integral member of NBP'sNBP’s team and has helped to increase its supply of high-quality cattle by facilitating the growth of the membership base at U.S. Premium Beef.

On June 12, 2003, U.S. Premium Beef entered into an agreement with Farmland Industries, Inc. (Farmland) to acquire all of the partnership interests in FNB held by Farmland. U.S. Premium Beef formed NB Acquisition, LLC (NB Acquisition) to consummate the acquisition. To finance the acquisition, U.S. Premium Beef, NBPCo Holdings, LLC (NBPCo Holdings) and certain members of NBP management team purchased equity in NB Acquisition for $46.0 million in cash. FNB issued $160.0 million of Senior Notes (Senior Notes), amended its credit facility and transferred a portion of the proceeds of the offering of the Senior Notes and borrowings under its amended credit facility to NB Acquisition.


Subsequently, NB Acquisition merged into FNB, and FNB then converted into a limited liability company under Delaware law and became known as National Beef Packing Company, LLC. These transactions closed on August 6, 2003. NBP continues to hold all of the same assets it held before the consummation of the transactions, including equity in its subsidiaries, except that concurrent with the closing of these transactions, it transferred to Farmland a 49% interest in its subsidiary National Beef aLF, LLC, which holds a 47.5% interest in aLF Ventures, LLC.  After the transaction, NBP holds a 24.2% interest in aLF Ventures, LLC through its 51% interest retained in National Beef aLF, LLC.  Farmland has a right to request that NBP repurchase this interest at fair market value any time from July 2006 to July 2008.   If NBP does not repurchase the interest, NBP agrees to put the entire interest up for sale.subsidiaries.

7



Industry Overview

Beef products represent the largest segment of the U.S. meat industry based on retail sales and the U.S. is the largest producer of beef in the world, producing approximately 24.524.7 billion pounds of beef in 2004.the calendar year 2005. Beef production, from the birth of the animal to the delivery of meat products to the end distributor, is comprised of two primary segments: production and processing. The production segment raises cattle for slaughter and the processing segment slaughters cattle and packages beef for delivery to customers. A typical 1,200 pound animal yields about 580 pounds of saleable meat, in addition to by-products.byproducts. Cattle supply in the beef industry typically follows a ten to twelve year cycle, consisting of about six to seven years of expansion followed by one to two years of consolidation and three to four years of contraction. This cycle is unique to cattle as other animals can either generate multiple offspring or have shorter incubation periods.  In 2004, there were 63 federally inspected processing plants in the U.S. that each slaughtered 50,000 or more head of cattle.

Beef carcasses are fabricated into boxed beef cuts for sale to retailers and food service operators who further process the cuts for sale to consumers. NBP estimates that approximately 80% of beef sold in the U.S. is sold as boxed beef. Recently, meat processors have begun slicing and repackaging cuts, thereby reducing the amount of handling by the end retailer. These case-ready products may be placed directly into the retail display case for selection by the consumer. Case-ready products allow retail stores to shift butcher shop square footage to revenue-generating activities, reduce labor costs and workplace injuries associated with slicing beef, and potentially reduce food safety liability.

The domestic beef industry is characterized by prices that change daily based on seasonal consumption patterns and overall supply and demand for beef and other proteins in the United States and abroad. In general, domestic and worldwide consumer demand for beef products determines beef processors'processors’ long-term demand for cattle, which is filled by feedlot operators. In order to operate profitably, beef processors seek to acquire cattle at the lowest possible costs and to minimize processing costs by maximizing plant operating rates. Cattle prices vary seasonally and are affected by inventory levels, the production cycle, weather, feed prices and other factors.

In FYE 2005,2006, approximately 26.327.1 million fed cattle were processed in the United States. In recent periods, demand for beef products in the United States has been relatively stable, with population growth the primary factor in determining increased aggregate demand.

BSE and Related Export Bans

The closure of U.S. borders to the importation of Canadian feeder and fattened (ready for slaughter) animals, which occurred in May 2003 following the discovery of bovine spongiform encephalopathy (BSE) in Alberta that same month, tightened the U.S. cattle supply. The closure of the U.S. border to Canadian livestock resulted in higher overall feeder and fed cattle prices in the U.S., negatively impacting raw material prices. Although the U.S. border opened to Canadian produced boxed beef in September 2003, the entire U.S. beef industry continued at a price disadvantage for both raw materials and boxed beef prices while the ban on importation of Canadian livestock was maintained.  The ban on the importation of Canadian cattle was in placemaintained from May 2003 to July 2005.

On December 23, 2003, it was announced by the United States Department of Agriculture (USDA) that a single Holstein dairy cow was discovered in the state of Washington to have tested positive for BSE. The origin of the animal was subsequently traced to a farm in Canada. Shortly after the announcement, several countries, including Japan, representing a substantial share of NBP'sNBP’s export business, closed their borders to the importation of edible beef products from the United States. Certain by-products have been classified as Specified Risk Materials (SRMs), and have been banned from use in feedstocks and the human food chain. Some of these products previously enjoyed a market in foreign countries. The closure of most foreign markets to U.S. beef following the discovery of this cow in Washington state, and lack of alternative U.S. markets for many products which previously were exported, negatively impacted the revenue per head enjoyedrealized by the U.S. packingprocessing industry.

8




All

     The reopening of theseU.S. export markets was further hampered by discovery in 2005 of a second case of BSE in the U.S. as well as additional precautions required by some other importing countries. In December 2005, Japan opened their border to U.S. beef, but subsequently closed it a short time later as a result of a U.S. packer erroneously shipping a product not approved for export to Japan. On July 26, 2006, Japan agreed to reopen its market to U.S. beef aged 20 months and younger after an inspection of U.S. beef processing plants. Shipments of U.S. beef to Japan commenced in August 2006. In September 2006, Korea announced a provisional opening of their border to U.S. beef, but restrictions imposed with the reopening have created uncertainty regarding amounts of beef that may qualify.

     These challenges resulted in tremendous volatility in U.S. livestock market prices duringsince FYE 2004. Where pre-BSE export sales were approximately 17% of total net sales in FYE 2003, FYE 2004 and FYE 2005.  In FYE 2003, 2004 and 2005, NBP'sNBP’s total export sales were approximately 17%10%, 10%7% and 7%, respectively, of total net sales.

On December 29,sales in FYE 2004, 2005 and 2006, respectively. With the USDA announcedage restrictions placed on cattle that qualify for export to Japan, it had established conditions under which it would allow imports into theis anticipated that between 5% and 20% of U.S. of livefed cattle under 30 months of age and certain other commodities from regions with effective BSE prevention and detection measures.  Prior to beingwill be able to import tomeet the U.S., each country must undergo a thorough risk assessment to be recognized as a "minimal-risk region."  Canada was the first country recognized as a minimal-risk region and, as such, would have been eligible to export to the U.S. live cattle under 30 months of age (subject to certain restrictions), as well as certain other animals and products.  The risk assessment conducted by the USDA, as part of the rulemaking process to determine Canada's status as a minimal-risk region, included consideration of the possibility that Canada could experience additional cases of BSE.  The final rule was published in the January 4, 2005 Federal Register and was to become effective March 7, 2005, but was delayed by litigation. criteria.

On March 2, 2005, the U.S. District Court in Billings, Montana granted a preliminary injunction to delay the implementation of USDA's minimal-risk regions rule, temporarily blocking the opening of the Canadian border to the importation of live cattle under 30 months of age into the U.S.  On March 17, 2005, the U.S. Department of Justice, on behalf of the USDA, filed a request with the U.S. Court of Appeals for the Ninth Circuit requesting that the court overturn the decision issued by the U.S. District Court in Montana, which would re-establish trade with Canada for beef products and live cattle under 30 months of age.  The National Meat Association along with the Canadian Cattlemen's Association and the Alberta Beef Producers, who were all denied leave to intervene in the trial court, also appealed seeking to overturn the preliminary injunction.  In July 2005, the U.S. Court of Appeals for the Ninth Circuit overturned the March 2005 preliminary injunction issued by the U.S. District Court in Billings, Mo ntana, which had continued the closure of the Canadian border to imports of live cattle. The U.S. Court of Appeals ruling resulted in the immediate reopening of the Canadian border to live cattle imports.  A petition for rehearing of the Ninth Circuit's ruling to the entire panel of Ninth Circuit judges was rejected by the Ninth Circuit on October 13, 2005.  Although the Court of Appeals action does not completely dispose of the action in the lower court, the lower court may or may not enter final rulings that will permit continued trade in live animals and beef products between the two countries.

Announcements of inconclusive, preliminary test results for BSE can be expected from time to time as a result of the sensitivity of the new screening regime.  Since the USDA enhanced surveillance program for BSE began in 2004, approximately 510,000 cattle have been tested for BSE using a rapid test.  Three of these animals tested inconclusive and were subsequently subjected to immunohistchemistry, or IHC, testing.  The IHC is an internationally recognized confirmatory test for BSE.  All three inconclusive samples tested negative using IHC.  The three samples were then tested by a second internationally recognized confirmatory test, referred to as the Western Blot test.  Of the three samples, two were negative but the third came back reactive.  Because of the conflicting results, the samples from the animal that tested reactive were sent to Weybridge, England for further testing and the results of that testing were confirmed on June 24, 2005 as positive for BSE.  In a USDA statement issued June 29, 2005, the cow was identified as born and raised in a herd in Texas and was approximately 12 years old.  In the USDA statement, USDA Chief Veterinarian John Clifford stated that the USDA believes, "it was most likely infected by consuming feed prior to the implementation of the ruminant-to-ruminant feed ban in 1997," and he emphasized "that this animal did not enter the human food chain."  Although the Secretary of the USDA has stated that there is no risk to animal or human health related to this case, the impact on the market created by this or other future tests is not possible to predict.  Prior to this second confirmed case of BSE in the U.S., many countries had reopened their borders to allow the import of U.S. beef; however, this second confirmed case of BSE has led to uncertainty as to whether or when additional markets may reopen, and whether or when existing open markets may close.

On October 31, 2005, a Japanese food safety panel responsible for recommendations concerning the importation of beef concluded that the risk of BSE in cattle 20 months of age and younger from the United States was very low.  The recommendation sets in motion a series of actions, including a month-long period for public comments, which could lead to the resumption of U.S. beef imports potentially before the end of the calendar year.  There can be no assurance that this action will result in the resumption of trade, or if so, when this will occur.

9



The Company     NBP cannot presently assess the full economic impact of the consequences of BSE on the U.S. beef packingprocessing industry or on its operations. The Company'sCompany’s revenues and net income may be materially adversely affected in the event existing importexport restrictions continue indefinitely, additional countries announce similar restrictions, additional regulatory restrictions are put into effect or domestic consumer demand for beef declines substantially.

Business Strategy

Increase Supplier Alliances.NBP intends to continue to increase the number of high-quality cattle that it purchases from supplier alliances to increase revenue and improve profitability. The cattle NBP purchases through supplier alliances, such as its relationship with U.S. Premium Beef, are purchased on either a value-based formula, which sets the price for carcasses according to both quality and yield, or a secondary-market basis, whereby NBP purchases cattle from suppliers outside of its primary supply territory. The percent of cattle NBP purchases pursuant to each of these methods fluctuates from period to period; the number of cattle NBP purchased on either a value-based formula or a secondary market basis was approximately 49%53% of its total cattle purchased in FYE 2005.2006. Based on NBP'sNBP’s experience and on actual results, it believes that these purchasing methods allow it to increase the percentage of high-quality cattle that it processes relative to NBP'sNBP’s total cattle processed. NBP has focused on building relationships with and educating its suppliers on the mutual benefits of these purchasing methods and believes that it will be able to increase its high-quality cattle purchases utilizing these methods in the future.

     Based on NBP’s experience and on actual results, NBP believes that these purchasing methods allow it to increase the percentage of high-quality cattle that it processes relative to its total cattle processed. NBP has focused on building relationships with and educating its suppliers on the mutual benefits of these purchasing methods and believe that it will be able to increase its high-quality cattle purchases utilizing these methods in the future.

On May 19, 2006, USPB’s majority owned subsidiary, NBP, entered into a Contribution Agreement with Brawley Beef, LLC (Brawley Beef) and National Beef California, LP (NBC) (the Agreement). NBC is a newly formed limited partnership, formed for the purposes of acquiring substantially all of the assets of Brawley Beef, with National Carriers, NBP’s wholly-owned subsidiary acting as its general partner. Brawley Beef was an alliance of cattle producers in Arizona and California who supplied the beef processing facility in Brawley, California. Pursuant to the terms of the Agreement, Brawley Beef contributed substantially all of its assets to NBC in exchange for limited partnership units of NBC, and NBC assumed certain of Brawley Beef’s debt and current liabilities. Brawley Beef then exchanged all of its NBC units with USPB for 44,160 new Class A units and 44,160 new Class B units. Under a separate unit exchange agreement between NBP and us, USPB then exchanged these units of NBC with NBP for 5,899,297 Class A nonvoting units and 664,475 Class B-1 voting units of NBP. As a result, USPB’s ownership interest in NBP’s Class B voting units increased to 54.76%. The transaction was effective May 30, 2006. Concurrently with the transfer of assets, Brawley Beef entered into long-term cattle supply agreements with both NBC and USPB under which Brawley Beef committed to supply approximately 275,000 head of cattle to NBC’s Brawley facility.


Continue to Improve Operating Efficiencies.NBP plans to continue to focus on increasing its profit margins by improving operating efficiencies and increasing processing yields. Since 1995, NBP has invested over $260$330 million and successfully expanded its processing facilities, creating an efficient and high volume business.

Pursue Strategic Acquisitions.     NBP'sNBP’s management team has a history of successfully executing and integrating acquisitions in core or complementary businesses. NBP intends to continue to evaluate and selectively pursue acquisitions, particularly of underperforming processing facilities, which it believes are strategically important based on their potential to: (i) meet NBP's customers'NBP’s customers’ needs, (ii) diversify NBP'sNBP’s product offerings and customer base, (iii) broaden NBP'sNBP’s geographic production and distribution platform and (iv) increase cash flow. It may pursue any such acquisitions subject to the covenants contained in its debt agreements. As an example, USPB’s majority owned subsidiary, NBP, acquired substantially all of the assets of Brawley Beef effective May 30, 2006, which resulted in NBP’s ownership of its beef processing facility in Brawley, California, and entered into a long-term supply agreement for approximately 275,000 head of cattle per year to this facility. Additionally, NBP acquired Vintage Foods, L.P., including the Vintage™ Natural Beef brand, during fiscal year 2006. The Vintage brand is marketed as natural beef that is antibiotic- and hormone-free, from cattle that are 20 months of age and younger.

Competitive Strengths

Vertically Integrated Business Model.In connection with USPB's purchase of its interest in Farmland National Beef, USPB obtainedowns the right and becameis subject to the obligation, to deliver cattle annually to NBP relative to: (i) USPB'sUSPB’s ownership in NBP and (ii) the number of cattle processed annually by NBP. USPB'sUSPB’s ownership of and contractual supply relationship with NBP enhances NBP'sNBP’s ability to deliver a consistent, high-quality, value-added product to its customers. USPB is a limited liability company and its owners and associates consist of cattle ranchers and feedlot owners and operators. In FYE 2005,2006, USPB and its owners and associates provided NBP with approximately 19%18% of its total cattle requirements through the pricing grid process as more fully described in itemItem 13.Certain Relationships and Related Transactions. NBP believes this supply relationship with USPB provides NBP with significant competitive advantages; including: (i) consistently supplying high-quality cattle, and (ii) an ability to consistently provide NBP'sNBP’s customers with higher margin, value-added products.

10



Modern and Efficient Facilities.NBP has invested more than $260$330 million since 1995 to modernize its facilities, expand capacity and increase the rate at which cattle are processed. These facility upgrades and expansions have enabled NBP to more than double the number of cattle it processes. NBP management believes that its beef processing facilities in Liberal, Kansas and Dodge City, Kansas are among the largest, most modern and efficient processing facilities in the United States. AtWith the acquisition of the Brawley, California plant in June 2006, these twothree facilities combined NBP processare capable of processing over 11,00013,000 cattle per day. NBP believes that the efficiency improvements at these facilities have allowed NBP to achieve higher capacity utilization rates, lower operating costs and higher operating margins than those of major competitors. Furthermore, these efficiencies have helped NBP increase its market share of the United States supply of fed cattle processed from approximately 7.5% in 1997 to approximately 12.3%12.5% in 2005. NBP's2006. NBP’s two case-ready facilities in Hummels Wharf, Pennsylvania and Moultrie, Georgia, which began operating in 2001, are outfitted with state-of-the-art processing and packaging equipment that allows NBP to serve customers, such as Wal-Mart, in this growing niche market. In addition, its facilities are strategically located to enable NBP to source cattle and beef products efficiently and to effectively serve customers.

Significant Value-Added Product Portfolio.    NBP'sNBP’s value-added product portfolio consists of branded boxed beef, case-ready beef and pork, chilled and frozen export beef and portion control beef. NBP'sNBP’s total value-added sales were approximately $970.9$1,246.9 million in FYE 2005,2006, comprising approximately 22.4%26.9% of its total net sales. NBP'sNBP’s value-added products contribute significantly more, in terms of gross margin, than its traditional boxed beef products and are an important component of NBP'sNBP’s profitability. Prior to the discovery of a single dairy cow in Washington state infected with BSE on December 23, 2003, NBP'sNBP’s chilled and frozen export beef products, which primarily consist of premium cuts, had been its primary export to the international beef market, particularly to Japan. Notwithstanding the loss of export markets in Japan and South Korea for all of FYE 2005, NBP has increased its sales of value-added products by $155.6 million from FYE 2004 to FYE 2005.


Focus on Food Safety.NBP has continually focused on food safety. Its processing facilities utilize NBP'sNBP’s proprietary BioLogic® Food Safety System to facilitate the production of clean, fresh, safe and high-quality beef products. Each of its processing facilities is divided into five zones that separate different stages of the production process and minimize the risk of contamination. NBP continually tests its products and facilities to track and trend the process effectiveness.

NBP believes that it is an industry leader in developing new food safety technologies. NBP is continuing to develop activated Lactoferrin (aLF) through aLF Ventures, LLC, a joint venture it founded with DMV USA LP, a subsidiary of Campina Melkunie BV, the Netherlands' largest dairy cooperative. aLF is a new food safety technology that has been found to eliminate up to 99% of harmful bacteria found on beef products in tests conducted at California Polytechnic State University.

Supplier, Customer and Channel Diversification.NBP'sTwo of NBP’s beef processing facilities are located in southwest Kansas, and its primary market area for the purchase of cattle for those facilities includes Kansas, Texas and Oklahoma. According to information from the USDA, cattle on feed in the Kansas, Texas and Oklahoma area represented approximately 53%52% of the fed cattle marketed in the U.S. during 2004.2006. The close proximity of NBP'sNBP’s facilities to large supplies of cattle gives its buyers the ability to visit feedlots on a regular basis, which enables them to develop strong working relationships with its suppliers. Additionally,During 2006, USPB’s majority owned subsidiary, NBP, acquired substantially all of the assets of Brawley Beef, LLC. Brawley Beef was an alliance of cattle producers in Arizona and California who supplied cattle to this beef processing facility in Brawley, California. Concurrent with this acquisition, these Brawley Beef cattle producers became unitholders of USPB and also entered into long-term cattle supply agreements with both NBP and USPB under which Brawley Beef committed to supply cattle to NBP’s Brawley facility.

     The close proximity of NBP'sNBP’s facilities to large supplies of cattle encourages its suppliers to tailor their production decisions to efficiently meet the demands of NBP'sNBP’s customers, reduces NBP'sNBP’s reliance on any one cattle supplier and lowers transportation costs. In FYE 2005,2006, excluding NBP'sNBP’s supply arrangement with USPB, NBP'sNBP’s largest supplier accounted for 5.7%5.6% of total purchases and NBP'sNBP’s top 25 suppliers accounted for 39.7%39.3% of its total purchases.

NBP also has a diversified sales mix across distribution channels and customers. This approach provides multiple avenues of potential growth and reduces its dependence on any one market or customer. NBP sells products to retailers, distributors, food service providers, further processors, the United States military and through other channels. In FYE 2005,2006, approximately 55%65% of NBP'sNBP’s total net sales were to retailers and 30%20% to food service providers. Across these channels, NBP serves over 800900 customers, which represent most major retailers and food service providers in the U.S. In FYE 2005,2006, no one customer represented more than 3.7%3.0% of total net sales, other than Wal-Mart and its affiliate Sam'sSam’s Club, which together represented 7.0%7.9% of NBP'sNBP’s total net sales. NBP'sNBP’s top 10 customers represented 29.2%29.8% of total net sales in FYE 2005.2006.

11



Experienced Management.NBP is led by an experienced management team with, on average, over 2021 years of experience in the beef processing industry. John R. Miller, Chief Executive Officer, has over 25 years of experience in the beef processing industry. Mr. Miller has been recognized by Forbes magazine for his achievements and leadership within the U.S. beef processing industry. He has assembled a team of professionals, including NBP President, Timothy M. Klein, who have worked together over the past 1415 years in developing NBP into a profitable and premium supplier of beef products.

Description of Business Segments

NBP reports in two business segments:  Core Beef and Other. NBP measures segment profit as operating income.

Core Beef

Products, Sales and Marketing

The majority of NBP's revenues are generated from the sale of fresh meat either as a boxed beef product or a case-ready product. These products accounted for approximately 89% of its revenues in FYE 2005. In addition, NBP sells beef by-products to a variety of meat, feed processing, fertilizer and pet food industries. NBP also sells cattle hides to tanners, who primarily supply the clothing and automotive industries for both domestic and international use. NBP emphasizes the sale of higher-margin, branded beef products, and markets these products under several brand names, including National Black Angus Beef™, Black Canyon® Angus Beef, Certified Premium Beef™ and Naturewell® Natural Beef.  Also part of our value-added product line is Certified Angus Beef®, a registered trademark (used with permission) of Certified Angus Beef, LLC, a wholly-owned subsidiary of the American Angus Beef Association; and Certified Hereford Beef®, a registered trademark (used with permission) of Certified Hereford Beef, LLC.

NBP's focus continues to be adding further processing, specialized cutting, packaging and other value-added components to its products that generate higher profitability. In 2001, NBP opened two state-of-the-art case-ready facilities, which enabled it to expand margins by adding value to the beef it processes. NBP's case-ready operations further process its boxed beef products, as well as third-party pork products, by trimming and cutting these products into individual portions, and in some instances injecting with a solution to tenderize and moisturize the products. These portions are then packaged, oxygenated and sealed in a plastic case to increase the shelf-life of these products by up to five times versus traditional packaging methods.

During FYE 2005, NBP sold its beef products to more than 800 customers located in 25 countries. NBP markets its beef products through several channels, including:

12



As of August 27, 2005, NBP's domestic sales team consisted of 26 employees. The sales office for domestic sales is located in NBP's headquarters building in Kansas City, Missouri. The sales team in this office is responsible for selling and coordinating the movement of approximately 39 million pounds of boxed beef products per week to NBP customers nationwide. This centralized sales concept allows NBP to respond quickly to customer requests for pricing and load information. NBP has also integrated the satellite tracking capabilities of refrigerated carriers into its website allowing customers to track shipments in process. While providing significant customer advantages, NBP's centralized sales concept also enables its sales force to share key market intelligence in a manner that allows them to react to changing market conditions in an efficient manner.

The sales office for international sales is located in Chicago, Illinois. This office coordinates all aspects of sales, pricing and shipping to all destinations outside of the United States. NBP also has two satellite offices in Japan and South Korea that assist in the coordination of sales in those regions, historically two of its largest international markets.

NBP's marketing efforts include engaging in business-to-business programming and communications to create preferences for products among its customers. In addition, NBP supports its value-added, branded beef business through in-store merchandising and feature advertising support.

Raw Materials and Procurement

NBP's primary raw material for its processing plants is live cattle. During FYE 2005, NBP obtained approximately 19% of its cattle requirements from U.S. Premium Beef and its owners and associates through the pricing grid process. During FYE 2004 and FYE 2003, NBP obtained approximately 18% and 22% of its cattle requirements from USPB. NBP's arrangement with USPB provides it with a consistent supply of high-quality cattle. For information regarding this agreement, see Item 13. Certain Relationships and Related Transactions and Note 9. Related Party Transactions to USPB's consolidated financial statements in Item 8, both of which are included in this report.  NBP also purchases cattle on a cash bid basis from its primary and secondary markets.  NBP also sponsors other, non-affiliated supplier alliances that provide it with high-quality cattle. NBP believes that it is a first choice processor for suppliers seeking to attain premium pricing for their high-quality cattle and that cattle suppliers view NBP more favorably than its competitors due to its vertically integrated business model, which emphasizes building relationships and cooperating with suppliers and paying a premium for high-quality cattle. During FYE 2005, approximately 1,100 suppliers provided NBP with cattle.

All of NBP's cattle suppliers are required to document the quality of their feedlot operations. Each cattle supplier must verify that its use of antibiotics or other agricultural chemicals follows the manufacturer's intended purpose. They must also confirm that they use only Food and Drug Administration (FDA) approved pharmaceutical compounds and comply with dosage and administrative standards. Furthermore, each cattle supplier must confirm that they do not use feed containing animal based protein products, which have been associated with outbreaks of BSE.  Many of NBP's producers participate in state beef quality assurance training programs and have established certification and verification practices.  These programs emphasize meeting and exceeding the FDA, USDA, Food Safety Inspection Service (FSIS) and U.S. Environmental Protection Agency (EPA) standards for food safety and further protect the nation's beef supply utilizing hazard analysis and critical control point principles.  Using guidelines established by National Cattleman's Beef Association (NCBA), beef safety and quality assurance programs are administered and audited annually by various state beef associations.  State associations certifying NBP's suppliers include, among others, Texas Cattle Feeders Association, Kansas Livestock Association and Nebraska Cattlemen's Association.

Processing Facilities and Operations

NBP operates a total of four beef processing facilities in the United States. NBP's Liberal, Kansas and Dodge City, Kansas facilities are geographically positioned near its suppliers to efficiently source raw materials by reducing transportation costs. Two of NBP's facilities are case-ready facilities that supply beef and pork products to its customers. NBP's case-ready facilities are located in close proximity to key customer markets resulting in decreased delivery times. NBP's case-ready facilities are also located in areas with a highly skilled and cost-effective labor force.   See Item 2. Properties in this report for further information about these facilities.

13



Cattle delivered to NBP's facilities are generally processed into beef products within 36 hours after arrival. Approximately 65% of the cattle processed in any week are committed to sale before the cattle are delivered to NBP's facilities. NBP processed in excess of three million fed cattle at its facilities in FYE 2005. NBP's facilities utilize modern, highly automated equipment to process and package beef products. NBP strives to maintain and enhance its facilities and has invested more than $260 million since 1995 to expand capacity and increase efficiency at its facilities. The design of NBP's facilities emphasizes worker safety to ensure compliance with all regulations and to reduce worker injury and turnover.  Additionally, NBP has placed a substantial amount of ammonia piping on the roof versus in the production areas, not in response to regulatory requirements, but in the interest of worker safety.  These and other changes designed the workplace to better fit NBP's employees.  All expansions are reviewed by internal personnel, including NBP's Corporate Environmental Director, Vice President of Safety, Vice President of Technical Services, Vice President of Engineering and Corporate Project Engineer, for regulatory compliance prior to construction.  NBP's facilities are also designed to reduce waste products and emissions and dispose of waste in accordance with applicable environmental standards.

NBP distributes beef products domestically directly from its processing facilities and case-ready facilities. NBP utilizes its subsidiary National Carriers and third party carriers to deliver products to its customers.

Other

Products, Sales and Marketing

NBP also sells beef products through its portion control business, Kansas City Steak Company, in which NBP has an approximate 75% interest. Kansas City Steak Company provides trimmed and cut individual portions both directly to consumers on a branded basis through television outlets (such as the QVC Channel) and direct mail catalogs; and directly to restaurants (such as Outback Steakhouse) and the food service industry on an unbranded basis.  On March 28, 2003, FNB acquired National Carriers, a refrigerated and livestock contract carrier service with terminals in Liberal, Kansas; Dallas, Texas; and Denison, Iowa.  National Carriers currently operates approximately 1,200 refrigerated and livestock units.  NBP contracts a significant portion of its freight services from National Carriers.  For further information regarding this relationship, see Note 8. Related Party Transactions to NBP's consolidated financial statements in Item 8. 

Raw Materials and Procurement

NBP's primary raw material for its portion control processing facility is boxed beef.  Approximately 30% of its boxed beef purchases are made through contractual agreements predetermined by the customer for whom the product is produced.  These contractual agreements are typically one year in duration and stipulate from whom the boxed beef can be purchased. The balance of NBP's raw material is purchased at its discretion on the open market from primary and secondary suppliers with similar quality and yield grade specifications as required under NBP's contracts.   NBP periodically conducts comprehensive cutting tests of potential suppliers' boxed beef to determine composition and quality.

Processing Facilities and Operations

NBP has a portion control facility in Kansas City, Kansas, which processes trimmed and cut individual portions for sale through Kansas City Steak Company.  See Item 2. Properties in this report for further information about this facility. National Carriers has offices located in Liberal, Kansas and Dodge City, Kansas, both of which are within close proximity to NBP's beef processing facilities in those locations, enabling NBP to efficiently transport product by reducing transportation costs.   National Carriers also has an office in Denison, Iowa, and administrative offices located in Kansas City, Missouri.

14



Food Safety

NBP remains committed in the area of food safety by continuing to develop activated Lactoferrin through aLF Ventures, LLC, a joint venture NBP founded with DMV USA LP, a subsidiary of Campina Melkunie BV, the Netherlands' largest dairy cooperative. aLF is an activated form of Lactoferrin, a naturally occurring milk protein that has been shown to prevent harmful bacteria from attaching and growing on the surface of beef. In tests conducted at California Polytechnic State University, it was shown that aLF was effective in providing a high level of protection on fresh beef products from more than thirty different strains of harmful bacteria, including E. coli 0157:H7, Salmonella, Campylobacter, radiation-resistant strains and other pathogens.  aLF Ventures, LLC has an exclusive worldwide license to use aLF for food safety purposes on meat, dairy, produce and animal feed products.  aLF Ventures, LLC may not be able to commercially develop aLF into a product capable of achieving future revenues.  NBP has an approximately 24% interest in aLF Ventures, LLC.

NBP's     NBP’s food safety efforts incorporate a comprehensive network of leading technology that minimizes the risks involved in beef processing. NBP'sNBP’s proprietary BioLogic® Food Safety System promotes the production of clean, fresh, safe, high-quality beef products. The BioLogic® Food Safety System is an integrated company philosophy that helps to establish new principles in food safety. The BioLogic® Food Safety System divides NBP'sNBP’s production facilities into five zones based on the potential for microbial contamination during the processing procedures that take place in each zone. Within each of the five zones, BioLogic® employs its "Test,“Test, Track and Treat"Treat” approach, which provides on-going testing in each of the zones, effective tracking of the results of such tests and continuous treatments throughout the facilities. The Test, Track and Treat approach includes preventative measures such as equipment sterilization, hygiene, temperature control and ongoing testing to greatly reduce contamination risks.

Intellectual Property

NBP holds a number of trademarks and domain names that it believes are material to its business and which are registered with the United States Patent and Trademark Office, including Black Angus Beef™, National Beef®, BioLogic®, Food Safety System, Black Canyon® Angus Beef, Naturewell™Certified Premium Beef™, Naturewell® Natural Beef, NatureSource™ Natural Angus Beef, Vintage™ Natural Beef and Leading the Way in Quality Beef™. NBP has also registered the National Beef® trade name and trademark in most of the foreign countries to which NBP sells products. Currently, NBP has a number of trademark registrations pending in the United States and in foreign countries. In addition to trademark protection, NBP attempts to protect its unregistered marks and other proprietary information under trade secret laws, employee and third-party non-disclosure agreements and other laws and methods of protection. All other trademarks or trade names referred to in this report are the property of their respective owners.


Competition

The beef processing industry is highly competitive. Competition exists both in the purchase of live cattle, as well as in the sale of beef products. NBP'sNBP’s products compete with a large number of other protein sources, including pork and poultry, but NBP'sNBP’s principal competition comes from other beef processors, including Tyson Foods, Inc., Cargill Inc., Swift & Company and Smithfield Foods, Inc. NBP management believes that the principal competitive factors in the beef processing industry are price, quality, food safety, customer service, product distribution, technological innovations and brand loyalty. Some of NBP'sNBP’s competitors have greater financial and other resources and enjoy wider recognition for their consumer branded products.

Employees

As of August 27, 2005,26, 2006, NBP had approximately 6,7008,300 employees. Approximately 2,700 of NBP'sNBP’s employees at the Liberal, Kansas facility are represented by the United Food and Commercial Workers International Union under a collective bargaining agreement that expiresscheduled to expire on December 16, 2007. Approximately 1,000 of NBP’s employees at its Brawley, California facility are jointly represented by the United Food and Commercial Workers International Union and the Teamsters International Union under a collective bargaining agreement scheduled to expire on May 31, 2008. NBP considers its relations with its employees and the United Food and Commercial Workers International Union and Teamsters International Union to be good.

15



Government Regulation and Environmental Matters

NBP's     NBP’s operations are subject to extensive regulation by the USDA, the Grain Inspection Packers and Stockyards Administration (GIPSA), the FDA, the EPA and other state, local and foreign authorities regarding the processing, packaging, storage, distribution, advertising and labeling of its products, including food safety standards. Recently, the food safety practices and procedures in the beef processing industry have been subject to more intense scrutiny and oversight by the USDA. For example, on January 12, 2004, FSIS published an interim final rule on Specified Risk Materials (SRMs) and requirements for non-ambulatory disabled cattle due to the finding of BSE in routine testing. NBP immediately implemented the appropriate programs/policies to ensure compliance with FSIS rules. The rule dealt with three Interim Regulations that prohibit the slaughter of non-ambulatory disabled cattle, require the description and removal of SRMs that are considered to be inedible, and restrict the use of captive bolt stunners that deliberately inject compressed air into the cranium of an animal. NBP continueshas historically and will continue to work closely with the USDA and any regulatory agencies to ensure that its operations comply with all applicable food safety laws and regulations.

Wastewater, stormwater, and air discharges from NBP'sNBP’s operations are subject to extensive regulation by the EPA and other state and local authorities. NBP'sNBP’s Dodge City, Kansas and Liberal, Kansas facilities are subject to Title V permitting pursuant to the federal Clean Air Act and the Kansas Air Quality Act and implementing regulations. These permits were renewed on January 11, 2005, and will expire on January 25, 2010. NBP’s Brawley, California facility permitting consists of a Conditions for Authority to Construct and Permit to Operate, issued November 13, 2002, which is automatically renewed annually unless revoked for cause. NBP has an Environmental Compliance Management System (ECMS) in place for the Dodge City and Liberal plants that requires periodic and systematic self-auditing of compliance with all environmental requirements applicable to its operations. NBP has a Compliance Calendar System in place at its Hummels Wharf, Pennsylvania and Moultrie, Georgia facilities.facilities and are developing a Compliance Calendar System for the recently acquired Brawley, California facility. Through the implementation of the ECMS system, NBP has identified violations of the Kansas Air Quality Law and implementing regulations at its Dodge City, Kansas and Liberal, Kansas facilities. NBP has reported these violations to the Kansas Department of Health and Environment (KDHE) and Region VII of the EPA. These violations have been resolved through settlement agreements with KDHE without material costs to the company.  NBP'sNBP. NBP’s Dodge City, Kansas,Kansas; Liberal, Kansas,Kansas; Hummels Wharf, PennsylvaniaPennsylvania; Moultrie, Georgia; and Moultrie, GeorgiaBrawley, California facilities are also subject to risk management planning pursuant to the federal Clean Air Act.


All of NBP'sNBP’s facilities are indirect dischargers of wastewater to publicly-owned treatment works and are subject to requirements under the federal Clean Water Act and corresponding state laws and agreements or permits with municipal or county authorities. Agreements are in effect for NBP'sNBP’s Dodge City, Kansas and Moultrie, Georgia facilities that will continue unless amended or revoked pursuant to their terms. NBP is in the process of obtaining an agreement with the City of Brawley for the National Beef California plant. NBP is also in the process of upgrading the treatment facilities at the Brawley plant to provide treatment that consistently meets the requirements of the Brawley City Ordinance. NBP holds a permit for its Hummels Wharf, Pennsylvania facility from the Eastern Snyder County Regional Authority that automatically renews each year unless suspended or revoked pursuant to its terms. NBP does not expect material costs in the continuation of these agreements and permit. Stormwater discharges from NBP'sthe Hummels Wharf, Pennsylvania and Moultrie, Georgia facilities and for the National Beef California Brawley plant are regulated pursuant to general permits issued by the states of Pennsylvania and Georgia, respectively.  Therespective states. Coverage under the Pennsylvania general permit was renewed on February 1, 2004 and expires on June 30, 2006.  NBP'sJanuary 31, 2009. NBP’s coverage under the Georgia general permit expired on May 31, 2003. The California general permit expired in 2002. The permit has been administratively extended pending issuance of a new permit. According to the California State Water Resources Control Board, the new permit may be issued in December 2006. NBP anticipates coverage for its Moultrie, Georgia facility under a new general permit, which was issued by the Georgia Environmental Protection Division, but has been stayed pending resolution of two appeals of the permit. NBP'sNBP’s coverage is anticipated to begin when the permit becomes final after resolution of the appeals. Thereafter, NBP expects these permits to be reissued by the respective states, and it does not expect material costs in securing coverage under such permits. NBP'sNBP’s Dodge City, Kansas facility has filed a notice of intent to be subject to the Kansas General Permit for Stormwater Discharges when promulgated. ItsNBP’s Liberal, Kansas facility discharges stormwater to the publicly owned treatment works and thus has not been required to file a notice of intent. NBP'sNBP’s Dodge City, Kansas,Kansas; Liberal, KansasKansas; and Hummels Wharf, Pennsylvania facilities are supplied by water from NBP ownits wells. NBP holds public water supply permits for its Dodge City, Kansas and Liberal, Kansas facilities that do not have expiration dates.

16



NBP is also subject to laws that provide for strict, and in certain circumstances joint and several, liability for remediation of hazardous substances at contaminated sites that could include current or former facilities or other sites where wastes it generated have been disposed. NBP'sOur Dodge City, KansasKansas; Liberal, Kansas; Hummels Wharf, Pennsylvania; Moultrie, Georgia; and Liberal, KansasBrawley, California facilities are small quantity or conditionally exempt generators of hazardous waste and are subject to recordkeeping, but not permit requirements. Solid waste generated at theNBP’s Dodge City, Kansas and Liberal, Kansas facilities is disposed of or composted. A special waste permit is maintained by NBP'sNBP’s Dodge City, Kansas facility for the disposal of certain animal parts for which no market currently exists. The solid waste generated at itsNBP’s Hummels Wharf, Pennsylvania and Moultrie, Georgia facilities is disposed of in a municipal landfill if it is general plant trash and is taken to renderers if it is usable waste. Solid waste from the National Beef California Brawley plant is composted except that general plant trash is landfilled and usable waste is taken to renderers. NBP is not aware that itis has any actual or potential liability under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund). NBP'sNBP’s plants are subject to community right to know reporting requirements under the Superfund Amendments and Reauthorization Act of 1986, which requires yearly filings as to the substances used on the plant premises.

NBP's     NBP’s domestic operations are subject to the Packers and Stockyards Act of 1921 (PSA). This statute generally prohibits meat packers in the livestock industry from engaging in certain anti-competitive practices. In addition, this statute requires NBP to make payment for its livestock purchases before the close of the next business day following the purchase and transfer of possession of the livestock it purchases, unless otherwise agreed to by its livestock suppliers. Any delay or attempt to delay payment will be deemed an unfair practice in violation of the statute. Under the PSA, NBP must hold its cash livestock purchases in trust for its livestock suppliers until they have received full payment of the cash purchase price. As of August 27, 2005,26, 2006, NBP has secured a bond of $25.7$30.0 million to satisfy these requirements. The bond is supported by a $12.5$15.0 million letter of credit.


From time to time NBP receives notices from regulatory authorities and others asserting that NBPit is not in compliance with some laws and regulations. In some instances, litigation ensues. NBP is currently in receipt of one such notice, from the Bureau of Immigration and Customs Enforcement (BICE) that it does not believe will result in material liability, if any. In May 2003, NBP received a request for information from BICE regarding the immigration status of its employees, and itNBP has provided BICE with all requested information. No fines or penalties have been suggested or discussed.

We believe     NBP believes that weit currently areis in substantial compliance with all governmental laws and regulations and maintainmaintains all material permits (other than the stormwater permit for our Moultrie, Georgia facility discussed previously) and licenses relating to ourits operations. We areNBP is not aware of any violations of environmental or other laws and regulations that are likely to result in material penalties or pending changes in such laws or regulations that are likely to result in material cost increases.

ITEM 1A.         RISK FACTORS

As described throughout this document, USPB'sUSPB’s business involves the operation of an integrated cattle processing and beef marketing enterprise in which USPB'sUSPB’s owners and associates supply cattle that are processed at the facilities owned and operated by USPB'sUSPB’s majority-owned subsidiary, National Beef Packing Co, LLC. NBP markets and distributes the beef and beef products produced from both cattle supplied by USPB'sUSPB’s owners and associates and other cattle purchased by NBP from other sources. The financial results of NBP'sNBP’s operations therefore are the single largest influence on USPB'sUSPB’s financial performance. Consequently, those factors and risks that impact the performance of NBP'sNBP’s business have a direct and immediate influence on USPB'sUSPB’s performance. However, there are also some risks that are unique to USPB. ThisRisk Factors section is divided into two parts, with one subsection focusing on the risk factors that influence the performance of NBP and another subsection discussing certain risk factors that are directly applicable to USPB itself. USPB.

USPB's     USPB’s business operations and the implementation of our business strategiesstrategy are subject to significant risks inherent toin our businesses,business, including, without limitation, the risks and uncertainties described below. The occurrence of any one or more of the risks or uncertainties described below could have a material adverse effect on our financial condition, results of operations and cash flows. While we believe we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our business, operations, industry, financial position and financial performance in the future.

Risk Factors Associated With Operations of NBP

Outbreaks of disease affecting livestock can adversely affect NBP'sNBP’s business.

An outbreak of disease affecting livestock, such as BSE or foot-and-mouth disease, could result in restrictions on sales of products to NBP'sNBP’s customers or purchases of livestock from its suppliers. Also, outbreaks of these diseases or concerns of such disease, whether or not resulting in regulatory action, can lead to cancellation of orders by NBP’s customers and create adverse publicity that may have a material adverse effect on consumer demand and, as a result, on NBP'sits results of operations. Furthermore, an outbreak of disease could lead to widespread destruction of cattle, which could have a negative impact on NBP.

17



If NBP'sNBP’s products become contaminated, it may be subject to product liability claims and product recalls that would adversely affect its business.

NBP may be subject to significant liability if the consumption of any of its products causes injury, illness or death and it may in the future recall products in the event of contamination or damage. Contamination of NBP’s products also may create adverse publicity that could negatively affect NBP'sits business. NBP may encounter the same risks of contamination or negative publicity if a third party tampers with its products. The occurrence of any of these risks may increase NBP’s costs and decrease demand for its products. Organisms producing food borne illnesses are generally found in the environment and there is a risk that as a result of food processing they could be present in NBP'sNBP’s products. For example,E. coli 0157:H7 is one of many food borne bacteria commonly associated with beef products. Once contaminated products have been shipped for distribution and consumption, illness or death may result if the pathogens are present, increase due to handling or temperatures, and are not otherwise eliminated at the further processing, food service or consumer level.


If the products of NBP'sNBP’s competitors become contaminated, the beef industry may be subject to adverse publicity, which could negatively affect NBP'sits business.

If the products of NBP'sNBP’s competitors, in the United States or elsewhere, become contaminated, the beef industry may face adverse publicity. Any such adverse publicity could result in consumers lowering their demand for NBP'sNBP’s beef products, which may negatively affect its business, financial condition, results of operations and cash flows.

NBP'sNBP’s substantial debt could adversely affect its business.

NBP has a significant amount of debt. As of August 27, 200526, 2006, NBP had $308.8$378.7 million of long-term debt, none$2.4 million of which was classified as a current liability. As of August 27, 2005, NBP's26, 2006, NBP’s fifth amended and restated credit facility consistedconsists of a $120.0$170.0 million term loan, all of which $120.0 million was outstanding, and a $140.0$160.0 million revolving line of credit loan, which had outstanding borrowings of $15.0$18.9 million, outstanding letters of credit of $44.0$53.0 million and available borrowings of $74.1$88.1 million, based on the most restrictive financial covenant calculations. In addition to outstanding borrowings on the fifth amended and restated credit facility, NBP had outstanding borrowings under industrial revenue bonds of $13.8$20.7 million, senior notesSenior Notes of $160.0 million, and operating lease commitments of $35.0$40.2 million and capital leases and other obligations of $9.1 million as of August 27, 2005.26, 2006. See Item 7.Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.

NBP'sNBP’s substantial debt could:

18



The occurrence of any one of these events could have a material adverse effect on NBP'sNBP’s business, financial condition and results of operations.

Despite NBP'sNBP’s current levels of debt, it may still incur significantly more debt, which could intensify the risks described above.

NBP may incur significant additional debt in the future. The terms of the indenture governing NBP's senior notesNBP’s Senior Notes permit it to incur additional debt in the future and its fifth amended and restated credit facility permits additional borrowings under certain circumstances. As of August 27, 2005,26, 2006, NBP had approximately $74.1$88.1 million of availability under the most restrictive financial covenant calculations in its fifth amended and restated credit facility. NBP may borrow funds to fund its capital expenditures and working capital needs. NBP also may incur additional debt to finance future acquisitions.


Restrictive covenants under NBP'sNBP’s amended and restated credit facility and the indenture will limit itsNBP’s ability to operate its business.

NBP's     NBP’s fifth amended and restated credit facility and the indenture governing NBP's senior notes,its Senior Notes, contain, among other things, restrictive covenants that will limit NBP'sNBP’s and its subsidiaries'subsidiaries’ ability to finance future operations or capital needs or to engage in other business activities. The indenture and NBP'sNBP’s amended and restated credit facility restrict, among other things, NBP'sNBP’s ability and the ability of its subsidiaries to:

In addition, NBP'sNBP’s fifth amended and restated credit facility requires NBPit to meet specified financial ratios and tests. These ratios and tests could have an adverse effect on NBP'sNBP’s business by limiting its ability to take advantage of financing, merger and acquisition or other corporate opportunities and to fund its operations. Events beyond NBP'sNBP’s control, including changes in general business and economic conditions, may affect its ability to meet those financial ratios and tests. Any future debt could also contain financial and other covenants more restrictive than those imposed under the indenture governing the senior notesNBP’s Senior Notes or NBP'sNBP’s amended and restated credit facility.

NBP may not meet those ratios and tests and its lenders may not waive any failure to meet those ratios and tests. A breach of any of those covenants or failure to maintain such ratios would result in a default under NBP'sNBP’s fifth amended and restated credit facility and any resulting acceleration under NBP'sthe amended and restated credit facility may result in a default under the indenture governing the senior notes.NBP’s Senior Notes. If an event of default under NBP'sNBP’s fifth amended and restated credit facility occurs, the lenders could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable which would result in an event of default under the senior notes. NBP'sNBP’s Senior Notes. NBP’s assets or cash flow may not be sufficient to repay in full its outstanding debt, including the senior notes.Senior Notes.

19



NBP may be unable to generate sufficient cash flow to service its debt, which could adversely affect itsNBP’s financial condition and results of operations.

To service its debt, NBP will require a significant amount of cash. If itsNBP’s cash flow and capital resources are insufficient to fund its debt service obligations, NBP may be forced to reduce or delay capital expenditures, sell material assets or operations, obtain additional capital or restructure debt. NBP'sNBP’s ability to generate cash, make scheduled payments or to refinance its obligations depends on itsNBP’s successful financial and operating performance. NBP'sNBP’s financial and operating performance, cash flow and capital resources depend upon prevailing economic conditions and certain financial, business and other factors, many of which are beyond NBP'sits control. These factors include among others:


NBP'sNBP’s margins may be negatively impacted by fluctuating raw material costs and selling prices and other factors that are outside of itsNBP’s control.

NBP's     NBP’s margins are dependent on the price at which its beef products can be sold and the price it pays for its raw materials, among other factors. These prices can vary significantly over a relatively short period of time as a result of a number of factors, including the relative supply and demand for live cattle and beef products, as well as the market for other proteincompeting or complimentary products, such as pork and poultry. For example, beginning in March 2002, a month-long Russian trade embargo on chicken imported from the United States had the effect of increasing chicken supplies in the United States, which put downward pressure on demand and prices for red meat products. In addition, closure of international markets to U.S. beef product exports as a result of the December 23, 2003 BSE discovery negatively affected U.S. beef product margins, as certain by-products, classified as SRMs, have been banned from use in feedstocks and the human food chain. Some of these products previously enjoyed a market in foreign countries.  Smaller export markets have reopened their borders to U.S. beef; however, with the June 2005 announcement by the USDA of a second confirmed case of BSE in the U.S. there is further uncertainty as to whether or when additional markets may reopen, and whether or when existing open markets may close.

The supply and market price of the livestock that constitute NBP'sNBP’s principal raw material and represent the substantial majority of its cost of goods sold are dependent upon a variety of factors over which itNBP has little or no control, including fluctuations in the size of herds maintained by producers, the relative cost of feed, weather and livestock diseases. Additionally, the closure of the U.S. border to Canadian livestock from May 2003 until July 2005 constrained the supply of cattle in the U.S. which resulted in higher overall fed cattle prices in the U.S. compared to Canada, and the closure prompted Canada to increase its processing capabilities, which may also have an adverse impact on ourNBP’s future margins.

Severe price swings in raw materials, and the resulting impact on the prices NBP charges for its products, have at times had, and may in the future have, a material adverse effect on its financial condition, results of operations and cash flows. If NBP experiences increased costs, it may not be able to pass them along to its customers.

NBP generally does not have long-term contracts with its customers, and, as a result, the prices at which it sells its beef products are subject to market forces.

Other than NBP’s existing arrangements with APC, Inc. and the United States military, NBP generally doesdo not have long-term sales arrangements with its customers and, as a result, the prices at which it sells products to them are determined in large part by market forces. NBP'sNBP’s customers, including those with which it has long-term contracts, place orders for products on an as-needed basis and, as a result, their order levels have varied from period to period in the past and may vary significantly in the future. The loss of one or more of itsNBP’s key customers, a significant decline in the number of orders from one or more of its key customers or a significant decrease in beef product prices for a sustained period of time could have a material adverse effect on itsNBP’s business, financial condition or results of operations.

20



Wal-Mart'sWal-Mart’s failure to continue purchasing from NBP could have a material adverse effect on NBP'sNBP’s sales.

Sales to Wal-Mart Stores, Inc., or Wal-Mart, which does not cover NBP'sNBP’s sales to Wal-Mart'sWal-Mart’s affiliate Sam'sSam’s Club, represented approximately 5% of NBP'sNBP’s total net sales in FYE 2005. NBP's2006. NBP’s agreement with Wal-Mart expired on January 31, 2004 and NBPit has not entered into a new agreement. If Wal-Mart does not continue to purchase from NBP, it could have a material adverse effect on NBP's sales.its sales, financial position, results of operations and cash flows.

NBP is subject to extensive governmental regulation and anyNBP’s noncompliance with or changes in applicable requirements could adversely affect NBP'sits business, financial condition, results of operations and cash flows.

NBP's     NBP’s operations are subject to extensive regulation and oversight by the USDA, the GIPSA, the FDA, and other state, local and foreign authorities regarding the processing, packaging, storage, distribution, advertising and labeling of itsNBP’s products, including food safety standards. Recently, the food safety practices and procedures in the meat processing industry have been subject to more intense scrutiny and oversight by the USDA. NBP is also subject to a variety of environmental laws and regulations, including those relating to wastewater and stormwater discharges, air emissions, waste handling and disposal, and remediation of soil and groundwater contamination that are administered by the EPA, state, local and other authorities. FailureNBP’s failure to comply with applicable laws and regulations could subject NBPit to administrative penalties and injunctive relief, civil remedies, including fines, injunctions, recalls of NBP'sNBP’s products or seizures of itsNBP’s properties, as well as potential criminal sanctions or personal injury or other damage claims. These remedies, changes in the applicable laws and regulations or discovery of currently unknown conditions could increase NBP'sNBP’s costs and limit its business operations.


Compliance with environmental regulations may result in significant costs and failure to comply with environmental regulations may result in civil as well as criminal penalties, liability for damages and negative publicity.

NBP's     NBP’s operations are subject to extensive and increasingly stringent regulations pertaining to the discharge of materials into the environment and the handling and disposition of wastes. Failure to comply with these regulations can have serious consequences for NBP, including criminal as well as civil and administrative penalties and negative publicity. NBP has incurred and will continue to incur significant capital and operating expenditures to avoid violations of these laws and regulations. Additional environmental requirements imposed in the future could require currently unanticipated investigations, assessments or expenditures, and may require NBP to incur significant additional costs. Because the nature of these potential future charges is unknown, NBP management is not able to estimate the magnitude of any future costs and NBP has not accrued any reserve for any potential future costs.

Some of NBP'sNBP’s facilities have been in operation for many years. During that time, NBP and previous owners of these facilities have generated and disposed of wastes that are or may be considered hazardous or may have polluted the soil or groundwater at theseNBP’s facilities, including adjacent properties. The discovery of previously unknown contamination of property underlying or in the vicinity of NBP'sNBP’s present or former properties or manufacturing facilities and/or waste disposal sites could require itNBP to incur material unforeseen expenses. Occurrences of any of these events may have a material adverse effect on NBP'sNBP’s business, financial condition, results of operations and cash flows.

NBP'sNBP’s international operations expose itNBP to political and economic risks in foreign countries, as well as to risks related to currency fluctuations.

In FYE 2005,2006, exports, primarily to China, Mexico, Canada, South Korea, Hong Kong and ThailandTaiwan, accounted for approximately 7%6.7% of NBP'sNBP’s total net sales. NBP'sNBP’s international activities expose it to risks not faced by companies that limit themselves to the domestic market. One significant risk is that the international operations may be affected by tariffs, other trade protection or food safety measures and import or export licensing requirements.

21An example of a risk related to our international operations is BSE, as discussed above in Item 1, Business – Industry Overview.



       

For example, on December 23, 2003, it was announced by the USDA that a single Holstein dairy cow was discovered in the state of Washington to have tested positive for BSE.  The origin of the animal was subsequently traced to a farm in Canada.  Shortly after the announcement, several countries representing a substantial share of NBP's export business closed their borders to the importation of edible beef products from the United States.  Responding to the loss of export markets, live cattle prices in the United States declined by approximately 18% within 3 days.  During the second quarter of FYE 2004, NBP recorded charges to earnings totaling approximately $18.8 million due to the market impacts of the closure of international borders as a result of the BSE discovery in late December.  While exports of some beef products commenced once again to Mexico in April 2004, NBP cannot anticipate the duration of other continuing beef import bans or whether additional countries may impose similar restrictions.  In June 2005, the USDA announced a second confirmed case of BSE in the U.S., furthering uncertainty as to whether or when additional markets may reopen, and whether or when existing markets may close.  Thus far, the effect of resumed export of beef products to limited, smaller export markets has been marginal on the U.S. beef industry. Thus far, the effect of resumed export of beef products to Mexico has been marginal on the United States beef industry.

Other risks associated with NBP'sNBP’s international activities include:


The occurrence of any of these events could increase NBP'sNBP’s costs, lower demand for itsNBP’s products or limit itsNBP’s operations, which could have a material adverse effect on its business, financial condition, results of operations or prospects.

Failure to successfully implement itsNBP’s business strategy may impede NBP'sits plans to increase revenues, margins and cash flow.

NBP's     NBP’s revenues, margins and cash flows will not increase as planned if it fails to implement the key elements of its strategy, and itsNBP’s ability to successfully implement this strategy is dependent at least in part on factors beyond NBP'sits control. For example, the willingness of consumers to purchase value-added products depends in part on economic conditions. In periods of economic uncertainty, consumers tend to purchase more private label or less-expensive products. Thus, if NBP encounters periods of economic uncertainty, the sales volume for its value-added products could suffer. Also, NBP may not be successful in identifying favorable international expansion opportunities.

Changes in consumer preferences could adversely affect NBP'sNBP’s business.

The food industry in general is subject to changing consumer trends, demands and preferences. NBP'sNBP’s products compete with other protein sources, such as pork and poultry, and other foods. Trends within the food industry change often and NBP’s failure to anticipate, identify or react to changes in these trends could lead to, among other things, reduced demand and price reductions for NBP'sNBP’s products, and could have a material adverse effect on NBP'sNBP’s business, financial condition, results of operations and cash flows. In addition, NBP does not have any other material lines of business or other sources of revenue to rely upon if it is unable to efficiently process and sell beef products or if the market for beef declines. This lack of diversification means that NBP may not be able to adapt to changing market conditions or withstand any significant decline in the beef industry.

22



The beef processing industry is highly competitive and NBP'sNBP’s customers may not continue to purchase itsNBP’s products.

The beef processing industry is highly competitive. Competition exists both in the purchase of live cattle and in the sale of beef products. In addition, NBP'sNBP’s products compete with a number of other protein sources, including pork and poultry.

NBP's     NBP’s principal competition arises from other beef processors, including Tyson Foods, Inc., Cargill Incorporated, Swift & Company and Smithfield Foods, Inc. The principal competitive factors in the beef processing industry are price, quality, food safety, product distribution, technological innovations and brand loyalty. NBP'sNBP’s ability to be an effective competitor will depend on its ability to compete on the basis of these characteristics. Some of NBP'sNBP’s competitors have greater financial and other resources and enjoy wider recognition for their consumer branded products. NBP cannot assure youprovide certainty that it will be able to compete effectively with these companies and itsNBP’s ability to compete could be adversely affected by its significant debt levels.

The sales of NBP’s beef products are subject to seasonal variations and, as a result, NBP'sNBP’s quarterly operating results may fluctuate.

The beef industry is characterized by prices that change based on seasonal consumption patterns. The highest period of demand for NBP'sNBP’s products is usually the summer barbecue season. As a result of these seasonal fluctuations, NBP'sNBP’s operating results may vary substantially between fiscal quarters.

NBP depends on the service of key individuals, the loss of which could materially harm itsNBP’s business.

NBP's     NBP’s success will depend, in part, on the efforts of itsNBP’s executive officers and other key employees. In addition, the market for qualified personnel is competitive and NBP'sNBP’s future success will depend on its ability to attract and retain these personnel. NBP does not have long-term employment agreements with some of its executive officers, and NBP does not maintain key-person insurance for some of its other officers, employees or members of itsNBP’s board of managers. NBP may not be able to negotiate the terms of renewals of any existing long-term employment agreements on terms favorable to NBP or at all.


      The loss of the services of any of NBP'sits key employees or the failure to attract and retain employees could have a material adverse effect on itsNBP’s business, results of operations and financial condition.

NBP'sNBP’s performance depends on favorable labor relations with its employees. Any deterioration of those relations or increase in labor costs could adversely affect NBP'sNBP’s business.

NBP has approximately 6,7008,300 employees worldwide. Approximately 2,700 employees at itsNBP’s Liberal, Kansas facility are represented by the United Food and Commercial Workers International Union under a collective bargaining agreement that expires on December 16, 2007. Approximately 1,000 employees at NBP’s Brawley, California facility are jointly represented by the United Food and Commercial Workers International Union and Teamsters International Union under a collective bargaining agreement that expires on May 31, 2008. A labor-related work stoppage by these unionized employees could limit NBP'sNBP’s ability to process and ship its products or increase its costs, which could adversely affect itsNBP’s results of operations and financial condition. In addition, it is possible that any labor union efforts to organize employees at NBP'sNBP’s non-unionized facilities might be successful and that any labor-related work stoppages at these non-unionized facilities in the future could adversely affect its results of operations and financial condition. In general, any significant increase in labor costs, deterioration of employee relations, slowdowns or work stoppages at any of NBP'sNBP’s locations, whether due to union activities, employee turnover or otherwise, could have a material adverse effect on its business, financial condition, results of operations and cash flows.

The consolidation of NBP'sNBP’s retail and foodservice customers may put pressures on its operating margins.

In recent years, the trend among NBP'sNBP’s retail and foodservice customers, such as supermarkets, warehouse clubs and foodservice distributors, has been towards consolidation. These consolidations, along with the entry of mass merchants into the grocery industry, have resulted in customers with increasing negotiating strength who tend to exert pressure on NBP with respect to pricing terms, product quality and new products. As NBP'sthe customer base continues to consolidate, competition for the business of fewer customers is expected to intensify. If NBP does not negotiate favorable terms of sale with its customers and implement appropriate pricing to respond to these trends, or if itNBP loses its existing large customers, NBP'sits profitability could decrease.

23



NBP may not be able to successfully integrate existing and future acquisitions, which could result in it not achieving the expected benefits of the acquisition, the disruption of itsNBP’s business and an increase in itsNBP’s costs.

NBP continually explores opportunities to acquire related businesses, some of which could be material to it. NBP'sNBP’s ability to continue to grow may depend upon identifying and successfully acquiring attractive companies, effectively integrating these companies, achieving cost efficiencies and managing these businesses as part of NBP. For example, effective May 30, 2006, NBP, along with its majority owner, U.S. Premium Beef, acquired substantially all the assets of Brawley Beef, LLC (Brawley Beef). Brawley Beef operated a beef processing facility in Brawley, California, producing upscale custom cuts for sale to retail customers. Additionally, NBP acquired Vintage Foods, L.P., including the Vintage™ Natural Beef brand, during fiscal year 2006. The Vintage brand is marketed as natural beef that is antibiotic- and hormone-free, from cattle that are 20 months of age and younger.

NBP may not be able to effectively integrate the acquired companies such as Brawley Beef and Vintage Foods, L.P. and successfully implement appropriate operational, financial and management systems and controls to achieve the benefits expected to result from these acquisitions. NBP'sNBP’s efforts to integrate these businesses could be affected by a number of factors beyond its control, such as regulatory developments, general economic conditions and increased competition. In addition, the process of integrating these businesses could cause the interruption of, or loss of momentum in, the activities of NBP'sNBP’s existing business. The diversion of management'smanagement’s attention and any delays or difficulties encountered in connection with the integration of these businesses could negatively impact NBP'sNBP’s business and results of operations. Further, the benefits that NBP anticipates from these acquisitions such as Brawley Beef and Vintage Foods, L.P. may not develop.


Risk Factors Associated with USPB

U.S. Premium Beef sellsdelivers all of the cattle provided by its owners and associates to National Beef Packing Company, LLC and does not have arrangements for alternative markets for its owners and associates cattle.

USPB's     USPB’s sole customer for the cattle provided by USPB'sUSPB’s owners and associates is National Beef Packing Company, LLC. Given USPB'sUSPB’s ownership of a majority interest in NBP, USPB has not developed alternative customers for the cattle provided by USPB'sUSPB’s owners and associates. If events were to occur which would prevent NBP from purchasing and processing the cattle supplied by USPB'sUSPB’s owners and associates, USPB would need to exercise provisions in its agreements with both NBP and USPB'sUSPB’s owners and associates that would permit USPB to reduce the number of cattle acquired from owners and associates and sold to NBP. While such provisions would mitigate harm to USPB, it is likely that the value of the Class A and Class B linked units and the associated delivery rights held by USPB'sUSPB’s owners would be impaired.

The other members of National Beef Packing Company, LLC do not deliver cattle to NBP for processing, creating the possibility that the interests of those other members of NBP could conflict with the interests of U.S. Premium Beef and its members.

The other members of NBP do not deliver cattle to NBP for processing and marketing. As a result, conflicts of interest may arise between USPB and NBP relating to cattle purchases. If a dispute were to arise, the settlement of any such dispute may not be on terms as favorable to USPB as would be expected if all of the members of NBP were involved in the delivery of cattle to NBP for processing.

The restructuring of the cooperative was a taxable event for both the cooperative and its shareholders.

The restructuring of the cooperative to become an LLC was a taxable event for both the cooperative and its shareholders. The tax consequences to the cooperative depended on the value of its assets and apportionment of the value among specific assets, both of which involved risks described in the following risk factors.

24



The shareholders recognized gain or loss depending on when and how their shares in the cooperative were acquired. The amount depended on the value of the cooperative's assets, net of liabilities, and customary discounts allowed, both of which involved valuation risks described in the following risk factors. The taxable gain or loss that was recognized depended on whether the value of the Class A and Class B linked units received in the restructuring for those shares was greater or less than the tax basis in the common stock of the cooperative. If the shares were purchased in the cooperative's initial stock offerings, they had a gain on this portion of the restructuring. Values were subject to closing date adjustments and the possibility of future challenges by the Internal Revenue Service.

The intended tax treatment of the restructuring is subject to the possibility of future challenges by the Internal Revenue Service that could have adverse consequences for the LLC, as the successor to the cooperative's obligations, and to the unitholders.

The board of directors and senior management relied on an appraisal that is not binding on the Internal Revenue Service.

In evaluating the tax consequences of the restructuring, USPB has relied, in part, on the appraisal prepared by American Appraisal Associates. Their appraisal is not binding on the Internal Revenue Service. There is a risk that the Internal Revenue Service might determine that the Company or the cooperative'scooperative’s shareholders at the point of restructuring must recognize additional taxable income or gain for federal income tax purposes.

The Internal Revenue Service could also challenge other aspects of the restructuring that could materially adversely affect the LLC and its unitholders.

In addition to challenging the overall valuation of the cooperative and the LLC units received in the restructuring, the Internal Revenue Service might also challenge:


If the Internal Revenue Service challenges the transaction on any of these grounds, it could materially adversely affect the LLC and subject the unitholders and the LLC, as successor to the cooperative's obligations, to additional tax liability.

The Internal Revenue Service could also challenge post-restructuring tax reporting positions to be taken by the LLC that could materially adversely affect the LLC unitholders.

USPB believes that the LLC will be treated as a partnership for federal income tax purposes. This means that the LLC will pay no federal or state income tax and unitholders will pay tax on their share of the LLC's net income. However, the LLC would become taxable as a corporation if it elects corporate tax status or if it is treated as a publicly traded partnership because of the manner in which units are transferred. The LLC's taxable income each year will depend in part on the depreciation, amortization and other cost recovery of the tax basis of its assets. The LLC's initial aggregate basis will bewas based on the fair market value of assets deemed to be received by the members in the restructuring. However, the method of apportioning basis to specific LLC assets is uncertain, and the IRS could challenge the apportionment of basis to specific assets so as to increase the allocation to longer lived assets or assets that cannot be depreciated or amortized. This generally would defer the timing of some of the LLC's depreciation, amortization or other cost recovery deductions. The patronage notices for which the LLC became obligated in the restructuring are expected to have a face value substantially in excess of their negative present value that was used in valuing the liquidating distribution deemed to be received by the shareholders. It is expected that capital loss deduction will be available to the LLC, and therefore to its unitholders, when cumulative payments made by the LLC to the holders of the patronage notices exceed their restructuring date negative present value. Because of the lack of controlling legal authority on this issue, the IRS could challenge the capital loss deduction. Also, limitations on the deductibility of capital losses could reduce or eliminate the benefit of the deduction.

25



Failure to achieve and maintain effective internal controls could have a material adverse effect on USPB'sUSPB’s business, operating results and financial condition.

The Company is in the process of documenting and testing its internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of its internal controls over financial reporting and a report by its independent auditors addressing these assessments. This process is both costly and challenging. During the course of testing the Company may identify deficiencies which it may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if the Company fails to achieve and maintain the adequacy of its internal controls, as such standards are modified, supplemented or amended from time to time, it may not be able to ensure that it can conclude on an ongoing basis that it has effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for the Company to produce reliable financial reports and are important to helping prevent financial fraud. If the Company cannot provide reliable financial reports or prevent fraud, its business and operating results could be harmed, investors could lose confidence in its reported financial information, and its business, results of operation and financial condition could be adversely affected.


USPB depends on the service of key senior management personnel, the loss of which could materially harm its business.

USPB's     USPB’s success will depend, in part, on the efforts of its key senior management personnel. The market for qualified personnel is competitive and USPB'sUSPB’s future success will depend on its ability to attract and retain these personnel. USPB does not have long-term employment agreements with most of its senior management. USPB may not be able to negotiate either new contracts or renewals of any existing long-term employment agreements on terms favorable to USPB or at all. The loss of the services of any of USPB'sUSPB’s key senior management personnel or the failure to attract and retain highly skilled personnel in the future could have a material adverse effect on itsour business, results of operations and financial condition.

ITEM 2.     PROPERTIES

USPB's     USPB’s corporate office is located at 12200 Ambassador Drive, Suite 501, Kansas City, Missouri, in proximity to the corporate offices of NBP. The Company leases its office space from HDP -the Kansas City LLC,Aviation Department, with offices at c/o Kessinger/Hunter & Co., 2600 Grand Blvd., Suite 700,601 Brasilia Avenue, Kansas City, Missouri 64108.     64153.

NBP owns its Dodge City, Kansas,Kansas; Liberal, KansasKansas; Brawley, California; and Hummels Wharf, Pennsylvania facilities. It leases its headquarters facility in Kansas City, Missouri, its Kansas City Steak Company processing facility in Kansas City, Kansas and its case-ready facility in Moultrie, Georgia. NBP also leases its offices in Chicago, Illinois,Illinois; Salt Lake City, Utah,Utah; Denison, Iowa,Iowa; Dallas, Texas,Texas; Perkins, Oklahoma; Tokyo, Japan and Seoul, South Korea. NBP'sNBP’s fifth amended and restated credit facility is secured by a first priority lien on substantially all of its assets. The facility locations and approximate daily processing levels are shown in the table below:

26



Location

Daily Processing

Processing Facilities:

Liberal, Kansas

6,000 head

Dodge City, Kansas

5,7005,900 head

Case-Ready Facilities:

   Brawley, California
1,600 head

Case Ready Facilities:

Hummels Wharf, Pennsylvania

101,00075,000 pounds

Moultrie, Georgia

153,000215,000 pounds

Portion Control Facility:

Kansas City, Kansas

38,50042,000 pounds

ITEM 3.     LEGAL PROCEEDINGS

For information regarding legal proceedings, see Note 12.Legal Proceedings to our consolidated financial statements included in Item 8 of this report.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the unitholders during the last quarter of the fiscal year covered by this report.


PART II

ITEM 5.     MARKET FOR THE REGISTRANT'SREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

There is no established public trading market for any class of common equity of U.S. Premium Beef, LLC. As of November 21, 2005,October 28, 2006, there were 436435 record holders of Class A and Class B interests.  There have been nounits. The sales of the linked combination of Class Aprices by quarter and Class B units since the end of the fiscal year.  During the first quarter of the fiscal year ended August 27, 2005, thewere as follows:

 Affiliated Sales  Third Party Sales
   
 Low High Low High
Quarter ending:           
   November 26, 2005$97.00 $112.50 $160.00 $160.00
   February 25, 2006$55.00 $112.50 $148.00 $148.00
   May 27, 2006$55.00 $60.00 $130.00 $145.00
   August 26, 2006$44.44 $165.00 $120.00 $135.00
Since August 26, 2006$165.00 $165.00 $135.00 $135.00

The affiliated sales price for the linked combination of one Class A unit and one Class B unit ranged from $55.00 to $172.00, while sales prices during the second quarter of the fiscal year ranged from $55.00 to $175.00.  During the third quarter of the fiscal year, sales prices for the linked combination of one Class A unit and one Class B unit ranged from $152.50 to $170.00.  During the fourth quarter of the fiscal year, sales prices for the linked combination of one Class A unit and one Class B unit ranged from $60.00 to $170.00.  However some of therepresent sales that occurred during the fiscal year were not sales at arms length and, therefore, the sales price ranges disclosed above are not necessarily indicative of the market value of the units during the periods in question.

     On September 23, 2005, USPB made a cash distribution to each of its members in the amount of $1.73 for the linked combination of each Class A unit and Class B unit held by its members.

USPB made a cash distribution on December 22, 2004 of approximately $1.2 million to help offset the potential tax liability to unitholders due to the conversion from a cooperative to a limited liability company. The payment of cash dividends are made only from assets legally available for that purpose and depend on the Company'sCompany’s financial condition, results of operations, and other factors then deemed relevant by USPB'sUSPB’s board of directors. Cash distributions are paid to the interest holders of Class A and Class B units at the discretion of the board of directors and to the extent permitted by USPB'sUSPB’s senior lenders. See Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters.

Patronage dividends of $2,118,532 and $20,923,789approximately $2.1 million were allocated to the cooperative'scooperative’s patrons for FYE 2004 and FYE 2003 earnings, respectively.2004. Approximately forty-five percent of the FYE 2004 patronage dividend was paid in cash and the remaining approximate fifty-five percent was retained as patronage refunds for reinvestment.  Forty percent of the FYE 2003 patronage dividend was paid in cash and the remaining sixty percent was retained as patronage refunds for reinvestment. Patronage refunds for reinvestment, known as patronage notices in the LLC, will be paid by the LLC at such time and in such amounts as may be determined by the board of directors in its sole and absolute discretion. In addition, in the event of liquidation of the LLC, any patronage notice amounts that had not been paid previously would be entitled to be paid after the debts and liabilities of the LLC had been paid, but prior to any distributions based on ownership of units in the LLC.

27     Effective May 30, 2006, USPB’s majority owned subsidiary, NBP, completed the acquisition of substantially all of the assets of Brawley Beef pursuant to the Contribution Agreement with Brawley Beef and National Beef California, LP (NBC) (the Agreement). NBC is a newly formed limited partnership with National Carriers, Inc., a wholly-owned subsidiary of NBP, acting as its general partner. Brawley Beef was an alliance of cattle producers in Arizona and California who supplied the beef processing facility in Brawley, California. The facility commenced operations in December 2001.

     Pursuant to the terms of the Agreement, Brawley Beef contributed substantially all of its assets to NBC in exchange for limited partnership units of NBC, and NBC assumed certain of Brawley Beef’s debt and current liabilities. Brawley Beef then exchanged all of its NBC units with USPB for 44,160 new USPB Class A units and 44,160 new USPB Class B units. Under a separate unit exchange agreement between USPB and NBP, USPB exchanged these units of NBC with NBP for 5,899,297 Class A units and 664,475 Class B-1 units of NBP. As a result, USPB’s ownership interest in the NBP’s Class B voting units increased to approximately 54.8%.




The USPB did not sell any equity securities during FYE 2005Class A and Class B units that were not registered underissued in connection with the acquisition of Brawley were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

ITEM 6.     SELECTED FINANCIAL DATA

The following table sets forth selected data presented under the captions "Statement of Operations Data"consolidated financial and "Selected Balance Sheet Data"other data for, and as of the end of, each of the years in the five-year period ended August 27, 2005 are derived from the consolidated financial statements of the Company and its subsidiaries, which financial statements have been audited by KPMG LLP, independent registered public accountants. The consolidated financial statements as of August 27, 2005 and August 28, 2004 and for each of the years in the three-year period ended August 27, 2005, and the report thereon, are included elsewhere in this document.26, 2006. The selected data should be read in conjunction with the consolidated financial statements for the year ended August 27, 2005,26, 2006, the related notes and the independent auditors'auditors’ report.

As described in Item 1,Business – General, USPB acquired a controlling interest in NBP on August 6, 2003 and since that date has consolidated the results of NBP in its consolidated financial statements. As a result of the acquisition of a controlling interest in NBP, the financial position and operating results after the Acquisition are not comparable with those before the Acquisition.

     Historical per share data has been omitted because, under the cooperative structure, earnings of the cooperative are distributed as patronage dividends to members and associate members based on the level of business conducted with the cooperative as opposed to common stockholder'sstockholder’s proportionate share of underlying equity in the cooperative. Pro forma per unit data has been included below because as an LLC, the restructured entity will, beginning in FYE 2005,September 2004, make distributions to its unitholders based on their proportionate share of the underlying equity in the Class A and Class B linked units, 33% and 67%, respectively, as opposed to the level of business conducted with the LLC. The pro forma per unit data gives effect to the exchange of one Class A unit and one Class B unit of the newly formed LLC for each share of common stock of the cooperative, effective August 29, 2004. Class A units and Class B units shall be issued, redeemed, and transferred together on a one for one basis until the board of directors determines the extent and conditions under which Class A units and Class B linked units may be issued, redeemed, and transferred separately.

As described in Note 1 to the consolidated financial statements under Item 8. Financial Statements and Supplementary Data, USPB acquired a controlling interest in NBP on August 6, 2003 and since that date has consolidated the results of NBP in its consolidated financial statements.  As a result of the acquisition of a controlling interest in NBP, a new basis of accounting was established for NBP on the date of acquisition.  Prior to August 7, 2003, USPB accounted for its interest in FNB under the equity method of accounting.  For these reasons the financial position and operating results after the Acquisition are not comparable with those before the Acquisition.

The following table should be read in conjunction with Item 7.Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8.Financial Statements and Supplementary Data (including the accompanying notes) contained elsewhere in this report.

 

 

 


28


  Fiscal Years Ended(1)
  August 26, August 27, August 28, August 30, August 31,
  2006 2005 2004 2003 2002
    (In millions, except unit, share, and per unit data)
Statement of Operations Data:         
Net sales$4,636.0  $4,338.9  $4,093.5  $871.8  $697.4 
Costs and expenses:              
 Cost of sales 4,503.8   4,229.9   3,973.7   853.6   697.4 
 Selling, general & administrative 37.6   34.0   34.8   5.7   3.6 
 Depreciation and amortization 28.7   24.4   21.2   2.1   
Operating income (loss) 65.9   50.6   63.8   10.4   (3.6)
Other income (expense):              
 Minority owners' interest in net income of              
      National Beef Packing Co. (16.6)  (8.5)  (19.4)  (4.9)  
 Equity in income from Farmland National              
      Beef Packing Co.       22.6   20.3 
 Interest income 1.3   0.7   0.7   0.2   0.3 
 Interest expense (32.4)  (29.0)  (26.6)  (2.4)  (0.7)
 Interest rate exchange agreement   0.1   0.6     (1.0)
 Other, net 1.5   (5.3)    (1.7)  0.5 
Total other (expense) income (46.2)  (42.0)  (44.7)  13.8   19.4 
Net income$19.7  $8.6  $19.1  $24.2  $15.8 
                
Selected Balance Sheet Data:              
 Cash and cash equivalents$58.4  $54.4  $43.6  $42.2  $16.1 
 Total assets$784.8  $656.1  $663.8  $641.2  $107.2 
 Long-term debt, less current maturities$380.5  $314.0  $331.8  $312.7  $8.2 
 Minority interest$73.0  $65.0  $63.1  $54.0  $
 Capital shares and equities$148.8  $124.0 $118.0  $98.4  $82.4 
    
 Common shares outstanding       691,845   691,845   691,845 
 Class A and Class B linked units outstanding 735,505   691,845          
                
Per Linked Unit Data:              
Earnings Per Unit              
 Basic$28.06  $12.49          
 Diluted$27.56  $12.25          
    
Outstanding weighted-average units              
 Basic 702,843   691,845          
 Diluted 715,385   705,063          
    
Proforma amounts assuming the conversion to              
 an LLC is applied retroactively:              
               
Earnings Per Unit              
 Basic$28.06  $12.49  $27.60  $35.02  $22.78 
 Diluted$27.56  $12.25  $27.10  $34.43  $22.45 
     
Outstanding weighted-average units              
 Basic 702,843   691,845   691,845   691,845   691,845 
 Diluted 715,385   705,063   704,748   703,761   701,844 
                
(1)Our fiscal year ends on the last Saturday in August. Fiscal year ended 2002 consisted of 53 weeks. All others consisted of 52 weeks.

 Fiscal Years Ended (1)
          
 August 27,
 2005
 August 28,
 2004
 August 30,
2003
 August 31,
 2002
 August 25,
2001
 (In millions, except unit, share, and per unit data)
Statement of Operations Data:         
Net sales$4,338.9  $4,093.5  $871.8  $697.4  $572.4 
Costs and expenses:              
      Cost of sales 4,229.9   3,973.7   853.6   697.4   572.4 
      Selling, general & administrative 34.0   34.8   5.7   3.6   2.6 
      Depreciation and amortization 24.4   21.2   2.1     -
Operating income (loss) 50.6   63.8   10.4   (3.6)  (2.6)
Other income (expense):              
      Minority owners' interest in net income of              
           National Beef Packing Co. (8.5)  (19.4)  (4.9)    
      Equity in income from Farmland National              
           Beef Packing Co.   -  22.6   20.3   21.2 
      Interest income 0.7   0.7   0.2   0.3   0.9 
      Interest expense (29.0)  (26.6)  (2.4)  (0.7)  (3.2)
      Interest rate exchange agreement 0.1   0.6   -  (1.0)  (1.2)
      Other, net (5.3)    (1.7)  0.5   0.1 
Total other (expense) income (42.0)  (44.7)  13.8   19.4   17.8 
Net income$8.6  $19.1  $24.2  $15.8  $15.2 
               
Selected Balance Sheet Data:              
      Cash and cash equivalents$54.4  $43.6  $42.2  $16.1  $14.3 
      Total assets$656.1  $663.8  $641.2  $107.2  $128.4 
      Long-term debt, less current maturities$314.0  $331.8  $312.7  $8.2  $28.1 
      Minority interest$65.0  $63.1  $54.0  $- $-
      Capital shares and equities$124.0  $118.0  $98.4  $82.4  $76.5 
               
      Common shares outstanding -  691,845   691,845   691,845   691,845 
      Class A and Class B Linked Units Outstanding 691,845         -
               
Per Linked Unit Data:              
Earnings Per Unit              
      Basic$12.49             
      Diluted$12.25             
               
Outstanding weighted-average units              
      Basic 691,845             
      Diluted 705,063             
               
Proforma amounts assuming the conversion to              
      an LLC is applied retroactively:              
Earnings Per Unit              
      Basic$12.49  $27.60  $35.02  $22.78  $21.90 
      Diluted$12.25  $27.10  $34.43  $22.45  $21.64 
               
Outstanding weighted-average units              
      Basic 691,845   691,845   691,845   691,845   691,845 
      Diluted 705,063   704,748   703,761   701,844   700,201 

(1)  Our fiscal year ends on the last Saturday in August.  Fiscal year ended 2002 consisted of 53 weeks.  All others consisted of 52 weeks.

29




ITEM 7.  MANAGEMENT'S7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this report. In addition to historical information, the following discussion and other parts of this report contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under Item 1. Business - - Risk Factors, Disclosure Regarding Forward-Looking Statements, Item 1A.Risk Factors, and elsewhere in this report.

Overview

USPB was formed as a closed marketing cooperative on July 1, 1996. Its mission is to increase the quality of beef and long-term profitability of cattle producers by creating a fully integrated producer-owned beef processing system that is a global supplier of high quality, value-added beef products responsive to consumer desires.

On December 1, 1997, the cooperative became operational by acquiring 25.4966% of FNB, a partnership owned by the cooperative and Farmland Industries, Inc. (Farmland). The cooperative acquired an additional 3.29% partnership interest in February 1998, bringing its ownership to 28.7866% of FNB. Farmland then owned the remaining 71.2134%.

On May 31, 2002, Farmland and four of its subsidiaries filed voluntary petitions to reorganize under Chapter 11 of the United States Bankruptcy Code. FNB was not a party of these filings. Provisions of FNB'sFNB’s operating agreement and its financing agreement restricted partners'partners’ access to FNB'sFNB’s assets. In the fourth quarter of fiscal year 2003, as a result of the acquisition of Farmland'sFarmland’s interest by the cooperative and others, as more fully described below, the cooperative acquired a controlling interest in the former FNB, now NBP, and the assets, liabilities and operating results of NBP are consolidated with those of USPB effective August 7, 2003. Prior to the acquisition date, the cooperative accounted for its 28.7866% non-controlling interest in FNB under the equity method of accounting.

In connection with the cooperative'scooperative’s purchase of its interest in FNB, the cooperative obtainedowns the right and becameis subject to the obligation to deliver cattle annually to NBP relative to: (i) USPB'sUSPB’s ownership in NBP and (ii) the number of cattle processed annually by NBP. That arrangement continues following the conversion of the cooperative into the LLC. The price received for cattle is based upon a price grid determined by USPB and NBP, which reflects current market conditions. The cattle purchase agreement is effective as long as the USPB is an owner in NBP. Cattle delivered by USPB are processed in NBP's twoNBP’s three processing plants.

USPB acquires all its cattle requirements from its owners and associates. Under Uniform Delivery and Marketing Agreements, owners are obligated to deliver a designated number of cattle to USPB during specified delivery periods, as defined. The agreements are for a term of ten years and provide for minimum quality standards, delivery variances, and termination provisions, as defined. Cattle acquired pursuant to the agreements are concurrently sold to NBP pursuant to the cattle purchase agreement. Sales transactions are based upon prevailing cash market prices, and purchases are on terms no less favorable to NBP than would be obtained from an unaffiliated party.

On June 12, 2003, the cooperative entered into an agreement with Farmland to acquire all of the partnership interests in FNB held by Farmland, which approximated 71.2%. As a result of this acquisition, the cooperative gained voting control of FNB and converted it to a limited liability company, National Beef Packing Company, LLC, under Delaware law. These transactions (the Acquisition) closed on August 6, 2003. NBP assumed both the Uniform Delivery and Marketing Agreements and the cattle purchase agreement. NBP continues to hold all of the same assets its predecessor held before the consummation of the transactions, including equity in subsidiaries, except that Farmland retained a 49% interest in a NBP subsidiary National Beef aLF, LLC, which holds a 47.5% interest in aLF Ventures, LLC. After the Acquisition, NBP holds a 24.2% interest in aLF Ventures, LLC through its 51% interest retained in National Beef aLF, LLC. From July 2006 to July 2008, Farmland has a put right of this interest in National Beef aLF, LLC to NBP at its then fair market value. If the interest in NBP aLF, LLC is not repurchased, NBP is required to put the entire interest up for sale. Due to uncertainties in aLF Ventures, LLC's ability to generate future revenues, no amounts were allocated to the put option in the consolidated financial statements.

30




On August 18, 2004, the shareholders of U.S. Premium Beef, Ltd. approved the merger of the cooperative into a wholly-owned subsidiary, U.S. Premium Beef, Inc., a Delaware corporation. The merger was effective on August 29, 2004. The Delaware corporation then, in a statutory conversion authorized under Delaware law, converted into a Delaware limited liability company. Following the effective date of the merger and the statutory conversion, the business of the cooperative was continued in the limited liability company form of business organization. The Company was subsequently renamed U.S. Premium Beef, LLC.

     Effective May 30, 2006, USPB’s majority owned subsidiary, NBP, completed the acquisition of substantially all of the assets of Brawley Beef, LLC (Brawley Beef), consisting of a state-of-the-art beef processing facility in Brawley, California pursuant to the Contribution Agreement with Brawley Beef and National Beef California, LP (NBC) (the Agreement). NBC is a limited partnership formed with National Carriers, Inc., a wholly-owned subsidiary of the Company, acting as its general partner. Brawley Beef was an alliance of cattle producers in Arizona and California who supplied the beef processing facility. The facility commenced operations in December 2001.

     In calendar year 2005, NBP was the fourth largest beef processing company in the United States. In FYE 2005,2006, NBP accounted for approximately 12.3%12.5% of the fed cattle processed in the United States. NBP processes, packages and delivers fresh beef for sale to customers in the United States and international markets. NBP'sNBP’s products include boxed beef and beef by-products, such as hides and offal. In addition, they sell value-added beef products including branded boxed beef, case-ready beef and pork, chilled and frozen export beef and portion control beef. NBP markets its products to retailers, distributors, food service providers and the United States military. The relationship between the USPB and NBP facilitates a vertically integrated business model and provides NBP with a significant portion of the high-quality cattle used in its boxed beef and value-added products.

The 2003 results discussed below include the historical results of FNB as an equity investment using the equity method of accounting for the periods prior to the Acquisition from September 1, 2002 through August 6, 2003. For the periods subsequent to the Acquisition, the operating results of NBP have been consolidated and intercompany transactions eliminated. This new basis of accounting was established on the date of the closing of the Acquisition (see description of the Acquisition in Note 1 of our consolidated financial statements), and, therefore, the financial position and operating results after the Acquisition are not comparable with those before the Acquisition. As a result, we have provided an overview of the operations of NBP (formerly FNB) below to provide a better understanding of the impact that our ownership in NBP (approximately 53.2% for the 24 days ended August 30, 2003 and thereafter, and approximately 28.8% for the period prior to August 7, 2003) had on our operations.

As a result of the Acquisition and resulting consolidation of NBP, there were significant increases in the year of the Acquisition to the Company's consolidated assets, liabilities and expenses in comparison to prior periods. The Company's assets increased by 405%, with debt increasing by 3,800% and liabilities other than debt increasing by 726%. The Company's revenues for the 2003 fiscal year increased by approximately 469% in comparison to the prior year.

     

31



The following table presents the historical consolidated statements of operations data expressed in millions of dollars for NBP (formerly FNB) for the periods indicated:

 Fiscal Years Ended
 August 26, August 27, August 28,
 2006 2005 2004
   (in millions)  
Net sales$4,636.0  $4,338.9  $4,093.5 
Costs and expenses:        
   Cost of sales 4,503.8   4,229.9   3,973.7 
   Selling, general & administrative 34.0   30.5   29.6 
   Depreciation and amortization 28.7   24.4   21.2 
   Operating income 69.5   54.1   69.0 
  
Other income (expense):        
   Interest income 0.4   0.4   0.6 
   Interest expense (32.0)  (28.6)  (25.9)
   Other, net 1.5   (5.1)  0.3 
Total other expense, net (30.1)  (33.3)  (25.0)
Net income$39.4  $20.8  $44.0 

     NBP’s net income for the FYE 2006 was $39.4 million compared to $20.8 million for the FYE 2005, an increase of $18.6 million or 89.4%. This is attributed to increased operating income due primarily to increased margins and a decrease in other expense, net. Sales were higher, principally due to an increase in the number of cattle processed as a result of the acquisition of Brawley Beef, LLC, at higher average weights. Cost of sales were higher, principally due to the higher number of cattle processed as a result of the acquisition of Brawley Beef, LLC, at higher average weights, and a slight increase in average live cattle prices. Operating income increased $15.4 million or 28.5% over the prior year. As a percent of sales, operating income was 1.5% and 1.2% for FYE 2006 and FYE 2005, respectively.

 

 Successor  Successor     Successor  Predecessor
             Farmland
 National Beef  National Beef     National Beef  National Beef
 Packing  Packing     Packing  Packing
 Company, LLC  Company, LLC     Company, LLC  Company, L.P.
 and  and     and  and
 Subsidiaries  Subsidiaries  Combined  Subsidiaries  Subsidiaries
 52 Weeks  52 Weeks  364 Days      
 Ended  Ended  Ended  24 Days Ended   
 August 27,  August 28,  August 30,  August 30,  340 Days Ended
(in millions)2005  2004  2003  2003  August 6, 2003
              
Net sales$4,338.9   $4,093.5   $3,661.4   $282.8   $3,378.6 
                   
Costs and expenses:                  
      Cost of sales 4,229.9    3,973.7    3,515.7    264.8    3,250.9 
      Selling, general & administrative 30.5    29.6    26.5    2.1    24.4 
      Depreciation and amortization 24.4    21.2    20.3    2.0    18.3 
                   
      Operating income 54.1    69.0    98.9    13.9    85.0 
                   
Other income (expense):                  
                   
      Interest income 0.4    0.6    0.5       0.5 
      Interest expense (28.6)   (25.9)   (7.3)   (1.7)   (5.6)
      Other, net (5.1)   0.3    (3.1)   (1.7)   (1.4)
Total other expense, net (33.3)   (25.0)   (9.9)   (3.4)   (6.5)
                   
Net income$20.8   $44.0   $89.0   $10.5   $78.5 

     

The combined consolidated statement of operations data for the 364 days ended August 30, 2003 includes the results of Farmland National Beef Packing Company, L.P. for the 340 days ended August 6, 2003 and the results of National Beef Packing Company, LLC for the 24 days ended August 30, 2003. The results have been combined for the 364 day period to facilitate comparison. The results of operations for the 24 days ended August 20, 2003 are within a period for which demand for beef products was at a seasonally high level.

TheNBP’s net income for the FYE 2005 was $20.8 million compared to $44.0 million for the FYE 2004, a decrease of $23.2 million or 52.7%. This is attributed to decreased margins as noted below, decreased other, net due primarily to the write-off of debt issuance costs in FYE 2005 and an increase in interest expense primarily due to higher interest rates in FYE 2005. Sales were higher, principally due to the higher number of cattle slaughtered and processed at higher average weights. Cost of sales were higher, principally due to the higher number of cattle slaughtered and processed at higher average weights, partially offset by a decrease in average live cattle prices. Operating income decreased $14.9 million or 21.6% over the prior year. As a percent of sales, operating income was 1.2% and 1.7% for FYE 2005 and FYE 2004, respectively.

The net income for the FYE 2004 was $44.0 million compared to $89.0 million for the FYE 2003, a decrease of $45.0 million or 50.6%.  This is attributed to decreased margins and an $18.6 million increase in interest expense due to the increased borrowings as a result of the Acquisition.  While sales and cost of sales were higher, principally due to the higher live cattle prices and corresponding higher selling prices of beef products, operating income decreased $29.9 million or 30.2% over the prior year.  As a percent of sales, operating income was 1.7% and 2.7% for FYE 2004 and FYE 2003, respectively.  In May 2003 a cow in Canada was diagnosed with BSE, so the U.S. closed its border to the importation of live cattle from Canada.  The single case of BSE discovered in Washington state in December 2003 caused many international importers to close their borders to U.S. beef products.  As a result of these actions and their corresponding effects on the aggregate supply of cattle and aggregate demand for beef products, the U.S. beef industry experienced a noticeable compression of industry margins during the latter part of FYE 2004 and throughout FYE 2005.

32



Financial Statement Accounts

Net Sales. Pursuant to the cattle purchase agreement between USPB and NBP, all of the USPB sales are eliminated, leaving only sales of NBP. Prior to the Acquisition, pursuant to the cattle purchase agreement between the cooperative and FNB, all of the cooperative's sales were to FNB. NBP'sNBP’s net sales are generated from sales of boxed beef, case-ready beef and pork, chilled and frozen export beef, portion control beef and beef by-products. They are affected by the volume of animals processed and the value that is extracted from each animal. The value that is extracted from cattle processed, the cut-out value, is affected by beef prices and product mix, as premium products and further processed products generate higher prices and operating margins. NBP'sNBP’s total value-added sales were approximately $970.9$1,246.9 million in FYE 2005,2006, comprising approximately 22.4%26.9% of total net sales. NBP'sNBP’s value-added products contribute significantly more, in terms of gross margin, than its traditional boxed beef products and are an important component of profitability. Wholesale beef prices fluctuate seasonally because of higher demand during the summer months. Wholesale beef prices also fluctuate because of changes in supply and demand for competing proteins and other foods, as well as changes in cattle supply, which have typically followed ana ten to twelve year cycle, consisting of about six to seven years of expansion followed by one to two years of consolidation and three to four years of contraction. We believe we are currently in the expansion phase of this cycle. In addition, beef and by-product sales are affected by the general economic environment and other factors.

Cost of Sales.    USPB's cost of sales, both prior to and subsequent to the Acquisition are accounted for in the same manner as net sales. NBP'sNBP’s cost of sales is comprised of the cost of livestock and plant costs such as labor, packaging, utilities, and other facility expenses. Livestock is the highest cost component, representing 83.1%82.6% of cost of sales in FYE 2005.2006. Total livestock costs are a function of the volume of animals processed and the price paid for each animal. Cattle prices vary over time and are affected by production cycles, weather, feed prices and other factors that affect the supply of and demand for livestock. Historically, changes in cut-out values, a representation normally expressed on a per hundred weight basis, of the sales value of a beef carcass, for beef products and corresponding livestock costs have been positively correlated. As a result, profitability is primarily affected by the difference between cut-out value and livestock cost, the volume of livestock processed and its processing yields, the amount of saleable product, typically expressed as a percentage of a total carcass weight. Labor and freight represented 4.2%4.5% and 2.7%3.2%, respectively, of cost of sales in FYE 2005.2006.

Selling, General and Administrative Expenses.Selling expenses consist primarily of salaries, trade promotions, advertising, commissions and other marketing costs. General and administrative costs consist primarily of general management, insurance and professional expenses.

Outlook

The recent opening     Drought conditions in the early part of calendar 2006 contributed to poor pastures in many important grazing areas of the Canadian border to livecountry and subsequently caused larger than normal numbers of cattle imports tobeing placed on feed. The larger numbers of cattle on feed increased the U.S.supply of market ready cattle in the late spring and summer months of calendar 2006. This larger than normal increase in market ready cattle increased the continued uncertaintylikelihood of additional border openingsa decline in key markets creates a difficult environment for beefcattle supply being realized in the fall and winter months of 2006. A decrease in available market ready cattle could negatively impact industry participants.  In general, domestic cattle supplies are anticipated to improve over the next two to three years, but with questions remaining regarding international market access, margins can be expected to continue to be negatively impacted.margins.

Recent Developments and Market Trends

The closure of U.S. borders toSee the importation of Canadian feederdiscussions above in Item 1, Business – Industry Overview – BSE and fattened (readyRelated Export Bans for slaughter) animals, which occurred in May 2003 following the discoverya more complete discussion of bovine spongiform encephalopathy (BSE) in Alberta that same month, tightened.

     Effective May 30, 2006, USPB’s majority owned subsidiary, NBP, completed the U.S. cattle supply.  The closureacquisition of substantially all of the U.S. border to Canadian livestock resulted in higher overall feeder and fed cattle prices in the U.S., negatively impacting raw material prices.  Although the U.S. border opened to Canadian produced boxed beef in September 2003, the entire U.S. beef industry continued  at a price disadvantage for both raw materials and boxed beef prices while  the ban on importationassets of Canadian livestock was maintained.  The ban on the importation of Canadian cattle was in place from May 2003 to July 2005.

33



On December 23, 2003, it was announced by the United States Department of Agriculture (USDA) that a single Holstein dairy cow was discovered in the state of Washington to have tested positive for BSE.  The origin of the animal was subsequently traced to a farm in Canada.  Shortly after the announcement, several countries, including Japan, representing a substantial share of NBP's export business, closed their bordersBrawley Beef pursuant to the importationContribution Agreement with Brawley Beef and National Beef California, LP (NBC). NBC is a newly formed limited partnership with National Carriers, Inc., a wholly-owned subsidiary of edibleNBP, acting as its general partner. Brawley Beef was an alliance of cattle producers in Arizona and California who supplied the beef products from the United States.  Certain by-products have been classified as Specified Risk Materials (SRMs), and have been banned from useprocessing facility in feedstocks and the human food chain. Some of these products previously enjoyed a marketBrawley, California. The facility commenced operations in foreign countries. The closure of most foreign markets to U.S. beef following the discovery of this cow in Washington state, and lack of alternative U.S. markets for many products which previously were exported, negatively impacted the revenue per head enjoyed by the U.S. packing industry. December 2001.

All of these challenges resulted in tremendous volatility in U.S. livestock market prices during FYE 2003, FYE 2004 and FYE 2005. In FYE 2003, 2004 and 2005, NBP's total export sales were approximately 17%, 10% and 7% of total net sales.

During the second quarter of FYE 2004, NBP recorded charges to sales and cost of sales totaling approximately $18.8 million due to the market impacts of the closure of international borders as a result of the BSE discovery in late December 2003.     

On December 29, 2004, the USDA announced it had established conditions under which it would allow imports into the U.S. of live cattle under 30 months of age and certain other commodities from regions with effective BSE prevention and detection measures.  Prior to being able to import to the U.S., each country must undergo a thorough risk assessment to be recognized as a "minimal-risk region."  Canada was the first country recognized as a minimal-risk region and, as such, would have been eligible to export to the U.S. live cattle under 30 months of age (subject to certain restrictions), as well as certain other animals and products.  The risk assessment conducted by the USDA, as part of the rulemaking process to determine Canada's status as a minimal-risk region, included consideration of the possibility that Canada could experience additional cases of BSE.  The final rule was published in the January 4, 2005 Federal Register and was to become effective March 7, 2005, but was delayed by litigation.

On March 2, 2005, the U.S. District Court in Billings, Montana granted a preliminary injunction to delay the implementation of USDA's minimal-risk regions rule, temporarily blocking the opening of the Canadian border to the importation of live cattle under 30 months of age into the U.S.  On March 17, 2005, the U.S. Department of Justice, on behalf of the USDA, filed a request with the U.S. Court of Appeals for the Ninth Circuit requesting that the court overturn the decision issued by the U.S. District Court in Montana, which would re-establish trade with Canada for beef products and live cattle under 30 months of age.  The National Meat Association along with the Canadian Cattlemen's Association and the Alberta Beef Producers, who were all denied leave to intervene in the trial court, also appealed seeking to overturn the preliminary injunction.  In July 2005, the U.S. Court of Appeals for the Ninth Circuit overturned the March 2005 preliminary injunction issued by the U.S. District Court in Billings, Montana, which had continued the closure of the Canadian border to imports of live cattle.  The U.S. Court of Appeals ruling resulted in the immediate reopening of the Canadian border to live cattle imports.  A petition for rehearing of the Ninth Circuit's ruling to the entire panel of Ninth Circuit judges was rejected by the Ninth Circuit on October 13, 2005. Although the Court of Appeals action does not completely dispose of the action in the lower court, the lower court may or may not enter final rulings that will permit continued trade in live animals and beef products between the two countries.

Announcements of inconclusive, preliminary test results for BSE can be expected from time to time as a result of the sensitivity of the new screening regime.  Since the USDA enhanced surveillance program for BSE began in 2004, approximately 510,000 cattle have been tested for BSE using a rapid test.  Three of these animals tested inconclusive and were subsequently subjected to immunohistchemistry, or IHC, testing.  The IHC is an internationally recognized confirmatory test for BSE.  All three inconclusive samples tested negative using IHC.  The three samples were then tested by a second internationally recognized confirmatory test, referred to as the Western Blot test.  Of the three samples, two were negative but the third came back reactive.  Because of the conflicting results, the samples from the animal that tested reactive were sent to Weybridge, England for further testing and the results of that testing were confirmed on June 24, 2005 as positive for BSE.  In a USDA statement issued June 29, 2005, the cow was identified as born and raised in a herd in Texas and was approximately 12 years old.  In the USDA statement, USDA Chief Veterinarian John Clifford stated that the USDA believes, "it was most likely infected by consuming feed prior to the implementation of the ruminant-to-ruminant feed ban in 1997," and he emphasized "that this animal did not enter the human food chain."  Although the Secretary of the USDA has stated that there is no risk to animal or human health related to this case, the impact on the market created by this or other future tests is not possible to predict. Prior to this second confirmed case of BSE in the U.S., many countries had reopened their borders to allow the import of U.S. beef; however, this second confirmed case of BSE has led to uncertainty as to whether or when additional markets may reopen, and whether or when existing open markets may close.

34




On October 31, 2005, a Japanese food safety panel responsible for recommendations concerning the importation of beef concluded that the risk of BSE in cattle 20 months of age and younger from the United States was very low.  The recommendation sets in motion a series of actions, including a month-long period for public comments, which could lead to the resumption of U.S. beef imports potentially before the end of the calendar year.  There can be no assurance that this action will result in the resumption of trade, or if so, when this will occur.

The Company cannot presently assess the full economic impact of the consequences of BSE on the U.S. beef packing industry or on its operations.  NBP's revenues and net income may be materially adversely affected in the event existing import restrictions continue indefinitely, additional countries announce similar restrictions, additional regulatory restrictions are put into effect or domestic consumer demand for beef declines substantially.

Critical Accounting Policies and Estimates

The following discussion and analysis of financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates and revises its estimates based on historical experience and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from those estimates. Changes in our estimates could materially affect our results of operations and financial condition for any particular period. Our fiscal year ends on the last Saturday in August. We believe that our most critical accounting policies are:are as follows:

Accounting for Investment in NBP.  Prior to the Acquisition, FNB was accounted for as an equity investment under the equity method of accounting. USPB's share of FNB's income was recognized as equity in earnings of FNB in a single line item in our consolidated statements of operations and recorded in the consolidated balance sheet in a single line item - Investment in FNB. Distributions received from FNB reduced the investment balance. Upon acquiring a controlling interest in the Acquisition, inIn accordance with accounting principles generally accepted in the United States of America, NBP'sNBP’s financial position and results of operations are consolidated into our financial statements and all transactions between the two companies are eliminated in the consolidation. A minority interest is presented which represents the earnings of NBP attributable to those holding a minority interest in NBP.

Allowance for Returns and Doubtful Accounts. The allowance for returns and doubtful accounts reflects reserves for customer receivables to reduce receivables to amounts expected to be collected. Management uses significant judgment in estimating uncollectible amounts. In estimating uncollectible amounts, management considers factors such as current overall economic conditions, industry-specific economic conditions, historical customer performance, and anticipated customer performance. Specific accounts are also reviewed for collectibility. While management believes these processes effectively address our exposure to doubtful accounts, changes in the economy, industry or specific customer conditions may require adjustment to the recorded allowance for doubtful accounts. Management uses significant judgment in estimating amounts expected to be returned. Management considers factors such as historical performance and customer conditions in estimating return amounts.

35



Inventory Valuation. Inventories of NBP'sNBP’s beef processing operations, except supplies inventories, are determined using the first-in, first-out cost method or market. The cost of all other inventories is determined using the first-in, first-out method, specific or average cost methods. Management periodically reviews inventory balances and purchase commitments to estimate if inventories will be sold at amounts (net of estimated selling costs) less than their carrying amounts. If actual results differ from management estimates with respect to the selling of inventories at amounts less than their carrying amounts, NBP would adjust its inventory balances accordingly.

Goodwill. We recognize excess cost over the fair value of the net tangible and identifiable intangible assets acquired in a reporting unit, and record this excess as goodwill. We calculate the fair value of the applicable reporting unit using estimates of future cash flows. In accordance with Statement of Financial Accounting Standards (SFAS) 142,Goodwill and Other Intangible Assets,we assess the goodwill balance for impairment annually. This test involves comparing the fair value of each reporting unit to the unit’s book value to determine if any impairment exists. In connection with the Transaction,acquisition of Vintage Foods, L.P. during the fourth quarter of fiscal year 2006, we recognized excess cost over the fair value of the net tangible and identifiable intangible assets acquired, and recorded this excess as goodwill. On an annual basis, we assess the goodwill balance for impairment.  In accordance with Statement of Financial Accounting Standards (SFAS) 142, Goodwill and Other Intangible Assets, this test involves comparing the fair value of each reporting unit to the unit's book value to determine if any impairment exists.  We calculate the fair value of each reporting unit using estimates of future cash flows.  Goodwill was tested for impairment, and, as of August 27, 2005,26, 2006, management determined there was no impairment.

Workers'Workers’ Compensation Accrual. NBP incurs certain expenses associated with workers'workers’ compensation. To measure the expense associated with these costs, management must make a variety of estimates including employee accidents incurred but not yet reported. The estimates used by management are based on our historical experience as well as current facts and circumstances. NBP uses third-party specialists to assist management in appropriately measuring the expense and obligations associated with these costs.

Results of Operations

The following table shows consolidated statements of operations data for the periods indicated:

 Fiscal Years Ended
 August 27, August 28, August 30,
 
2005
 
2004
 
2003
   (in millions)  
Net sales$4,338.9  $4,093.5  $871.8 
         
Costs and expenses:        
      Cost of sales 4,229.9   3,973.7   853.6 
      Selling, general & administrative 34.0   34.8   5.7 
      Depreciation and amortization 24.4   21.2   2.1 
         
      Operating income 50.6   63.8   10.4 
         
Other income (expense):        
         
      Minority owners' interest in net income of        
         National Beef Packing Co. (8.5)  (19.4)  (4.9)
      Equity in income from Farmland National        
         Beef Packing Co.     22.6 
      Interest income 0.7   0.7   0.2 
      Interest expense (29.0)  (26.6)  (2.4)
      Interest rate exchange agreement 0.1   0.6   
      Other, net (5.3)    (1.7)
         
      Total other (expense) income (42.0)  (44.7)  13.8 
         
Net income$8.6  $19.1  $24.2 

 Fiscal Years Ended
 August August August
 26, 2006 27, 2005 28, 2004
   (in millions)  
Net sales$4,636.0  $4,338.9  $4,093.5 
Costs and expenses:        
      Cost of sales 4,503.8   4,229.9   3,973.7 
      Selling, general & administrative 37.6   34.0   34.8 
      Depreciation and amortization 28.7   24.4   21.2 
      Operating income 65.9   50.6   63.8 
  
   Other income (expense):        
      Minority owners' interest in net income of        
         National Beef Packing Co. (16.6)  (8.5)  (19.4)
      Interest income 1.3   0.7   0.7 
      Interest expense (32.4)  (29.0)  (26.6)
      Interest rate exchange agreement   0.1   0.6 
      Other, net 1.5   (5.3)  -
   Total other expense (46.2)  (42.0)  (44.7)
Net income$19.7  $8.6  $19.1 

     

36



The results of operations of NBP for the FYE August 26, 2006, the FYE August 27, 2005 and the FYE August 28, 2004 and the 24 days ended August 30, 2003 are consolidated in the respective periods and transactions between the USPB and NBP have been eliminated. Accordingly, these operating results

FYE August 26, 2006 compared to August 27, 2005

Net Sales.Net sales were $4,636.0 million for FYE 2006, an increase of $297.1 million, or 6.8%, compared to $4,338.9 million for FYE 2005. The increase resulted primarily from an increase of approximately 5.3% in the number of cattle processed, with 3.6% of that increase due to the acquisition of Brawley Beef, LLC, at average weights about 1.5% higher than the prior year, which translates to an increase in pounds of beef products sold in the period. Sales prices generally improved due to an improved product sales mix and a more favorable market environment for FYE 2006 compared to FYE 2005, including the resumption of shipments to Asian markets late in the fourth quarter of FYE 2006.

Cost of Sales.Cost of sales was $4,503.8 million for FYE 2006, an increase of $273.9 million, or 6.5%, from $4,229.9 million for FYE 2005. The majority of the increase came as a result of an increase of approximately 5.3% in the number of cattle processed, with 3.6% of that increase due to the acquisition of Brawley Beef, LLC, at average weights about 1.5% higher than the prior year, and slight increase in average live cattle prices of approximately 0.2%. The first half of FYE 2006 was negatively impacted by the tightened supply of market-ready cattle; increased supply of market-ready cattle in the second half of FYE 2006 helped lower live cattle costs during that period. Cost of sales, as a percentage of net sales, was 97.1% and 97.5% for FYE 2006 and FYE 2005, respectively.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $37.6 million for FYE 2006 compared to $34.0 million for FYE 2005, an increase of $3.6 million or 10.6%. The increase resulted primarily from an approximate $2.1 million increase in payroll and related expenses, an increase of approximately $1.8 million in marketing and travel expense associated with supporting two new marketing programs, increased travel associated in part from the Brawley Beef, LLC acquisition, and increased fuel costs; partially offset by a reduction of $0.6 million in bad debt reserve. Selling, general and administrative expenses, as a percentage of net sales, were 0.8% and 0.8% for FYE 2006 and FYE 2004 are not consistent2005, respectively.

Results of Operations

      The following table shows consolidated statements of operations data for the periods indicated:


Depreciation and Amortization Expense. Depreciation and amortization expenses were $28.7 million for FYE 2006 compared to $24.4 million for FYE 2005, an increase of $4.3 million, or 17.6%. This increase was due to additional assets being placed into service primarily at our two Kansas beef processing plants during FYE 2006, as well as additional assets acquired through the purchase of Brawley Beef, LLC in the fourth quarter of FYE 2006.

Operating Income. Operating income was $65.9 million for FYE 2006 compared to $50.6 million for FYE 2005, an increase of $15.3 million, or 30.2%. Operating income, as a percentage of net sales, was 1.4% for FYE 2006 and 1.2% for FYE 2005. The first half of FYE 2006 was negatively impacted by the tightened supply of market-ready cattle; increased supply of market-ready cattle in the second half of FYE 2006 helped lower live cattle costs during that period, which helped improve gross margin for FYE 2006. Gross margin improvements were primarily due to a more favorable market environment for FYE 2006 compared to FYE 2005, including the resumption of shipments to Asian markets late in the fourth quarter of FYE 2006.

Minority Owners’ Interest in NBP. Minority interest in NBP in FYE 2006 was $16.6 million compared to $8.5 million in FYE 2005, an increase of $8.1 million, or 95.3%. The increase is due to higher net income earned by NBP. The minority interest in NBP represents the minority owners’ equity in NBP’s earnings.

Interest Expense. Interest expense was $32.4 million for FYE 2006 compared to $29.0 million for FYE 2005, an increase of $3.4 million, or 11.7%. The increase was due primarily to higher average interest rates in FYE 2006 compared to FYE 2005, as evidenced by an increase of approximately 160 basis points in the published LIBOR index interest rates as of August 26, 2006 compared to August 27, 2005, which is the basis for interest rates on most of our variable rate borrowings. Additionally, the weighted average of variable rate debt increased primarily from the acquisition of Brawley Beef, LLC.

     Other, Net. Other non-operating income, net was $1.5 million in FYE 2006 compared to other non-operating expense, net of $5.3 million in FYE 2005, a variance of $6.8 million. FYE 2006 includes an approximate $1.4 million reduction in postretirement benefit obligation necessitated by a significant reduction of participants and premiums because of changes in Medicare, and an approximate $0.6 million in income for a settlement of a lawsuit related to corrugated packaging materials, partially offset by income tax expense of $1.5 million recorded on income for FYE 2006 for National Carriers, Inc., which is organized as a C Corporation. FYE 2006 includes $0.6 million in expense for the write-off of unamortized loan costs associated with amending and restating our fifth amended and restated credit facility. FYE 2003 operating results.2005 includes $3.2 million in expense for the write-off of unamortized loan costs associated with amending and restating our fourth amended and restated credit facility and income tax expense of $1.9 million recorded on the income for FYE 2005 for National Carriers, Inc.

FYE August 27, 2005 compared to August 28, 2004

Net Sales. Net sales were $4,338.9 million for FYE 2005, an increase of $245.4 million, or 6.0%, compared to $4,093.5 million for FYE 2004. The increase resulted primarily from an increase of approximately 4.4% in the number of cattle processed, at average weights about 2.9% higher than the prior year, which translates to an increase in pounds of beef products sold in the period. Overall volume was higher due in part to long-term expansion at the Dodge City beef processing facility, partially offset by market instability caused by the uncertainties created by BSE discoveries in the U.S.

Cost of Sales. Cost of sales were $4,229.9 million for FYE 2005, an increase of $256.2 million, or 6.4%, from $3,973.7 million for FYE 2004. The majority of the increase came as a result of an increase of approximately 4.4% in the number of cattle processed, at average weights about 2.9% higher than the prior year, partially offset by an approximate 1.7% decrease in average live cattle prices. Cost of sales, as a percentage of net sales, was 97.5% and 97.1% for FYE 2005 and FYE 2004, respectively.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $34.0 million for FYE 2005 compared to $34.8 million for FYE 2004, a decrease of $0.8 million or 2.3%. The decrease was the result of a $2.2 million recovery of a bad debt in FYE 2005 that had been written off in FYE 2003 due to the bankruptcy of one of NBP'sNBP’s customers, and a decrease of approximately $0.5 million in professional services partially offset by a $1.3 million increase in payroll and related expenses and an expense for state franchise taxes of approximately $0.3 million. Selling, general and administrative expenses, as a percentage of net sales, were 0.8% and 0.9% for FYE 2005 and FYE 2004, respectively.


Depreciation and Amortization Expense. Depreciation and amortization expenses were $24.4 million for FYE 2005 compared to $21.2 million for FYE 2004, an increase of $3.2 million, or 15.1%. This increase was due to additional assets being placed into service primarily at our beef processing plants during FYE 2005 and FYE 2004.

Operating Income. Operating income was $50.6 million for FYE 2005 compared to $63.8 million for FYE 2004, a decrease of $13.2 million, or 20.7%. Operating income, as a percentage of net sales, was 1.2% for FYE 2005 and 1.6% for FYE 2004. A small number of cases of BSE in Canada and the U.S. since May 2003 has caused many international importers to close their borders to U.S. beef products. As a result of these actions and their corresponding effects on the aggregate supply of cattle and aggregate demand for beef products, the U.S. beef industry has experienced a noticeable compression of industry margins during the latter part of FYE 2004 and all of FYE 2005.

Minority Owners'Owners’ Interest in NBP. Minority interest in NBP in FYE 2005 was $8.5 million compared to $19.4 million in FYE 2004, a decrease of $10.9 million, or 56.2%. The decrease is primarily due to lower net income earned by NBP. The minority interest in NBP represents the minority owners'owners’ equity in NBP'sNBP’s earnings.

Interest Expense. Interest expense was $29.0 million for FYE 2005 compared to $26.6 million for FYE 2004, an increase of $2.4 million, or 9.0%. The increase was due primarily to the higher average interest rates in FYE 2005 compared to FYE 2004 as evidenced by an increase of approximately 200 basis points in the published LIBOR index interest rates as of August 27, 200526, 2006 compared to August 28, 2004,27, 2005, which is the basis for interest rates on most of our variable rate borrowings.

Other, Net. Other, net expenses were $5.3 million for FYE 2005 compared to $0.0 million for FYE 2004. Other, net expenses are lower in FYE 2005 compared to FYE 2004 due to $3.2 million in expense for the write-off of unamortized loan costs associated with amending and restating NBP's existing seniorNBP’s fourth amended and restated credit facility, and income tax expense of $1.9 million recorded on the income for FYE 2005 for National Carriers, Inc., which is organized as a C corporation. FYE 2004 includes a $1.1 million gain received through the demutualization of a company which held annuities for NBP employees, offset by income tax expense of $0.7 million recorded on the income for FYE 2004 for National Carriers, Inc. and tax accruals of $0.5 million in consideration of the potential recharacterization of income from patronage-source to nonpatronage-source,non-patronage-source, which could be asserted by the IRS.

37



FYE August 27, 2004  compared to August 30, 2003

Net Sales. Net sales were $4,093.5 million for FYE 2004 compared to $871.8 million for  FYE 2003, an increase of $3,221.7 million or 369.5%. The increase was the direct result of consolidating NBP's sales of $4,093.5 million and eliminating the intercompany sales of $614.3 million from the cooperative to NBP. The decline in the cooperative's sales to NBP of $10.9 million, or 1.7%, was driven by a decrease of 15.0% in the number of cattle sold, offset by an increase in the average sales price of 16.2%.

Cost of Sales. Cost of sales were $3,973.7 million for FYE 2004 compared to $853.6 million for FYE 2003, an increase of $3,120.1 million or 365.5%. The increase was the direct result of consolidating NBP's cost of sales of $3,973.7 million and eliminating the intercompany cost of sales of $614.3 million.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $34.8 million for FYE 2004 compared to $5.7 million for FYE 2003, an increase of $29.1 million or 510.5%. The increase was the direct result of consolidating NBP's expenses of $29.6 million that were not consolidated in the 2003 period.

Depreciation and Amortization Expense. Depreciation and amortization expenses were $21.2 million for FYE 2004 compared to $2.1 million for FYE 2003, an increase of $19.1 million or 909.5%. This increase was the direct result of consolidating NBP's depreciation of $21.2 million which included increases that resulted from depreciation on new capital projects placed in service, from the depreciation of assets acquired in the acquisition of National Carriers, Inc.  Additionally, a small increase resulted from the amortization of intangible assets identified in the purchase accounting under the Acquisition.

Operating Income. Operating income was $63.8 million for FYE 2004 compared to $10.4 million for FYE 2003, a favorable increase of $53.4 million. Operating income, as a percentage of net sales, was 1.6% for FYE 2004 and 1.2% for FYE 2003. This is the direct result of consolidating NBP's results of operations in 2004 of $69.0 million which was 1.7% of our consolidated sales.

Equity in Earnings. In FYE 2004 the results of NBP were consolidated while earnings in FNB were $22.6 million for FYE 2003. The minority interest in NBP represents the minority owners' equity in NBP's earnings. 

Interest Expense. Interest expense was $26.6 million for FYE 2004 compared to $2.4 million for FYE 2003, an increase of $24.2 million. The increase was due primarily to the higher level of borrowings in FYE 2004 as a result of the Acquisition.

Other, Net. Other, net was income of $0.0 million for FYE 2004 compared to an expense of $1.7 million for FYE 2003. In 2004, NBP received $1.1 million through the demutualization of a company which held annuities for NBP employees, and the loss in NBP's equity investment of aLF Ventures, LLC of $0.8 million. These were offset by tax accruals of $0.5 million in consideration of the potential recharacterization of income from patronage-source to nonpatronage-source, which could be asserted by the IRS. FYE 2003 is primarily due to the consolidation of NBP's net expense of $1.7 million for the 24 day period from August 7 to August 30, 2003. This net expense consisted of $1.7 million of bridge loan commitment fees, $1.6 million in the write-off of unamortized debt issuance costs (both associated with the Acquisition), $0.9 million of expenses associated with an investment in an electronic commerce venture, as offset by receipt of a $2.3 million award in an antitrust vitamin litigation.

Liquidity and Capital Resources

     As of August 26, 2006 we had net working capital of $226.6 million, which included $4.9 million in distributions payable, and cash and cash equivalents of $58.4 million, including $4.0 million restricted to IRB approved expenditures. As of August 27, 2005, we had net working capital of $178.6 million, which included $1.9 million in distributions payable, and cash and cash equivalents of $54.4 million, including $3.9 million restricted to IRB approved expenditures. As of August 28, 2004, we had net working capital of $179.9 million, which included $3.1 million in partner and member distributions payable, and cash and cash equivalents of $43.6 million, including $8.4 million restricted to IRB approved expenditures.  Our primary sources of liquidity are cash flow from operations and available borrowings under ourNBP’s fifth amended and restated credit facility.

38



As of August 27, 2005,26, 2006, we had $315.0$383.9 million of long-term debt, of which $1.0$3.4 was classified as a current liability. As of August 27, 2005, NBP's26, 2006, NBP’s fifth amended and restated credit facility consisted of a $120.0$170.0 million term loan, all of which $120.0 million was outstanding, a term loan with CoBank of which $6.2$5.2 million was outstanding and a $140.0$160.0 million revolving line of credit loan, which had outstanding borrowings of $15.0$18.9 million, outstanding letters of credit of $44.0$53.0 million and available borrowings of $74.1$88.1 million, based on the most restrictive financial covenant calculations. Cash flow from operations and borrowings under NBP'sNBP’s fifth amended and restated credit facility have funded itsacquisitions, working capital requirements, capital expenditures and other general corporate purposes. We were in compliance with all financial covenants as of August 27, 2005.26, 2006.

In addition to outstanding borrowings under its fifth amended and restated credit facility, NBP had outstanding borrowings under industrial revenue bonds of $13.8$20.7 million, Senior Notes of $160.0 million and senior notescapital lease and other obligations of $160.0$9.1 million as of August 27, 2005.26, 2006.


Capital spending through FYE 20062007 is expected to approximate $40.0 million, with projects already initiated at August 27, 2005 accounting for $5.5 million of that amount.$50.0 million. These expenditures as well as proposed new capital projects expected to start during FYE 2006, are primarily for plant expansion, equipment renewals and improvements.

The Company believes that available borrowings under NBP'sNBP’s fifth amended and restated credit facility and cash provided by operating activities will be sufficient to support its working capital, capital expenditures and debt service requirements for the foreseeable future. NBP'sNBP’s ability to generate sufficient cash, however, is subject to certain general economic, financial, industry, legislative, regulatory and other factors beyond their control.

Operating Activities

     Net cash provided by operating activities was $44.6 in FYE 2006 and $60.0 million in FYE 2005. The $15.4 million decrease was due primarily to a net increase in working capital requirements in the current period resulting from increased beef inventory levels, partially offset by an increase in accounts receivable collections and by increased net income in FYE 2006.

Net cash provided by operating activities was $60.0 million in FYE 2005 and $39.7 million in FYE 2004. The $20.3 million increase was due primarily to an increase in working capital resulting partially from increased accounts receivable collections, offset by lower net income in FYE 2005.

Net cash provided by operating activities was $39.7 million in FYE 2004 and $20.4 million in FYE 2003. The $19.3 million increase was due primarily to the consolidation of NBP.

Investing Activities

     Net cash used in investing activities was $32.9 million in FYE 2006 compared to $16.7 million for FYE 2005, an increase of $16.2 million. The increase was due to an increase in capital spending in FYE 2006.

Net cash used in investing activities was $16.7 million in FYE 2005 compared to $31.2 million for FYE 2004, a decrease of $14.5 million. The decrease was due primarily to decreased capital spending in FYE 2005.

Net cash used in investing activities was $31.2 million in FYE 2004 compared to $227.9 million for FYE 2003, a decrease of $196.7 million. The decrease was due primarily to the 2003 funding of the Acquisition and funding of the acquisition of National Carriers. 

Financing Activities

     Net cash used in financing activities was $7.7 million in FYE 2006 compared to net cash used in financing activities of $32.5 million for FYE 2005. The $24.8 million change was due primarily to an increase in borrowings on the term note payable of $46.4 million and revolving credit lines of $31.0 million in FYE 2006 compared to FYE 2005, partially offset by the repayment of $52.9 million of Brawley Beef, LLC debt in FYE 2006.

Net cash used in financing activities was $32.5 million in FYE 2005 compared to $7.2 million for FYE 2004. The increase in FYE 2005 of $25.3 million was due primarily to a lower revolving credit line balance in FYE 2005, partially offset by a decrease in the member distributions paid in FYE 2005.

Net cash used in financing activities was $7.2 million in FYE 2004 compared to cash provided by financing of $233.7 million for FYE 2003. The decrease in FYE 2004 of $240.9 million was due primarily to the FYE 2003 issuance of Senior Notes and member contributions associated with the Acquisition.

39



CoBank Term Debt

USPB'sEffective June 1, 2006, and related to the purchase of the assets of Brawley Beef, more fully described inRecent Developments above, USPB amended the CoBank term debt agreement to facilitate USPB’s acquisition of additional membership units in NBP. USPB contributed partnership units in NBC, which were acquired from Brawley Beef, LLC, to NBP in exchange for an additional (i) 5,899,297 Class A units and (ii) 664,475 Class B-1 units in NBP. The amendment also modifies the term “Collateral” to not include the partnership units in NBP and exempts USPB from being required to grant CoBank a security interest in the NBC partnership units. The amendment also permits USPB to have up to a one-hundred percent (100%) interest in NBP and to acquire the NBC partnership units and additional units in NBP.

     Effective July 19, 2006, USPB amended the CoBank term debt agreement to cause distributions that are made in excess of the amount allowed (Excess Distribution) to be deducted from the amount which could otherwise be distributed to its members for the subsequent periods until the Excess Distribution has been fully deducted.


     USPB’s CoBank term debt of approximately $6.2$5.2 million is payable in quarterly installments with final payment due in July 2011, bearing interest at the 90 day LIBOR index plus 2.50%, adjusted quarterly (6.01%(8.01% at August 26, 2006, 6.01% at August 27, 2005, and 4.10% at August 28, 2004 and 3.36% at August 30, 2003)27, 2004).

The debt agreement with CoBank contains certain covenants which require, among other things:

The Company was in compliance with all CoBank debt covenants as of August 27, 2005.26, 2006. The debt is secured by USPB'sUSPB’s interest in NBP.

USPB's     USPB’s rate margin, which is adjusted annually, is determined pursuant to a table based on the NBP leverage ratio, as of the end of each fiscal year of NBP. Based on the table, the rate margin was 2.50% at bothFYE August 26, 2006, August 27, 2005 and August 28, 2004 and 2.25% at August 30, 2003.  2004.

Amended and Restated Senior Credit FacilityFacilities

Effective December 30, 2004,June 1, 2006, and related to the purchase of the assets of Brawley Beef, more fully described in Item 1.Business – Business Strategy, NBP amended and restated its existing senior credit facility with a consortium of banks. The facility now consists of a $120.0$170.0 million term loan that matures in December 2014May 2016 and a $140.0$160.0 million revolving line of credit loan that matures in December 2009May 2011 that is subject to certain borrowing base limitations. TheThis fifth amendment and restatement is within the scope of the Emerging Issues Task Force (EITF) 96-19,Debtor'sDebtor’s Accounting for a Modification or Exchange of Debt Instruments as well as EITF 98-14,Debtor'sDebtor’s Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements. In accordance with that guidance, a portion of the unamortized loan costs of approximately $2.6$0.5 million from the previousfourth amended and restated credit facility as well as additional finance and legal charges associated with the new fifth amended and restated credit facility of approximately $0.6$0.1 million were recordedexpensed in Other, net in the Statement of Operations during the fiscal year 2005. ended August 26, 2006.

The borrowings under the revolving loan are available for NBP'sNBP working capital requirements, capital expenditures and other general corporate purposes. The fifth amended and restated credit facility is secured by a first priority lien on substantially all of NBP'sNBP’s assets. The principal amount outstanding under the term loan is due and payable in equal quarterlysemi-annual installments of $6.0 million on the last business day of each March, June September and December commencing June 30, 2011 in equal installments of approximately $2.8 million, with any and all remaining principal outstanding being due and payable on March 31, 2010 and ending on December 29, 2014.the maturity date. Prepayment is allowed at any time.

NBP's     The fifth amended and restated credit facility contains covenants that limit its ability to incur additional indebtedness, sell or dispose of assets, make capital expenditures, pay certain dividends and prepay or amend certain indebtedness among other matters. The fifth amended and restated credit facility also contains a provision for a conversion to more favorable interest rates and more restrictive financial covenants on the earlier of (a) June 1, 2006August 25, 2007 or (b) ourNBP’s election (the Conversion(Conversion Date). At NBP's election,Currently, the interest may be computed atrate for the term loan is (a) the Base Rate (as defined in the credit agreement) plus an applicable margin75 basis points or (b) the LIBOR Rate (as defined in the credit agreement) plus 275 basis points, or a LIBOR rate plus an applicable margin.combination of these rates at our election. As of August 27, 2005,26, 2006, the interest rate for the term loan was equal to LIBOR8.0625%. Currently, the interest rate for the revolving loan is (a) the Base Rate plus 27550 basis points (6.1%) andor (b) the weighted averageLIBOR Rate plus 250 basis points, or a combination of these rates at our election. As of August 26, 2006, the interest rate for the revolving loan was equal to LIBOR plus 250 basis points (6.0%)8.75%. After the Conversion Date, the interest rate for the term loan and revolving loan iswill be determined by reference to a matrix of rates keyed to our funded debt to EBITDA (as defined in the credit agreement) ratio.

 


40



The fifth amended and restated credit facility also imposes certain financial covenants. From DecemberMay 30, 20042006 until the earlier of February 28, 2007 or the Conversion Date, NBP isNBP’s required to (i) have as of the end of each fiscal quarter a minimum four-quarter rolling EBITDA of $50.0 million and (ii) maintain at all times a minimum Borrowing Base Availability (as defined in the credit agreement) of at least $25.0 million. After February 28, 2007 until the Conversion date, NBP’s required to (i) have as of the end of each fiscal quarter a minimum four-quarter rolling EBITDA of $60.0 million and (ii) maintain at all times a minimum Borrowing Base Availability of at least $25.0 million. After the Conversion Date, NBP will be subjectNBP’s required to covenants imposingmaintain at all times a specified maximum funded debt to EBITDA ratio, a maximum senior secured funded debt to EBITDA ratio, a minimum four-quarter rolling EBITDA and a minimum four-quarter rolling debt service coverage ratio. As definedIn addition, NBP’s annual net capital expenditures are limited to $50 million in the amended credit facility, EBITDA contains specified adjustments.  On August 27, 2005, NBP was in compliance with all financial covenants.fiscal year 2007 and each fiscal year thereafter.

Effective July 7, 2005, the     The fifth amended and restated credit facility was further amendedcontains customary affirmative covenants, including furnishing financial statements, maintenance of insurance, conduct of business, maintenance of properties, and compliance with laws. The facility also contains customary negative covenants, including covenants restricting NBP’s ability to allow NBP to purchase up to $30 million in cumulative purchase price (including any premium) of our 10‑1/2% Senior Notes due August 1, 2011 so long as NBP is not in default under the facility at the time of the purchasepay certain distributions, incur additional indebtedness, merge with another entity, sell or as a result of the purchase.

Effective October 14, 2005, NBP further amended its existing senior credit facility to reflect changes in the covenant limiting its net capital expenditures.  There were no changes to the remaining covenants in the credit facility.  NBP's net capital expenditures are now limited to $64 million in the combined period of FYE 2005dispose assets, and FYE 2006, $35 million in FYE 2007 and $40 million in FYE 2008 and fiscal years thereafter.  Prior to this amendment, FYE 2005 and FYE 2006 were separately limited to $32 million each year.make investments or acquire assets, among other restrictions.

Industrial Revenue Bonds

In conjunction with the fourth amendment and restatement of its creditour NBP’s facility, effective December 30, 2004, NBP entered into a transaction with the City of Dodge City, Kansas, in order to provide NBP property tax savings. Under the transaction, the City purchased ourNBP’s Dodge City facility (the "facility"“facility”) by issuing $102.3 million in bonds due in December 2014, and leased the facility to NBP for an identical term under a capital lease. The City'sCity’s bonds were purchased by NBP using proceeds of its term loan under the fourth amended and restated credit facility. Because the City has assigned the lease to the bond trustee for the benefit of NBP as the sole bondholder, NBP, in effect, controls enforcement of the lease against itself. As a result of the capital lease treatment, the facility will remain a component of property, plant and equipment in NBP'sNBP’s consolidated balance sheet. As a result of the legal right of offset, the capital lease obligation and the corresponding bond investments will be eliminated in consolidation. The transaction provides NBP with property tax exemptions for the leased facility, which, after netting payments to the City and local school district under payment in lieu of tax agreements, result in an annual property tax savings of approximately 25%. The facility remains subject to a prior mortgage and security interest in favor of the lenders under the senior credit facility. Additional revenue bonds may be issued to cover the costs of certain improvements to this facility. The total amount of revenue bonds authorized for issuance is $120.0 million.

The cities of Liberal and Dodge City, Kansas issued an aggregate of $13.8 million of industrial development revenue bonds on NBP'sNBP’s behalf to fund the purchase of equipment and construction of improvements at its facilities in those cities. These bonds were issued in 1999 and 2000 in four series of $1.0 million, $1.0 million, $6.0 million and $5.8 million and are due on demand or on February 1, 2029, March 1, 2027, March 1, 2015 and October 1, 2009. However, because each series of bonds is backed by a letter of credit under our existing amended and restated credit facility, these bonds have been presented as non-current obligations. Pursuant to a lease agreement, NBP leases the facilities, equipment and improvements from the respective cities and make lease payments in the amount of principal and interest due on the bonds. Each series of bonds is backed by a letter of credit under NBP's amended and restated credit facility.

The bonds issued in 1999 and 2000 are variable rate demand obligations that bear interest at a rate that is adjusted weekly, which rate will not exceed 10% per annum. The average per annum interest rate for each series of bonds was 2.3%3.4% in FYE 2005.2006. NBP has the option to redeem a series of bonds at any time for an amount equal to the principal plus accrued interest to the date of such redemption. The holders of the bonds have the option to tender the bonds upon seven days'days’ notice for an amount equal to par plus accrued interest. To the extent that the remarketing agent for the bonds is unable to resell any of the bonds that are tendered, the remarketing agent will use the letter of credit to fund such tender.

41     In connection with the Brawley Beef acquisition, NBP assumed the obligation under a Trust Indenture securing $6.8 million in California Pollution Control Financing Authority Tax-Exempt variable rate demand solid waste disposal revenue bonds dated as of October 1, 2001. The bonds bear a rate that is adjusted weekly, which rate will not exceed 12% per annum. The average per annum interest rate for this series of bonds for the period from the Brawley acquisition date until the end of FYE 2006 was 3.7%. These bonds have been presented as non-current. NBP has the option to redeem all or a portion of the bonds at any time for an amount equal to the principal plus accrued interest to the date of such redemption. The holders of the bonds have the option to tender the bonds upon seven days’ notice for an amount equal to par plus accrued interest. To the extent that the remarketing agent for the bonds is unable to resell any of the bonds that are tendered, the remarketing agent will use the letter of credit to fund such tender.




Utilities Commitment

Effective December 30, 2004, NBP finalized an agreement with the City of Dodge City, Kansas, whereby in consideration of certain improvements made to the city water and wastewater systems, NBPit has committed to make a series of service charge payments totaling $19.3 million over a 20 year period, of which $0.8 million wasand $1.2 million were paid in fiscal year 2005.years 2005 and 2006, respectively. Payments under the commitment will be $1.2 million in fiscal year 2006, $1.4 million in each of the fiscal yearyears 2007 $1.4 million in fiscal year 2008, $1.4 million in fiscal yearthrough 2009, and $1.7 million in fiscal year 2010 and $0.8 million in fiscal year 2011, with the balance of $11.4$10.6 million to be paid in subsequent years.

10 ½% Senior Notes

Concurrent with the Acquisition, NBP issued the     The 10 ½% Senior Notes that will mature on August 1, 2011. Interest on the Senior Notes is payable semi-annually in arrears on August 1 and February 1 of each year, which commenced on February 1, 2004. The Senior Notes are senior unsecured obligations, ranking equal in right of payment with all of ourits other senior unsecured obligations. With limited exceptions, the Senior Notes are not redeemable before August 1, 2007. During the 12 month period commencing August 1, 2007 and August 1, 2008, the Senior Notes may be redeemed at 105.250% and 102.625%, respectively, of the principal amount. Thereafter, the Senior Notes may be redeemed at 100% of face value. The Indenture governing the Senior Notes contains certain covenants that restrict NBP'sits ability to:

Cash Payment Obligations

The following table describes our cash payment obligations as of August 27, 200526, 2006 (in thousands):

Total

Year 1
FY06

Year 2
FY07

Year 3
FY08

Year 4
FY09

Year 5
FY10

After  
Year 5

Term loan facility

$  126,178

$      1,030

$    1,030

$      1,030

$      1,030

$    13,030

$  109,028

Revolving credit facility

15,000

-     

-     

-     

-     

15,000

-     

Senior Notes

160,000

-     

-     

-     

-     

-     

160,000

Industrial Revenue Bonds

13,850

-     

-     

-     

-     

5,850

8,000

Operating leases

34,962

8,514

7,067

6,115

4,109

3,650

5,507

Purchase commitments

4,708

4,708

-     

-     

-     

-     

-     

Cattle commitments (1)

61,019

61,019

-     

-     

-     

-     

-     

Utilities commitment

18,503

1,179

1,418

1,399

1,379

1,737

11,391

     Total

$  434,220

$    76,450

$    9,515

$   8,544

$  6,518

$    39,267

$  293,926

   Year 1 Year 2 Year 3 Year 4 Year 5 After
 Total FY 07 FY 08 FY 09 FY 10 FY 11 Year 5
Term loan facility$175,149 $1,030 $1,030 $1,030 $1,030 $1,029 $170,000
Revolving credit facility 18,864  -  -  -  -  18,864  -
Senior Notes 160,000  -  -  -  -  160,000  -
Industrial Revenue Bonds 20,665  -  -  -  5,850  -  14,815
Capital Leases 9,018  2,370  2,416  3,039  1,193  -  -
City of Brawley loan 200  -  -  40  40  40  80
Operating leases 40,220  11,671  10,480  8,143  5,797  2,926  1,203
Purchase commitments 11,641  11,641  -  -  -  -  -
Cattle commitments(1) 68,932  68,932  -  -  -  -  -
Utilities commitment 17,320  1,417  1,399  1,379  1,734  818  10,573
   Total$522,009 $97,061 $15,325 $13,631 $15,644 $183,677 $196,671

(1) NBP makes a verbal commitment to cattle producers to purchase cattle about one week in advance of delivery of the live animals to ourits plants, with the actual price paid for the cattle determined after the cattle are delivered and inspected at our facilities. This amount approximates ourits outstanding cattle commitments at August 27, 2005.26, 2006.

42




Off-Balance Sheet Arrangements

As of August 27, 200526, 2006 we did not have any significant off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Inflation

We believe that our results of operations are not materially affected by moderate changes in the inflation rate. Inflation and changing prices did not have a material affect on our operations in FYE 2006, 2005 2004 and 2003.2004. Severe increases in inflation, however, could affect the global and U.S. economies and could have an adverse affect on our business, financial condition and results of operations.

Seasonality and Fluctuations in Operating Results

The Company'sCompany’s operating results are influenced by seasonal factors in the beef industry. These factors affect the price that we pay for livestock as well as the ultimate price at which NBP sells its products. The seasonal demand for beef products is highest in the summer and fall months as weather patterns permit more outdoor activities and there is an increased demand for higher value items that are grilled, such as steaks. Both live cattle prices and boxed beef prices tend to be at seasonal highs during the summer and fall. Because of higher consumption, more favorable growing conditions and the housing of animals in feedlots for the winter months, there are generally more cattle available in the summer and fall.

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Disclosures

The principal market risks affecting our business are exposure to changes in prices for commodities, such as livestock and boxed beef.beef, and interest rate risk.

Commodities.    NBP usesWe use various raw materials, many of which are commodities. Raw materials are generally available from several different sources, and NBPwe presently believesbelieve that itwe can obtain them as needed. Commodities are subject to price fluctuations that may create price risk. When appropriate, NBPwe may hedge commodities in order to mitigate this price risk. While this may tend to limit NBP'sour ability to participate in gains from commodity price fluctuations, it also tends to reduce the risk of loss from changes in commodity prices. NBP reflectsWe reflect commodity contract gains and losses as adjustments to the basis of underlying commodities purchased; gains or losses are recognized in the statement of operations as a component of costs of goods sold.

NBP purchases     We purchase cattle for use in itsour processing businesses. When appropriate, NBP enterswe enter into forward purchase contracts at prices determined prior to the delivery of the cattle. The commodity price risk associated with these activities can be hedged by selling (or buying) the underlying commodity, or by using an appropriate commodity derivative instrument. The particular hedging instrument NBP useswe use depends on a number of factors, including availability of appropriate derivative instruments.

NBP sells     We sell commodity beef products in itsour business. Commodity beef products are subject to price fluctuations that may create price risk. When appropriate, NBP enterswe enter into forward sales contracts at prices determined prior to shipment. We may hedge the commodity price risk associated with these activities in order to mitigate this price risk. While this may tend to limit NBP'sour ability to participate in gains from commodity price fluctuations, it also tends to reduce the risk of loss from changes in commodity beef prices. NBP reflectsWe reflect commodity contract gains and losses as adjustments to the basis of underlying commodities sold; gains or losses are recognized in the statement of operations as a component of net sales.

43



NBPWe may use futures contracts in order to reduce exposure associated with entering into firm commitments to purchase live cattle at prices determined prior to delivery of the cattle as well as firm commitments to sell certain beef products at sales prices determined prior to shipment. In accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended, NBP accountswe account for futures contracts and their related firm purchase commitments at fair value. MostCertain firm commitments for live cattle purchases and all firm commitments for boxed beef sales are treated as "normal“normal purchases and sales"sales” and not marked to market. SFAS No. 133 imposes extensive recordkeeping requirements in order to treat a derivative instrument as a hedge for accounting purposes. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the instrument and the related change in fair value of the underlying commitment. For derivatives that qualify as effective hedges, the change in fair value has no net effect on earnings until the hedged transaction affects earnings. For derivatives that are not designated as hedging instruments, or for the ineffective portion of a hedging instrument, the change in fair value does affect current period net earnings.


While NBP management believes each of these instruments help mitigate various market risks, they are not designated and accounted for as hedges under SFAS No. 133 as a result of the extensive recordkeeping requirements of this statement. Accordingly, the gains and losses associated with the change in fair value of the instrument and the offsetting gains and losses associated with changes in the market value of certain of the firm purchase commitments related to the futures contracts are recorded to income and expense in the period of change.

The following     While we previously presented the market value of commodity derivative instruments and firm commitments in a table, describeswe currently use sensitivity analysis to evaluate the numbereffect that changes in the market value of futures positionscommodities will have on these commodity derivative instruments. We feel that sensitivity analysis more appropriately reflects the potential market value exposure associated with the use of derivative instruments. As of August 26, 2006, and August 27, 2005, the potential change in the fair value of those positionsapplicable commodity prices, assuming a hypothetical 10% decrease in the underlying commodity price in each year, was $1.4 million and related firm commitments at August 27, 2005 and August 28, 2004.  A position in live cattle consists of 40,000 pounds.  Firm commitments for purchase are for live cattle and firm commitments for sales are for boxed beef (dollars in thousands).less than $0.1 million, respectively.

 Positions expiring  
 within one year Fair Value
August 27, 2005   
Live Cattle   
   Futures long  
   Futures short443 (51)
   Firm Commitments Purchase  62 
   Firm Commitments Sale  
August 28, 2004   
Live Cattle   
   Futures long  
   Futures short55 96 
   Firm Commitments Purchase  (96)
    Firm Commitments Sale   - 

Foreign Operations.Transactions denominated in a currency other than an entity'sentity’s functional currency may expose that entity to currency risk. Although NBP operateswe operate in international markets including Japan and South Korea, product sales are predominately made in United States dollars and therefore currency risks are limited.

Interest Rates.As a result of the Company'sour normal borrowing and leasing activities, our operating results are exposed to fluctuations in interest rates, which we manage primarily through our regular financing activities. We generally maintain limited investments in cash and cash equivalents.

We have short-term and long-term debt with variable interest rates. Our variable interest expense is sensitive to changes in the general level of interest rates. As of August 27, 2005,26, 2006, most of our debt is borrowed at LIBOR plus a weighted average margin.margin rate of 2.75%. As of August 27, 2005,26, 2006, the weighted average interest rate on our $155.0$209.5 million of variable interest debt was approximately 5.8%7.7%.

We had total interest expense of approximately $32.4 million in FYE 2006 and approximately $29.0 million in FYE 2005 and approximately $26.6 million in FYE 2004.2005. The estimated increase in interest expense from a hypothetical 200 basis point increase in applicable variable interest rates would have been approximately $3.4 million in FYE 2006 and approximately $3.3 million in FYE 2005 and approximately $3.4 million in FYE 2004.2005.

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and notes thereto, and other information required by this Item 8 are included in this report beginning on page F-1.

44



ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.


ITEM 9A.     CONTROLS AND PROCEDURES

The Company maintains a system of controls and procedures designed to provide reasonable assurance as to the reliability of the Consolidated Financial Statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e) under supervision and with the participation of management, including our Chief Executive Officer and Chief Reporting and Compliance Officer. Based upon that evaluation, as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Reporting and Compliance Officer concluded that our disclosure controls and procedures were effective in alerting them, in a timely manner, to material information required to be included in our periodic Securities and Exchange Commission filings. There have been no changes in our internal control over financial reporting during the thirteen weeks ended August 27, 200526, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events.

ITEM 9B.     OTHER INFORMATION

None.

PART III

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Board of Directors

U.S. Premium Beef'sBeef’s business and affairs are governed by its board of directors. The board of directors currently consists of seven directors. The board of directors has full authority to act on behalf of USPB. The board of directors acts collectively through meetings, committees and senior management members it appoints. In addition, USPB employs a staff of executives to manage the day-to-day business of USPB. The members of the board of directors and the senior members of the executive team are identified below.

45



Senior Management and Members of the Board of Directors

 

Term Expires

Name and Address

Age

Position

After FY

Terry Ryan

53

Chairman of the Board

2006

Mark Gardiner

44

Vice Chairman of the Board

2007

John Fairleigh

40

Secretary/Treasurer of the Board

2006

John Adams

45

Director

2005

Kelly K. Giles

45

Director

2005

Douglas A. Laue

54

Director

2007

Jerry Bohn

55

Director

2007

Steven D. Hunt

46

Chief Executive Officer

-

Stan Linville

46

Chief Operating Officer

-

Danielle Imel

30

Treasurer

-

Scott J. Miller

41

Chief Reporting and Compliance Officer

-

      Term Expires

Name

 Age 

Position

 After FY
Terry D. Ryan 54 Chairman of the Board 2006
Mark R. Gardiner 45 Vice Chairman of the Board 2007
John D. Fairleigh 41 Secretary of the Board 2006
Jerry L. Bohn 56 Director 2007
Douglas A. Laue 55 Director 2007
Carol A. Keiser 60 Director 2008
Rex W. McCloy 51 Director 2008
Steven D. Hunt 47 Chief Executive Officer 
Stan D. Linville 47 Chief Operating Officer 
Danielle D. Imel 31 Treasurer 
Scott J. Miller 42 Chief Reporting and Compliance Officer 

Terry D. Ryan. Mr. Ryan manages HRC Feedyards, Inc., nearis employed by Fairleigh Companies, Scott City, Kansas, and has been involved in the commercial cattle feeding industry since 1977. He is also a partner in the family farm operation in Rawlins County, Kansas. He is a member of the National Cattlemen'sCattlemen’s Beef Association and the Kansas Livestock Association (KLA). Mr. Ryan is a past member of the KLA boardBoard of directors.Directors. Mr. Ryan has served as a member of USPB's boardUSPB’s Board of directorsDirectors since 1996. He was elected to the Chairmanchairman of USPB's boardUSPB’s Board of directorsDirectors in 2004. Mr. Ryan attended Colby Community College with an emphasis onin Animal Science and Farm and Ranch Management.


Mark R. Gardiner. Mr. Gardiner is President of Gardiner Angus Ranch, Inc. (GAR), a family owned purebred and commercial Angus operation headquartered at Ashland, Kansas, with nine seedstock satellite cowherds across the United States and Australia. Gardiner Angus Ranch markets over 1,500 bulls and 600 females per year to both commercial and seedstock beef producers throughout the United States. Gardiner Angus Ranch also runs an embryo transfer program that makes more than 2,000 transfers per year, including more than 60% of GAR'sGAR’s 1,500-plus head of registered Angus calves born each year. A percentage of its calves are finished at commercial feedlots to provide carcass data on all Gardiner sires. In addition to a native range program, Gardiner Angus Ranch operates a significant dryland farming enterprise. Mr. Gardiner is a member of the National Cattlemen'sCattlemen’s Beef Association, Kansas Livestock Association, American Angus Association, Kansas Angus Association and the Beef Improvement Federation. Mr. Gardiner has served as a member of USPB's boardUSPB’s Board of directorsDirectors since 1996. He was elected Secretary/Treasurer of USPB's boardUSPB’s Board in 2003 and Vice Chairman of the boardBoard in 2004.  Mr. Gardiner holds a Bachelor'sBachelor’s degree from Kansas State University in Animal Sciences and Industry.

John D. Fairleigh. Mr..Mr. Fairleigh is President and CEO of Fairleigh Companies, a family-owned business in Scott City, Kansas, consisting of a 44,000 head commercial feedyard, Fairleigh Ranch, a 10,000 acre backgrounding and grazing operation, Fairleigh Farms and L&M Western Tire and Oil Company. He is a member of the National Cattlemen'sCattlemen’s Beef Association and Kansas Livestock Association. Mr. Fairleigh has served as a USPB boardBoard member since 1999 and was elected Secretary/TreasurerSecretary of the boardBoard in 2004. Mr. Fairleigh holds a Bachelor'sBachelor’s degree in Business from Kansas State University.

John Adams. Mr. Adams is a fourth generation partner in Adams Cattle Company and manages operations in Meade and Seward counties in Kansas and in Beaver County in Oklahoma. Mr. Adams's family has engaged in that business for more than 100 years. Most of the calves off that ranch are backgrounded at the family's northeast Kansas ranch, where they are grown to feeder weight. Mr. Adams also runs an extensive farming operation that includes irrigated and dryland crops and hay production, as well as a wheat grazing program. Mr. Adams is a member of the National Cattlemen's Beef Association, Kansas Livestock Association and the Oklahoma Cattlemen's Association. Mr. Adams has served as a member of USPB's board of directors since 1999. Mr. Adams attended the University of Kansas School of Business.

46



Kelly K. Giles.  Mr. Giles is a third generation cow-calf, stocker/feeder and seed stock operator.  Mr. Giles is the General Manager of Giles Enterprises, LLC, a genetics, marketing and procurement company based in Ashland, Kansas, with a business office in Canyon, Texas.  He is also a General Partner in Giles Land Co., LP of Ashland, Kansas, which owns the Giles Ranch that has been in operation since 1947.  Mr. Giles is a member of the National Cattlemen's Beef Association, the Kansas Livestock Association, and the American Angus Association.  He holds a Bachelor's degree in Animal Science and Industry from Kansas State University and a Masters of Business Administration degree in Finance from Texas A&M University.  Mr. Giles has served as a member of USPB's Board of Directors since 1996.

Douglas A. Laue. Mr. Laue owns and operates Black Diamond Customer Feeders, Inc. in Herington, Kansas, and runs a grazing program in the Kansas Flint Hills. He is a member of the National Cattlemen's Beef Association and Kansas Livestock Association (KLA). Mr. Laue previously served as the Chairman of the KLA Feeders Council. Mr. Laue has been a member of USPB's board of directors since 1996 and served as Vice Chairman of USPB's board of directors from 1996 through 2002. Mr. Laue holds a Bachelor's degree in Animal Sciences and Industry from Kansas State University.

Jerry L. Bohn. Mr. Bohn has served as the General Manager of Pratt Feeders since 1989. Pratt Feeders has a one-time capacity of 115,000 head in four feedlots in Kansas and Oklahoma. In this capacity he oversees more than 100 employees. Mr. Bohn also owns and manages a 5,000 to 6,000 head cattle operation which includes grazing and finishing cattle. Mr. Bohn previously was employed as Director of Market Analysis for Cattle-Fax, an industry market analysis firm. Mr. Bohn has served as Presidentpresident of the Kansas Livestock Association. He has been a boardBoard member of the Kansas Beef Council, the National Cattlemen'sCattlemen’s Beef Association (NCBA) and Feeders Advantage, a private animal health product distribution company. Mr. Bohn has also served on the NCBA'sNCBA’s Executive Committee and as Chairmanchairman of NCBA'sNCBA’s Live Cattle Marketing Committee.Marketing.

Douglas A. Laue. Mr. Laue owns and operates Black Diamond Customer Feeders, Inc. near Herington, Kansas, and runs a grazing program in the Kansas Flint Hills. He has served asis a member of USPB's boardthe National Cattlemen’s Beef Association and Kansas Livestock Association (KLA). Mr. Laue previously served as the chairman of directorsthe KLA Feeders Council. Mr. Laue has been a member of USPB’s Board of Directors since 2004.1996 and served as vice chairman of USPB’s Board of Directors from 1996 through 2002. Mr. Bohn isLaue holds a graduate of Kansas State University with a Bachelor'sBachelor’s degree in Animal Sciences and Industry.Industry from Kansas State University.

Carol A. Keiser. Ms. Keiser is president of C-BAR Cattle Company, Inc. where she manages operations for the feeding of 5,000 to 6,000 head of cattle in Texas, Kansas, Nebraska, and Western Illinois. Prior to C-BAR Cattle Company she developed health and well-being procedures for Loveless Feedlot, taught vocational agriculture and served as an FFA advisor. She is a Certified Livestock Manager, Certified Livestock Dealer and is a member of the National Cattlemen’s Beef Association and the American Society of Animal Science and American Meat Science Association. Currently, Ms. Keiser serves on the National Agricultural Research, Extension, Education, and Economics Advisory Board, the Board of Trustees of the Farm Foundation, and the Illinois Global partnership Advisory. She served on the Steering Committee of the Future of Animal Agriculture in North America Project, the Board of Directors of the Council of Food and Agricultural Research, Illinois Beef Association Check-off Division, was past chair of UIAA University of Illinois Alumni Association and Board of UIUC Agriculture, Consumer and Environmental Sciences Alumni Board. Ms. Keiser is a graduate of the University of Illinois in Animal Science.

Rex W. McCloy. Mr. McCloy is manager and part-owner of McLeod Farms Inc., a family-owned business headquartered in Morse, TX. The operation includes a 6,500 head capacity feed yard, a 7,000 acre irrigated farm, a backgrounding operation and a 20,000 acre ranch in Harding Co., NM. Mr. McCloy is a member of the National Cattlemen’s Beef Association, the Texas Cattle Feeder's Association (TCFA) and the Texas Southwestern Cattle Raiser's Association. He is a past Board member and marketing committee chairman of TCFA. In addition he is a former member of U.S. Premium Beef’s nominating committee. Mr. McCloy holds a Bachelors degree in Agricultural Economics from Texas Tech University.


Steven D. Hunt. Mr. Hunt was named Chief Executive Officer in July 1996 and was instrumental in the development and establishment of U.S. Premium Beef. Prior to his employment with USPB, Mr. Hunt owned and operated SDH Cattle Company at Winfield, Kansas, until 1996. As Vice President of Corporate Lending with CoBank, ACB from January 1987 to October 1988, Mr. Hunt also has experience in many areas of commercial banking, including direct agricultural lending, commercial lending, finance, business analysis, training, marketing and personnel. Mr. Hunt has served on the Board of National Beef Packing Company, LLC, (NBP) since 1997 and was elected chairman of NBP’s Board in 2003. Mr. Hunt holds a Bachelor'sBachelor’s degree in Agricultural Economics from Kansas State University.

Stan LinvilleD. Linville.. Mr. Linville is USPB'sUSPB’s Chief Operating Officer and joined USPB in 1997. He oversees cattle scheduling and technical operations. Before joining USPB, he operated a family farming operation near Holcomb, Kansas. He also worked in the cattle division of Brookover Enterprises at Garden City, Kansas, and as a grain merchandiser for Bartlett Grain Co. in Kansas City. Mr. Linville holds a Bachelor'sBachelor’s degree in Agricultural Economics from Kansas State University.

Danielle ImelD. Imel.. Ms. Imel is USPB'sUSPB’s Treasurer and joined USPB in 1998. She oversees the Company'sCompany’s finance functions and is directly responsible for Company treasury activities. She was employed by the CPA firm of Kennedy, McKee and Co., LLC of Dodge City, Kansas, prior to joining USPB. Ms. Imel earned a Bachelor'sBachelor’s degree in Accounting and a second Bachelor'sBachelor’s degree in Agricultural Economics from Kansas State University.

Scott J. Miller. Mr. Miller is USPB'sUSPB’s Chief Reporting and Compliance Officer and joined USPB in 2005. He oversees financial reporting and will ensureensures compliance with internal policies and regulatory requirements. Before joining USPB, he worked as the Manager, Capital Markets for Sprint Corporation from 2001 to 2005 and, prior to that, in various finance and accounting positions with Farmland Industries. Mr. Miller earned a Bachelors degree in Accounting from Benedictine College and an MBA with an emphasis in Finance from the University of Missouri-Kansas City (UMKC).City. He has passed the Certified Public Accounting exam and the Certified Cash Managers exam.

48



Board of Directors

Under USPB'sUSPB’s LLC operating agreement, the number of directors is set by the board of directors but may not be less than seven (7) directors. Directors must be unitholders of USPB and will be elected by holders of USPB Class A units. The operating agreement states that at least one director will represent Seedstock breeders and the balance of the directors will be evenly divided between directors who are unitholders who have Even Slot delivery agreements and unitholders who have Odd Slot delivery agreements. Current representation is as follows:

The directors are elected at the annual meeting of the unitholders and hold office for a term of three years. The terms of the directors are staggered in such a manner that approximately one-third of the directors will be elected each year. All directors will hold office until their successors are elected and qualified. Any vacancy in the board, other than a vacancy resulting from expiration of a term of office, will be filled by a majority vote of the remaining directors. In case a vacancy in the board of directors extends beyond the next annual meeting, the vacancy will be filled by the remaining directors until such meeting, at which meeting a director will be chosen by the unitholders for the unexpired term of such vacancy.

In the discretion of the board of directors, the number of directors may be increased by up to an additional five (5) directors. Those additional directors may be elected or appointed by either the board of directors or by the holders of USPB Class B units, although the majority of the members of the board of directors will be elected by members holding USPB Class A units.


Compensation of Directors

The board of directors meets from time to time at such time and place as may be fixed by resolution adopted by a majority of the whole board of directors. Members of the board of directors receive a per diem payment of $250 for each activity on behalf of USPB, as well as direct reimbursement of travel expenses related to service on the board of directors.

Audit Committee

The board of directors has an audit committee consisting of Messrs. Ryan, GilesBohn and Laue .Laue. Mr. GilesBohn is an "audit“audit committee financial expert"expert” within the meaning of the rules and regulations of the Securities and Exchange Commission and has sufficient background and experience in sophisticated financial and accounting matters necessary to fulfill the duties and obligations of the audit committee.

Code of Ethics

USPB has adopted a corporate Code of Conduct that is enforced throughout all levels of management and a Code of Ethics For Financial Officers for its chief executive officer, principal financial and accounting officer and treasurer within the meaning of the rules and regulations of the Securities and Exchange Commission; that are, to deter wrongdoing and promote honest and ethical conduct; provide full, fair, accurate, timely and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal reporting of code violations; and provide accountability for adherence to the code. A copy of the Code of Conduct may be obtained, without charge, upon written request to Scott J. Miller, Chief Reporting and Compliance Officer, U.S. Premium Beef, LLC, P. O. Box 20103, Kansas City, Missouri 64195.

48



ITEM 11.     EXECUTIVE COMPENSATION

The goal of USPB'sUSPB’s executive compensation policy is to ensure that an appropriate relationship exists between executive pay, USPB'sUSPB’s financial performance and the creation of unitholder value, while at the same time motivating and retaining key employees. The base salaries for senior management are reviewed periodically to determine if such salaries fall within the range of those persons holding comparably responsible positions at other companies. Individual salaries are also based upon an evaluation of other factors, such as individual past performance, potential with USPB and level and scope of responsibility. Those responsibilities include, among other responsibilities, oversight of the activities of USPB'sUSPB’s majority-owned subsidiary, NBP, as well as analysis of and negotiations regarding the pricing grid used to establish the payments USPB members USPB receive for their cattle. USPB believes that the base salaries of the members of senior management as a whole are comparable with the base salaries of other persons similarly situated.

USPB's     USPB’s relationship with NBP and the complexity of USPB'sUSPB’s obligations under its various contracts with NBP require USPB to retain the services of key senior management personnel with the experience, skill and expertise necessary to manage an enterprise competitive with other sophisticated participants in the beef and meat industries. Each employee is compensated through the payment of a base salary with eligibility for incentive bonuses. In addition, each senior management employee is eligible to participate in benefits programs maintained by USPB. These programs include group medical insurance, disability and accidental death and dismemberment insurance, retirement plan and similar programs.

The following table shows the compensation paid to the Chief Executive Officer (Chief Executive Officer prior to the conversion) and the three other individuals who were serving as senior executive officers at the end of fiscal year 2006.


Summary Compensation Table
 
 
Annual Compensation
      
             Long Term  
         Other Annual   Compensation  
 Fiscal Salary Bonus   Compensation   Payouts  
Name and Principal PositionYear ($) ($)   ($)   ($)  
                
Steven D. Hunt2006 550,000 281,330 (1) - (5) - (3)
Chief Executive Officer2005 550,000 519,369 (1) - (5) - (3)
 2004 562,500 745,235 (1) - (5) 204,765 (3)
Stan D. Linville2006 102,833 10,448 (2) 25,850   17,514 (4)
Chief Operating Officer2005 98,667 18,180 (2) 24,798   29,250 (4)
 2004 101,022 29,250 (2) 22,713   26,152 (4)
Scott J. Miller (6)2006 98,333 1,433 (2) 18,001   -  
Chief Reporting and Compliance Officer2005 13,674 -   1,591   -  
 2004 - -   -   -  
Danielle D. Imel2006 94,667 17,450 (2) 23,409   15,708 (4)
Treasurer2005 90,673 26,543 (2) 22,308   25,556 (4)
 2004 89,125 35,556 (2) 20,594   22,741 (4)

(1)      Represents amounts paid under the annual incentive provisions of the CEO Employment Contract. The CEO Employment Contract Plan has been established to provide additional incentive-based compensation opportunities for the CEO of USPB. Bonuses are paid under the Plan if USPB attains highly focused specified performance objectives in the applicable fiscal year. The Board of Directors determines the performance goals. Does not include $647,668 earned, but not yet paid, under the CEO Employment Contract for fiscal year 2006.

(2)      Represents amounts paid for discretionary bonuses and bonuses pursuant to the Management Incentive Plan. The Management Incentive Plan provides incentive compensation opportunities for designated management employees of USPB based on the attainment of certain performance goals. Participation in the Management Incentive Plan is determined by the Chief Executive Officer for each fiscal year. Upon the attainment of the performance goals, the participant receives a cash bonus, one half of which is payable in the current calendar year. The other one half is paid at the end of the following calendar year if the executive is an active employee at the end of the following fiscal year and is disclosed in "Long Term Compensation Payouts" above in the year paid (see "(4)" below). Does not include $28,767 earned by, but not yet paid to, the executives for fiscal year 2006.

(3)      Represents amounts paid under long-term and full-term provisions of the CEO Employment Contract. Provides long-term incentive-based compensation based on the attainment of highly focused long-term performance goals and full-term compensation if the executive is employed through the term of the contact. Does not include $1,242,470 accrued, but not yet paid in fiscal year 2006 pursuant to the provisions of the CEO Employment Contract.

(4)      Represents the amount of the Management Incentive Plan cash bonus that is contingent on employment at the end of the following fiscal year (see "(2)" above). Does not include $28,767 and $29,873 earned by, but not yet paid to, the executives for fiscal year 2006 and fiscal year 2005 pursuant to the Management Incentive Plan.

(5)      None of the perquisites and other benefits paid to the executive exceeded the lesser of $50,000 or 10% of the total annual salary and bonus received by the executive.

(6)      Mr. Miller commenced employment on July 11, 2005.

 

49




Summary Compensation Table
 Annual Compensation   
         Long Term 
       Other Annual Compensation 
 Fiscal Salary Bonus Compensation Payouts 
Name and Principal PositionYear ($) ($) ($) ($) 
           
Steven D. Hunt

2005

 550,000      519,369     (1)-     (5)-     (3)
Chief Executive Officer2004 562,500      745,235     (1)-     (5)204,765     (3)
 2003 287,500      483,382     (1)-     (5)850,506     (3)
Stan Linville2005 98,667      18,180     (2)24,798      29,250     (4)
Chief Operating Officer2004 101,022      29,250     (2)22,713      26,152     (4)
 2003 90,395      34,152     (2)18,902      8,373     (4)
Scott J. Miller (6)2005 13,674      -      1,591      -      
Chief Reporting and Compliance Officer2004 -      -      -      -      
 2003 -      -      -      -      
Danielle Imel2005 90,673      26,543     (2)22,308      25,556     (4)
Treasurer2004 89,125      35,556     (2)20,594      22,741     (4)
 2003 79,311      34,741     (2)17,682      7,070     (4)

(1)Represents amounts paid under the annual salary and annual incentive provisions of the CEO Employment Contract. The CEO Employment Contract Plan has been established to provide additional incentive-based compensation opportunities for the CEO of USPB. Bonuses are paid under the Plan if USPB attains highly focused specified performance objectives in the applicable fiscal year. The Board of Directors determines the performance goals. Does not include $281,330 earned, but not yet paid, under the CEO Employment Contract in fiscal year 2005.
(2)Represents amounts paid for discretionary bonuses and bonuses pursuant to the Management Incentive Plan. The Management Incentive Plan provides incentive compensation opportunities for designated management employees of USPB based on the attainment of certain performance goals. Participation in the Management Incentive Plan is determined by the Chief Executive Officer for each fiscal year. Upon the attainment of the performance goals, the participant receives a cash bonus, one half of which is payable in the current calendar year. The other one half is paid at the end of the following calendar year if the executive is an active employee at the end of the following fiscal year and is disclosed in "Long Term Compensation Payouts" above in the year paid (see "(4)" below). Does not include $29,331 earned by, but not yet paid to, the executives in fiscal year 2005.
(3)Represents amounts paid under long-term and full-term provisions of the CEO Employment Contract. Provides long-term incentive-based compensation based on the attainment of highly focused long-term performance goals and full-term compensation if the executive is employed through the term of the contact. Does not include $788,474 accrued, but not yet paid in fiscal year 2005 pursuant to the provisions of the CEO Employment Contract.
(4)Represents the amount of the Management Incentive Plan cash bonus that is contingent on employment at the end of the following fiscal year (see "(2)" above). Does not include $29,873 and $33,222 earned by, but not yet paid to, the executives in fiscal year 2005 and fiscal year 2004 pursuant to the Management Incentive Plan.
(5)None of the perquisites and other benefits paid to the executive exceeded the lesser of $50,000 or 10% of the total annual salary and bonus received by the executive.
(6)Mr. Miller commenced employment on July 11, 2005.

50



Employment Agreements

USPB is party to an employment agreement with its Chief Executive Officer, Steven D. Hunt. The agreement provides for Mr. Hunt'sHunt’s employment for an initial period from September 1, 2003fiscal years 2004 through August 31, 2009. Under the agreement, USPB is to paypaid Mr. Hunt an annual base salary of $550,000 for thefiscal years ending August 31, 2004, August 31, 2005, and August 31, 2006; and will pay $700,000 for thefiscal years ending August 31, 2007, August 31, 2008, and August 31, 2009. USPB shall, if Mr. Hunt is still employed by USPB as of the last day of each fiscal year during the term of the agreement, pay an annual "incentive"“incentive” bonus equal to two percent (2.0%) of the sum of the total financial benefits to the Company (USPB Total Benefits) that exceed $18,000,000. USPB Total Benefits are: (1) audited fiscal year-end USPB earnings before tax; and (2) two times the fiscal year USPB grid premiums which is the net sum of all USPB member grid premiums and discounts calculated through the USPB grid, taking into account all calculators including, but not limited to, base price, dressing percent, quality grade, outlier cattle and other specific categories, less the base price calculator excluding any set base price premium. Mr. Hunt has qualified for the annual “incentive” bonus for fiscal years 2004, 2005, and 2006. In addition to Mr. Hunt'sHunt’s base salary and annual incentive bonus, if Mr. Hunt is employed by USPB as of August 31, 2006, and as of August 31, 2009, he willeligible to be paid a "long-term incentive"“long-term incentive” bonus based on a percentage of the amount that USPB Total Benefits exceed certain benchmarks, as of August 31,the end of fiscal years 2006 and as of August 31, 2009, respectively.if employed on those dates. Mr. Hunt is also entitled to a "full-term"has qualified for the “long-term incentive” bonus based on benchmarks through the end of fiscal year 2006. A “full-term” bonus in the amount of $550,000 if he iswas paid to Mr. Hunt for being employed by USPB through August 31,the last day of fiscal year 2006, and additionally,he will be entitled to an additional “full-term” bonus of $700,000 if he is employed through August 31,the last day of fiscal year 2009. The agreement also vests phantom unit rights to 20,000 phantom Class A units of USPB with an exercise price of $55 per unit and 20,000 phantom Class B Units of USPB with an exercise price of $0 per unit in Mr. Hunt. Mr. Hunt is entitled to receive paid vacations, holidays and sick days; reimbursement of reasonable business expenses and other fringe benefits under the USPB'sUSPB’s group benefit plans. If USPB terminates the agreement for cause or if Mr. Hunt terminates the agreement for any or no reason, USPB needs only pay salary earned to the date of the termination. If USPB terminates the agreement for any reason other than cause, or if Mr. Hunt terminates the agreement for good reason, Mr. Hunt shall be entitled to salary and benefits through August 31,fiscal year 2009; the annual incentive bonus for the year in which the termination occurs and each subsequent year through August 31,fiscal year 2009; the long-term incentive bonus that would have accrued had Mr. Hunt been employed through August 31,fiscal year 2009; and the payment on or before October 2, 2006 or 2009 of the full-term bonuses that would have accrued if Mr. Hunt had remained employed through August 31, 2006 or August 31, 2009, respectively.fiscal year 2009.

The Company has established a savings plan for certain qualifying employees. Under the plan, employees may contribute a portion of their compensation to a vested account under the savings. The employee'semployee’s contribution is eligible for a matching contribution by the Company for up to 4% of the employee'semployee’s qualifying compensation.

 


51



ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED UNITHOLDER MATTERS

The following table furnishes information, as of November 21, 2005October 28, 2006 regarding ownership of the LLC'sUSPB’s Class A and Class B units by each person known by us to beneficially own more than 5% of the LLC'sCompany’s issued and outstanding units, each of the LLC'sits directors and senior management and all of the LLC'sits directors and senior management as a group.

Beneficial Ownership of

Class A and Class B Units

Name

Number(1)

Percentage(2)

Douglas A. Laue(3)

95,000

13.7314

Terry Ryan(4)

49,450

7.1476

John Fairleigh(5)

52,288

7.5578

Jerry Bohn(6)

19,161

2.7696

Mark Gardiner(7)

3,000

0.4336

John Adams(8)

1,000

0.1445

Kelly K. Giles(9)

200

0.0289

Steven D. Hunt

-

-

Stan Linville

-

-

Danielle Imel

-

-

Scott J. Miller

-

-

Officers and Directors as a group (11 persons)(10)

220,099

31.8133

  Beneficial Ownership of
  Class A and Class B Units
Name Number(1) Percentage(2)
Douglas A. Laue(3) 95,000 12.9163%
John D. Fairleigh(4) 54,288 7.3811%
Jerry L. Bohn(5) 19,161 2.6051%
Rex W. McCloy(6) 5,685 0.7729%
Mark R. Gardiner(7) 3,000 0.4079%
Carol A. Keiser(8) 1,000 0.1360%
Terry D. Ryan(9) 500 0.0680%
Steven D. Hunt - -
Stan D. Linville - -
Danielle D. Imel - -
Scott J. Miller - -
Officers and Directors as a group (11 persons)(10) 178,634 24.2873%

(1)     Each cooperative shareholder received one Class A unit and one Class B unit in USPB for each share of cooperative common stock held prior to the conversion.

(2)     Represents the percentage of Class A units and the percentage of Class B units held by the named party.

(3)      Includes i) 90,000 Class A and Class B units held by Black Diamond Cattle Co., Inc., of which Mr. Laue is the owner and ii) 5,000 Class A and Class B units held by Black Diamond Custom Feeders, of which Mr. Laue is the owner.

(4)      Includes 54,288 Class A and Class B units held by Fairleigh Corporation, of which Mr. Fairleigh is an owner.

(5)     Includes i) 11,800 Class A and Class B units held by Pratt Feeders, LLC, of which Mr. Bohn is the general manager, and ii) 7,361 Class A and Class B units held by Hays Feeders, LLC, of which Mr. Bohn is the general manager.

(6)      Includes 5,685 Class A and Class B units held by McLeod Farms, Inc., of which Mr. McCloy is an owner.

(7)     Includes 3,000 Class A and Class B units held by the Mark Gardiner Revocable Trust, over which Mr. Gardiner has sole voting and investment power.

(8)     Includes 1,000 Class A and Class B units held by C-Bar Cattle Co. Inc., of which Ms. Keiser is the president.(9)Includes 500 Class A and Class B units held by Mr. Ryan.(10)Reflects unit ownership by all seven directors and four members of senior management of USPB.

Each cooperative shareholder received one Class A unit and one Class B unit in the LLC for each share of cooperative common stock held prior to the conversion.

(2)

Represents the percentage of Class A units and the percentage of Class B units held by the named party.

(3)

Includes i) 90,000 Class A and Class B units held by Black Diamond Cattle Co., Inc., of which Mr. Laue is the owner and ii) 5,000 Class A and Class B units held by Black Diamond Custom Feeders, of which Mr. Laue is the owner.

(4)

Includes i) 43,200 Class A and Class B units held by Crown H Cattle Co., Inc., of which Mr. Ryan is the manager, and ii) 2,250  Class A and Class B units held by AELA Cattle Company, of which Mr. Ryan has sole voting and investment power. In each case, Mr. Ryan holds voting power with respect to the unitholder's LLC membership.  

(5)

Includes 52,288 Class A and Class B units held by Fairleigh Corporation, of which Mr. Fairleigh is an owner.

(6)

Includes i) 11,800 Class A and Class B units held by Pratt Feeders, LLC, of which Mr. Bohn is the general manager and ii) 7,361 Class A and Class B units held by Hays Feeders, LLC, of which Mr. Bohn is the general manager.

(7)

Includes 3,000 Class A and Class B units held by the Mark Gardiner Revocable Trust, over which Mr. Gardiner has sole voting and investment power.

(8)

Includes 1,000 Class A and Class B units held by Adams Cattle Co., of which Mr. Adams is an owner.

(9)

Includes 200 Class A and Class B units held by Giles Land Co., of which Mr. Giles is an owner.

(10)Reflects unit ownership by all seven directors and four members of senior management of the LLC.

52



ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Directors who are unitholders

All of the USPB'sUSPB’s directors hold units of the LLC and are also agricultural producers. By virtue of their unitholder status and ownership of Class A units, each of these individuals is obligated to deliver cattle to USPB. The amount and terms of the payments received by these individuals (or the entities they represent) for the delivery of cattle are made on exactly the same basis as those received by other owners and associates of the LLCUSPB for the delivery of their cattle.

Certain Arrangements in connection with the AcquisitionHolders of NBP’s Membership Interests

     Simultaneous with the Acquisition,ownership changes on August 6, 2003, all of the holders of NBP'sNBP’s membership interests entered into a limited liability company agreement that provides for, among other things, election of its board of managers, the powers of its board of managers and its officers, approval rights for certain of its equity holders, restrictions and rights related to the transfer, sale or purchase of its membership interests, and preemptive and repurchase rights.

 


The limited liability company agreement provides that NBPCo Holdings and the members of NBP management who hold membership interests in NBP have the right to request that NBP purchase their membership interests under certain circumstances.

Transactions with NBP

In December 1997, USPB entered into a contract with FNB to deliver cattle annually to NBP relative to: (i) USPB'sUSPB’s ownership in NBP and (ii) the number of cattle processed annually by NBP. During FYE 2005,2006, USPB and its owners and associates provided approximately 19%18% of NBP'sNBP’s total cattle requirements. The purchase price for the cattle is determined by pricing grids, which, under the terms of our agreement with NBP, must be competitive with the formula pricing of our competitors and may not be less favorable than formula pricing it offers to other suppliers. Under the terms of the Acquisition, anyAny new purchase agreements and payment formulas with NBP must be consistent with the agreement existing at the time U.S. Premium Beef acquired the majority interest in NBP on August 6, 2003..

On May 19, 2006, U.S. Premium Beef’s majority owned subsidiary, NBP, entered into a Contribution Agreement (Agreement) with Brawley Beef, LLC (Brawley Beef) and National Beef California, LP (NBC). NBC is a newly formed limited partnership, formed for the purposes of acquiring substantially all of the Acquisition.assets of Brawley Beef, with National Carriers, NBP’s wholly-owned subsidiary, acting as its general partner. Pursuant to the terms of the Agreement, Brawley Beef contributed substantially all of its assets to NBC in exchange for limited partnership units of NBC, and NBC assumed approximately $74.7 million of Brawley Beef’s debt and current liabilities. Brawley Beef then exchanged all of its NBC units with USPB for 44,160 new Class A units and 44,160 new Class B units. Under a separate unit exchange agreement between USPB and NBP, USPB then exchanged these units of NBC with NBP for 5,899,297 Class A nonvoting units and 664,475 Class B-1 voting units of NBP. As a result, USPB’s ownership interest in NBP’s Class B voting units increased to 54.76%.

Transactions with Beef Products, Inc.

Since 1994, NBP has had a business relationship with Beef Products, Inc. (BPI), which is an affiliate of NBPCo Holdings, whereby NBP sold beef trimmings, referred to as trim, to BPI, and purchased processed lean beef from BPI for use in its ground beef operations. NBP'sNBP’s aggregate sales of trim to BPI totaled approximately $61.2$65.7 million in FYE 2005.  NBP's2006. NBP’s aggregate purchases of processed lean beef from BPI totaled approximately $19.1$15.0 million in FYE 2005.2006.

Transactions with John R. Miller

In December 1998, the Predecessor entered into an aircraft lease agreement under which it leased a business jet aircraft from John R. Miller Enterprises, L.L.C., a Utah limited liability company of which John R. Miller, NBP's Chief Executive Officer, is the beneficial owner. The term of the lease was for five years and could have been terminated by either John R. Miller Enterprises, L.L.C. or NBP on 90 days' prior written notice. During the FYE August 27, 2005, NBP paid $0.07 million to lease the aircraft and $0.03 million into an engine replacement reserve account. The funds in the reserve account are to be used to finance new engines installed on the aircraft.  The lease expired on December 15, 2003.  NBP still uses this aircraft on an as needed basis, with the payment terms, including the payments into the engine replacement reserve account, essentially identical to the lease agreement, except the monthly usage payment is calculated on the actual hours used, not to exceed the monthly lease payment we paid while the lease was active.  There is no lease agreement in effect for this aircraft.

53



In October 2003, NBP entered into an aircraft lease agreement under which it leases a business jet aircraft from John R. Miller Enterprises III, L.L.C., a Utah limited liability company of which John R. Miller, ourNBP’s Chief Executive Officer, is the beneficial owner. The term of the lease is 81 months. The monthly lease payments will range from $25,400 in the first year of the lease to $45,380 in the fourth year of the lease and thereafter, and are adjusted quarterly based on the change in the three month LIBOR interest rate. During the FYE August 27, 2005,26, 2006, NBP paid $0.5$0.7 million to lease the aircraft and $0.1 million into an engine replacement reserve account. The funds in the reserve account are to be used to finance new engines installed on the aircraft.

In December 2004, NBP entered into an aircraft lease agreement under which it leases a business jet aircraft from John R. Miller Enterprises, L.L.C., a Utah limited liability company of which John R. Miller, NBP'sNBP’s Chief Executive Officer, is the beneficial owner. The term of the lease is 72 months. This aircraft replaces an aircraft leased from John R. Miller Enterprises, L.L.C. in March 2001. The base monthly lease payments will range from $35,400 in the first year of the lease to $45,380 in the fourth year of the lease and thereafter, and are adjusted quarterly based on the change in the three month LIBOR interest rate. During the FYE August 27, 2005,26, 2006, NBP paid $0.5$0.7 million to lease the aircraft and $0.06$0.1 million into an engine replacement reserve account. The funds in the reserve account are to be used to finance new engines installed on the aircraft.


NBP believes that the terms of these aircraft leases are at least as favorable to it as itwe could have obtained from unaffiliated third parties.

We paid a per person fee for lodging and meals of $0.1 million in FYE 2005 to J. R. Miller Ranches, LLC, in which John R. Miller holds a beneficial interest, for management meetings held at John R. Miller's property in Montana. 

ITEM 14.     PRINCIPAL ACCOUNTANT FEES AND SERVICES

KPMG LLP, an independent registered public accounting firm, served as our auditors for the fiscal years ended August 27, 200526, 2006 and August 28, 200427, 2005 (dollars in thousands).

Type of Service FYE 2005 FYE 2004 FYE 2006 FYE 2005
  
       
Audit Fees $325 $271 $386 $325
Audit Related Fees  17  239  1  17
Tax Fees  164  202  26  164
All Other Fees  0  0  0  0
 $506 $712 $413 $506

Audit Fees

Audit fees relate to the audits of our consolidated financial statements including the audit of the consolidated financial statements of NBP filed on Form 10-K and the reviews of quarterly reports on Form 10-Q.

Audit-Related Fees

Audit-related fees in FYE 2006 and 2005 primarily relate to meetings discussing implementation of the Sarbanes-Oxley Act of 2002.  The fees in FYE 2004 primarily related to our filings of Registration Statements on Form S-4 and NBP's Prospectus under Rule 424(b)(3) of the Securities Act of 1933 for its senior notes and other consultations on accounting related matters.

Tax Fees

Tax fees related to tax compliance, tax advice and tax planning services.

54



All Other Fees

We did not pay any other type of fee and did not receive any other services from KPMG LLP during FYE 20052006 and FYE 2004.2005.

Our audit committee appoints our independent auditors. The audit committee is solely and directly responsible for the approval of the appointment, re-appointment, compensation and oversight of our independent auditors. The audit committee approves in advance all work to be performed by the independent auditors.

PART IV

ITEM 15.     EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Financial Statements and Financial Statement Schedules

(1)The consolidated financial statements filed as part of this report at Item 8 are listed in the Index to the Consolidated Financial Statements on page F-1 contained herein.

(2) The financial statement scheduleschedules required to be filed by Item 8 of this report is set forth in "Item“Item 15(c) Financial Statement Schedules"Schedules” contained herein.

(b) The following documents are filed or incorporated by reference as exhibits to this report:

2.1       Agreement and Plan of Merger between U.S. Premium Beef, Ltd. and U.S. Premium Beef, Inc. (incorporated herein by reference to Appendix A to voting materials-prospectus contained in U.S. Premium Beef, Inc. Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004).

2.2       Plan of Conversion adopted by U.S. Premium Beef, Inc. (incorporated herein by reference to Appendix B to the voting materials - prospectus contained in U.S. Premium Beef, Inc. Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004).

3.1       Certificate of Formation of U.S. Premium Beef, LLC (incorporated herein by reference to Appendix C to the voting materials - prospectus contained in U.S. Premium Beef, Inc. Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004).

3.2       Limited Liability Agreement of U.S. Premium Beef, LLC (incorporated herein by reference to Appendix D to the voting materials - prospectus contained in U.S. Premium Beef, Inc. Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004).

3.3       Limited Liability Company Agreement of National Beef Packing Company, LLC, dated as of August 6, 2003 (incorporated herein by reference to Exhibit 3.1(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 28, 2005, filed with the SEC on July 11, 2005).

3.4       Amendment to the Limited Liability Company Agreement of National Beef Packing Company, LLC, dated as of July 7, 2005 (incorporated by reference to Exhibit 3.1(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended May 28, 2005, filed with the SEC on July 11, 2005).


 

55



3.5       Certificate of Incorporation of NB Finance Corp.  (incorporated herein by reference to Exhibit 3.2 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

3.6       Bylaws of NB Finance Corp.  (incorporated herein by reference to Exhibit 3.3 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

4.1       Indenture dated as of August 6, 2003 by and among National Beef Packing Company, L.P., NB Finance Corp and U.S. Bank National Association  (incorporated herein by reference to Exhibit 4.1 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

4.2       Form of Series B Senior Note due 2011 (incorporated herein by reference to Exhibit 4.1 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

4.3       Registration Rights Agreement dated as of August 6, 2003 by and among National Beef Packing Company, L.P., NB Finance Corp., Deutsche Bank Securities Inc., U.S. Bancorp Piper Jaffray Inc. and Rabo Securities USA, Inc.  (incorporated herein by reference to Exhibit 4.3 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

10.1     Cattle Purchase and Sale Agreement dated as of December 1, 1997 by and among Farmland National Beef Packing Company, L.P. and U.S. Premium Beef, Ltd.  (incorporated herein by reference to Exhibit 10.7 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

10.2     Form of Uniform Delivery and Marketing Agreement - Even Slots (incorporated herein by reference to Exhibit 10.2 to U.S. Premium Beef Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004)

10.3     Form of Uniform Delivery and Marketing Agreement - Odd Slots (incorporated herein by reference to Exhibit 10.3 to U.S. Premium Beef Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004).

10.4     Office Lease by and between HDP - Kansas City, LLC and U.S. Premium Beef, Ltd.  (incorporated herein by reference to Exhibit 10.5 to U.S. Premium Beef Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004).

10.5     * U.S. Premium Beef, Ltd. Management Incentive Plan (incorporated herein by reference to Exhibit 10.8 to U.S. Premium Beef Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004).

10.6     Fifth Amendment to Credit Agreement, dated September 30, 2004, by and among U.S. Premium Beef, LLC. and CoBank, ACB, as agent for the benefit of the syndication parties.  (incorporated herein by reference to Exhibit 10.6 to the Annual
(b) The following documents are filed or incorporated by reference as exhibits to this report:
2.1Agreement and Plan of Merger between U.S. Premium Beef, Ltd. and U.S. Premium
Beef, Inc. (incorporated herein by reference to Appendix A to voting materials-
prospectus contained in U.S. Premium Beef, Inc. Registration Statement on Form S-4
(File No. 333-115164) filed with the SEC on August 5, 2004).
2.2Plan of Conversion adopted by U.S. Premium Beef, Inc. (incorporated herein by
reference to Appendix B to the voting materials – prospectus contained in U.S. Premium
Beef, Inc. Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC
on August 5, 2004).
2.3+Contribution Agreement dated as of May 19, 2006 between Brawley Beef, LLC, National
Beef California, L.P. and National Beef Packing Company, LLC (incorporated by
reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q for the quarter
ended May 27, 2006, filed with the SEC on July 10, 2006).
2.4+Contribution Agreement dated as of May 30, 2006 between U.S. Premium Beef, LLC and
Brawley Beef, LLC (incorporated by reference to Exhibit 2.2 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended May 27, 2006, filed with the SEC on July 10,
2006).
2.5+Contribution Agreement dated as of May 30, 2006 between U.S. Premium Beef, LLC and
National Beef Packing Company, LLC (incorporated by reference to Exhibit 2.3 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended May 27, 2006, filed
with the SEC on July 10, 2006).
3.1Certificate of Formation of U.S. Premium Beef, LLC (incorporated herein by reference to
Appendix C to the voting materials – prospectus contained in U.S. Premium Beef, Inc.
Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on August
5, 2004).
3.2Limited Liability Agreement of U.S. Premium Beef, LLC (incorporated herein by
reference to Appendix D to the voting materials – prospectus contained in U.S. Premium
Beef, Inc. Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC
on August 5, 2004).
3.3(a)Limited Liability Company Agreement of National Beef Packing Company, LLC, dated
as of August 6, 2003 (incorporated herein by reference to Exhibit 3.1(a) to the
Company’s Quarterly Report on Form 10-Q for the quarter ended May 27, 2006, filed
with the SEC on July 10, 2006).
3.3(b)Amendment to the Limited Liability Company Agreement of National Beef Packing
Company, LLC, dated as of July 7, 2005 (incorporated by reference to Exhibit 3.1(b) to
the Company’s Quarterly Report on Form 10-Q for the quarter ended May 27,2006, filed
with the SEC on July 10, 2006).
3.3(c)Revised Exhibit 3.1 to the Limited Liability Company Agreement of National Beef
Packing Company, LLC, effective as of May 30, 2006 (incorporated by reference to
Exhibit 3.1(c) to the Company’s Quarterly Report on Form 10-Q for the quarter ended
May 27, 2006, filed with the SEC on July 10, 2006).
3.4(a)Certificate of Incorporation of NB Finance Corp. (incorporated herein by reference to
Exhibit 3.2 to Registration Statement on Form S-4 (File No. 333-111407) filed with the
SEC on December 19, 2003).
3.4(b)Bylaws of NB Finance Corp. (incorporated herein by reference to Exhibit 3.3 to
Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on
December 19, 2003).


4.1(a)Indenture dated as of August 6, 2003 by and among National Beef Packing Company,
L.P., NB Finance Corp and U.S. Bank National Association (incorporated herein by
reference to Exhibit 4.1 to Registration Statement on Form S-4 (File No. 333-111407)
filed with the SEC on December 19, 2003).
4.1(b)Form of Series B Senior Note due 2011 (incorporated herein by reference to Exhibit 4.1
to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on
December 19, 2003).
4.1(c)Registration Rights Agreement dated as of August 6, 2003 by and among National Beef
Packing Company, L.P., NB Finance Corp., Deutsche Bank Securities Inc., U.S. Bancorp
Piper Jaffray Inc. and Rabo Securities USA, Inc. (incorporated herein by reference to
Exhibit 4.3 to Registration Statement on Form S-4 (File No. 333-111407) filed with the
SEC on December 19, 2003).
10.1Cattle Purchase and Sale Agreement dated as of December 1, 1997 by and among
Farmland National Beef Packing Company, L.P. and U.S. Premium Beef, Ltd.
(incorporated herein by reference to Exhibit 10.7 to Registration Statement on Form S-4
(File No. 333-111407) filed with the SEC on December 19, 2003).
10.2Form of Uniform Delivery and Marketing Agreement – Even Slots (incorporated herein
by reference to Exhibit 10.2 to U.S. Premium Beef Registration Statement on Form S-4
(File No. 333-115164) filed with the SEC on August 5, 2004)
10.3Form of Uniform Delivery and Marketing Agreement – Odd Slots (incorporated herein
by reference to Exhibit 10.3 to U.S. Premium Beef Registration Statement on Form S-4
(File No. 333-115164) filed with the SEC on August 5, 2004).
10.4Office Lease by and between HDP – Kansas City, LLC and U.S. Premium Beef, Ltd.
(incorporated herein by reference to Exhibit 10.5 to U.S. Premium Beef Registration
Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004).
10.5* U.S. Premium Beef, Ltd. Management Incentive Plan (incorporated herein by reference
to Exhibit 10.8 to U.S. Premium Beef Registration Statement on Form S-4 (File No. 333-
115164) filed with the SEC on August 5, 2004).
10.6(a)Seventh Amendment to Credit Agreement, dated June 20, 2006, effective as of May 30,
2006, by and among U.S. Premium Beef, LLC and CoBank, ACB, as agent for the
benefit of the syndication parties. (filed herewith)
10.6(b)Sixth Amendment to Credit Agreement, dated June 20, 2006, effective as of May 30,
2006, by and among U.S. Premium Beef, LLC and CoBank, ACB, as agent for the
benefit of the syndication parties. (incorporated by reference to Exhibit 10.1(b) to the
Company’s Quarterly Report on Form 10-Q for the quarter ended May 27, 2006, filed
with the SEC on July 10, 2006).
10.6(c)Fifth Amendment to Credit Agreement, dated September 30, 2004, by and among U.S.
Premium Beef, LLC. and CoBank, ACB, as agent for the benefit of the syndication
parties. (incorporated herein by reference to Exhibit 10.6 to the Annual Report on Form
10-K for the fiscal year ended August 28, 2004, filed by U.S. Premium Beef with the
SEC on November 26, 2004)
10.6(d)Fourth Amendment to Credit Agreement, dated August 6, 2003, by and among U.S.
Premium Beef, Ltd. and CoBank, ACB, as agent for the benefit of the syndication parties.
(incorporated herein by reference to Exhibit 10.9 to U.S. Premium Beef Registration
Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004).
10.6(e)Third Amendment to Credit Agreement, dated August 29, 2002, by and among U.S.
Premium Beef, Ltd. and CoBank, ACB, as agent for the benefit of the syndication parties
(incorporated herein by reference to Exhibit 10.10 to U.S. Premium Beef Registration
Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004).


10.6(f)Second Amendment to Credit Agreement, dated August 24, 2001, by and among U.S.
Premium Beef, Ltd. and CoBank, ACB, as agent for the benefit of the syndication parties
(incorporated herein by reference to Exhibit 10.11 to U.S. Premium Beef Registration
Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004).
10.6(g)First Amendment to Credit Agreement, dated February 25, 2000, by and among U.S.
Premium Beef, Ltd. and CoBank, ACB, for its own benefit as a lender and as agent for
the benefit of the syndication parties (incorporated herein by reference to Exhibit 10.12 to
U.S. Premium Beef Registration Statement on Form S-4 (File No. 333-115164) filed with
the SEC on August 5, 2004).
10.6(h)Credit Agreement, dated November 25, 1997, by and among U.S. Premium Beef, Ltd.
and CoBank, ACB, for its own benefit as a lender and as agent for the benefit of the
syndication parties (incorporated herein by reference to Exhibit 10.13 to U.S. Premium
Beef Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on
August 5, 2004).
10.7(a)**CEO Employment Agreement by and between Steven D. Hunt and U.S. Premium Beef,
LLC adopted September 1, 2004 (incorporated herein by reference to Exhibit 10.14 to
U.S. Premium Beef Registration Statement on Form S-4 (File No. 333-115164) filed with
the SEC on August 5, 2004).
10.7(b)*Employment Agreement dated as of August 6, 2003 by and between National Beef
Packing Company, LLC and John R. Miller (incorporated herein by reference to Exhibit
10.2 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on
December 19, 2003).
10.7(c)*Deferred Equity Incentive Compensation Agreement dated August 6, 2003 by and
between National Beef Packing Company, LLC and John R. Miller (incorporated herein
by reference to Exhibit 10.3 to Registration Statement on Form S-4 (File No. 333-
111407) filed with the SEC on December 19, 2003).
10.7(d)*Employment Agreement dated as of August 6, 2003 by and between National Beef
Packing Company, LLC and Timothy M. Klein (incorporated herein by reference to
Exhibit 10.4 to Registration Statement on Form S-4 (File No. 333-111407) filed with the
SEC on December 19, 2003).
10.7(e)*Deferred Equity Incentive Compensation Agreement dated August 6, 2003 by and
between National Beef Packing Company, LLC and Timothy M. Klein (incorporated
herein by reference to Exhibit 10.5 to Registration Statement on Form S-4 (File No. 333-
111407) filed with the SEC on December 19, 2003).
10.8Purchase Agreement dated July 31, 2003 by and among NB Acquisition, LLC, National
Beef Packing Company, L.P., NB Finance Corp., Deutsche Bank Securities Inc., U.S.
Bancorp Piper Jaffray Inc. and Rabo Securities USA, Inc. (incorporated herein by
reference to Exhibit 10.1 to Registration Statement on Form S-4 (File No. 333-111407)
filed with the SEC on December 19, 2003).
10.9Fifth Amended and Restated Credit Agreement dated as of May 30, 2006 (“Credit
Agreement”) by and among National Beef Packing Company, LLC and certain agents,
lenders and issuers (incorporated by reference to Exhibit 10.1 (File No. 333-111407) to
Form 8-K filed with the SEC on June 22, 2006).
10.10(a)Lease Agreement dated as of February 1, 1999 between City of Dodge City, Kansas and
Farmland National Beef Packing Company, L.P. securing $1,000,000 City of Dodge
City, Kansas Industrial Development Revenue Bonds (Farmland National Beef Packing
Company, L.P. Project), Series 1999 (incorporated herein by reference to Exhibit 10.8 to
Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on
December 19, 2003).


10.10(b)Indenture of Trust dated as of February 1, 1999 between City of Dodge City, Kansas and
Commerce Bank, N.A., as trustee, securing $1,000,000 City of Dodge City, Kansas
Industrial Development Revenue Bonds (Farmland National Beef Packing Company,
L.P. Project), Series 1999 (incorporated herein by reference to Exhibit 10.9 to
Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on
December 19, 2003).
10.11(a)Indenture of Trust dated as of January 1, 1999 between City of Liberal, Kansas and
Commerce Bank, N.A., as trustee, securing $1,000,000 City of Liberal, Kansas Industrial
Development Revenue Bonds (Farmland National Beef Packing Company, L.P. Project),
Series 1999 (incorporated herein by reference to Exhibit 10.11 to Registration Statement
on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).
10.11(b)Amended and Restated Lease Agreement dated as of January 1, 1999 between City of
Liberal, Kansas and Farmland National Beef Packing Company, L.P. securing
$1,000,000 City of Liberal, Kansas Industrial Development Revenue Bonds (Farmland
National Beef Packing Company, L.P. Project), Series 1999 (incorporated herein by
reference to Exhibit 10.10 to Registration Statement on Form S-4 (File No. 333-111407)
filed with the SEC on December 19, 2003).
10.12(a)Lease Agreement dated as of March 1, 2000 between City of Dodge City, Kansas and
Farmland National Beef Packing Company, L.P. securing $6,000,000 City of Dodge
City, Kansas Industrial Development Revenue Bonds (Farmland National Beef Packing
Company, L.P. Project), Series 2000 (incorporated herein by reference to Exhibit 10.12
to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on
December 19, 2003).
10.12(b)Indenture of Trust dated as of March 1, 2000 between City of Dodge City, Kansas and
Commerce Bank, N.A., as trustee, securing $6,000,000 City of Dodge City, Kansas
Industrial Development Revenue Bonds (Farmland National Beef Packing Company,
L.P. Project), Series 2000 (incorporated herein by reference to Exhibit 10.13 to
Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on
December 19, 2003).
10.13(a)Lease Agreement dated as of March 1, 2000 between City of Liberal, Kansas and
Farmland National Beef Packing Company, L.P. securing $5,850,000 City of Liberal,
Kansas Industrial Development Revenue Bonds (Farmland National Beef Packing
Company, L.P. Project), Series 2000 (incorporated herein by reference to Exhibit 10.14
to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on
December 19, 2003).
10.13(b)Indenture of Trust dated as of March 1, 2000 between City of Liberal, Kansas and
Commerce Bank, N.A., as trustee, securing $5,850,000 City of Liberal, Kansas Industrial
Development Revenue Bonds (Farmland National Beef Packing Company, L.P. Project),
Series 2000 (incorporated herein by reference to Exhibit 10.15 to Registration Statement
on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).
10.14(a)Lease dated as of December 1, 2004 between City of Dodge City, Kansas and National
Beef Packing Company, LLC securing $102,300,000 City of Dodge City, Kansas
Industrial Development Revenue Bonds, Series 2004 (National Beef Packing Company,
LLC Project) (incorporated by reference to Exhibit 10.2 to Form 8-K (File No. 333-
111407) filed with the Commission on January 6, 2005).
10.14(b)Trust Indenture dated as of December 1, 2004 between City of Dodge City, Kansas and
Commerce Bank, N.A., as trustee, securing $102,300,000 City of Dodge City, Kansas
Industrial Development Revenue Bonds, Series 2004 (National Beef Packing Company,
LLC Project) (incorporated by reference to Exhibit 10.3 to Form 8-K filed (File No. 333-
111407) with the Commission on January 6, 2005).


10.15Agreement dated December 22, 2003 by and between National Beef and United Food and
Commercial Workers International Union, AFL-CIO-CK, UFCW District Local Two
(incorporated herein by reference to Exhibit 10.25 to Amendment No. 1 to Registration
Statement on Form S-4 (File No. 333-111407) filed with the SEC on February 11, 2004).
10.16Lease agreement dated as of January 16, 2001 between Joint Development Authority of
Brooks, Colquitt, Grady, Mitchell and Thomas counties and Farmland National Beef
Company (incorporated herein by reference to Exhibit 10.20 to Registration Statement on
Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).
10.17Aircraft Lease dated October 15, 2003 by and among John R. Miller Enterprises III, LLC
and National Beef Packing Company, LLC (incorporated herein by reference to Exhibit
10.22 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC
on December 19, 2003).
10.18Aircraft Lease dated as of December 9, 2004 by and among John R. Miller Enterprises,
L.L.C. and National Beef Packing Company, LLC (incorporated by reference to Exhibit
10.1 to Form 8-K (File No. 333-111407) filed with the Commission on December 9,
2004).
10.19*National Beef Packing Company, LLC Management Incentive Program (incorporated
herein by reference to Exhibit 10.23 to Registration Statement on Form S-4 (File No.
333-111407) filed with the SEC on December 19, 2003).
10.20*National Beef Packing Company, LLC Management Long Term Incentive Plan
(incorporated herein by reference to Exhibit 10.24 to Registration Statement on Form S-4
(File No. 333-111407) filed with the SEC on December 19, 2003).
21.1Subsidiaries of National Beef Packing Company, LLC (incorporated herein by reference
to Exhibit 21.1 to Form 10-K (File No. 333-111407) filed with the SEC on November 17,
2006).
31.1Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002 (filed herewith).
31.2Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002 (filed herewith).
32.1Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
_______________
*Management contract or compensatory plan or arrangement.
+The Contribution Agreements in Exhibits 2.1, 2.2 and 2.3 contain Schedules and Exhibits that the
Company hereby agrees to furnish supplementally to the SEC upon its request.


(c) Financial Statement Schedules:

Schedule I – Parent Company Financial Statements

U.S. PREMIUM BEEF, LLC
Balance Sheets of Parent Company
August 26, 2006 and August 27, 2005
(in thousands)

Assets 2006  2005
Current assets:     
   Cash and cash equivalents$25,748  $20,556 
   Accounts receivable —   
   Other receivables 688   504 
         Total current assets 26,436   21,063 
Property, plant, and equipment, at cost 229   241 
   Less accumulated depreciation (220)  (217)
          Net property, plant and equipment   24 
Investments in National Beef Packing Company, LLC 134,029   114,320 
Other assets 403   384 
         Total assets$160,877  $135,791 

Liabilities and Capital Shares and Equities

     
Current liabilities:     
   Current installments of long-term debt$1,030  $1,030 
   Accounts payable 56   49 
   Due to affiliates 507   1,134 
   Accrued compensation and benefits 4,088   3,530 
   Other accrued expenses and liabilities 1,232   1,155 
         Total current liabilities 6,913   6,898 
Long-term liabilities:     
   Long-term debt, excluding current installments 4,119   5,148 
         Total long-term liabilities 4,119   5,148 
         Total liabilities 11,032   12,046 
Capital shares and equities:     
   Members' capital, 735,505 and 691,845 Class A units and 735,505 and 691,845     
      Class B units authorized, issued and outstanding 99,203   73,103 
   Patronage notices 50,642   50,642 
         Total capital shares and equities 149,845   123,745 
         Total liabilities and capital shares and equities$160,877  $135,791 


U.S. PREMIUM BEEF, LLC
Statements of Operations of Parent Company

Years ended August 26, 2006, August 27, 2005, and August 28, 2004 filed by
(in thousands)

 2006 2005 2004
Net sales$ $381,496  $614,346 
Costs and expenses:        
   Cost of sales   381,496   614,346 
   Selling, general, and administrative expenses 3,590   3,509   5,198 
   Depreciation and amortization 17   38   45 
         Total costs and expenses 3,607   385,043   619,589 
            Operating loss (3,607)  (3,547)  (5,243)
Other income (expense):        
   Interest income 864   354   98 
   Interest expense (404)  (469)  (719)
   Equity in earnings of National Beef Packing        
      Company, LLC 22,779   12,244   24,595 
   Other, net 123   248   834 
         Total other income 23,362   12,377   24,808 
            Income before taxes 19,755   8,830   19,565 
Income tax expense (36)  (191)  (469)
         Net income$19,719  $8,639  $19,096 
  
Earnings Per Linked Unit:        
   Basic$28.06  $12.49    
   Diluted$27.56  $12.25    
Outstanding weighted-average Class A and Class B units:        
   Basic 702,843   691,845    
   Diluted 715,385   705,063    
Proforma amounts assuming the conversion to        
   an LLC is applied retroactively:        
Earnings Per Linked Unit:        
   Basic$28.06  $12.49  $27.60 
   Diluted$27.56  $12.25  $27.10 
  
Outstanding weighted-average Class A and Class B units:        
   Basic 702,843   691,845   691,845 
   Diluted 715,385   705,063   704,748 


U.S. Premium Beef with the SEC on November 26, 2004)

10.7     Fourth Amendment to Credit Agreement, dated August 6, 2003, by and among U.S. Premium Beef, Ltd. and CoBank, ACB, as agent for the benefitPREMIUM BEEF, LLC
Statements of the syndication parties. (incorporated herein by reference to Exhibit 10.9 to U.S. Premium Beef Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004).

10.8     Third Amendment to Credit Agreement, dated August 29, 2002, by and among U.S. Premium Beef, Ltd. and CoBank, ACB, as agent for the benefitCash Flows of the syndication parties  (incorporated herein by reference to Exhibit 10.10 to U.S. Premium Beef Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004).

56


Parent Company

10.9     Second Amendment to Credit Agreement, dated August 24, 2001, by and among U.S. Premium Beef, Ltd. and CoBank, ACB, as agent for the benefit of the syndication parties (incorporated herein by reference to Exhibit 10.11 to U.S. Premium Beef Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004).

10.10   First Amendment to Credit Agreement, dated February 25, 2000, by and among U.S. Premium Beef, Ltd. and CoBank, ACB, for its own benefit as a lender and as agent for the benefit of the syndication parties (incorporated herein by reference to Exhibit 10.12 to U.S. Premium Beef Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004).

10.11   Credit Agreement, dated November 25, 1997, by and among U.S. Premium Beef, Ltd. and CoBank, ACB, for its own benefit as a lender and as agent for the benefit of the syndication parties (incorporated herein by reference to Exhibit 10.13 to U.S. Premium Beef Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004).

10.12   *CEO Employment Agreement by and between Steven D. Hunt and U.S. Premium Beef, LLC adopted September 1, 2004 (incorporated herein by reference to Exhibit 10.14 to U.S. Premium Beef Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004).

10.13   Purchase Agreement dated July 31, 2003 by and among NB Acquisition, LLC, National Beef Packing Company, L.P., NB Finance Corp., Deutsche Bank Securities Inc., U.S. Bancorp Piper Jaffray Inc. and Rabo Securities USA, Inc.  (incorporated herein by reference to Exhibit 10.1 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

10.14* Employment Agreement dated as of August 6, 2003 by and between National Beef Packing Company, LLC and John R. Miller (incorporated herein by reference to Exhibit 10.2 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

10.15* Deferred Equity Incentive Compensation Agreement dated August 6, 2003 by and between National Beef Packing Company, LLC and John R. Miller (incorporated herein by reference to Exhibit 10.3 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

10.16* Employment Agreement dated as of August 6, 2003 by and between National Beef Packing Company, LLC and Timothy M. Klein (incorporated herein by reference to Exhibit 10.4 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

10.17* Deferred Equity Incentive Compensation Agreement dated August 6, 2003 by and between National Beef Packing Company, LLC and Timothy M. Klein (incorporated herein by reference to Exhibit 10.5 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

10.18   Fourth Amended and Restated Credit Agreement dated as of December 29, 2004 ("Credit Agreement") by and between National Beef Packing Company, LLC and certain agents, lenders and issuers (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on January 6, 2005).

10.19   First Amendment to Credit Agreement dated as of July 7, 2005, by and among the Company, certain agents, lenders and issuers (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended May 28, 2005, filed with the SEC on July 11, 2005).

57



10.20   Waiver dated September 2, 2005 to Credit Agreement (incorporated herein by reference to Exhibit 10.4(c) the Annual Report on Form 10-K for the fiscal yearYears ended August 26, 2006, August 27, 2005, and August 28, 2004 filed by National Beef Packing Company, LLC with the SEC on November 23, 2005).
(in thousands)

 2006 2005 2004
Cash flows from operating activities:        
   Net income$19,719  $8,639  $19,096 
   Adjustments to reconcile net income to net cash provided        
      by operating activities:        
         Depreciation and amortization 17   38   45 
         Equity in earnings of National Beef Packing Company, LLC (22,779)  (12,244)  (24,595)
         Distribution from National Beef Packing Company, LLC 10,701   10,954   18,698 
         Interest rate exchange agreement —   (105)  (631)
         Changes in assets and liabilities (net of acquisition):        
            Accounts receivable   15,554   (7,014)
            Due from affiliates (184)  (504)  — 
            Other receivables —   1,225   — 
            Other assets (19)  (39)  
            Accounts payable   (197)  176 
            Due to affiliates (627)  (198)  — 
            Accrued compensation and benefits 558   257   408 
            Other accrued expenses and liabilities 77   325   (512)
            Cattle purchases payable —   (3,574)  1,932 
               Net cash provided by operating activities 7,473   20,131   7,606 
Cash flows from investing activities:        
   Capital expenditures, including interest capitalized (2)  (8)  (13)
               Net cash used in investing activities (2)  (8)  (13)
Cash flows from financing activities:        
   Proceeds from membership and registration fees —   —   27 
   Proceeds from nondelivery fees —   —   1,330 
   Payments of notes payable and fees (1,029)  (1,030)  (1,005)
   Payments of patronage refunds/patronage notices —   (957)  (8,369)
   Change in overdraft balances —   (11,983)  5,113 
   Partnership distributions (1,250)  (1,210)  — 
               Net cash used in financing activities (2,279)  (15,180)  (2,904)
               Net increase in cash 5,192   4,943   4,689 
Cash and cash equivalents at beginning of period 20,556   15,613   10,924 
Cash and cash equivalents at end of period$25,748  $20,556  $15,613 
Supplemental cash disclosures:        
   Cash paid during the period for interest$402  $494  $679 
   Cash paid during the period for taxes, net of refunds$36  $191  $(25)
Supplemental noncash disclosures of investing and financing activities:        
   Issuance of equity for acquisition of Brawley Beef$7,631  $- $-

10.21   Second Amendment to Credit Agreement dated as of October 14, 2005, by


Schedule II – Valuation and among the Company, certain agents, lenders and issuers (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed with the SEC on October 20, 2005).

10.22   Lease Agreement dated as of February 1, 1999 between City of Dodge City, Kansas and Farmland National Beef Packing Company, L.P. securing $1,000,000 City of Dodge City, Kansas Industrial Development Revenue Bonds (Farmland National Beef Packing Company, L.P. Project), Series 1999 (incorporated herein by reference to Exhibit 10.8 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

10.23   Indenture of Trust dated as of February 1, 1999 between City of Dodge City, Kansas and Commerce Bank, N.A., as trustee, securing $1,000,000 City of Dodge City, Kansas Industrial Development Revenue Bonds (Farmland National Beef Packing Company, L.P. Project), Series 1999 (incorporated herein by reference to Exhibit 10.9 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

10.24   Indenture of Trust dated as of January 1, 1999 between City of Liberal, Kansas and Commerce Bank, N.A., as trustee, securing $1,000,000 City of Liberal, Kansas Industrial Development Revenue Bonds (Farmland National Beef Packing Company, L.P. Project), Series 1999 (incorporated herein by reference to Exhibit 10.11 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

10.25   Lease Agreement dated as of March 1, 2000 between City of Dodge City, Kansas and Farmland National Beef Packing Company, L.P. securing $6,000,000 City of Dodge City, Kansas Industrial Development Revenue Bonds (Farmland National Beef Packing Company, L.P. Project), Series 2000 (incorporated herein by reference to Exhibit 10.12 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

10.26   Indenture of Trust dated as of March 1, 2000 between City of Dodge City, Kansas and Commerce Bank, N.A., as trustee, securing $6,000,000 City of Dodge City, Kansas Industrial Development Revenue Bonds (Farmland National Beef Packing Company, L.P. Project), Series 2000 (incorporated herein by reference to Exhibit 10.13 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

10.27   Lease Agreement dated as of March 1, 2000 between City of Liberal, Kansas and Farmland National Beef Packing Company, L.P. securing $5,850,000 City of Liberal, Kansas Industrial Development Revenue Bonds (Farmland National Beef Packing Company, L.P. Project), Series 2000 (incorporated herein by reference to Exhibit 10.14 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

10.28   Indenture of Trust dated as of March 1, 2000 between City of Liberal, Kansas and Commerce Bank, N.A., as trustee, securing $5,850,000 City of Liberal, Kansas Industrial Development Revenue Bonds (Farmland National Beef Packing Company, L.P. Project), Series 2000 (incorporated herein by reference to Exhibit 10.15 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

58



10.29   Lease dated as of December 1, 2004 between City of Dodge City, Kansas and National Beef Packing Company, LLC securing $102,300,000 City of Dodge City, Kansas Industrial Development Revenue Bonds, Series 2004 (National Beef Packing Company, LLC Project) (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the Commission on January 6, 2005).

10.30   Trust Indenture dated as of December 1, 2004 between City of Dodge City, Kansas and Commerce Bank, N.A., as trustee, securing $102,300,000 City of Dodge City, Kansas Industrial Development Revenue Bonds, Series 2004 (National Beef Packing Company, LLC Project) (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed with the Commission on January 6, 2005).

10.31   Agreement dated December 22, 2003 by and between National Beef and United Food and Commercial Workers International Union, AFL-CIO-CK, UFCW District Local Two (incorporated herein by reference to Exhibit 10.25 to Amendment No. 1 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on February 11, 2004).

10.32   Lease agreement dated as of January 16, 2001 between Joint Development Authority of Brooks, Colquitt, Grady, Mitchell and Thomas counties and Farmland National Beef Company (incorporated herein by reference to Exhibit 10.20 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

10.33   Aircraft Lease dated December 15, 1998 by and among John R. Miller Enterprises, L.L.C. and Farmland National Beef Packing Company, L.P.  (incorporated herein by reference to Exhibit 10.17 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

10.34   Lease Amendment Number One, dated January 4, 1999, to Aircraft Lease dated December 15, 1998 by and among John R. Miller Enterprises, L.L.C. and Farmland National Beef Packing Company, L.P.  (incorporated herein by reference to Exhibit 10.18 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

10.35   Aircraft Lease dated October 15, 2003 by and among John R. Miller Enterprises III, LLC and National Beef Packing Company, LLC (incorporated herein by reference to Exhibit 10.22 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

10.36   Aircraft Lease dated as of December 9, 2004 by and among John R. Miller Enterprises, L.L.C. and National Beef Packing Company, LLC (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Commission on December 9, 2004).

10.37* National Beef Packing Company, LLC Management Incentive Program (incorporated herein by reference to Exhibit 10.23 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

10.38* National Beef Packing Company, LLC Management Long Term Incentive Plan (incorporated herein by reference to Exhibit 10.24 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

21.1     Subsidiaries of National Beef Packing Company, LLC (incorporated herein by reference to Exhibit 21.1 to Registration Statement on Form S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

31.1      Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).   

31.2      Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

59



32.1        Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.2        Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

_____________

*  Management contract or compensatory plan or arrangement.

 (c) Financial Statement SchedulesQualifying Accounts

The following table represents the consolidated rollforward of the allowance for returns and doubtful accounts for the fiscal years ended August 26, 2006, August 27, 2005, and August 28, 2004, and August 30, 2003.

Doubtful Accounts/Claims Rollforward 2004.

Period Ending

 

  

Beginning
Balance

 

Provision

 
 

Charge Off

 

 

Other

 

Ending
Balance

 
 

August 27, 2005

(5,613,545)

 

(3,186,535)

 

 4,897,531

       -      

(3,902,549)

August 28, 2004

(5,133,549)

 

(3,609,812)

 

3,129,816

  -

(5,613,545)

August 30, 2003

  

       -

(296,768)

 

216,256

  

(5,053,037)(1)

(5,133,549)

_____________          
(1)  Represents the acquisition of Farmland National Beef Packing Company, L.P.

60



  Beginning       Ending
Period Ending Balance Provision Charge Off Other (1) Balance
     
August 26, 2006 (3,902,549) (1,615,548) 3,380,259 (273,838) (2,411,676)
August 27, 2005 (5,613,545) (3,186,535) 4,897,531 - (3,902,549)
August 28, 2004 (5,133,549) (3,609,812) 3,129,816 - (5,613,545)
           
(1)Represents the acquisition of Brawley Beef, LLC      

 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULESCHEDULES

The Board of Directors and Stockholders
U.S. Premium Beef, LLC:

Under date of November 4, 2005,17, 2006, we reported on the consolidated balance sheets of U.S. Premium Beef, LLC and subsidiaries (the Company) as of August 27, 200526, 2006 and August 28, 2004,27, 2005, and the related consolidated statements of operations, comprehensive income, capital shares and equities and cash flows for each of the fiscal years in the three year period ended August 27, 2005.26, 2006 as contained in the Annual Report on Form 10-K for the fiscal year 2006. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement scheduleschedules in the Form 10-K. The consolidated financial statement schedule isschedules are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on this consolidatedthese financial statement scheduleschedules based on our audits.

In our opinion, such consolidated financial statement schedule,schedules, when considered in relation to the basic consolidated financial statements taken as a whole, presentspresent fairly, in all material respects, the information set forth therein.

/s/ KPMG LLP
Kansas City, Missouri
November 4, 2005

17, 2006

 

61




SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

U.S. Premium Beef, LLC
By: /s/ Steven D. Hunt
___________________________________________
Name: Steven D. Hunt
Chief Executive Officer
(Principal Executive Officer)
Date: November 17, 2006

U.S. Premium Beef, LLC

By:/s/ Steven D. Hunt

Name: Steven D. Hunt
Chief Executive Officer and Manager
(Principal Executive Officer)

Date: November 23, 2005

* * * *

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacity and on the dates indicated.

 

Signature

Title

Date

/s/ Steven D. Hunt

  
Steven D. HuntChief Executive Officer and Manager
(Principal Executive Officer)
November 23, 200516, 2006
 (Principal Executive Officer) 
/s/ Scott J. Miller  
Scott J. MillerChief Financial Officer
November 16, 2006
(Principal Financial and Accounting Officer)November 23, 2005

/s/ Terry D. Ryan
  
Terry D. RyanChairman of the Board of ManagersNovember 23, 200516, 2006

/s/ Mark R. Gardiner
  
Mark R. GardinerVice Chairman of the BoardNovember 23, 200516, 2006

/s/ John D. Fairleigh
  
John D. FairleighSecretary/TreasurerSecretary of the BoardNovember 23, 200516, 2006

/s Jerry L. Bohn
  
/s/ John Adams
John AdamsJerry L. BohnDirectorNovember 23, 200516, 2006
/s/ Kelly K. Giles
Kelly K. GilesDirectorNovember 23, 2005

/s/ Douglas A. Laue
  
Douglas A. LaueDirectorNovember 23, 200516, 2006

/s/ Carol A. Keiser
  
Carol A. KeiserDirectorNovember 16, 2006

/s/ Jerry BohnRex W. McCloy
  
Jerry BohnRex W. McCloyDirectorNovember 23, 200516, 2006


U.S. PREMIUM BEEF, LLC

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

  
 

62



U.S. PREMIUM BEEF, LLC
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

 

Audited Consolidated Financial Statements:

Report of Independent Registered Public Accounting Firm

F-2

 

Consolidated Balance Sheets at August 27, 200526, 2006 and August 28, 2004

27, 2005

F-3

 

Consolidated Statements of Operations for the years ended August 26, 2006, August 27, 2005,
   and August 28, 2004 and August 30, 2003

F-4

 

Consolidated Statements of Comprehensive Income for the years ended August 26, 2006,
   August 27, 2005, and August 28, 2004 and August 30, 2003

F-5

 

Consolidated Statements of Capital Shares and Equities for the years ended August 26, 2006,
   August 27, 2005 and August 28, 2004 and August 30, 2003

F-6

 

Consolidated Statements of Cash Flows for the years ended August 26, 2006, August 27, 2005,
   and August 28, 2004 and August 30, 2003

F-7

 

Notes to Consolidated Financial Statements

F-8

National Beef Packing Company, LLC and Subsidiaries Audited Consolidated Financial Statements

F-39

 

F-1




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Owners
U.S. Premium Beef, LLC:

We have audited the accompanying consolidated balance sheets of U.S. Premium Beef, LLC and subsidiaries (the Company) as of August 27, 200526, 2006 and August 28, 2004,27, 2005, and the related consolidated statements of operations, comprehensive income, capital shares and equities, and cash flows for each of the fiscal years in the three-year period ended August 27, 2005.26, 2006. These consolidated financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of U.S. Premium Beef, LLC and subsidiaries as of August 27, 200526, 2006 and August 28, 2004,27, 2005, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended August 27, 2005,26, 2006, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP
Kansas City, Missouri
November 4, 200517, 2006

 

F-2




U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES


Consolidated Balance Sheets
August 26, 2006 and August 27, 2005
(in thousands)

Assets2006 2005
Current assets:     
   Cash and cash equivalents$58,434  $54,428 
   Accounts receivable, less allowance for returns and doubtful     
      accounts of $2,412 and $3,903, respectively 173,233   170,854 
   Due from affiliates 3,391   2,979 
   Other receivables 5,943   3,385 
   Inventory 145,009   85,426 
   Other current assets 20,171   9,920 
 Total current assets 406,181   326,992 
Property, plant, and equipment, at cost 331,500   258,493 
   Less accumulated depreciation (69,490)  (43,331)
 Net property, plant and equipment 262,010   215,162 
Goodwill 79,411   78,858 
Other intangible assets, net of accumulated amortization of $5,276     
   and $3,335, respectively 30,562   28,426 
Other assets 6,594   6,710 
 Total assets$784,758  $656,148 
Liabilities and Capital Shares and Equities     
Current liabilities:     
   Current installments of long-term debt$3,400  $1,030 
   Cattle purchases payable 58,320   54,394 
   Accounts payable 54,449   42,514 
   Due to affiliates 878   1,533 
   Accrued compensation and benefits 27,894   22,168 
   Accrued insurance 17,651   15,528 
   Other accrued expenses and liabilities 12,086   9,389 
   Distributions payable 4,880   1,865 
 Total current liabilities 179,558   148,421 
Long-term liabilities:     
   Long-term debt, excluding current installments 380,496   313,998 
   Other liabilities 2,961   4,738 
 Total long-term liabilities 383,457   318,736 
 Total liabilities 563,015   467,157 
Minority interest in National Beef Packing Co. and Kansas City Steak Company, LLC 72,956   64,971 
Capital shares and equities:     
   Members' capital, 735,505 and 691,845 Class A units and 735,505 and 691,845     
      Class B units authorized, issued and outstanding, respectively 98,092   73,343 
   Patronage notices 50,642   50,642 
   Accumulated other comprehensive income 53   35 
 Total capital shares and equities 148,787   124,020 
 Total liabilities and capital shares and equities$784,758  $656,148 
      

See accompanying notes to consolidated financial statements.


U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended August 26, 2006, August 27, 2005, and August 28, 2004
(in thousands)

Assets2005 2004
Current assets:      
     Cash and cash equivalents $54,428  $43,611 
     Accounts receivable, less allowance for returns and doubtful     
          accounts of $3,903 and $5,614 in 2005 and 2004, respectively 170,854   177,614 
     Due from affiliates  2,979   2,873 
     Other receivables  3,385   4,513 
     Inventory   85,426   85,962 
     Other current assets  9,920   10,782 
 Total current assets  326,992   325,355 
Property, plant, and equipment, at cost  258,493   242,903 
     Less accumulated depreciation  (43,331)  (20,844)
 Net property, plant and equipment  215,162   222,059 
Goodwill  78,858   78,858 
Other intangible assets, net of accumulated amortization of $3,335      
     and $1,722 in 2005 and 2004, respectively  28,426   30,039 
Other assets  6,710   7,446 
 Total assets $656,148  $663,757 
Liabilities and Capital Shares and Equities     
Current liabilities:      
     Current installments of long-term debt $1,030  $10,483 
     Cattle purchases payable  54,394   49,569 
     Accounts payable  42,514   39,453 
     Due to affiliates  1,533   418 
     Patronage refunds payable in cash  —   847 
     Accrued compensation and benefits  22,168   20,828 
     Accrued insurance  15,528   13,903 
     Other accrued expenses and liabilities  9,389   7,690 
     Distributions payable  1,865   2,296 
 Total current liabilities  148,421   145,487 
Long-term liabilities:      
     Long-term debt, excluding current installments  313,998   331,812 
     Interest rate exchange agreement  —   105 
     Other liabilities  4,738   5,237 
 Total long-term liabilities  318,736   337,154 
 Total liabilities  467,157   482,641 
Minority interest in National Beef Packing Co. and Kansas City Steak, LLC 64,971   63,108 
Capital shares and equities:      
     Members' capital, 691,845 Class A units and 691,845 Class B units authorized,     
          issued and outstanding  73,343   — 
     Common stock, $0.01 par value; authorized 5,000,000 shares, 691,845 shares     
          issued and outstanding  —   
     Cooperative members' contributed capital  —   39,531 
    Nondelivery fee  —   1,330 
     Patronage notices  50,642   — 
     Patronage refunds for reinvestment  —   50,752 
     Unallocated equity  —   26,375 
     Accumulated other comprehensive income  35   13 
 Total capital shares and equities  124,020   118,008 
 Total liabilities and capital shares and equities $656,148  $663,757 
        
See accompanying notes to consolidated financial statements.      

F-3



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Consolidated Statements of Operations

Years ended August 27, 2005, August 28, 2004 and August 30, 2003
(in thousands)

 
2005
 
2004
 
2003
Net sales$4,338,920  $4,093,481  $871,774 
Costs and expenses:        
     Cost of sales 4,229,903   3,973,636   853,577 
     Selling, general, and administrative expenses 33,975   34,814   5,694 
     Depreciation and amortization 24,487   21,215   2,106 
          Total costs and expenses 4,288,365   4,029,665   861,377 
                    Operating income 50,555   63,816   10,397 
Other income (expense):        
   Interest income 734   647   170 
     Interest expense (29,021)  (26,628)  (2,397)
     Minority owners’ interest in net income of        
          National Beef Packing Co.        
          (net of tax expense of $830 in 2005        
          and $340 in 2004) (8,535)  (19,417)  (4,872)
     Minority owners’ interest in net income of        
         Kansas City Steak, LLC (160)  (313)  (2)
     Equity in loss of aLF Ventures, LLC (577)  (837)  (41)
     Equity in income from Farmland National        
         Beef Packing Co. —   —   22,586 
     Interest rate exchange agreement 105   630   — 
   Other, net (2,412)  2,395   (1,684)
               Total other (expense) income (39,866)  (43,523)  13,760 
                    Income before taxes 10,689   20,293   24,157 
Income tax (expense) benefit (2,050)  (1,197)  73 
            Net income$8,639  $19,096  $24,230 
         
         
Earnings Per Linked Unit:        
    Basic$12.49       
     Diluted$12.25       
         
Outstanding weighted-average Class A and Class B units:        
     Basic 691,845       
     Diluted 705,063       
         
Proforma amounts assuming the conversion to        
     an LLC is applied retroactively:        
         
Earnings Per Linked Unit:        
    Basic$12.49  $27.60  $35.02
     Diluted$12.25  $27.10  $34.43
         
Outstanding weighted-average Class A and Class B units:        
     Basic 691,845   691,845   691,845
     Diluted 705,063   704,748   703,761
         
See accompanying notes to consolidated financial statements.

F-4



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

Years ended August 27, 2005, August 28, 2004 and August 30, 2003
(in thousands)

 2005 2004 2003
Net income$8,639 $19,096  $24,230 
Other comprehensive income:        
   Change in fair value of interest rate        
      exchange agreement   (256)  256 
   Foreign currency translation adjustments 22  14   (1)
             Comprehensive income$8,661 $18,854  $24,485 
         
 2006 2005 2004
Net sales$4,636,030  $4,338,920  $4,093,481 
Costs and expenses:        
   Cost of sales 4,503,814   4,229,903   3,973,636 
   Selling, general, and administrative expenses 37,624   33,975   34,814 
   Depreciation and amortization 28,667   24,487   21,215 
               Total costs and expenses 4,570,105   4,288,365   4,029,665 
                   Operating income 65,925   50,555   63,816 
Other income (expense):        
  Interest income 1,267   734   647 
   Interest expense (32,413)  (29,021)  (26,628)
   Minority owners’ interest in net income of        
      National Beef Packing Co.        
      (net of tax expense of $660 in 2006, $830 in        
     2005 and $340 in 2004) (16,632)  (8,535)  (19,417)
   Minority owners’ interest in net income of        
      Kansas City Steak Company, LLC (160)  (160)  (313)
   Equity in loss of aLF Ventures, LLC (143)  (577)  (837)
   Interest rate exchange agreement —   105   630 
  Other, net 3,447   (2,412)  2,395 
               Total other expense (44,634)  (39,866)  (43,523)
                         Income before taxes 21,291   10,689   20,293 
Income tax expense (1,572)  (2,050)  (1,197)
               Net income$19,719  $8,639  $19,096 
         
Earnings Per Linked Unit:        
   Basic$28.06  $12.49    
   Diluted$27.56  $12.25    
Outstanding weighted-average Class A and Class B units:        
   Basic 702,843   691,845    
   Diluted 715,385   705,063    
Proforma amounts assuming the conversion to        
    an LLC is applied retroactively:        
Earnings Per Linked Unit:        
   Basic$28.06  $12.49  $27.60 
   Diluted$27.56  $12.25  $27.10 
Outstanding weighted-average Class A and Class B units:        
   Basic 702,843   691,845   691,845 
   Diluted 715,385   705,063   704,748 

See accompanying notes to consolidated financial statements.

 


U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income

Years ended August 26, 2006, August 27, 2005, and August 28, 2004
(in thousands)

 2006 2005 2004
Net income$19,719 $8,639 $19,096 
Other comprehensive income:        
   Change in fair value of interest rate        
      exchange agreement     (256)
   Foreign currency translation adjustments 18  22  14 
            Comprehensive income$19,737 $8,661 $18,854 

See accompanying notes to consolidated financial statements.

 


F-5U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES Consolidated Statements of Capital Shares and Equities

Years ended August 26, 2006, August 27, 2005, and August 28, 2004 (in thousands)

   Cooperative    AccumulatedTotal
   members' Patronage  othercapital
 Members'CommoncontributedNondeliveryrefunds forPatronageUnallocatedcomprehensiveshares and
 Capitalstockcapitalfeereinvestmentnoticesequityincomeequities
Balance at August 30, 2003$-$7$39,504$-$49,480$-$9,159$255$98,405
Collection of membership fees - - 27 - - - - - 27
Change in fair value of cash flow hedge - - - - - - - (256) (256)
   for interest rate exchange agreement                  
Foreign currency translation adjustment - - - - - - - 14 14
Assessment of nondelivery fee - - - 1,330 - - - - 1,330
Allocation of net income for the year                  
   ended August 28, 2004 - - - - 2,119 - 16,977 - 19,096
Adjustment to fair value of minority                  
   interest - - - - - - 239 - 239
Patronage refunds payable in cash                  
   transferred to current liabilities - - - - (847) - - - (847)
Balance at August 28, 2004$-$7$39,531$1,330$50,752$-$26,375$13$118,008
Foreign currency translation adjustment - - - - - - - 22 22
Nondelivery fee transferred                  
   to current liabilities - - - (1,330) - - - - (1,330)
Conversion from cooperative to LLC 65,913 (7) (39,531) - (50,642) 50,642 (26,375) - -
Allocation of net income for the year                  
   ended August 27, 2005 8,639 - - - - -   - 8,639
Partner distributions transferred to                  
   current liabilities (1,209) - - - - - - - (1,209)
Patronage refunds payable in cash                  
   transferred to current liabilities - - - - (110) - - - (110)
Balance at August 27, 2005$73,343$-$-$-$-$50,642$-$35$124,020
Foreign currency translation adjustment - - - - - - - 18 18
Equity Issued in Brawley acquisition 7,631 - - - - - - - 7,631
Allocation of net income for the year                  
   ended August 26, 2006 19,719 - - - - -   - 19,719
Adjustment to fair value of minority                  
   interest (1,351) - - - - - - - (1,351)
Partner distributions transferred to                  
   current liabilities (1,197) - - - - - - - (1,197)
Redemption of Members' Capital (53) - - - - - - - (53)
Balance at August 26, 2006$98,092$-$-$-$-$50,642$-$53$148,787

See accompanying notes to consolidated financial statements.




U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES


Consolidated Statements of Capital Shares and EquitiesCash Flows


Years ended August 26, 2006, August 27, 2005, and August 28, 2004 and August 30, 2003
(in thousands)

  Members'
Capital
 Common
stock
Cooperative
members'
contributed
capital
 Nondelivery
fee
 Patronage
refunds for
reinvestment
 Patronage
notices
 Unallocated
equity
 Accumulated
other
comprehensive
income
 Total capital
shares and
equities
 Balance at August 31, 2002$- $ 7$39,468 $165 $36,926 $- $5,853 $- $82,419
 Collection of membership fees -  - 36  -  -  -  -  -  36
 Change in fair value of cash flow hedge -  - -  -  -  -  -  256  256
    for interest rate exchange agreement                          
 Foreign currency translation adjustment -  - -  -  -  -  -  (1)  (1)
 Allocation of net income for the year                          
    ended August 30, 2003 -  - -  -  20,924  -  3,306  -  24,230
 Partner distributions transferred to                          
    current liabilities -  - -  (165)  -  -  -  -  (165)
 Patronage refunds payable in cash                          
    transferred to current liabilities -  - -  -  (8,370)  -  -  -  (8,370)
 Balance at August 30, 2003$- $ 7$39,504 $- $49,480 $- $9,159 $255 $98,405
 Collection of membership fees -  - 27  -  -  -  -  -  27
 Change in fair value of cash flow hedge -  - -  -  -  -  -  (256)  (256)
    for interest rate exchange agreement                          
 Foreign currency translation adjustment -  - -  -  -  -  -  14  14
 Assessment of nondelivery fee -  - -  1,330  -  -  -  -  1,330
 Allocation of net income for the year                          
    ended August 28, 2004 -  - -  -  2,119  -  16,977  -  19,096
 Adjustment to fair value of minority                          
    interest -  - -  -  -  -  239  -  239
 Patronage refunds payable in cash                          
    transferred to current liabilities -  - -  -  (847)  -  -  -  (847)
 Balance at August 28, 2004$- $ 7$39,531 $1,330 $50,752 $- $26,375 $13 $118,008
 Foreign currency translation adjustment -  - -  -  -  -  -  22  22
 Nondelivery fee transferred                          
    to current liabilities -  - -  (1,330)  -  -  -  -  (1,330)
 Conversion from cooperative to LLC 65,913  (7) (39,531)  -  (50,642)  50,642  (26,375)  -  -
 Allocation of net income for the year                         -
    ended August 27, 2005 8,639  - -  -  -  -     -  8,639
 Partner distributions transferred to                          
    current liabilities (1,209)  - -  -  -  -  -  -  (1,209)
 Patronage refunds payable in cash                         -
    transferred to current liabilities -  - -  -  (110)  -  -  -  (110)
 Balance at August 27, 2005$73,343 $ -$- $- $- $50,642 $- $35 $124,020
                            
See accompanying notes to consolidated financial statements.
 2006 2005 2004
Cash flows from operating activities:        
   Net income$19,719  $8,639  $19,096 
   Adjustments to reconcile net income to net cash provided        
      by operating activities:        
         Depreciation and amortization 28,667   24,487   21,215 
         (Gain) loss on disposal of property, plant, and equipment (64)  703   42 
         Minority interest 16,656   8,656   19,631 
         Write-off of debt issuance costs 527   2,552   
         Interest rate exchange agreement   (105)  (631)
         Changes in assets and liabilities (net of acquisitions):        
            Accounts receivable 25,652   6,760   (21,725)
            Due from affiliates (412)  (106)  (2,141)
            Other receivables 1,007   1,128   855 
            Inventories (53,271)  536   (8,375)
            Other assets (2,721)  700   21,371 
            Accounts payable 891   2,527   1,975 
            Due to affiliates (655)  (215)  35 
            Accrued compensation and benefits 4,662   1,340   (10,395)
            Accrued insurance (317)  1,625   (2,736)
            Other accrued expenses and liabilities 387   1,200   298 
            Cattle purchases payable 3,870   (459)  1,191 
               Net cash provided by operating activities 44,598   59,968   39,706 
Cash flows from investing activities:        
   Capital expenditures, including interest capitalized (34,494)  (18,208)  (32,484)
   Acquisition of businesses, net of cash acquired 648     
   Proceeds from sale of property, plant, and equipment 939   1,528   1,302 
               Net cash used in investing activities (32,907)  (16,680)  (31,182)
Cash flows from financing activities:        
   Proceeds from membership and registration fees     27 
   Proceeds from nondelivery fees     1,330 
   Net receipts (payments) under revolving credit lines 3,863   (27,059)  29,750 
   Repayment of Brawley Beef, LLC debt (52,850)    
   Borrowings under term note payable 50,000   3,594   
   Repayments of other indebtedness/capital leases (1,067)  (428)  (501)
   Payments of notes payable and fees (1,029)  (3,374)  (7,255)
   Payments of patronage refunds/patronage notices   (957)  (8,370)
   Cash paid for financing costs (126)  (1,653)  
   Change in overdraft balances 1,763   5,818   443 
   Distributions to minority interest owners in National Beef Packing Co. (7,007)  (7,224)  (22,579)
   Partnership distributions and redemptions (1,250)  (1,210)  
               Net cash used in financing activities (7,703)  (32,493)  (7,155)
Effect of exchange rate changes on cash 18   22   14 
               Net increase in cash 4,006   10,817   1,383 
Cash and cash equivalents at beginning of period 54,428   43,611   42,228 
Cash and cash equivalents at end of period$58,434  $54,428  $43,611 
Supplemental cash disclosures:        
   Cash paid during the period for interest$29,559  $25,687  $24,518 
   Cash paid during the period for taxes, net of refunds$176  $2,545  $608 
Supplemental noncash disclosures of investing and financing activities:        
   Assets acquired through capital lease$8,697  $- $-
   Issuance of Equity for the acquisition of Brawley Beef, LLC$7,631  $- $-

See accompanying notes to consolidated financial statements.

 

F-6




U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended August 27, 2005, August 28, 2004 and August 30, 2003
(in thousands)

  2005 2004 2003
Cash flows from operating activities:         
   Net income $8,639  $19,096  $24,230 
   Adjustments to reconcile net income to net cash provided         
      by operating activities:         
         Depreciation and amortization  24,487   21,215   2,106 
         Loss on disposal of property, plant, and equipment  703   42   598 
         Equity in earnings of National Beef Packing         
            Co./Farmland National Beef      (22,586)
         Distributions from National Beef Packing         
            Co./Farmland National Beef      9,257 
         Minority interest  8,656   19,631   4,874 
         Write-off of debt issuance costs  2,552     
         Interest rate exchange agreement  (105)  (631)  
         Changes in assets and liabilities (net of acquisition):         
            Accounts receivable  6,760   (21,725)  (8,497)
            Due from affiliates  (106)  (2,141)  2,005 
            Other receivables  1,128   855   1,126 
            Inventories  536   (8,375)  (3,781)
            Other assets  700   21,371   (305)
            Accounts payable  2,527   1,975   642 
            Due to affiliates  (215)  35   (2,918)
            Accrued compensation and benefits  1,340   (10,395)  (2,158)
            Accrued insurance  1,625   (2,736)  4,468 
            Other accrued expenses and liabilities  1,200   298   7,366 
            Cattle purchases payable  (459)  1,191   3,953 
                  Net cash provided by operating activities  59,968   39,706   20,380 
Cash flows from investing activities:         
   Capital expenditures, including interest capitalized  (18,208)  (32,484)  (1,707)
   Acquisition of National Beef Packing Co., net of cash acquired      (226,445)
   Proceeds from sale of property, plant, and equipment  1,528   1,302   226 
                  Net cash used in investing activities  (16,680)  (31,182)  (227,926)
Cash flows from financing activities:         
   Proceeds from membership and registration fees    27   36 
   Proceeds from nondelivery fees    1,330   
   Net (payments) receipts under revolving credit lines  (27,059)  29,750   12,448 
   Borrowings under term note payable  3,594     21,875 
   Repayments of other indebtedness  (428)  (501)  (73)
   Payments of notes payable and fees  (3,374)  (7,255)  (929)
   Proceeds from issuance of senior notes      160,000 
   Payments of patronage refunds  (957)  (8,370)  (4,702)
   Payments of nondelivery fees      (165)
   Cash paid for financing costs  (1,653)    (10,283)
   Change in overdraft balances  5,818   443   9,501 
   Member contributions      45,964 
   Distributions to minority interest owners in National Beef Packing Co.  (7,224)  (22,579)  
   Partnership distributions  (1,210)    
               Net cash (used in) provided by financing activities  (32,493)  (7,155)  233,672 
Effect of exchange rate changes on cash  22   14   (1)
               Net increase in cash  10,817   1,383   26,125 
Cash and cash equivalents at beginning of period  43,611   42,228   16,103 
Cash and cash equivalents at end of period $54,428  $43,611  $42,228 
Supplemental disclosures:         
Cash paid during the period for interest $25,687  $24,518  $1,037 
Cash paid (received) during the period for taxes, net of refunds $2,545  $608  $(73)
          
See accompanying notes to consolidated financial statements.         
          

F-7



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005 and August 28, 2004 and August 30, 2003

(1)     Description of Business and Acquisition

U.S. Premium Beef (USPB) was formed as a closed marketing cooperative on July 1, 1996, and was then known as U.S. Premium Beef, Ltd. Its mission is to increase the quality of beef and long‑termlong-term profitability of cattle producers by creating a fully integrated producer‑ownedproducer-owned beef processing system that is a global supplier of high quality, value-added beef products responsive to consumer desires.

On December 1, 1997, USPB became operational by acquiring 25.4966% of Farmland National Beef Packing Co., L.P. (FNB), a partnership owned by USPB and Farmland Industries, Inc. (Farmland). USPB acquired an additional 3.29% partnership interest in February 1998, bringing its ownership to 28.7866% of FNB. Farmland then owned the remaining 71.2134%.

On May 31, 2002, Farmland and four of its subsidiaries filed voluntary petitions to reorganize under Chapter 11 of the United States Bankruptcy Code. FNB was not a party of these filings. Provisions of FNB'sFNB’s Operating Agreement and its financing agreement restricted partners'partners’ access to FNB'sFNB’s assets. In the fourth quarter of fiscal year 2003, as a result of the acquisition of Farmland's interest by USPB and others, as more fully described below, USPB acquired a controlling interest in the former FNB, now National Beef Packing Company, LLC (NBP), and the assets, liabilities, and operating results of NBP are consolidated with those of USPB effective August 7, 2003. Prior to the acquisition date, USPB accounted for its noncontrolling interest in FNB under the equity method..

On August 18, 2004, the shareholders of U.S. Premium Beef, Ltd. approved the merger of the cooperative into a wholly-owned subsidiary, U.S. Premium Beef, Inc., a Delaware corporation. The merger was effective on August 29, 2004. The Delaware corporation then, in a statutory conversion authorized under Delaware law, converted into a Delaware limited liability company (see noteNote 10). Following the effective date of the merger and the statutory conversion, the business of the cooperative continues in the limited liability company form of business organization.

NBP sells its meat products to customers in the foodservice, international, further processor, and retail distribution channels. NBP also produces and sells by‑productsby-products that are derived from its meat processing operations and variety meats to customers in various industries.

NBP operates beef slaughter and fabrication facilities in Liberal and Dodge City, Kansas case‑readyand Brawley, California, case-ready beef and pork processing facilities in Hummels Wharf, Pennsylvania and Moultrie, Georgia, and holds a 75% interest in Kansas City Steak Company, LLC, a portion control processing facility in Kansas City, Kansas. NBP'sNBP’s wholly-owned subsidiary, National Carriers, Inc., located in Liberal, Kansas, provides trucking services to NBP and third parties.

In connection with its initial acquisition of its interest in FNB, USPB obtainedowns the right and becameis subject to the obligation to deliver cattle annually to NBP relative to: (i) USPB'sUSPB’s ownership in NBP and (ii) the number of cattle processed annually by NBP. This agreement remains in effect with NBP. The price received for cattle is based upon a pricing grids determined by USPB and NBP, which reflects current market conditions. The Cattle Purchase Agreement is effective as long as USPB is a partner in NBP. Cattle delivered by USPB, which approximated 19%18% of NBP'sNBP’s total cattle processed in fiscal year 2005,2006, are processed in NBP's twoNBP’s three processing facilities.

USPB acquires all its cattle requirements from its members under Uniform Delivery and Marketing Agreements. Members are obligated to deliver a designated number of cattle to USPB during specified delivery periods, as defined. The agreements are for a term of ten years and provide for minimum quality standards, delivery variances, and termination provisions, as defined.

Cattle acquired from members pursuant to the Uniform Delivery and Marketing Agreements are concurrently sold to NBP pursuant to the Cattle Purchase Agreement. Both agreements remain in effect under the new LLC structure.

F-8On May 19, 2006, USPB’s majority owned subsidiary, NBP, entered into a Contribution Agreement with Brawley Beef, LLC (Brawley Beef) and National Beef California, LP (NBC) (the Agreement). NBC is a newly formed limited partnership, formed for the purposes of acquiring substantially all of the assets of Brawley Beef, with National Carriers, a wholly-owned subsidiary of the Company, acting as its general partner. Brawley Beef was an alliance of cattle producers in Arizona and California who supplied the beef processing facility in Brawley, California. The facility commenced operations in December 2001. The closing occurred on June 1, 2006, as more fully described in Note 3.




U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005 and August 28, 2004 and August 30, 2003

The Acquisition - On June 12, 2003, USPB entered into an agreement with Farmland to acquire all of the interests in FNB held by Farmland, which approximated 71.2%. USPB, which held the remaining interest in FNB, formed NB Acquisition, LLC (NB Acquisition) to consummate the acquisition.     USPB, NBPCo Holdings, LLC (NBPCo Holdings), and certain members of management of NBP purchased equity in NB Acquisition for $46.0 million in cash. NB Acquisition used a portion of these funds to purchase all of the membership interest of an affiliate of Farmland that held Farmland's general partnership interest in FNB, giving NB Acquisition voting control of FNB. Immediately thereafter, to finance the purchase of Farmland's remaining interest, FNB issued $160.0 million of 10 1/2% Senior Notes due 2011 (the Senior Notes) and amended its existing credit facility. A portion of the proceeds of the Senior Notes offering and borrowings under the amended credit facility were transferred to NB Acquisition. Subsequently, NB Acquisition merged into FNB, and converted into a limited liability company, NBP, under Delaware law. These transactions closed on August 6, 2003. NBP continues to hold all of the same assets FNB held before the consummation of the transactions, including equity in subsidiaries, except that, concurrent with the closing of the Acquisition, Farmland retained a 49% interest in a NBP subsidiary, National Beef aLF, LLC, which holds a 47.5% interest in aLF Ventures, LLC. After the Acquisition, NBP holds a 24.2% interest in aLF Ventures, LLC through its 51% interest retained in National Beef aLF, LLC.  From July 2006 to July 2008, Farmland has a put right of this interest in National Beef aLF, LLC to NBP at its then fair market value. If the interest in National Beef aLF, LLC is not repurchased, NBP is required to put the entire interest up for sale. Due to uncertainties in aLF Ventures, LLC's ability to generate future revenues, no amounts were allocated to the put option in the consolidated financial statements.

The following table sets forth the approximate sources and uses of funds (in millions) in connection with the Acquisition as it occurred on August 6, 2003.

       Sources Uses 
 Available cash in FNB$3.2 Purchase of Farmland’s interest$232.0
 Revolving credit facility(1) 16.0 Refinancing of existing  
 Term loan 125.0      credit facility 103.1
 Senior notes 160.0 USPB’s investment in FNB 91.4
 NBPCo Holdings' equity of NBP(2) 35.4 Membership interests issued as  
 USPB’s initial interest in NBP(3) 96.4      deferred compensation(4) 10.0
 NBP Management’s equity of NBP(4) 15.6 Transaction costs(5) 15.1
    Total$451.6 Total$451.6

(1)     NBP had total availability, including the amount presented, of $140.0 million under the amended revolving credit facility at August 6, 2003. Actual borrowings under the amended revolving credit facility at the closing of the Acquisition were $16.0 million.

(2)     Represents cash equity from NBPCo Holdings.

(3)     Includes $5.0 million in cash and the predecessor basis of the 28.8% equity interest in FNB held by USPB prior to the Acquisition.

(4)     Includes $5.6 million in cash and $10.0 million of cash incentive compensation earned as of closing that was issued as compensation on a deferred basis in the form of additional membership interests in NBP.

(5)     Includes commitment, placement, financial advisory and other transaction fees, and legal, accounting, and other professional fees.

F-9



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 27, 2005, August 28, 2004 and August 30, 2003

The total purchase price (including expenses and other consideration) has been allocated to the net assets based on their estimated fair values at the date of acquisition to the extent of the approximately 71.2% change in ownership as of the date of closing. The Acquisition is within the scope of Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, which resulted in a new basis of accounting in accordance with the Emerging Issues Task Force (EITF) 88‑16, Basis in Leveraged Buyout Transactions. In accordance with that guidance, the interest of USPB, a minority owner of FNB, was carried over at its predecessor basis because a change in control has occurred in which USPB obtained unilateral control of NBP. The excess of the purchase price over USPB's predecessor basis of net assets acquired was recognized as a reduction in members' capital of NBP.

USPB, NBPCo Holdings, and management of NBP each hold Class A and Class B interests in NBP. In addition, members of management of NBP will be issued a fixed number of additional Class A and Class C interests in NBP in lieu of cash payments owed under existing employment arrangements.arrangements as noted below.

Capital Structure of NBP

Class A Interests - Class A interests are non-voting and are entitled to a priority distribution of 5% per year on the face amount of the Class A interests, payable not later than 30 days after the close of NBP'sNBP’s tax year quarters in cash to the extent permitted by NBP'sNBP’s senior lenders and the indenture governing the Senior Notes. The face amount of the Class A interests, together with all unpaid priority distributions, will be distributed on a priority basis upon liquidation.

Class B Interests - Class B interests, together with the Class C interests described below, are entitled to receive all assets available for distribution upon liquidation after payment of the Class A face amount together with all unpaid Class A priority distributions. Class B interests will also be allocated all items of income and loss earned or incurred by NBP after allocation of income attributable to the Class A priority distribution. In addition, the holders of Class B interests are entitled to receive quarterly distributions to make tax payments, which consist of 48% of NBP'sNBP’s remaining taxable net income after the Class A priority distributions are made. Certain of the Class B interests (B‑2(B-2 interests) issued to management of NBP are in the form of "profits interests"“profits interests” issued in exchange for services previously rendered. The B‑2B-2 interests have rights in liquidation only to the extent of their profits interest. The voting power of the members (voting either directly or by action of the board of managers designated by the members) is determined based upon the number of Class B interests held.

Class C Interests - Rights to Class C interests are held only by owners of Class B‑2B-2 interests. Class B‑2B-2 and Class C interests, collectively, have equal value and rights as Class B‑1B-1 interests. The face amount of the Class C interests will be distributed out of the assets available for distribution upon liquidation on a parity basis with the Class B interests after payment of the Class A face amount together with all unpaid Class A priority distributions.

USPB holds approximately 53.2%54.8% of the Class B interests, as well as Class A interests with an aggregate face amount of approximately $88.8$94.7 million; NBPCo Holdings owns approximately 20.2%19.5% of the Class B interests, as well as Class A interests with an aggregate face amount of approximately $31.6$31.5 million; and members of management of NBP own approximately 26.6%25.7% of the Class B interests, as well as Class A interests with an aggregate face amount of approximately $1.5 million. After the earlier of the occurrence of a specified period following completionmajor liquidity transaction, change of the Acquisition,control or August 2008, certain members of management of NBP will be issued a fixed number of additional Class A interests with an aggregate face amount of approximately $9.1 million and Class C interests with an aggregate face amount of approximately $0.9 million in lieu of cash payments owed under existing employment arrangements pursuant to deferred compensation agreements entered into in connection with the Acquisition.agreements. These amounts were previously expensed as compensation expense in FNB's financial statements.expense.

     

F-10



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 27, 2005, August 28, 2004 and August 30, 2003

Minority Interest represents Class A, B, and C interests held by management of NBP and NBPCo Holdings, which include repurchase rights of the holders (see Note 11).

Prior


U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to the current ownership, NBP was organized as a limited partnership of which NBPCo., LLCConsolidated Financial Statements
August 26, 2006, August 27, 2005 and USPBCo., LLC were the general partners and Farmland and USPB were the limited partners. Farmland was the ultimate parent company of NBPCo., LLC and USPB was the ultimate parent company of USPBCo., LLC.

Prior to the close of the Acquisition on August 6, 2003 as well as on August 31, 2002, the partners and their ownership interests of the Partnership were as follows:

Ownership
Partner nameTypeinterest
NBPCo., LLCGeneral2.5034%
USPBCo., LLCGeneral0.4966    
FarmlandLimited68.7100    
USPBLimited28.2900    
100.0000%

NBP continues to hold all of the same assets after the consummation of the Acquisition, including equity in its subsidiaries, with the exception of a 49% interest in its previously wholly-owned subsidiary, National Beef aLF, LLC (aLF, LLC), which holds a 47.5% interest in aLF Ventures, LLC. This 49% interest in aLF, LLC was retained by Farmland concurrent with the closing of the Acquisition. After the Acquisition, NBP continues to hold a 24.2% interest in aLF Ventures, LLC through its 51% interest retained in aLF, LLC.28, 2004

(2)     Basis of Presentation and Accounting Policies

(a)     Basis of Presentation and Consolidation

The consolidated financial statements include the accounts of USPB and its wholly-ownedmajority owned subsidiary, USPBCo., LLC for the periods up to August 6, 2003 and, as of and for the periods after August 6, 2003, as a result of the Acquisition described in Note 1, they include NBP, and its direct and indirect subsidiaries (collectively the Company). Prior to August 7, 2003, USPB accounted for its investment in FNB under the equity method of accounting.subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation.

The aggregate purchase price for the Acquisition described in Note 1 above was $236.8 million (including approximately $4.8 million of transaction costs), of which $190.8 million was funded through various incremental debt instruments, and the remainder funded through contributed or retained equity. The Acquisition and the financial statements of the Acquired Interest provided herein have been accounted for as a purchase in accordance with SFAS No. 141 and EITF Issue 88‑16.

(b)     Fiscal Year

The Company'sCompany’s fiscal year ends on the last Saturday in August. Fiscal years 2006, 2005, 2004, and 20032004 consisted of fifty‑twofifty-two week fiscal years. All references to years in these notes to consolidated financial statements represent fiscal years unless otherwise noted.

F-11



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 27, 2005, August 28, 2004 and August 30, 2003

(c)     Use of Estimates

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, using management'smanagement’s best estimates and judgments where appropriate. These estimates and judgments affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results could differ materially from these estimates and judgments.

(d)     Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. As of August 26, 2006, the Company had cash and cash equivalents of $58.4 million, including $4.0 million restricted to NBP IRB approved expenditures. Included in Other Current Assets is $7.4 million of cash restricted to support a workers compensation letter of credit related to the Brawley acquisition. As of August 27, 2005, the Company had cash and cash equivalents of $54.4 million, including $3.9 million restricted to NBP IRB approved expenditures.  As of August 28, 2004, the Company had cash and cash equivalents of $43.6 million, including $8.4 million restricted to NBP IRB approved expenditures.

(e)     Allowance for Returns and Doubtful Accounts

The allowance for returns and doubtful accounts is the Company'sCompany’s best estimate of the amount of probable returns and credit losses in its existing accounts receivable. The Company determines these allowances based on historical experience and management'smanagement’s judgments. Specific accounts are reviewed individually for collectibility.


U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005 and August 28, 2004

(f)     Inventories

Inventories consist primarily of meat products and supplies. Product inventories are stated at the lower of cost or market. The cost of inventories of the beef‑packingbeef-packing operation, except supply inventories, is determined using the first‑in, first‑outfirst-in, first-out (FIFO) method or market. The cost of all other inventories is determined using FIFO, specific, or average cost methods. The components of inventories are as follows (amounts in thousands):

  August 27, August 28,
  2005 2004
     
 Product inventories:     
    Dressed and boxed meat products$66,993 $67,801
    Beef by-products 8,476  9,158
 Supplies 9,957  9,003
  $85,426 $85,962
 August 26, August 27,
 2006 2005
Product inventories:     
   Dressed and boxed meat products$117,712 $66,993
   Beef by-products 15,180  8,476
Supplies 12,117  9,957
 $145,009 $85,426

F-12



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 27, 2005, August 28, 2004 and August 30, 2003

(g)     Property, Plant, and Equipment

Property, plant, and equipment purchased as part of the Acquisition were recorded at estimated fair value, based on independent appraisals, to the extent of the approximately 71.2% change in ownership. All other purchases of property, plant, and equipment are recorded at cost. Property, plant, and equipment are depreciated principally on a straight‑linestraight-line basis over the estimated useful life (based upon original acquisition date) of the individual asset by major asset class as follows:

Buildings and improvements15 to 25 years
Machinery and equipment2 to 8 years
Trailers and automotive equipment2 to 5 years
Furniture and fixtures3 to 5 years

Upon disposition of these assets, any resulting gain or loss is included in operations. Major repairs and maintenance costs that extend the useful life of the related assets are capitalized. Normal repairs and maintenance costs are charged to operations.

The Company capitalizes the cost of interest on borrowed funds, which are used to finance the construction of certain property, plant, and equipment. Such capitalized interest costs are charged to the property, plant, and equipment accounts and are amortized through depreciation charges over the estimated useful lives of the assets. Interest capitalized was $0.0$0.1 million, less than $0.1 million and $0.02$0.1 million for the fiscal years ended August 26, 2006, August 27, 2005 and August 28, 2004, and August 30, 2003, respectively.

The Company reviews its long‑livedlong-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is assessed based on estimated undiscounted future cash flows. Impairment, if any, is recognized based on fair value of the assets. Assets to be disposed of are reported at the lower of cost or fair value less costs to sell, and are no longer depreciated.


U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005 and August 28, 2004

A summary of cost and accumulated depreciation for property, plant, and equipment as of August 27, 200526, 2006 and August 28, 200427, 2005 follows (dollars in thousands):

  2005 2004
 Land and improvements$13,462  $7,817 
 Building and improvements 63,994   60,601 
 Machinery and equipment 157,158   139,833 
 Furniture and fixtures 3,449   2,985 
 Trailers and automotive equipment 1,481   2,233 
 Computer equipment 37   36 
 Construction in process 18,912   29,398 
         Total property, plant and equipment, at cost 258,493   242,903 
 Accumulated depreciation (43,331)  (20,844)
         Property, plant, and equipment, net$215,162  $222,059 
 FYE 2006 FYE 2005
Land and improvements$17,018  $13,462 
Building and improvements 85,522   63,994 
Machinery and equipment 195,286   157,158 
Furniture and fixtures 4,438   3,449 
Trailers and automotive equipment 1,346   1,481 
Computer equipment 39   37 
Construction in process 27,851   18,912 
   Total property, plant and equipment, at cost 331,500   258,493 
Accumulated depreciation (69,490)  (43,331)
   Property, plant, and equipment, net$262,010  $215,162 

F-13



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 27, 2005, August 28, 2004 and August 30, 2003

(h)     Debt Issuance Costs

Costs related to the issuance of debt are capitalized and amortized to interest expense using the straight line method, which approximates the effective interest method, over the period the debt is outstanding. The Company had unamortized costs of $7.2 million and $8.7 million for the fiscal years ended August 27, 2005 and August 28, 2004, respectively. In fiscal year 2003, NBP capitalized $10.3 million in debt issuance costs associated with the credit facility and with the issuance of Senior Notes. Effective December 30, 2004, the Company amended and restated its existing senior credit facility with a consortium of banks, additionally capitalizing $1.7 million in debt issuance costs. The amendment and restatement is within the scope of the Emerging Issues Task Force (EITF) 96-19.Debtor'sDebtor’s Accounting for a Modification or Exchange of Debt Instruments as well as EITF 98-14.Debtor'sDebtor’s Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements. In accordance with that guidance, a portion of the unamortized loan costs of approximately $2.6 million from the previous credit facility as well as additional finance and legal charges associated with the new amended and restated credit facility of approximately $0.6 million were expensed during the fiscal year ended August 27, 2005.

Effective June 1, 2006, NBP amended and restated its fifth senior credit facility with a consortium of banks, additionally capitalizing $1.6 million in debt issuance costs. This amendment and restatement is also within the scope of the Emerging Issues Task Force (EITF) 96-19,Debtor’s Accounting for a Modification or Exchange of Debt Instruments as well as EITF 98-14,Debtor’s Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements. In accordance with that guidance, a portion of the unamortized loan costs of approximately $0.5 million from the fourth credit facility as well as additional finance and legal charges associated with the new fifth amended and restated credit facility of approximately $0.1 million were expensed during the fiscal year ended August 26, 2006. The remaining costs are being amortized over the life of the related debt instruments.

      Amortization of $1.1 million, $1.2 million, $1.7 million and $0.1$1.7 million was charged to interest expense during the fiscal years ended August 26, 2006, August 27, 2005 and August 28, 2004, and the 24 days ended August 30, 2003, respectively, related to these costs. The Company had unamortized costs of $7.0 million and $7.2 million for the fiscal years ended August 26, 2006 and August 27, 2005, respectively.


U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005 and August 28, 2004

(i)     Goodwill and Other Intangible Assets

SFAS No. 142. 142,Goodwill and Other Intangible Assets,, provides that goodwill and other intangible assets with indefinite lives shall not be amortized but shall be tested for impairment on an annual basis. Identifiable intangible assets with definite lives are amortized over their estimated useful lives. The CompanyNBP evaluates goodwill and other indefinite life intangible assets annually for impairment and, if there is impairment, the carrying amount of goodwill and other intangible assets is written down to the implied fair value. For goodwill, this test involves comparing the fair value of each reporting unit to the unit'sunit’s book value to determine if any impairment exists. TheNBP calculates the fair value of each reporting unit is calculated using estimates of future cash flows. See Note 3 for a discussionAll of NBP’s goodwill has been allocated to the Core Beef segment. In connection with the acquisition of Vintage Foods, L.P. during the fourth quarter of fiscal year 2006, NBP recognized excess cost over the fair value of the purchase accounting associated with the Acquisitionnet tangible and the determinationidentifiable intangible assets acquired, and recorded this excess of additional$0.6 million as goodwill. In accordance with SFAS No. 142, goodwill was tested for impairment and, as of August 27, 2005,26, 2006, management determined there was no impairment.

The excessamounts of goodwill are as follows (amounts in thousands):

 August 26, 2006 August 27, 2005
Beginning balance$78,858 $78,858
   Goodwill from acquisitions during the year 553  -
Ending balance$79,411 $78,858

      The amounts of other intangibles assets are as follows (amounts in thousands):

   August 26, 2006 August 27, 2005
 Weighted        
 Average Gross   Gross  
 Amortization Carrying Accumulated Carrying Accumulated
 Period Amount Amortization Amount Amortization
Intangible assets subject to amortization:             
   Customer Relationships8.3 years $15,400 $5,276 $11,323 $3,335
Intangible assets not subject to amortization:             
   Trademarksindefinite  20,438  -  20,438  -
Total intangible assets  $35,838 $5,276 $31,761 $3,335

     Customer relationships, including contractual and noncontractual relationships, are being amortized using the Company's investment in FNBstraight-line method over its share of the underlying net assets of FNB priortheir useful lives which range from four to the Acquisition, which was classified as a part of the investment in FNB, had been amortized on a straight‑line basis over twenty‑five years and was recognized as an adjustment to equity in earnings. At August 31, 2002, the unamortized balance of this excess amounted to $40.2 million.

In connection with the Acquisition, intangible assets were identified and valued by an independent third party. As a result of this valuation, to the extent of the approximately 71.2% change of ownership, Trademarks were recorded at $20.4 million and Customer Relationships were recorded at $11.3 million.15 years. Trademarks are not scheduled for amortization due to their expected indefinite useful life. NBP amortizes the recorded fair valueIn accordance with SFAS 142, these trademarks were tested for impairment and, as of the Customer Relationships over 7 years on a straight-line basis.August 26, 2006, management determined there was no impairment.

     For the fiscal years ended August 26, 2006, August 27, 2005 and August 28, 2004, and for the 24 days ended August 30, 2003, the CompanyNBP recognized $1.9 million, $1.6 million $1.5 million and $0.2$1.5 million, respectively, of amortization expense.expense on intangible assets. The following table reflects the anticipated amortization expense relative to intangible assets recognized in the Company'sNBP’s balance sheet as of August 27, 2005,26, 2006, for each of the next five years and thereafter:

Estimated amortization expense for fiscal years ended:   

(dollars in thousands)

2007 $2,108
2008(1)  2,148
2009  2,108
2010  1,996
2011  325
Thereafter  1,811
    
(1)FYE 2008 consists of 53 weeks.   

F-14




U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005 and August 28, 2004 and August 30, 2003

Estimated amortization expense for fiscal years ended:

   (dollars in thousands)
 2006 $1,613
 2007  1,613
 2008(1)

 

 1,644
 2009  1,613
 2010  1,505
 

Thereafter

 -
   

(1)FYE 2008 consists of 53 weeks.

(j)     Overdraft Balances

The majority of the Company'sCompany’s bank accounts are zero balance accounts where cash needs are funded as checks are presented for payment by the holder. Checks issued pending clearance that result in overdraft balances for accounting purposes are included in the trade accounts payable and cattle purchases payable balances, and the change in the related balances is reflected in financing activities on the statement of cash flows. Overdraft balances of $62.1$63.9 million and $56.3$62.1 million were included in trade accounts and cattle purchases payables at August 26, 2006 and August 27, 2005, and August 28, 2004, respectively.

(k)     Self‑InsuranceSelf-Insurance

NBP is self‑insuredself-insured for certain losses relating to worker'sworker’s compensation, auto liability, general liability, and employee medical and dental benefits. NBP has purchased stop‑lossstop-loss coverage in order to limit its exposure to any significant levels of claims. Self‑insuredSelf-insured losses are accrued based upon NBP'sNBP’s estimates of the aggregate uninsured claims incurred using actuarial assumptions accepted in the insurance industry and NBP'sNBP’s historical experience rates.

(l)     Environmental Expenditures and Remediation Liabilities

Environmental expenditures that relate to current or future operations and which improve operational capabilities are capitalized at the time of expenditure. Expenditures that relate to an existing or prior condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated.

(m)     Foreign Currency Translation

NBP has representative offices located in Tokyo, Japan and Seoul, South Korea. The primary activity of these offices is to assist customers with product and order related issues. For foreign operations, the local currency is the functional currency. Translation into U.S. dollars is performed for assets and liabilities at the exchange rates as of the balance sheet date. Income and expense accounts are translated at average exchange rates for the period. Adjustments resulting from the translation are reflected as a separate component of other comprehensive income.

(n)     Income Taxes

Subchapter T of the Internal Revenue Code sets forth rules for the tax treatment of cooperatives and applies both to cooperatives exempt from tax under Section 521 of the Internal Revenue Code and to nonexempt cooperatives. Prior to August 29, 2004, the Company operated as an exempt cooperative. As an exempt cooperative, a company is not taxed on amounts of patronage and non-patronage source income withheld from its patrons in the form of qualified per-unit retains or on amounts distributed to its patrons in the form of Qualified Written Notices of Allocation. Such amounts are instead taxed directly to the patrons. If the Company was not entitled to be taxed under Subchapter T, its income would be taxed to the Company similar to a corporation and the patrons would be taxed when and if dividends are distributed. The characterization of income as patronage or non-patronage source income is subject to challenge by the Internal Revenue Service. Non-patronage source income, if deemed more than incidental, is subject to tax at the entity level instead of being passed through to the patrons in the form of a patronage dividend. Notwithstanding the acquisition of a controlling interest in NBP on August 6, 2003, management continues to believe that its non-patronage source income, if any, is incidental and would vigorously defend any such challenge by the Internal Revenue Service. However, USPB has recognized tax expense in the accompanying fiscal 2004 Consolidated Financial Statements on a portion of its earnings for periods after August 6, 2003 to provide for such potential recharacterization of income from patronage source to non-patronage source, which may be asserted by the Internal Revenue Service.

F-15




U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005 and August 28, 2004 and August 30, 2003

Effective August 29, 2004, the Company converted to an LLC, and under this structure, taxes are not provided at the Company level because the results of operations are included in the taxable income of the individual members.

The provision for income taxes for NBP is computed on a separate legal entity basis. Accordingly, NBP does not provide for income taxes as the results of operations are included in the taxable income of the individual members. However, to the extent that subsidiary entities provide for income taxes, deferred tax assets and liabilities are recognized based on the difference between the final statement and tax bases of assets and liabilities at each balance sheet date using enacted tax rates expected to be in effect in the year the differences are expected to reverse.

(o)     Fair Value of Financial Instruments

The carrying amounts of the Company'sCompany’s financial instruments, including cash and cash equivalents, short‑termshort-term trade receivables and payables, approximate their fair values due to the short‑termshort-term nature of the instruments. At August 27, 2005,26, 2006, the Senior Notes had a carrying value of $160.0 million and a fair value of $166.7$166.6 million, based on a calculation using a weekly High Yield Market report prepared by Deutsche Bank. The carrying value of other debt also approximates its fair value at August 27, 2005,26, 2006, as substantially all such debt has a variable interest rate.

(p)     Revenue Recognition

NBP recognizes revenue from the sale of products at the time of shipment, when NBP determines the risk of loss has transferred, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists, and the price is fixed or determinable.upon delivery to customers. National Carriers, Inc. recognizes revenue when shipments are complete.

(q)     Shipping Costs

Pass‑through     Pass-through finished goods delivery costs reimbursed by customers are reported in sales, while an offsetting expense is included in cost of sales.

(r)     Advertising and Promotion Expenses

Advertising and promotion expenses are charged to operations in the period incurred and were $3.0 million, $2.5 million $1.7 million and $0.09$1.7 million in the years ended August 26, 2006, August 27, 2005 and August 28, 2004, and August 30, 2003, respectively.

F-16



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 27, 2005, August 28, 2004 and August 30, 2003

(s)     Comprehensive Income

Comprehensive income consists of net income, foreign currency translation adjustments, and unrealized gains or losses on interest rate exchange agreements accounted for as cash flow hedges. NBP deems its foreign investments to be permanent in nature and does not provide for taxes on currency translation adjustments arising from converting the investment in a foreign currency to U.S. dollars.

(t)     Derivatives and Hedging Activities

NBP uses futures contracts in order to reduce exposure associated with entering into firm commitments to purchase live cattle at a priceprices determined prior to the delivery of the cattle as well as firm commitments to sell certain beef products at a sales priceprices determined prior to shipment. In accordance with SFAS No. 133. 133,Accounting for Derivative Instruments and Hedging Activities, as amended, NBP accounts for these futures contracts and their related firm purchase commitments at fair value. MostCertain firm commitments for live cattle purchases and all firm commitments for boxed beef sales are treated as "normal“normal purchases and sales"sales” and are not marked to market. SFAS No. 133 imposes extensive record-keepingrecordkeeping requirements in order to treat a derivative financial instrument as a hedge for accounting purposes. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the instrument and the related change in fair value of the underlying commitment. For derivatives that qualify as effective hedges, the change in fair value has no net impacteffect on net incomeearnings until the hedged transaction affects net income.earnings. For derivatives that are not designated as hedging instruments, or for the ineffective portion of a hedging instrument, the change in fair value does affect current period net earnings.


U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005 and August 28, 2004

     While management believes each of these instruments help mitigate various market risks, they are not designated and accounted for as hedges under SFAS No. 133 as a result of the extensive record-keepingrecordkeeping requirements of this statement. Accordingly, the gains and losses associated with the change in fair value of the instrument and the offsetting gains and losses associated with changes in the market value of certain of the firm purchase commitments related to the futures contracts are recorded to income and expense in the period of change.

The fair value of derivative assets is recognized within other current assets, while the fair value of derivative liabilities is recognized within accrued liabilities. The net fair value of derivatives recognized within other current assets and other accrued liabilities at August 27, 200526, 2006 and August 28, 200427, 2005 is not significant.

(u)     Earnings Per Unit

Prior to the conversion from a cooperative to an LLC, per share data had been omitted because, under the cooperative structure, earnings of the Company were distributed as patronage dividends to members and associate members, those who leased delivery rights from shareholders, based on the level of business conducted with the Company as opposed to a common shareholder'sshareholder’s proportionate share of underlying equity in the Company. Under the LLC structure, earnings of the Company are to be distributed to unitholders based on their proportionate share of underlying equity, and, as a result, earnings per unit (EPU) has been presented in the accompanying Consolidated Statement of Operations and in the table that follows, along with the pro forma amounts for the prior years assuming the conversion to an LLC was retroactively applied.

Basic EPU excludes dilution and is computed by dividing income available to unitholders by the weighted-average number of linked Class A and Class B units outstanding for the period. Class A units and Class B units shall be issued, redeemed, and transferred together on a one for one basis until the board of directors determines the extent and conditions under which Class A units and Class B units may be issued, redeemed, and transferred separately.

F-17



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 27, 2005, August 28, 2004 and August 30, 2003

Diluted EPU reflects the potential dilution that could occur if potential unit purchase rights were exercised or contractual appreciation rights were converted into units. Upon termination of the CEO employment agreement, at the election of the CEO, or upon mutual agreement of the Board of the Company and the CEO, the CEO may purchase up to 20,000 Class A and Class B units, or upon agreement of the CEO and the Board of the Company, the CEO may convert the contractual unit appreciation rights to up to 20,000 Class A and Class B units. The diluted EPU reflects the circumstances of termination of the CEO employment agreement, and the election of CEO or agreement by the Board of the Company and the CEO for the CEO to purchase or convert contractual rights to the maximum 20,000 units at $55 per unit for the periods as provided in the CEO employment agreement.

 

 Earnings Per Linked Unit Calculation        
          
 (In thousands, except unit and per unit data)52 weeks ended
     Pro-Forma Pro-Forma
  August 27, 2005 August 28, 2004 August 30, 2003
 Basic earnings per unit        
 Income available to unitholders (numerator)$8,639 $19,096 $24,230
          
 Outstanding units (denominator) 691,845  691,845  691,845
          
    Per unit amount$12.49 $27.60 $35.02
          
 Diluted earnings per unit        
 Income available to unitholders (numerator)$8,639 $19,096 $24,230
          
 Outstanding units 691,845  691,845  691,845
 Effect of dilutive securities - unit options 13,218  12,903  11,916
    Units (demoninator) 705,063  704,748  703,761
          
    Per unit amount$12.25 $27.10 $34.43

(3)       Equity Investment and Purchase Accounting

Through August 6, 2003, the Company accounted for its non-controlling 28.7866% investment in FNB on the equity method of accounting. The excess of the Company's investment in FNB over its share of the underlying net assets of FNB was being amortized, prior to September 1, 2002, on a straight-line basis over a period of 25 years and recognized as an adjustment to equity in earnings.

A summary of the activity in the investment account for the 340 days ended August 6, 2003 (dollars in thousands): 

2003
Balance at beginning of period$83,105 
Equity in earnings22,586 
Distributions received(9,257)
USPB basis at date of acquisition(1)(96,434)
Balance at end of period$

(1)       Includes a distribution of approximately $5.0 million that was declared by FNB but had not been received as of August 6, 2003.

F-18



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005 and August 28, 2004

Earnings Per Linked Unit Calculation        
         
(In thousands, except unit and per unit data)52 weeks ended
       Pro-forma
 August 26, 2006 August 27, 2005 August 28, 2004
Basic earnings per unit:        
Income available to unitholders (numerator)$19,719 $8,639 $19,096
Outstanding units (denominator) 702,843  691,845  691,845
   Per unit amount$28.06 $12.49 $27.60
         
Diluted earnings per unit:        
Income available to unitholders (numerator)$19,719 $8,639 $19,096
Outstanding units 702,843  691,845  691,845
Effect of dilutive securities - unit options 12,542  13,218  12,903
   Units (demoninator) 715,385  705,063  704,748
   Per unit amount$27.56 $12.25 $27.10

(3)     Acquisitions

On May 19, 2006, USPB’s majority owned subsidiary, NBP, entered into a Contribution Agreement (Agreement) with Brawley Beef, LLC (Brawley Beef) and August 30, 2003

Summary financial data for FNBNational Beef California, LP (NBC). NBC is a newly formed limited partnership, formed for the 340 days ended August 6, 2003 follows (dollarspurposes of acquiring substantially all of the assets of Brawley Beef, with National Carriers, a wholly-owned subsidiary of NBP, acting as its general partner. Brawley Beef was an alliance of cattle producers in thousands):Arizona and California who supplied the beef processing facility in Brawley, California. The facility commenced operations in December 2001.

 340 days
 ended
 August 6,
 
2003
Revenues$3,378,623
Costs and expenses 3,300,162
                            Net income$78,461

     

During 2003,Pursuant to the terms of the Agreement, Brawley Beef contributed substantially all of its assets to NBC in exchange for limited partnership units of NBC, and NBC assumed approximately $74.7 million of Brawley Beef’s debt and current liabilities. Brawley Beef then exchanged all of its NBC units with USPB acquiredfor 44,160 new Class A and 44,160 new Class B units at an aggregate fair value of approximately $7.6 million. Under a controllingseparate unit exchange agreement between USPB and NBP, USPB then exchanged these units of NBC with NBP for 5,899,297 Class A nonvoting units, at a price per unit of $1, and 664,475 Class B-1 voting units, at an approximate price per unit of $2.61, of NBP or an aggregate value of approximately $7.6 million. As a result, USPB’s ownership interest in FNB, as more fully described in Note 1 as the Acquisition.Company’s Class B voting units increased to 54.76%. The Acquisition has beenacquisition was accounted for using the purchase method of accounting as of August 6, 2003. The allocation ofmethod.

Adjustments to the purchase price were made based on changes in the working capital and debt of Brawley Beef as determined on the closing date. The effective date for this acquisition was May 30, 2006.

Concurrently with the transfer of assets, Brawley Beef entered into long-term cattle supply agreements with both NBC and USPB under which Brawley Beef committed to supply approximately 275,000 head of cattle to NBC’s Brawley facility.

     Under the net assets acquired has been performed in accordance with SFAS No. 141, giving considerationterms of the Agreement, Brawley Beef makes customary covenants, representations and warranties and agrees to EITF 88‑16, and resulted in goodwill of approximately $78.9 million. The beginning equity of NBP reflects the predecessor basis of USPB's interest in FNB plus the cash contributed by USPB and the new members ofindemnify NBC, NBP and the contributionUSPB for breaches of earned deferred compensation bythese representations and warranties. Brawley Beef can satisfy these indemnification obligations over a three-year period with a combination of cash, deductions from payments under certain memberscattle contracts or surrender of management of NBP. The calculation of the allocated purchase price for the Acquisition, as presented below, reflects the net book value of the business as of August 6, 2003.its Class A and Class B USPB units at $165 per unit. In addition, Brawley Beef pledged its USPB units to NBC to secure its obligations under the allocationAgreement. Brawley Beef’s obligations under the Agreement and cattle supply agreements are also supported by limited guaranties from its members. In connection with acquisition of the purchase price reflects the fair value of the individualBrawley Beef, LLC, during fiscal year 2006, intangible assets acquiredassociated with Customer Relationships were identified and liabilities assumed to the extent of the approximate 71.2% change in ownership. The purchase of the controlling interest was consummatedvalued by USPB following the bankruptcy of Farmland in order to maintain its relationship with NBP.

an independent third party at approximately $2.4 million and will be amortized on a straight-line basis over 15 years.

 

F-19




U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005 and August 28, 2004

     NBP acquired Vintage Foods, L.P., including the Vintage™ Natural Beef brand, during fiscal year 2006 for $1.5 million. The Vintage brand is marketed as natural beef that is antibiotic- and August 30, 2003hormone-free from cattle that are 20 months of age and younger. In connection with this acquisition, NBP recognized excess cost over the fair value of the net tangible and identifiable intangible assets acquired, and recorded this excess of $0.6 million as goodwill. Also in connection with the Vintage acquisition, if certain future net sales margin target levels are achieved, potential additional consideration will be payable, up to the maximum amounts of $0.5 million, $0.6 million and $0.6 million, respectively, for the fiscal years 2007, 2008 and 2009.

     In connection with acquisitions of Vintage Foods, L.P. and Rains Agency, a transportation company acquired for $0.6 million by National Carriers, Inc. during fiscal year 2006, intangible assets were identified from each acquisition and separately valued by an independent third party. As a result of these valuations, the intangible assets of approximately $1.7 million associated with Customer Relationships were acquired and will be amortized on a straight-line basis over a range of four to 12 years. Also in connection with the Rains acquisition, if certain future contingent objectives are achieved, potential additional consideration will be payable in amounts of approximately $0.3 million and $0.1 million, respectively, for the fiscal years 2007 and 2008.

The following details the adjustment to historical net book values based ontable summarizes the fair values of the assets acquired assets and liabilities included inassumed at the Acquisition. The adjustment to historical net book values of acquired assets and liabilitiesdate of the Acquired Interest is calculated as follows (dollars in thousands):Brawley acquisition after allocating negative goodwill of approximately $36.6 million to property, plant and equipment and intangible assets. The net assets acquired include an additional approximate $0.9 million incurred by NBP associated with costs from third parties attributable to the acquisition.

 Total purchase price and other consideration for Acquired Interest(in millions)
Current assets$232,00046.3 
Fees and expenses4,821 
$236,821 
Net book value of Acquired Interest on August 6, 2003(114,635)
         Excess purchase price to be allocated$122,186 
Amount allocated to:
Property, plant and equipment$51,73834.5 
   TrademarksIntangibles 20,4382.4 
      Customer relationshipsTotal assets acquired 11,32383.2 
   Goodwill
Current liablities, including current maturities 38,687 (13.4)
Long-term debt(61.3)
   Total liabilities assumed Excess purchase price allocated(74.7)
Net assets acquired$122,186 

USPB’s predecessor basis in FNB
$91,447 
Net book value of USPB’s interest on August 6, 2003(51,276)
         Excess of USPB’s basis over net book value at August 6, 2003
            attributable to goodwill$40,171 
Goodwill reconciliation:
   Allocated to goodwill from Acquired Interest$38,687 
   Excess of USPB’s basis attributable to goodwill (previously included
      as a component of Investment in FNB)40,171 
         Total goodwill$78,8588.5 

     Had the acquisition of Brawley Beef occurred at the beginning of FY 2005, pro forma revenue and earnings would have been $5.0 billion and $9.9 million, respectively, for FYE 2006 and $4.8 billion and $1.1 million, respectively, for FYE 2005.

In connection with USPB's initial investment in FNB, USPB paid an amount in excess of the proportionate underlying book value of the net assets acquired that amounted to $40.2 million. Because USPB held a minority interest in the Predecessor, this excess investment, which was attributed to goodwill, was not recorded in the FNB financial statements but was recorded as an investment in USPB's financial statements. As a result, USPB's predecessor basis in FNB was $40.2 million higher than its proportionate 28.8% of the underlying net book value of FNB. In accordance with EITF 88‑16, USPB carried over its predecessor basis, resulting in the recognition of the $40.2 million of goodwill in NBP's financial statements, and, as a result of the consolidation of NBP in 2003, the reclassification of $40.2 million from an investment in FNB to goodwill in the Company's consolidated financial statements.

F-20




U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005 and August 28, 2004 and August 30, 2003

(4)          Long‑TermLong-Term Debt and Loan Agreements

The Company entered into various debt agreements to finance the Acquisition described in Note 1 and to provide liquidity to operate the business on a going forward basis. As of August 27, 200526, 2006 and August 28, 2004,27, 2005, debt consisted of the following (dollars in thousands):

  August 27, August 28,
  2005 2004
 Short-term debt:     
    Current portion of long-term debt (term loan)(a)$1,030 $1,030
    Current portion of long-term debt (term loan)(b) -  9,375
    Current portion of capital lease obligations(e) -  78
  $1,030 $10,483
 Long-term debt:     
    Term loan facility, net of current portion(a)$5,148 $6,178
    Term loan facility, net of current portion(b) 120,000  109,375
    Senior Notes(c) 160,000  160,000
    Industrial Development Revenue Bonds(d) 13,850  13,850
    Revolving credit facility(b) 15,000  42,059
    Long-term capital lease obligations and other(e) -  350
  $313,998 $331,812
            Total debt$315,028 $342,295

The aggregate principal maturities of long‑term debt for each of the five fiscal years and thereafter following August 27, 2005 are as follows (dollars in thousands):

2006 $1,030
2007  1,030
2008  1,030
2009  1,030
2010  33,880
After 2010  277,028
  $315,028
 August 26, August 27,
 2006 2005
Short-term debt:     
   Current portion of long-term debt (term loan)(a)$1,030 $1,030
   Current portion of long-term debt (term loan)(b) -  -
   Current portion of capital lease obligations(e) 2,370  -
 $3,400 $1,030
  
Long-term debt:     
   Term loan facility, net of current portion(a)$4,119 $5,148
   Term loan facility, net of current portion(b) 170,000  120,000
   Senior Notes(c) 160,000  160,000
   Industrial Development Revenue Bonds(d) 20,665  13,850
   Revolving credit facility(b) 18,864  15,000
   Long-term capital lease obligations and other(e) 6,848  -
 $380,496 $313,998
      Total debt$383,896 $315,028

(a)CoBank Term Debt

CoBank TermDebt—Effective August 28, 2004, the CoBank debt was amended for extended termsJune 1, 2006, and favorable changesrelated to the interest rate and covenants.  Underpurchase of the new amendment,assets of Brawley Beef, USPB amended the CoBank term debt is payableagreement to facilitate USPB’s acquisition of additional membership units in equal quarterly installments with final payment dueNBP. USPB contributed partnership units in NBC, which were acquired from Brawley Beef, LLC, to NBP in exchange for an additional (i) 5,899,297 Class A units and (ii) 664,475 Class B-1 units in NBP. The amendment also modifies the term “Collateral” to not include the partnership units in NBP and exempts USPB from being required to grant CoBank a security interest in the NBC partnership units. The amendment also permits USPB to have up to a one-hundred percent (100%) interest in NBP and to acquire the NBC partnership units and additional units in NBP.

     Effective July 2011, bearing interest at19, 2006, USPB amended the LIBOR index plus a rate margin based on an NBP leverage ratio, adjusted quarterly (6.01% at August 27, 2005, 4.10% at August 28, 2004 and 3.36% at August 30, 2003).

F-21



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
NotesCoBank term debt agreement to Consolidated Financial Statements
August 27, 2005, August 28, 2004 and August 30, 2003cause distributions that are made in excess of the amount allowed (Excess Distribution) to be deducted from the amount which could otherwise be distributed to its members for the subsequent periods until the Excess Distribution has been fully deducted.

The debt agreement with CoBank contains certain covenants which require, among other things: reporting requirements, a minimum working capital reserve, a minimum debt service coverage ratio, a minimum net worth, restrictions on transactions with related parties and restrictions on dividend payments. The Company was in compliance with all CoBank debt covenants as of August 27, 2005.26, 2006. The debt is secured by USPB'sUSPB’s interest in NBP.

The Company'sCompany’s rate margin, which is adjusted annually, is determined pursuant to a table based on the NBP leverage ratio, as of the end of each fiscal year of NBP. Based on the table, the rate margin was 2.50% at August 26, 2006 and August 27, 2005 and 2.25% at August 28, 2004. CoBank term debt is payable in equal quarterly installments with final payment due in July 2011, bearing interest at the LIBOR index plus a rate margin based on an NBP leverage ratio, adjusted quarterly (8.01% at August 26, 2006, 6.01% at August 27, 2005 and 4.10% at August 28, 2004).


U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005 and August 28, 2004 and 2.25% at August 30, 2003.

(b)Senior Credit Facilities

Senior Credit Facilities-Facilities— Effective December 30, 2004,June 1, 2006, NBP amended and restated its existing senior credit facility with a consortium of banks which allow borrowings from time to time under a $120.0$170.0 million term loan that matures in December 2014May 2016 and a $140.0$160.0 million revolving line of credit loan that is subject to certain borrowing base limitations and that matures in December 2009.May 2011. The fifth amended and restated credit facility is secured by a first priority lien on substantially all of NBP'sNBP’s assets. At NBP'sNBP’s election, interest may be computed at the Base Rate (as defined in the credit agreement) plus an applicable margin or a LIBOR rate plus an applicable margin. As of August 27, 2005,26, 2006, the interest rate for the term loan was equal to LIBOR plus 275 basis points (6.1%(8.0625%) and the weighted average interest rate for the revolving loan was equal to LIBOR plus 250 basis points (6.0%(8.75%). The fifth amended and restated credit facility also contains a provision for a conversion to more favorable interest rates and more restrictive financial covenants on the earlier of (a) June 1, 2006August 25, 2007 or (b) NBP'sNBP’s election (the Conversion(Conversion Date). After the Conversion Date the interest rate for the term loan and revolving loan will be determined by reference to a matrix of rates keyed to NBP'sNBP’s funded debt to EBITDA ratio. A fee of 0.5% per annum is payable quarterly on the daily average unused amount of the revolving credit facility, and this fee also will vary after the Conversion Date depending on NBP'sNBP’s funded debt to EBITDA ratio.

Availability. Availability under the revolving credit facility is subject to a borrowing base. The borrowing base is based on NBP'sNBP’s and certain of its domestic wholly owned subsidiaries'subsidiaries’ assets. The borrowing base consists of percentages of NBP'sNBP’s eligible accounts receivable, inventory and supplies less certain eligibility and availability reserves. NBP is required to report the borrowing base on a monthly basis and, as a result, the availability under the senior credit facilities is subject to change. At August 27, 2005, NBP's26, 2006, NBP’s fifth amended and restated credit facility consisted of a $120$170.0 million term loan, all of which $120.0 million was outstanding, and a $140.0$160.0 million revolving line of credit loan, which had outstanding borrowings of $15$18.9 million, outstanding letters of credit of $44.0$53.0 million and available borrowings of $74.1$88.1 million, based on the most restrictive financial covenant calculation.

Repayment and Prepayment. The principal amount outstanding under the term loan is due and payable in equal quarterlysemi-annual installments of $6.0$2.8 million on the last business day of each March, June September and December commencing on March 31, 2010June 30, 2011 and ending with the payment of all outstanding principal and interest on December 29, 2014.May 30, 2016. Prepayment is allowed at any time.

The revolving credit facility terminates and all amounts outstanding thereunder must be repaid in full on the fifth anniversary of the closing date.May 30, 2011.

Affirmative Covenants. NBP'sNBP’s senior credit facilities contain customary affirmative covenants, including providing financial statements, insurance, conduct of business, maintenance of properties, etc.

Negative Covenants. NBP'sNBP’s senior credit facilities contain customary negative covenants, including covenants restricting itsNBP’s ability to incur additional indebtedness, sell or dispose of assets, make capital expenditures, pay certain dividends and prepay or amend certain indebtedness, among other restrictions.

F-22



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 27, 2005, August 28, 2004 and August 30, 2003

Financial Covenants.These facilities also impose certain financial covenants. From December 30, 2004June 1, 2006 until the earlier of February 28, 2007 or the Conversion Date, NBP is required to (i) have as of the end of each fiscal quarter a minimum four-quarter rolling EBITDA of $50.0 million and (ii) maintain at all times a minimum Borrowing Base Availability (as defined in the credit agreement) of at least $25.0 million. After February 28, 2007 but on or before the Conversion Date, NBP is required to (i) have as of the end of each fiscal quarter a minimum four-quarter rolling EBITDA of $60 million and (ii) maintain at all times a minimum Borrowing Base Availability (as defined in the credit agreement) of at least $25.0 million. As defined in the fifth amended and restated credit facility, EBITDA contains specified adjustments. On August 27, 2005,26, 2006, NBP was in compliance with all financial covenants under its senior credit facilities.


U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
ugust 26, 2006, August 27, 2005 and August 28, 2004

After the Conversion Date, NBP will be subject to the following financial covenants:

(i)A maximum Funded Debt to EBITDA Ratio, as follows:
Funded Debt
to EBITDAFiscal Quarter Ended
5.00 to 1.00Closing Date through August 25, 2007
4.00 to 1.00November 30, 2007 through August 25, 2008
3.50 to 1.00November 30, 2008 and thereafter
(ii)A maximum Senior Secured Funded Debt to EBITDA Ratio, as follows:
Senior Secured
Funded Debt
to EBITDA RatioFiscal Quarter Ended
3.50 to 1.00Closing Date through August 25, 2007
3.25 to 1.00November 30, 2007 through August 25, 2008
3.00 to 1.00November 30, 2008 and thereafter
(iii)A minimum four-quarter rolling EBITDA as follows:
EBITDAFiscal Quarter Ended
$60,000,000Closing Date through August 25, 2007
$70,000,000November 30, 2007 through February 28, 2008
$90,000,000May 31, 2008
$100,000,000August 25, 2008 and thereafter
(iv)A minimum four-quarter rolling Debt Service Coverage Ratio as follows:
Debt Service Coverage RatioFiscal Quarter Ended
1.75 to 1.00Closing Date through May 31, 2007
2.00 to 1.00August 25, 2007 and thereafter

(i)    A maximum Funded Debt to EBITDA Ratio, as follows:

Funded Debt
to EBITDAFiscal Quarter Ended
4.50 to 1.00                                                    August 31, 2005 through May 31, 2006
4.25 to 1.00                                                    August 31, 2006 through November 30, 2006
4.00 to 1.00                                                    February 28, 2007 through May 31, 2007
3.75 to 1.00                                                    August 31, 2007 and thereafter

(ii)   A maximum Senior Secured Funded Debt to EBITDA Ratio, as follows:

Senior Secured
Funded Debt
to EBITDA RatioFiscal Quarter Ended
3.25 to 1.00                                                    August 31, 2005 through May 31, 2006
2.75 to 1.00                                                    August 31, 2006 and thereafter

(iii)  A minimum four-quarter rolling EBITDA, as follows:

EBITDAFiscal Quarter Ended
$72,000,000                           ��                        August 31, 2005 through May 31, 2006
$75,000,000                                                    August 31, 2006 through May 31, 2007
$85,000,000                                                    August 31, 2007 and thereafter

(iv)  A minimum four-quarter rolling Debt Service Coverage Ratio, as follows:

Debt Service Coverage RatioFiscal Quarter Ended
2.00 to 1.00                                                    August 31, 2005 and thereafter

Effective July 7, 2005, the amended and restated senior credit facility was amended to allow NBP to purchase up to $30 million in cumulative purchase price (including any premium) of its 10‑1/2% Senior Notes due August 1, 2011 so long as NBP is not in default under the facility at the time of the purchase or as a result of the purchase.

Effective October 14, 2005, the amended senior credit facility was further amended to reflect changes in the covenant limiting its net capital expenditures.  There were no changes to the remaining covenants in the credit facility.  NBP'sNBP’s net capital expenditures are now limited to amounts in each period as follows:  $64 million in the combined period of FYE 2005 and FYE 2006, $35$50 million in FYE 2007 and $40 million in FYE 2008 andeach fiscal yearsyear thereafter.  Prior to this amendment, FYE 2005 and FYE 2006 were separately limited to $32 million each year.

F-23



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 27, 2005, August 28, 2004 and August 30, 2003

(c)    Senior Notes

In connection with the Acquisition, onSenior Notes—On August 6, 2003, NBP issued $160.0 million of its 10 1/2% 2% Senior Notes due 2011. The Senior Notes will mature on August 1, 2011. Interest on the Senior Notes is payable semi-annually in arrears on August 1 and February 1 of each year, and commenced on February 1, 2004.year. The Senior Notes are senior unsecured obligations, ranking equal in right of payment with all other senior unsecured obligations of NBP. With limited exceptions, the Senior Notes are not redeemable before August 1, 2007. During the 12 month period commencing August 1, 2007 and August 1, 2008, the Senior Notes may be redeemed at 105.250% and 102.625%, respectively, of the principal amount. Thereafter, the Senior Notes may be redeemed at 100% of face value. The Indenture governing the Senior Notes contains certain covenants that restrict NBP'sNBP’s ability to:

  • incur additional indebtedness;

  • make restricted payments;


U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005 and August 28, 2004

  • sell assets;

  • direct NBP'sNBP’s restricted subsidiaries to pay dividends or make other payments;

  • create liens;

  • merge or consolidate with another entity; and

  • enter into transactions with affiliates.

As of August 27, 2005,26, 2006, NBP was in compliance with all covenants associated with the Senior Notes.

NB Finance Corp., a wholly-owned finance subsidiary of NBP, is a co-issuer on a joint and several basis with NBP of the Senior Notes. NB Finance Corp. has nominal assets and conducts no business or operations. There are no significant restrictions on the ability of subsidiaries to transfer funds to NBP.

(d)   Industrial Development Revenue Bonds

Industrial Development Revenue BondsIn conjunction with the amendmentfourth amended and restatement of the Company'srestated credit facility, effective December 30, 2004, NBP entered into a transaction with the City of Dodge City, Kansas, in order to provide property tax savings to NBP. Under the transaction, the City purchased NBP'sNBP’s Dodge City facility (the "facility"“facility”) by issuing $102.3 million in bonds due in December 2014, and leased the facility to NBP for an identical term under a capital lease. The City'sCity’s bonds were purchased by the CompanyNBP using proceeds of its term loan under the fourth amended and restated credit facility. Because the City has assigned the lease to the bond trustee for the benefit of NBP as the sole bondholder, NBP, in effect, controls enforcement of the lease against itself. As a result of the capital lease treatment, the facility will remain a component of property, plant and equipment in NBP'sNBP’s consolidated balance sheet. As a result of the legal right of offset, the capital lease obligation and the corresponding bond investments have been eliminated in consolidation. The transaction provides NBP with property tax exemptions for the leased facility, which, after netting payments to the City and local school district under payment in lieu of tax agreements, result in an annual property tax savings of approximately 25%. The facility remains subject to a prior mortgage and security interest in favor of the lenders under the existing senior credit facility. Additional revenue bonds may be issued to cover the costs of certain improvements to this facility. The total amount of revenue bonds authorized for issuance is $120.0 million.

F-24



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 27, 2005, August 28, 2004 and August 30, 2003

In 1999 and 2000 the cities of Liberal and Dodge City, Kansas issued an aggregate of $13.8 million of industrial development revenue bonds on the Predecessor's behalf to fund the purchase of equipment and construction improvements at NBP'sNBP’s facilities in those cities. These bonds were issued in four series of $1.0 million, $1.0 million, $6.0 million and $5.8 million and are due on demand or on February 1, 2029, March 1, 2027, March 1, 2015 and October 1, 2009. TheseHowever, because each series of bonds were assumedare backed by NBP in connection witha letter of credit under NBP’s senior credit facilities, the Transaction.bonds have been presented as non-current obligations. Pursuant to a lease agreement, NBP leases the facilities, equipment and improvements from the respective cities and makes lease payments in the amount of principal and interest due on the bonds. After giving effect to the Transaction, each series of bonds are backed by a letter of credit under NBP'sNBP’s senior credit facilities.

The 1999 and 2000 issued bonds are variable rate demand obligations that bear interest at a rate that is adjusted weekly, which rate will not exceed 10% per annum. The per annum interest rate for each series of bonds was 3.4% in 2006, 2.3% in 2005 and 1.3% in 2004 and 1.5% in 2003.2004. NBP has the option to redeem a series of bonds at any time for an amount equal to the principal plus accrued interest to the date of such redemption. The holders of the bonds have the option to tender the bonds upon seven days'days’ notice for an amount equal to par plus accrued interest. To the extent that the remarketing agent for the bonds is unable to resell any of the bonds that are tendered, the remarketing agent will use the letter of credit to fund such tender.


U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005 and August 28, 2004

An event of default would occur under the lease agreements if NBP fails to make any lease payment or other required payment, if a petition of bankruptcy is filed by or against NBP, if a receiver is appointed on NBP'sNBP’s behalf, or if NBP fails to observe and perform any covenant, condition, obligation or agreement under the lease agreements.

     In connection with the Brawley Beef acquisition, NBP assumed the obligation under a Trust Indenture securing $6.8 million in California Pollution Control Financing Authority Tax-Exempt variable rate demand solid waste disposal revenue bonds dated as of October 1, 2001. The bonds bear a rate that is adjusted weekly. The average per annum interest rate for this series of bonds for the period from the Brawley acquisition date until the end of FYE 2006 was $3.7%. These bonds have been presented as non-current. NBP has the option to redeem all or a portion of the bonds at any time for an amount equal to the principal plus accrued interest to the date of such redemption. The holders of the bonds have the option to tender the bonds upon seven days’ notice for an amount equal to par plus accrued interest. To the extent that the remarketing agent for the bonds is unable to resell any of the bonds that are tendered, the remarketing agent will use the letter of credit to fund such tender.

(e)    Capital and Operating Leases

Capital and Operating Leases—NBP leases a variety of buildings and equipment, some of which were acquired through the Brawley Beef, LLC acquisition, as well as tractors and trailers subsequent to the acquisition ofthrough its subsidiary National Carriers, in March 2003, under capital and operating lease agreements that expire in various years. Future minimum lease payments required at August 27, 2005,26, 2006, under capital leases and non-cancelable operating leases with terms exceeding one year, are as follows:

    Non-Cancelable
  Capital Operating
  Lease Lease
  Obligations Obligations
   

(dollars in thousands)

For the fiscal years ended August:      
   2007 $2,919  $11,671
   2008  2,814   10,480
   2009  3,266   8,143
   2010  1,227   5,797
   2011    2,926
   Thereafter    1,203
      Net minimum lease payments $10,226  $40,220
Less amount representing interest  (1,208)   
      Present value of net minimum lease payments $9,018    

     

     Non-Cancelable
   Capital Operating
   Lease Lease
   
Obligations
 
Obligations
   (dollars in thousands)
 For the fiscal years ended August:      
    2006 $- $8,514
    2007  -  7,067
    2008  -  6,115
    2009  -  4,109
    2010  -  3,650
    Thereafter  -  5,507
       Net minimum lease payments $- $34,962
 Less amount representing interest  -   
       Present value of net minimum lease payments $-   

Effective August 31, 2005, NBP acquired a material handling system for its Liberal, Kansas, beef facility under a capital lease obligation for five years.  Future minimum lease payments are $1.0 million each year for the fiscal years ended 2006, 2007, 2008, 2009 and 2010, respectively.

F-25



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 27, 2005, August 28, 2004 and August 30, 2003

Rent expense associated with operating leases was $10.9 million, $10.6 million $8.5 million and $0.5$8.5 million, for fiscal years 2006, 2005 2004 and 2003,2004, respectively. NBP expects that it will renew lease agreements or enter into new leases as the existing leases expire.

(f)   Utilities Commitment

Utilities CommitmentNot included in the table above are the obligations under an agreement for a utilities commitment at the Dodge City, Kansas, facility. In order to meet the continuing growth needs for water and wastewater services of the Dodge City facility, effective December 30, 2004, NBP entered into a services agreement for the city to provide NBP water and wastewater services at a price and term sufficient to permit the city to recoup up to one-half of the capital cost of providing fresh water service from a parcel of land owned by NBP eleven11 miles south of Dodge City, and of providing upgraded city wastewater facilities to help service the needs of the Dodge City facility. The city sold twenty year municipal bonds to pay for these improvements and NBP has committed to make a series of service charge payments totaling $19.3 million over a 20 year period, of which $0.8 million and $1.2 million was paid in fiscal year 2005.years 2005 and 2006, respectively. Payments under the commitment will be $1.2 million in fiscal year 2006, $1.4 million in fiscal year 2007, $1.4 million in fiscal year 2008, $1.4 million in fiscal year 2009, and $1.7 million in fiscal year 2010, and $0.8 million in fiscal year 2011, with the remaining balance of $11.4$10.6 million to be paid in subsequent years.


U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005 and August 28, 2004

Additionally, NBP makes a verbal commitment to cattle producers to purchase cattle about one week in advance of delivery of the live animals to its plants, with the actual price paid for the cattle determined after the cattle are delivered and inspected at the Company'sits facilities. NBP'sNBP’s estimated cattle commitments as of August 27, 200526, 2006 were $61.0$68.9 million.

     The aggregate principal maturities of long-term debt for each of the five fiscal years and thereafter following August 26, 2006 are as follows (dollars in thousands):

2007 $3,400
2008  3,446
2009  4,109
2010  8,113
2011  179,933
After 2012  184,895
  $383,896

(5)     Interest Rate Exchange Agreement

At August 25, 2001, the Company had an interest rate exchange agreement in place effectively fixing the interest rate on approximately $27.5 million of variable rate debt to a fixed rate of 6.153% plus 1.25%. The Company entered into the interest rate exchange agreement concurrent with its variable rate term debt agreement to reduce its exposure to changes in interest rates. The Company initially designated the interest rate exchange agreement to be 100% effective in hedging its variable interest rate risk, as both the variable interest rate of the debt obligation and the interest rate exchange agreement are based on LIBOR, reprice on the same dates, and had the same term. Effective August 25, 2001, the Company determined that it was no longer probable that it would continue to be exposed to interest rate risk as a result of the intention of FNB to make a significant cash distribution to its partners. As a result of this determination, in accordance with SFAS No. 133, the Company recognized the fair value on August 25, 2001 of the interest rate exchange agreement recorded in accumulated other comprehensive income of $1.2 million as a charge to operations. The difference in interest payments as a result of the interest rate exchange agreement has been recognized in interest rate exchange agreement expense in the amount of $422,771 in fiscal 2002.

On August 31, 2001, the Company received a $36.0 million cash payment from FNB. The payment was comprised of a discretionary cash dividend of $32.3 million and the normal quarterly distribution of $3.7 million. A portion of these proceeds were used to reduce the term loan by $20.0 million on September 10, 2001. The Company also reduced the notional amount of its interest rate exchange agreement by $17.5 million through September 26, 2001 at a cost of $1.0 million. Changes in the fair value of the remaining notional amount of the interest rate exchange agreement were charged to operations in 2002 and amounted to $0.6 million.

F-26



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 27, 2005, August 28, 2004 and August 30, 2003

     

On August 31, 2002, the notional amount of the interest rate exchange agreement was realigned with the principal balance of the debt obligation, effectively fixing the interest rate on approximately $9.1 million of the variable rate debt to a fixed rate of 6.153% plus the applicable rate margin (note(Note 4). The rate margin was 2.50% at August 28, 200427, 2005 and 2.25% at August 30, 2003. As a result of this development, the Company designated the revised interest rate exchange agreement as a hedge of its forecasted variable rate interest payments and determined the hedge is and will continue to be highly effective in accordance with SFAS No. 133. In 2003, the Company recorded the change in the fair value of its interest rate swap as an increase to equity through Accumulated Other Comprehensive Income (AOCI), rather than as other income. In 2004, the balance in the AOCI of $256,430 was adjusted to recognize the fair value of the interest rate swap as other income and current year changes in the fair value of the remaining notional amount of the exchange agreement were charged to operations in accordance with SFAS No. 133. Changes in the fair value were charged to operations. This interest rate exchange agreement expired on January 3, 2005 and at this time the Company does not anticipate entering into another interest rate exchange agreement.


U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005 and August 28, 2004

(6)     Employee Compensation and Benefits

The cooperative had established a phantom stock option plan which provided for the issuance of 20,000 phantom stock options with an exercise price of $55 per share, all of which had been issued and were exercisable upon election. In connection with the Conversion, this phantom stock option plan was converted into a phantom unit plan in a similar fashion as the conversion of cooperative shares to LLC units. The 20,000 phantom stock options converted into 20,000 phantom Class A units and 20,000 phantom Class B units with an exercise price of $55 per unit and $0 per unit, respectively. During this period when unitholders of USPB are required to transfer each Class A unit with a corresponding Class B unit, a phantom Class A unit cannot be exercised without a corresponding Class B unit being exercised. The Company recognized a reduction in compensation expense under this plan for the year ended August 26, 2006 and $0.3 million, $0.4 million, and $0.5$0.4 million, in compensation expense under this plan for the years ended August 27, 2005, and August 28, 2004, and August 30, 2003, respectively.

The Company maintains tax‑qualifieda tax-qualified employee savings and retirement plans (theplan (together, the 401(k) Plans)Plan) covering its non-union employees. Pursuant to the 401(k) Plans,Plan, eligible employees may elect to reduce their current compensation by up to the lesser of a percentage75% of their annual compensation (prescribed by the 401(k) Plans) or the statutorily prescribed annual limit and have the amount of such reduction contributed to the 401(k) Plans.Plan. The 401(k) Plans providePlan provides for additional matching contributions by the Company, based on specific terms contained in the 401(k) Plans.Plan. The trustee of the 401(k) Plans,Plan, at the direction of each participant, invests the assets of the 401(k) PlansPlan in designated investment options. The 401(k) Plans arePlan is intended to qualify under Section 401 of the Internal Revenue Code. Expenses related to the 401(k) PlansPlan totaled approximately $0.6 million, $0.7 million $0.5 million and $0.1$0.5 million for the fiscal years ended August 26, 2006, August 27, 2005, and August 28, 2004, and August 30, 2003, respectively.

NBP has agreed to make contributions to the United Food & Commercial Workers International Union-Industry Pension Fund (the UFCW Plan) for employees covered by a collective bargaining agreement as provided for in that agreement. Expenses related to the UFCW Plan totaled approximately $0.6 million, $0.6 million and $0.6 million for the fiscal yearyears ended August 26, 2006, August 27, 2005 $0.6 million for fiscal year endedand August 28, 2004, and $0.0 million for the 24 days ended August 30, 2003.respectively.

Postretirement Benefits- Certain former employees are covered by an unfunded postretirement benefit plan that provides medical and dental benefits. Costs associated with this plan, which relate primarily to insurance premiums, benefit payments and changes in the accumulated benefit obligation were approximately $1.5 million, $0.1 million $1.9 million and $0.0$1.9 million, for fiscal years 2006, 2005 2004 and 2003,2004, respectively, and are included in cost of sales.

The health care trend rate used to value the accumulated benefit obligation at August 27, 200526, 2006 is a rate of 9%10% per year, declining by 1% per year to an ultimate rate of 5% in 20092011 and thereafter. The discount rate used to value the accumulated benefit obligation is 6.25%6%. The unfunded accumulated benefit obligation was $3.6$2.1 million and $3.7$3.6 million at August 27, 200526, 2006 and August 28, 2004,27, 2005, respectively, and has been recorded as a liability in the financial statements.

F-27



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 27, 2005, August 28, 2004 The unfunded accumulated benefit obligation was reduced in 2006 necessitated by a reduction of both participants and August 30, 2003premiums because of changes in Medicare.

(7)    Other Income

Other non-operating income, net expenses were $2.4was $3.4 million forin FYE 20052006 compared to incomeother non-operating expense, net of $2.4 million in FYE 2004,2005. Fiscal year 2006 includes an approximate $1.4 million reduction in postretirement benefit obligation as more fully described in Note 6.Retirement Plans, and an approximate $0.6 million in income for a variancesettlement of $4.8 million.a lawsuit related to corrugated packaging materials. Fiscal year ended August 27, 2005 includes approximately $3.2 million in expense for the write-off of unamortized loan costs associated with amending and restating NBP's existingNBP’s fourth senior credit facility, offset by $0.5 million gain related to the securities received through the demutualization of a company whichthat held annuities for NBP employees.  . Fiscal year ended August 28, 2004 includes approximately $1.1 million gain NBP received through the demutualization of a company which held annuities for NBP employees.  Other income, net for fiscal 2003 includes fees associated with a bridge loan commitment obtained in connection with the Acquisition of approximately $1.7 million.   

(8)       Income Taxes 

Income tax expense (benefit) includes the following current and deferred provisions (dollars in thousands):

  Year Ended
  August 27, August 28, August 30,
  2005 2004 2003
 Current provision:        
    Federal$1,339 $868 $(69)
    State 388  155  (12)
    Foreign 12  20  (3)
       Total current tax expense (benefit) 1,739  1,043  (84)
          
 Deferred provision:        
    Federal 263  131  
    State 48  23  
    Foreign -  -  
       Total deferred tax expense 311  154  11 
       Total income tax expense (benefit)$2,050 $1,197 $(73)

 

 

F-28




U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005 and August 28, 2004

(8)     Income Taxes

     Income tax expense includes the following current and August 30, 2003deferred provisions (dollars in thousands):

   Year Ended  
 August 26, August 27, August 28,
 2006 2005 2004
Current provision:        
   Federal$2,198  $1,339 $868
   State 437   388  155
   Foreign 12   12  20
      Total current tax expense 2,647   1,739  1,043
      
Deferred provision:        
   Federal (909)  263  131
   State (166)  48  23
   Foreign   -  -
      Total deferred tax expense (1,075)  311  154
      Total income tax expense$1,572  $2,050 $1,197

Income tax expense differed from the "expected"“expected” income tax (computed by applying the federal income tax rate of 35% to earnings before income taxes) as follows (dollars in thousands):

 
Year Ended
 August 26, August 27, August 28,
 2006 2005 2004
Computed “expected” income tax expense$7,452  $3,741  $7,103 
Patronage deduction     (742)
Passthrough income (6,118)  (2,076)  
Deferred patronage     (1,874)
Foreign income exclusion     (162)
State taxes, net of federal 179   288   (116)
Adjustment of deferred taxes upon conversion to an LLC   1,375   
Change in valuation allowance upon conversion to an LLC   (1,375)  (3,019)
Other 59   97   
   Total income tax expense$1,572  $2,050  $1,197 

     

 Year Ended
 August 27, August 28, August 30,
 2005 2004 2003
Computed “expected” income tax expense$3,741  $7,103  $8,455 
Patronage deduction   (742)  (7,323)
Passthrough income (2,076)    
Deferred patronage   (1,874)  (603)
Foreign income exclusion   (162)  (551)
State taxes, net of federal 288   (116)  (7)
Foreign taxes     (3)
Recognition of initial net deferred tax asset     (4,394)
Adjustment of deferred taxes upon conversion to an LLC 1,375     
Change in valuation allowance upon conversion to an LLC (1,375)  (3,019)  4,394 
Other 97     (41)
   Total income tax expense (benefit)$2,050  $1,197  $(73)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at August 27, 200526, 2006 and August 28, 200427, 2005 are presented below (dollars in thousands):

August 26, August 27,
Deferred tax assets:

2005

 2004

2006

 2005
Accounts receivable, due to allowance for doubtful accounts$172 $682$181 $172
Expense accruals -  52
Investments -  39
Charitable contribution carryforward -  35
Intangible assets 40  -
Self-insurance and workers compensation accruals 1,605  6,046 2,355  1,605
Total gross deferred tax assets before evaluation allowance 1,777  6,854
Valuation allowance -  (1,375)
Total gross deferred tax assets 1,777  5,479 2,576  1,777
Deferred tax liabilities:          
Goodwill and other intangible assets -  642
Prepaid expenses -  204
Property, plant, and equipment, principally due to differences in depreciation 820  3,365 544  820
Total gross deferred tax liabilities 820  4,211 544  820
Net deferred tax assets$957 $1,268$2,032 $957

 


U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005 and August 28, 2004

Net deferred tax assets and liabilities at August 27, 200526, 2006 and August 28, 200427, 2005 are included in the consolidated balance sheet as follows (dollars in thousands):

August 26, August 27,
2005 20042006 2005
Other current assets$1,777 $2,435$2,576 $1,777
Other liabilities 820  1,167 544  820
$957 $1,268$2,032 $957

     

F-29



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 27, 2005, August 28, 2004 and August 30, 2003

Upon the acquisition of FNB in 2003, USPB established deferred tax assets attributable to differences between financial statement and tax basis of assets and liabilities. Although such differences could have resulted in non-patronage income (expense) in future periods, management believed that it was more likely than not that the results of future non-patronage operations would not generate sufficient taxable income to realize the deferred tax assets. Accordingly, a valuation allowance of $1.4 million had been recorded at August 28, 2004.27, 2005.

During FYE 2005, USPB converted to a limited liability company (LLC) as discussed in Note 10. Accordingly, the net deferred tax assets at August 28, 2004,27, 2005, together with the related valuation allowance established under the cooperative structure as a result of the acquisition were reversed resulting in no net impact to fiscal year 2005 tax expense. The remaining net deferred tax assets and liabilities at August 27, 200526, 2006 result from National Carriers, Inc., a C Corp subsidiary of NBP.

Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the remaining deferred tax assets associated with National Carriers, Inc., a taxable subsidiary. Accordingly, no valuation allowance has beenwas provided at August 26, 2006 and August 27, 2005.

Subchapter T of the Internal Revenue Code sets forth rules for the tax treatment of cooperatives and applies both to cooperatives exempt from tax under Section 521 of the Internal Revenue Code and to nonexempt cooperatives. Prior to August 29, 2004, the Company operated as an exempt cooperative. As an exempt cooperative, it was not taxed on amounts of patronage and nonpatronage source income withheld from its patrons in the form of qualified per-unit retains or on amounts distributed to its patrons in the form of Qualified Written Notices of Allocation. Such amounts were instead taxed directly to the patrons. If the Company was not entitled to be taxed under Subchapter T, its income would have been taxed to the Company similar to a corporation and the patrons would have been taxed when and if dividends are distributed. The characterization of income as patronage or non-patronage source income is subject to challenge by the Internal Revenue Service. Non-patronage source income, if deemed more than incidental, is subject to tax at the entity level instead of passed through to the patrons in the form of a patronage dividend. Notwithstanding the acquisition of a controlling interest in NBP on August 6, 2003, management continues to believe that its non-patronage source income, if any, is incidental and would vigorously defend any such challenge by the Internal Revenue Service. However, USPB has recognized tax expense in the accompanying fiscal year 2004 consolidated financial statements on a portion of its earnings for periods from August 6, 2003 to August 29, 2004 (date of conversion to an LLC) to provide for such potential recharacterization of income from patronage-source to nonpatronagenon-patronage source, which may be asserted by the Internal Revenue Service.

Effective August 29, 2004, the Company converted to an LLC, and under this structure, taxes are not provided at the Company level because the results of operations of the LLC are included in the taxable income of the individual members.

(9)     Related Party Transactions

All of the Company'sCompany’s directors hold units of the Company. By virtue of their ownership of the units, each of these individuals is obligated to deliver cattle to the Company. The amount and terms of the payments received by these individuals (or the entities they represent) for the delivery of cattle are made on exactly the same basis as those received by other unitholders of the Company for the delivery of their cattle.

All sales


U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005 and August 28, 2004

     USPB facilitates the delivery of USPB arecattle annually to NBP.NBP through its individual producer-owners. During the fiscal year ended August 27, 200526, 2006 USPB and its owners and associates provided approximately 19%18% of NBP'sNBP’s cattle requirements. During the fiscal years ended August 27, 2005, and August 28, 2004, the 24 days ended August 30, 2003, and the 340 days ended August 6, 2003, USPB provided approximately 18%, 17%,19% and 22%18%, respectively, of NBP'sNBP’s cattle requirements. The purchase price for the cattle is determined by NBP'sNBP’s pricing grid, which, under the terms of the agreement with U.S. Premium Beef, must be competitive with the pricing grids of NBP'sNBP’s competitors and may not be less favorable than pricing grids offered to other suppliers.

F-30



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
     At August 26, 2006 and August 27, 2005, August 28, 2004 and August 30, 2003

At August 27, 2005 and August 28, 2004, the Company had payables due to members for the purchase of cattle in the amount of $0.0 million and $3.6 million, respectively. All cattle purchases during the respective periods were from members.  At August 27, 2005 and August 28, 2004, the Company had payables to members for the return of nondelivery penalties in the amount of $1.1$0.5 million and $0.0$1.1 million, respectively. At August 27, 200526, 2006 and August 28, 2004,27, 2005, the Company had receivables from members for non-delivery penalties in the amount of $0.7 million and $0.5 million, and $1.2 million, respectively.

NBP entered into various transactions with Beef Products, Inc., a company affiliated with NBPCo Holdings in the ordinary course of business. Sales transactions were based upon prevailing market prices, and purchases were on terms no less favorable to NBP than would be obtained from an unaffiliated party. Our aggregate sales of trim to BPI in FYE 2005, 2004At August 26, 2006 and the 24 days ending August 20, 2003 were approximately $61.2 million, $52.7 million, and $1.9 million, respectively.  Our aggregate purchases of processed lean beef from BPI in FYE 2005, 2004 and the 24 days ending August 20, 2003 were approximately $19.1 million, $16.7 million, and $1.1 million, respectively.  At August 27, 2005, and August 28, 2004, the amounts due from Beef Products, Inc. were approximately $2.5$2.7 million and $2.9$2.5 million, respectively. At August 27, 200526, 2006 and August 28, 2004,27, 2005, the amounts due to Beef Products, Inc. were approximately $0.4 million and $0.4 million, respectively.

In December 1998, the Predecessor entered into an aircraft lease agreement under which it leases a business jet aircraft from John R. Miller Enterprises, L.L.C., a Utah limited liability company of which John R. Miller, NBP's Chief Executive Officer, is the majority member. The term of the lease was for five years and could have been terminated by either John R. Miller Enterprises, L.L.C. or NBP on 90 days' prior written notice. During the fiscal years ended August 27, 2005 and August 28, 2004 and the 24 days ended August 30, 2003, NBP paid $0.07 million, $ 0.2 million and $0.02 million, respectively, to lease the aircraft and $0.03 million, $ 0.07 million and $0.0 million, respectively, into an engine replacement reserve account. The funds in the reserve account are to be used to finance new engines installed on the aircraft.   The lease expired on December 15, 2003.  NBP still uses this aircraft on an as-needed basis, with the payment terms, including the payments into the engine replacement reserve account, essentially identical to the lease agreement, except the monthly usage payment is calculated on the actual hours used, not to exceed the monthly lease payment NBP paid while the lease was active.  There is currently no lease agreement in effect for this aircraft.

 In March 2001, the Predecessor entered into an aircraft lease agreement under which it leased a business jet aircraft from John R. Miller Enterprises, L.L.C., a Utah limited liability company of which John R. Miller, NBP's Chief Executive Officer, is the majority member. The term of the lease automatically renews every 11 months unless either John R. Miller Enterprises, L.L.C. or NBP requests termination within 90 days of the end of the lease term. During the fiscal year ended August 28, 2004 and  the 24 days ended August 30, 2003, NBP paid $0.4 million and $0.04 million, respectively, to lease the aircraft and $0.05 million and $0.01 million, respectively, into an engine replacement reserve account. The funds in the reserve account are to be used to finance new engines installed on the aircraft.  This lease was terminated effective at the end of May 2004.

In October 2003, NBP entered into an aircraft lease agreement under which NBP leased a business jet aircraft from John R. Miller Enterprises III, L.L.C., a Utah limited liability company of which John R. Miller, NBP'sNBP’s Chief Executive Officer, is the beneficial owner. The term of the lease is 81 months. The monthly lease payments will range from $25,400 in the first year of the lease to $45,380 in the fourth year of the lease and thereafter, and are adjusted quarterly based on the change in the three month LIBOR interest rate. During the fiscal years ended August 26, 2006, August 27, 2005 and August 28, 2004, NBP paid $0.7 million, $0.5 million and $0.3 million, respectively, to lease the aircraft and $0.1 million, $0.1 million and $0.08 million, respectively, into an engine replacement reserve account. The funds in the reserve account are to be used to finance new engines installed on the aircraft.

F-31



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 27, 2005, August 28, 2004 and August 30, 2003

In December 2004, NBP entered into an aircraft lease agreement under which it leases a business jet aircraft from John R. Miller Enterprises, L.L.C., a Utah limited liability company of which John R. Miller, NBP'sNBP’s Chief Executive Officer, is the beneficial owner. The term of the lease is 72 months. This aircraft replaces an aircraft leased from John R. Miller Enterprises, L.L.C. in March 2001. The base monthly lease payments will range from $35,400 in the first year of the lease to $45,380 in the fourth year of the lease and thereafter, and are adjusted quarterly based on the change in the three month LIBOR interest rate. During the FYEfiscal years ended August 26, 2006 and August 27, 2005, NBP paid $0.7 million and $0.5 million, respectively, to lease the aircraft and $0.1 million and $0.06 million, respectively, into an engine replacement reserve account. The funds in the reserve account are to be used to finance new engines installed on the aircraft.

(10)     Capital Shares and Equities

LLC Structure

On August 18, 2004, the shareholders of U.S. Premium Beef, Ltd. approved the mergerconversion of the cooperative into a wholly-owned subsidiary, U.S. Premium Beef, Inc., a Delaware corporation. The merger was effective on August 29, 2004. The Delaware corporation then, in a statutory conversion authorized under Delaware law, converted into a Delaware limited liability company.LLC. Under the new ownership structure, each share of common stock of the cooperative was converted to one unit of Class A interest and one unit of Class B interest. Immediately following the conversion,Conversion, there were 691,845 units of Class A interests and 691,845 units of Class B interests. For a period to be determined by the board of directors, each Class A unit will be linked to its corresponding Class B unit and each pair of linked units must, if transferred, be transferred together. Patronage refundsRefunds for reinvestmentReinvestment in the cooperative were carried over at their face amount into the LLC as patronage notices. Patronage Notices.


U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005 and August 28, 2004

     On June 1, 2006, U.S. Premium Beef’s majority owned subsidiary, NBP, completed the acquisition of the assets of Brawley Beef. As a result of the acquisition, USPB issued 44,160 new Class A units and 44,160 new Class B units to Brawley Beef in exchange for 44,160 limited partnership units in National Beef California (NBC), a subsidiary of National Beef. USPB then exchanged the limited partnership units with National Beef for a higher ownership percentage in National Beef. Immediately following the issuance, there were 736,005 units of Class A interests and 736,005 units of Class B interests.

Class A Interests. Holders of Class A interests are entitled to a pro rata share of 33% of the profits and losses; to receive distributions of the Company'sCompany’s net cash flow when declared by the board of directors; to participate in the distribution of the Company'sCompany’s assets in accordance with their positive capital account balances if the Company dissolves or liquidates after payment of the patronage notices, and, if the holder is a member, to vote on matters submitted to a vote of the Company'sCompany’s members. Holders of Class A interests are committed under Uniform Delivery and Marketing Agreements to deliver one head of cattle to the Company annually for each unit held.

Class B Interests. Holders of Class B interests are entitled to a pro rata share of 67% of the profits and losses; to receive distributions of the Company'sCompany’s net cash flow when declared by the board of directors; to participate in the distribution of the Company'sCompany’s assets in accordance with their positive capital account balances if the Company dissolves or liquidates after the payment of the patronage notices, and, if the holder is a member, to vote on matters submitted to a vote of the Company'sCompany’s members. Holders of Class B interests have no cattle delivery commitment.

Patronage Notices. Patronage notices do not constitute units or membership interests in the Company, and holders will not be unitholders or members of the Company by virtue of holding patronage notices. As was the case in the cooperative, patronage notices will be paid by the Company at such time and in such amounts as may be determined by the board of directors in its sole and absolute discretion. Upon liquidation, holders of patronage notices will be paid before Holders of Class A and Class B interests. Patronage notices carry no other or additional rights.

Cooperative Structure

Prior to the Conversion on August 29, 2004, the Company was organized as a cooperative.

F-32



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 27, 2005, August 28, 2004 and August 30, 2003

(a)     Common Stock

The cooperative was authorized to issue 5,000,000 shares of common stock, $0.01 par value. At August 28, 2004, there were 691,845 shares of common stock issued and outstanding. Ownership of common stock was restricted to agricultural producers of cattle, as defined, who resided in the territory served by the cooperative, and who qualify for membership in the cooperative. Membership requirements included payments of membership and registration fees, execution of a Uniform Delivery and Marketing Agreement, and approval by the Board of Directors.

Members holding at least 100 shares of common stock were entitled to vote; however, each voting member had only one vote regardless of the number of shares of common stock held. No dividends were paid on the common stock.

(b)     Preferred Stock

The cooperative was authorized to issue 5,000,000 shares of preferred stock, $0.01 par value. At August 28, 2004, there were no shares of preferred stock issued or outstanding.


U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005 and August 28, 2004

Preferred stock had no voting rights. Dividends could have been paid as determined by the Board of Directors.

(c)     Members'Members’ Contributed Capital

Members'     Members’ contributed capital represented amounts paid in excess of the par value of common stock, and membership and registration fees collected from members.

(d)     Nondelivery Fee

A nondelivery fee represents amounts retained by the cooperative ($12 per head) in relation to the nondelivery of cattle by members in accordance with the Uniform Delivery and Marketing Agreement. A nondelivery fee was held by the cooperative and then distributed back to the members upon approval of the Board of Directors. There were $1.3 million in outstanding nondelivery fees as of August 28, 2004.

(e)     Patronage Refunds

The cooperative paid patronage refunds with respect to cattle delivered to the cooperative in the form of cash, stock, or written notices of allocation, or any combination thereof based on each member'smember’s patronage business with the cooperative. Patronage refunds for reinvestment represented the portion of patronage refunds payable from current year earnings in equities.

For purposes of patronage refunds, current year earnings were determined in accordance with federal income tax regulations. For the yearsyear ended August 28, 2004, and August 30, 2003, 45.12% and 40% of current year earnings was distributed in cash and the remaining 54.88% and 60% werewas distributed in equities, respectively.equities.

The difference in net income for financial reporting purposes, determined in accordance with accounting principles generally accepted in the United States of America, and current patronage refunds determined on a federal taxable income basis was reflected as deferred patronage.

F-33



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 27, 2005, August 28, 2004 and August 30, 2003

(f)     Unallocated Equity

Unallocated equity represented equities not allocated to members. Unallocated equity at August 28, 2004 was as follows (dollars in thousands):

 
2004
Deferred patronage$9,492
Earned surplus 16,883
 $26,375

Earned surplus consisted of foreign sales income not distributed, the net loss incurred during the Company'sCompany’s development stage (prior to December 1, 1997) and corporate subsidiaries.

(11)     Minority Interest

At any time after certain dates, the earliest being July 31, 2008, the latest being July 31, 2011, certain members of NBP management and/or NBPCo Holdings, LLC have the right to request that NBP repurchase their interests, the value of which is to be determined by a mutually agreed appraisal process. If NBP is unable to effect the repurchase within a specified time, the requesting member(s) have the right to cause a sale process to commence. NBP accounts for changes in the redemption value of these interests by accreting the change in value over the period from the date of issuance tochange through the earliest redemption date of the respective interests using the interest method. At August 27, 2005,26, 2006, the minority interest in National Beef, included in the minority interest in the accompanying Consolidated Balance Sheet, was revalued by an independent appraisal process, and the value was determined to be $64.2 million.  Under the interest method,$77.5 million which was in excess of its carrying value. Accordingly, the carrying value of the minority interest increased by approximately $1.4 million through accretion during the fiscal year ended August 26, 2006, resulting in NBP approximates the fair$72.2 million carrying value, of $64.2 million, as reflected in the accompanying Consolidated Balance Sheet as of August 26, 2006.


U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005.2005 and August 28, 2004

(12)     Legal Proceedings

Schumacher v. Tyson Foods, et al.On July 1, 2002, a lawsuit was filed against Farmland National Beef Packing Company, L.P. (FNB(FNBPC or the predecessor to NBP), ConAgra Beef Company, Tyson Foods, Inc. and Excel Corporation in the United States District Court for the District of South Dakota seeking certification of a class of all persons who sold cattle to the defendants for cash, or on a basis affected by the cash price for cattle, during the period from April 2, 2001 through May 11, 2001 and for some period up to two weeks thereafter. The case was filed by three named plaintiffs on behalf of a putative nationwide class that plaintiffs estimate is comprised of hundreds or thousands of members. The complaint allegesalleged that the defendants, in violation of the Packers and Stockyards Act of 1921, knowingly used, without correction or disclosure, incorrect and misleading boxed beef price information generated by the USDA to purchase cattle offered for sale by the plaintiffs at a price substantially lower than was justified by the actual and correct price of boxed beef during this period. Plaintiffs also seeksought recovery against all defendants under a theory of unjust enrichment. The case was certified as a class-action matter in June of 2004. The plaintiffs claimclaimed damages against FNBFNBPC in the amount of approximately $4.5 million plus prejudgment interest, attorneys'attorneys’ fees and court costs. The claim will be reducedis subject to reduction in an unknown amount by the number of class members who have opted out of the class. Trial began March 31, 2006. On April 13, 2006, the jury returned a verdict in favor of FNBPC but against the other defendants. The opt-out deadline was October 31, 2005, but the numberdefendants found liable filed post-trial motions for judgment as a matter of opt outs willlaw, which were denied. The plaintiffs did not be known to the Company until plaintiffs file a report, which is due November 30, 2005.  Discovery has been completed.  Trial ispost-trial motion seeking to set aside the jury’s verdict for April 3, 2006.  Management believes that FNB acted properly and lawfully in dealings with cattle producers. Management is currently unable to evaluate the outcome of this matter or to estimate the amount of potential loss, if any. In accordance with SFAS No. 5, Accounting for Contingencies, NBPFNBPC. The court has not establishedyet entered a loss accrual associated with this claim.

F-34



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notesfinal judgment or appealable order and, until it does, the time for an appeal does not begin to Consolidated Financial Statements
August 27, 2005, August 28, 2004 and August 30, 2003run.

      NBP's wholly owned subsidiary, National Carriers, Inc. has various independent contractor drivers who are involved in accidents from time to time which in the aggregate could result in a material liability for the Company.

The Company is also a party to a number of other lawsuits and claims arising out of the operation of its business. Management believes the ultimate resolution of such matters should not have a material adverse effect on the Company'sCompany’s financial condition, results of operations, or liquidity.

(13)     Business Segments

In June of 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 (SFAS No. 131),Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes annual and interim reporting standards for operating segments of a company. It also requires entity‑wideentity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues, and its major customers. USPB is not organized by multiple operating segments for the purpose of making operating decisions or assessing performance. Accordingly, USPB operates in one operating segment and reports only certain enterprise‑wideenterprise-wide disclosures.

(a)     Customer Concentration

     In the fiscal year ended August 26, 2006, one customer with its consolidated subsidiaries represented 7.9% of total sales, with no other customer representing more than 3.0% of total sales. In the fiscal year ended August 27, 2005, one customer with its consolidated subsidiaries represented 7.0% of total sales, with no other customer representing more than 3.7% of total sales. In the fiscal year ended August 28, 2004, one customer with its consolidated subsidiaries represented 9.1% of total sales, with no other customer representing more than 3.3% of total sales. In the fiscal year ended August 30, 2003, one customer with its consolidated subsidiaries represented approximately 10.3%9.1% of total sales with no other single customer representing more than 2.9%3.3% of total sales.


U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005 and August 28, 2004

(b)     Sales to Foreign Countries

NBP had sales outside the United States of America in the fiscal years ended August 26, 2006, August 27, 2005 and 2004 and the 24 days ended August 30, 200328, 2004 of approximately $309.7 million, $295.2 million $395.5 million and $48.9$395.5 million, respectively. No single country accounted for more than 10%4% of total sales. The amount of assets maintained outside the United States of America is not material.

(14)     United States BSE Outbreak

The closure of U.S. borders to the importation of Canadian feeder and fattened (ready for slaughter) animals, which occurred in May 2003 following the discovery of bovine spongiform encephalopathy (BSE) in Alberta that same month, tightened the U.S. cattle supply. The closure of the U.S. border to Canadian livestock resulted in higher overall feeder and fed cattle prices in the U.S., negatively impacting raw material prices. Although the U.S. border opened to Canadian produced boxed beef in September 2003, the entire U.S. beef industry continued at a price disadvantage for both raw materials and boxed beef prices while the ban on importation of Canadian livestock was maintained. The ban on the importation of Canadian cattle was in place from May 2003 to July 2005.

On December 23, 2003, it was announced by the United States Department of Agriculture (USDA) that a single Holstein dairy cow was discovered in the state of Washington to have tested positive for BSE. The origin of the animal was subsequently traced to a farm in Canada. Shortly after the announcement, several countries, including Japan, representing a substantial share of NBP'sNBP’s export business, closed their borders to the importation of edible beef products from the United States. Certain by-products have been classified as Specified Risk Materials (SRMs), and have been banned from use in feedstocks and the human food chain. Some of these products previously enjoyed a market in foreign countries. The closure of most foreign markets to U.S. beef following the discovery of this cow in Washington state, and lack of alternative U.S. markets for many products which previously were exported, negatively impacted the revenue per head enjoyedrealized by the U.S. packingbeef processing industry.

F-35



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 27, 2005, August 28, 2004 and August 30, 2003

     The reopening of U.S. export markets was further hampered by discovery in 2005 of a second case of BSE in the U.S. as well as additional precautions required by some other importing countries. In December 2005, Japan opened their border to U.S. beef but subsequently closed a short time later as a result of a U.S. packer erroneously shipping a product not approved for export to Japan. On July 26, 2006, Japan agreed to reopen its market to U.S. beef aged 20 months and younger after an inspection of U.S. beef processing plants. Shipments of U.S. beef to Japan commenced in August 2006. In September 2006, Korea announced a provisional opening of their border to U.S. beef, but restrictions imposed with the reopening have created uncertainty regarding amounts of beef that may qualify.

All of these     These challenges resulted in tremendous volatility in U.S. livestock market prices duringsince FYE 2004. Where pre-BSE export sales were approximately 17% of total net sales in FYE 2003, in FYE 2004, 2005 and FYE 2005.  In FYE 2003, 2004 and 2005, NBP's2006, NBP’s total export sales were approximately 17%10%, 10%7% and 7%, respectively, of total net sales.

On December 29, 2004,sales, respectively. With the USDA announced it had established conditions under which it would allow imports into the U.S. of liveage restrictions placed on cattle under 30 months of age and certain other commodities from regions with effective BSE prevention and detection measures.  Prior to being able to import to the U.S., each country must undergo a thorough risk assessment to be recognized as a "minimal-risk region."  Canada was the first country recognized as a minimal-risk region and, as such, would have been eligible tothat qualify for export to the U.S. live cattle under 30 months of age (subject to certain restrictions), as well as certain other animalsJapan, it is anticipated that between 5% and products.  The risk assessment conducted by the USDA, as part of the rulemaking process to determine Canada's status as a minimal-risk region, included consideration of the possibility that Canada could experience additional cases of BSE.  The final rule was published in the January 4, 2005 Federal Register and was to become effective March 7, 2005, but was delayed by litigation. 

On March 2, 2005, the U.S. District Court in Billings, Montana granted a preliminary injunction to delay the implementation of USDA's minimal-risk regions rule, temporarily blocking the opening of the Canadian border to the importation of live cattle under 30 months of age into the U.S.  On March 17, 2005, the U.S. Department of Justice, on behalf of the USDA, filed a request with the U.S. Court of Appeals for the Ninth Circuit requesting that the court overturn the decision issued by the U.S. District Court in Montana, which would re-establish trade with Canada for beef products and live cattle under 30 months of age.  The National Meat Association along with the Canadian Cattlemen's Association and the Alberta Beef Producers, who were all denied leave to intervene in the trial court, also appealed seeking to overturn the preliminary injunction.  In July 2005, the U.S. Court of Appeals for the Ninth Circuit overturned the March 2005 preliminary injunction issued by the U.S. District Court in Billings, Montana, which had continued the closure of the Canadian border to imports of live cattle. The U.S. Court of Appeals ruling resulted in the immediate reopening of the Canadian border to live cattle imports.  A petition for rehearing of the Ninth Circuit's ruling to the entire panel of Ninth Circuit judges was rejected by the Ninth Circuit on October 13, 2005.  Although the Court of Appeals action does not completely dispose of the action in the lower court, the lower court may or may not enter final rulings that will permit continued trade in live animals and beef products between the two countries.

Announcements of inconclusive, preliminary test results for BSE can be expected from time to time as a result of the sensitivity of the new screening regime.  Since the USDA enhanced surveillance program for BSE began in 2004, approximately 510,000 cattle have been tested for BSE using a rapid test.  Three of these animals tested inconclusive and were subsequently subjected to immunohistchemistry, or IHC, testing.  The IHC is an internationally recognized confirmatory test for BSE.  All three inconclusive samples tested negative using IHC.  The three samples were then tested by a second internationally recognized confirmatory test, referred to as the Western Blot test.  Of the three samples, two were negative but the third came back reactive.  Because of the conflicting results, the samples from the animal that tested reactive were sent to Weybridge, England for further testing and the results of that testing were confirmed on June 24, 2005 as positive for BSE.  In a USDA statement issued June 29, 2005, the cow was identified as born and raised in a herd in Texas and was approximately 12 years old.  In the USDA statement, USDA Chief Veterinarian John Clifford stated that the USDA believes, "it was most likely infected by consuming feed prior to the implementation of the ruminant-to-ruminant feed ban in 1997," and he emphasized "that this animal did not enter the human food chain."  Although the Secretary of the USDA has stated that there is no risk to animal or human health related to this case, the impact on the market created by this or other future tests is not possible to predict.  Prior to this second confirmed case of BSE in the U.S., many countries had reopened their borders to allow the import20% of U.S. beef; however, this second confirmed case of BSE has led to uncertainty as to whether or when additional markets may reopen, and whether or when existing open markets may close.

F-36



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 27, 2005, August 28, 2004 and August 30, 2003

On October 31, 2005, a Japanese food safety panel responsible for recommendations concerning the importation of beef concluded that the risk of BSE infed cattle 20 months of age and younger from the United States was very low.  The recommendation sets in motion a series of actions, including a month-long period for public comments, which could lead to the resumption of U.S. beef imports potentially before the end of the calendar year.  There can be no assurance that this action will result in the resumption of trade, or if so, when this will occur.

The Company cannot presently assess the full economic impact of the consequences of BSE on the U.S. beef packing industry or on its operations.  The Company's revenues and net income may be materially adversely affected in the event existing import restrictions continue indefinitely, additional countries announce similar restrictions, additional regulatory restrictions are put into effect or domestic consumer demand for beef declines substantially.

(15)     Quarterly Results (Unaudited)

Selected quarterly financial data for 2005 and 2004 is set forth below (dollars in thousands):

        Basic Diluted
    Operating Net Earnings Per Earnings Per
  Net sales Income Income Linked Unit Linked Unit
 2005 quarterly results:              
    November 27, 2004$1,050,720 $1,860 $(2,982) $(4.31) $(4.23)
    February 26, 2005 1,026,727  (2,842)  (7,453) $(10.77) $(10.57)
    May 28, 2005 1,126,574  28,604  11,097 $16.04 $15.74
    August 27, 2005 1,134,899  22,933  7,977 $11.53 $11.31
  $4,338,920 $50,555 $8,639      
 2004 quarterly results:              
    November 29, 2003$1,058,306 $25,213 $9,607      
    February 28, 2004(1) 932,036  6,447  225      
    May 29, 2004 1,018,740  16,126  3,928      
    August 28, 2004 1,084,399  16,030  5,336      
  $4,093,481 $63,816 $19,096      

(1)         As more fully described in Note 14, NBP recorded charges to earnings totaling approximately $18.8 million due to the market impacts of the closure of international borders as a result of the BSE discovery in late December.

Prior to the conversion from a cooperative to an LLC, per share data had been omitted because, under the cooperative structure, earnings of the Company were distributed as patronage dividends to members and associate members, those who leased delivery rights from shareholders, based on the level of business conducted with the Company as opposed to a common shareholder's proportionate share of underlying equity in the Company.  Under the LLC structure, earnings of the Company are to be distributed to unitholders based on their proportionate share of underlying equity, and, as a result, earnings per unit (EPU) has been presented in the table above.

F-37



U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 27, 2005, August 28, 2004 and August 30, 2003

(16)     Subsequent Events

On September 23, 2005, the Company made a cash distribution to each of its members in the amount of $1.73 for the linked combination of each Class A unit and Class B unit held by such members.  The distribution was approved by the Company's Board of Directors on September 16, 2005 and was paid to all members of record as of June 25, 2005.   

F-38



NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-39



Report of Independent Registered Public Accounting Firm

The Board of Managers and Stockholders
National Beef Packing Company, LLC:

We have audited the accompanying consolidated balance sheets of National Beef Packing Company, LLC and subsidiaries (Successor) as of August 27, 2005 and August 28, 2004, and the related consolidated statements of operations, members' capital, comprehensive income, and cash flows for the fiscal years ended August 27, 2005 and August 28, 2004 and for the 24 days ended August 30, 2003 (Successor periods), and the consolidated statements of operations, partners' capital, comprehensive income, and cash flows of Farmland National Beef Packing Company, LP and subsidiaries (Predecessor) for the 340 days ended August 6, 2003 (Predecessor period).  These consolidated financial statements are the responsibility of the Companies' management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the aforementioned Successor consolidated financial statements present fairly, in all material respects, the financial position of National Beef Packing Company, LLC and subsidiaries as of August 27, 2005 and August 28, 2004, and the results of their operations and cash flows for the Successor periods, in conformity with U.S. generally accepted accounting principles.  Further, in our opinion, the aforementioned Predecessor consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Farmland National Beef Packing Company, LP and subsidiaries for the Predecessor period, in conformity with U.S. generally accepted accounting principles. 

As discussed in Note 3 to the consolidated financial statements, effective August 7, 2003, U.S. Premium Beef, Ltd. acquired a controlling interest in Farmland National Beef Packing Company, LP and subsidiaries in a business combination accounted for as a purchase.  As a result of the transaction, the consolidated financial information for the periods after the acquisition (Successor periods) are presented on a different cost basis than that for the period before the acquisition (Predecessor period) and, therefore, are not comparable.

KPMG LLP
Kansas City, Missouri
November 4, 2005

F-40



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

Consolidated Balance Sheets
(in thousands)

 

 August 27, 2005

 

August 28, 2004

Assets

Current assets:

Cash and cash equivalents

$       

33,872

$    

27,998

Accounts receivable, less allowance for returns and
                       doubtful accounts of $3,903 and
                       $5,614, respectively

170,851

177,614

Due from affiliates

2,475

2,873

Other receivables

3,385

3,288

Inventories

85,426

85,962

Other current assets

9,920

10,782

Total current assets

305,929

308,517

 Property, plant and equipment, at cost:

Land and improvements

13,462

7,817

Buildings and improvements

63,994

60,601

Machinery and equipment

157,092

139,761

Trailers and automotive equipment

1,419

2,148

Furniture and fixtures

3,373

2,913

Construction in progress

18,912

29,398

258,252

242,638

 Less accumulated depreciation

43,114

20,633

 Net property, plant, and equipment

215,138

222,005

Goodwill

78,858

78,858

Other intangibles, net of accumulated amortization of
              $3,335 and $1,722, respectively

28,426

30,039

Other assets

6,326

7,102

$     

634,677

$     

646,521

Liabilities and Members' Capital

Current liabilities:

Current installments of long-term debt

$          

-

$

9,453

Cattle purchases payable

54,394

49,569

Accounts payable - trade

42,465

39,207

Due to affiliates

399

416

Accrued compensation and benefits

18,638

17,555

Accrued insurance

15,528

13,903

Other accrued expenses and liabilities

8,234

6,860

Distributions payable

4,621

5,541

        Total current liabilities

144,279

142,504

Long-term debt, excluding current installments

308,850

325,634

Other liabilities

4,738

5,237

Total liabilities

457,867

473,375

Minority interest

753

632

Capital subject to redemption

64,218

62,476

Members' capital:

Members' capital

111,804

110,025

Accumulated other comprehensive income

35

13

Total Members' capital

111,839

110,038

Commitments and contingencies

-

-

$      

634,677

$       

646,521

See accompanying notes to consolidated financial statements.

F-41



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

Consolidated Statements of Operations
(in thousands)

Successor Entity

Predecessor Entity

National Beef
Packing
Company, LLC
and Subsidiaries

National Beef
Packing
Company, LLC
and Subsidiaries

National Beef
Packing Company,
 LLC and
Subsidiaries

Farmland National
 Beef Packing
 Company, L.P. and
Subsidiaries

52 weeks ended

52 weeks ended

24 days ended

340 days ended

August 27,
2005

August 28,
 2004

August 30,
 2003

August 6,
 2003

Net sales

$

4,338,920

$

4,093,481

$

282,832

$

3,378,623

Costs and expenses:

Cost of sales

4,229,903

3,973,636

264,776

3,250,960

Selling, general, and administrative

30,466

29,616

2,098

24,356

Depreciation and amortization

24,449

21,170

2,055

18,368

     Total costs and expenses

4,284,818

4,024,422

268,929

3,293,684

Operating income

54,102

69,059

13,903

84,939

Other income (expense):

Interest income

380

549

41

511

Interest expense

(28,552

)

(25,909

)

(1,690

)

(5,560

)

Minority owners' interest in net
    income of  Kansas City Steak, LLC

(160

)

(313

)

(2

)

(121

)

Equity in loss of aLF Ventures, LLC

(577

)

(837

)

(41

)

(1,343

)

Other, net

(2,555

)

2,192

(1,714

)

332

Income before taxes

22,638

44,741

10,497

78,758

Income tax (expense) benefit

(1,859

)

(729

)

74

(297

)

              Net income

$20,779

 

$44,012

  

$10,571

  

$78,461

 
 

See accompanying notes to consolidated financial statements.

F-42



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)

Successor Entity

Predecessor Entity

National Beef Packing Company, LLC and Subsidiaries

Farmland National
Beef Packing Company, L.P. and
 Subsidiaries

52 weeks ended

52 weeks ended

24 days ended

340 days ended

August 27, 2005

August 28, 2004

August 30, 2003

August 6, 2003

Cash flows from operating activities:

Net income

$        

20,779

$

44,012

$

10,571

$

78,461

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

24,449

21,170

2,055

18,368

Loss (gain) on disposal and impairment of property, plant, and equipment

703

42

598

(10

)

Minority interest

121

213

2

 

162

Write-off of debt issuance costs

2,552

-

-

-

Change in assets and liabilities:

 

Accounts receivable

6,763

(21,756

)

(8,535

)

(30,015

)

Due from affiliates

398

(2,141

)

2,005

308

Other receivables

(97

)

855

1,126

(3,173

)

Inventories

536

(8,375

)

(3,781

)

(9,551

)

Other assets

739

21,369

(323

)

(2,087

)

Accounts payable

2,724

1,801

632

10,551

Due to affiliates

(17

)

33

(2,954

)

(2,386

)

Accrued compensation and benefits

1,083

(10,803

)

(2,388

)

8,634

Accrued insurance

1,625

(2,736

)

4,468

2,827

Accrued expenses and liabilities

875

809

7,361

(2,917

)

Cattle purchases payable

(459

)

1,191

3,953

(5,763

)

Net cash provided by operating activities

62,774

45,684

14,790

63,409

Cash flows from investing activities:

Capital expenditures, including interest capitalized

(18,200

)

(32,471

)

(1,698

)

(31,996

)

Acquisition of interest in Predecessor Entity

-

-

(236,821

)

         -

Acquisition of National Carriers, Inc.

-

-

-

(5,025

)

Proceeds from sale of property, plant, and equipment

1,528

1,301

226

304

Net cash used in investing activities

(16,672

)

(31,170

)

(238,293

)

(36,717

)

Cash flows from financing activities:

Net (payments) receipts under revolving credit lines

(27,059

)

29,750

12,448

(204

)

Repayments of term note payable

(2,344

)

(6,250

)

-

-

Borrowings under term note payable

3,594

-

-

-

Proceeds from issuance of term note

-

-

21,875

-

Proceeds from issuance of senior notes

-

-

160,000

-

Cash paid for financing costs

(1,653

)

-

(10,283

)

-

Change in overdraft balances

5,818

443

9,501

(1,330

)

Principal payments of debt

-

-

-

(9,375

)

(Repayments) acquisition of other indebtedness

(428

)

(501

)

(73

)

1,001

Member contributions

-

-

45,964

-

Member distributions

(18,178

)

(41,276

)

-

-

Partnership distributions

-

-

-

(32,158

)

Net cash (used in) provided by financing activities

(40,250

)

(17,834

)

239,432

(42,066

)

Effect of exchange rate changes on cash

22

14

(1

)

4

Net increase (decrease) in cash

5,874

(3,306

)

15,928

(15,370

)

Cash and cash equivalents at beginning of period

27,998

31,304

15,376

30,746

Cash and cash equivalents at end of period

$

33,872

$

27,998

$

31,304

$

15,376

Supplemental Disclosures:

Cash paid during the period for interest

$

25,193

$

23,839

$

316

$

4,957

Cash paid during the period for taxes

$

2,354

$

633

$

203

$

67

See accompanying notes to consolidated financial statements.

F-43



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES
Consolidated Statements of Partners' and Members' Capital
(in thousands)

 

Predecessor Entity

 

Farmland National Beef Packing Company, L.P. and Subsidiaries

 

General partners

 

Limited partners

 

Total

 

Balance at August 31, 2002

 $

4,107 

 $

132,809 

 

 $

136,916 

 

Allocation of net income

2,354 

76,107 

 

78,461 

 

Distributions

(1,117)

(36,138)

 

(37,255)

 

Foreign currency translation adjustments

                 -  

 

 

Balance at August 6, 2003

 $

5,344 

 $

172,782 

 

 $

178,126 

  

Successor Entity

National Beef Packing Company, LLC and Subsidiaries

Capital Subject to Redemption

Class A

Class B-1

Class B-2
and C(a)

Total

Balance at August 7, 2003

$

-

$

-

$

-

$

-

Issuance of Class A and Class B-1 Units for cash

33,068

7,896

-

40,964

Contribution of earned deferred compensation for Class
    B-2 Units and rights to Class A and Class C Units

9,086

-

914

10,000

Allocation of net income

-

4,437

514

4,951

Class A 5% Priority Distributions

(109

)

-

-

(109

)

Class B Distributions

-

(1,956

)

(227

)

(2,183

)

Balance at August 30, 2003

$

42,045

$

10,377

$

1,201

$

53,623

Allocation of net income

1,649

15,924

1,844

19,417

Class A 5% Priority Distributions

(1,540

)

-

-

(1,540

)

Class B Distributions

-

(7,893

)

(892

)

(8,785

)

Appraisal valuation adjustment

-

(214

)

(25

)

(239

)

Balance at August 28, 2004

$

42,154

$

18,194

$

2,128

$

62,476

Allocation of net income

1,649

6,171

715

8,535

Class A 5% Priority Distributions

(1,777

)

-

-

(1,777

)

Class B Distributions

-

(4,495

)

(521

)

(5,016

)

Appraisal valuation adjustment

-

-

-

-

Balance at August 27, 2005

$

42,026

$

19,870

$

2,322

$

64,218

Members' Capital

Class A

Class B-1

Accumulated
Other
Comprehensive
Income

Total

Balance at August 7, 2003

$

-

$

-

$

-

$

-

Issuance of Class A and Class B-1 Units in exchange for
    U.S. Premium's interest in FNBPC

86,447

5,000

-

91,447

Issuance of Class B-1 Units for cash

-

5,000

-

5,000

Allocation of net income

-

5,620

-

5,620

Class A 5% Priority Distributions

(292

)

-

-

(292

)

Class B Distributions

-

(2,478

)

-

(2,478

)

Foreign currency translation adjustments

-

-

(1

)

(1

)

Balance at August 30, 2003

$

86,155

$

13,142

$

(1

)

$

99,296

Allocation of net income

4,427

20,168

-

24,595

Class A 5% Priority Distributions

(4,135

)

-

-

(4,135

)

Class B Distributions

-

(9,971

)

-

(9,971

)

Appraisal valuation adjustment

-

239

-

239

Foreign currency translation adjustments

-

-

14

14

Balance at August 28, 2004

$

86,447

$

23,578

$

13

$

110,038

Allocation of net income

4,427

7,817

-

12,244

Class A 5% Priority Distributions

(4,771

)

-

-

(4,771

)

Class B Distributions

-

(5,694

)

-

(5,694

)

Appraisal valuation adjustment

-

-

-

-

Foreign currency translation adjustments

-

-

22

22

Balance at August 27, 2005

$

86,103

$

25,701

$

35

$

111,839

___         
(a)      Class B-2 and Class C collectively have equal value and rights as Class B-1

          See accompanying notes to consolidated financial statements.

F-44



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(in thousands)

 

 

 

 

 

 

 

Successor Entity

 

Successor Entity

 

Successor Entity

 

Predecessor Entity

National Beef Packing Company, LLC and Subsidiaries 

 

National Beef Packing Company, LLC and Subsidiaries 

 

National Beef Packing Company, LLC and Subsidiaries 

 

 Farmland National Beef Packing Company, L.P. and Subsidiaries 

52 weeks ended

 

52 weeks ended

 

24 days ended

 

340 days ended

August 27, 2005

 

August 28, 2004

 

August 30, 2003

 

August 6, 2003

Net income

$

20,779

$

44,012

$

10,571

$

78,461

Other comprehensive income(loss):

Foreign currency translation adjustments

                       22

                       14

                   (1)

                   4 

Comprehensive income

$

20,801

$

44,026

$

10,570

$

78,465

See accompanying notes to consolidated financial statements

F-45



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.  DESCRIPTION OF BUSINESS AND THE TRANSACTION

National Beef Packing Company, LLC (NBP or Successor), is a Delaware limited liability company which is the successor entity to the former Farmland National Beef Packing Company, L.P. (FNBPC or Predecessor) as a result of the transaction described below, which occurred on August 6, 2003. Since the assets and liabilities of NBP are presented on a new basis of accounting, the financial information for NBP is not comparable to the financial information of FNBPC prior to August 7, 2003.

NBP sells its meat products to customers in the foodservice, international, further processor and retail distribution channels. NBP also produces and sells by-products that are derived from its meat processing operations and variety meats to customers in various industries.

NBP operates beef slaughter and fabrication facilities in Liberal and Dodge City, Kansas, case-ready beef and pork processing facilities in Hummels Wharf, Pennsylvania and Moultrie, Georgia and holds a 75% interest in Kansas City Steak Company, LLC, a portion control processing facility in Kansas City, Kansas. A wholly-owned subsidiary, National Carriers, Inc., (National Carriers) located in Liberal, Kansas, provides trucking services to NBP and third parties.

Approximately 2,700 employees at the Liberal, Kansas facility are represented under a collective bargaining agreement scheduled to expire December 16, 2007.

The Transaction-On June 12, 2003, U.S. Premium Beef, Ltd. (U.S. Premium Beef) entered into an agreement with Farmland Industries, Inc., (Farmland), to acquire all of the partnership interests in FNBPC held by Farmland, which approximated 71.2%. U.S. Premium Beef, which held the remaining interest in FNBPC, formed NB Acquisition, LLC (NB Acquisition) to consummate the acquisition. U.S. Premium Beef, NBPCo Holdings, LLC (NBPCo Holdings), and certain members of management purchased equity in NB Acquisition for $46.0 million in cash. NB Acquisition used a portion of these funds to purchase all of the membership interest of an affiliate of Farmland that held Farmland's general partnership interest in FNBPC, giving NB Acquisition voting control of FNBPC. Immediately thereafter, to finance the purchase of Farmland's remaining interest, FNBPC issued $160.0 million of 10 1/2% Senior Notes due 2011 (the Senior Notes) and amended its existing credit facility. A portion of the proceeds of the Senior Notes offering and borrowings under the amended credit facility were transferred to NB Acquisition. Subsequently, NB Acquisition merged into FNBPC, and converted into a limited liability company, NBP, under Delaware law. These transactions closed on August 6, 2003. NBP continues to hold all of the same assets FNBPC held before the consummation of the transactions, including equity in subsidiaries, except that, concurrent with the closing of the Transaction, Farmland retained a 49% interest in a NBP subsidiary National Beef aLF, LLC, which holds a 47.5% interest in aLF Ventures, LLC. After the Transaction, NBP holds a 24.2% interest in aLF Ventures, LLC through its 51% interest retained in National Beef aLF, LLC.  From July 2006 to July 2008, Farmland has a put right of this interest in National Beef aLF, LLC to NBP at its then fair market value. If the interest in National Beef aLF, LLC is not repurchased, NBP is required to put the entire interest up for sale. Due to uncertainties in aLF Ventures, LLC's ability to generate future revenues, no amounts were allocated to the put option in the consolidated financial statements.

The following table sets forth the approximate sources and uses of funds (in millions) in connection with the Transaction as it occurred on August 6, 2003.

     Sources

  

     Available cash

$

3.2

     Revolving credit facility(1)

16.0

     Term loan

125.0

     Senior Notes

160.0

     NBPCo Holdings equity(2)

35.4

     U.S. Premium Beef equity(3)

96.4

     Management equity(4)

15.6

     Total

$

451.6

F-46



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Uses

  

Purchase of Farmland's interest

$

     232.0

Refinancing of existing credit facility

103.1

U. S. Premium Beef rollover equity

91.4

Membership interests issued as deferred compensation(4)

10.0

Transaction costs(5)

15.1

          Total

$

451.6

  


(1)

NBP had total availability, including the amount presented, of $140.0 million under the amended revolving credit facility at August 6, 2003. Actual borrowings under the amended revolving credit facility at the closing of the Transaction were $16.0 million.

(2)

Represents cash equity from NBPCo Holdings.

(3)

Includes $5.0 million in cash and the predecessor basis of the 28.8% equity interest in FNBPC held by U.S. Premium Beef prior to the Transaction.

(4)

Includes $5.6 million in cash and $10.0 million of cash incentive compensation earned as of closing that was issued as compensation on a deferred basis in the form of additional membership interests in NBP.

(5)

Includes commitment, placement, financial advisory and other transaction fees, and legal, accounting and other professional fees.

The total purchase price (including expenses and other consideration) has been allocated to the net assets based on their estimated fair values at the date of acquisition to the extent of the approximately 71.2% change in ownership as of the date of closing. The Transaction is within the scope of Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, which resulted in a new basis of accounting in accordance with the Emerging Issues Task Force (EITF) 88-16, Basis in Leveraged Buyout Transactions. In accordance with that guidance, the interest of U.S. Premium Beef, a minority owner of the Predecessor, was carried over at its predecessor basis because a change in control has occurred in which U.S. Premium Beef obtained unilateral control of NBP. The excess of the purchase price over U.S. Premium Beef's predecessor basis of net assets acquired was recognized as a reduction in members' capital.

U.S. Premium Beef, NBPCo Holdings and management each hold Class A and Class B interests in NBP. In addition, members of management will be issued a fixed number of additional Class A and Class C interests in NBP in lieu of cash payments owed under existing employment arrangements.

Class A Interests. Class A interests are non-voting and are entitled to a priority distribution of 5% per year on the face amount of the Class A interests, payable not later than 30 days after the close of NBP's tax year quarters in cash to the extent permitted by NBP's senior lenders and the indenture governing the Senior Notes. The face amount of the Class A interests, together with all unpaid priority distributions, will be distributed on a priority basis upon liquidation.

Class B Interests. Class B interests, together with the Class C interests described below, are entitled to receive all assets available for distribution upon liquidation after payment of the Class A face amount together with all unpaid Class A priority distributions. Class B interests will also be allocated all items of income and loss earned or incurred by NBP after allocation of income attributable to the Class A priority distribution. In addition, the holders of Class B interests are entitled to receive quarterly distributions to make tax payments, which consist of 48% of NBP's remaining estimated taxable net income after the Class A priority distributions are made. Certain of the Class B interests (B-2 interests) issued to management are in the form of "profits interests" issued in exchange for services previously rendered. The B-2 interests have rights in liquidation only to the extent of their profits interest. The voting power of the members (voting either directly or by action of the board of managers designated by the members) is determined based upon the number of Class B interests held.

F-47



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Class C Interests. Rights to Class C interests are held only by owners of Class B-2 interests. Class B-2 and Class C interests collectively, have equal value and rights as Class B-1 interests. The face amount of the Class C interests will be distributed out of the assets available for distribution upon liquidation on a parity basis with the Class B interests after payment of the Class A face amount together with all unpaid Class A priority distributions.

U.S. Premium Beef holds approximately 53.2% of the Class B interests, as well as Class A interests with an aggregate face amount of approximately $88.8 million, NBPCo Holdings owns approximately 20.2% of the Class B interests, as well as Class A interests with an aggregate face amount of approximately $31.6 million, and members of management own approximately 26.6% of the Class B interests, as well as Class A interests with an aggregate face amount of approximately $1.5 million. After a specified period following completion of the Transaction, certain members of management will be issued a fixed number of additional Class A interests with an aggregate face amount of approximately $9.1 million and Class C interests with an aggregate face amount of approximately $0.9 million in lieu of cash payments owed under existing employment arrangements pursuant to deferred compensation agreements entered into in connection with the Transaction. These amounts were previously expensed as compensation expense in the Predecessor financial statements.

Capital subject to redemption represents Class A, B and C interests held by management and NBPCo Holdings, which include repurchase rights of the holders (see Note 9).

Prior to the current ownership, NBP was organized as a limited partnership of which NBPCo., L.L.C. and USPBCo., L.L.C. were the general partners and Farmland and U. S. Premium Beef were the limited partners. Farmland was the ultimate parent company of NBPCo., L.L.C. and U.S. Premium Beef was the ultimate parent company of USPBCo., L.L.C.

Prior to the close of the Transaction on August 6, 2003 as well as on August 31, 2002, the partners and their ownership interests of the Partnership were as follows:

Partner Name

Type

Ownership interest

NBPCo., L.L.C.

General

        2.5034

%

USPBCo., L.L.C.

General

0.4966

Farmland

Limited

68.7100

U.S. Premium Beef

Limited

28.2900

100.0000

%

NOTE 2.  BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Basis of Presentation

The aggregate purchase price for the Transaction described in Note 1 above was $236.8 million (including approximately $4.8 million of transaction costs), of which $190.8 million was funded through various incremental debt instruments, and the remainder funded through contributed or retained equity. The Transaction and the financial statements of the Acquired Interest provided herein have been accounted for as a purchase in accordance with SFAS No. 141 and EITF 88-16.

Accounting principles generally accepted in the United States of America require NBP's operating results prior to the Transaction to be reported as the results of the Predecessor for periods prior to August 7, 2003 in the historical financial statements. NBP's operating results subsequent to the Transaction are presented as the Successor's results in the historical financial statements and include the fiscal years ended August 27, 2005, August 28, 2004 and the 24 days ended August 30, 2003. Since the assets and liabilities of NBP are presented on a new basis of accounting, the financial information for NBP is not comparable to the financial information of FNBPC prior to August 7, 2003. Certain prior year amounts have been reclassified in order to conform to the current year presentation.

F-48



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidation

The consolidated financial statements include the accounts of NBP and its direct and indirect subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Fiscal Year

NBP's fiscal year consists of 52 or 53 weeks, ending on the last Saturday in August. Fiscal 2005, 2004 and 2003 were 52 week fiscal years. All references to years in these notes to consolidated financial statements represent fiscal years unless otherwise noted.

Use of Estimates

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, using management's best estimates and judgments where appropriate. These estimates and judgments affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results could differ materially from these estimates and judgments.

Cash and Cash Equivalents

NBP considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. As of August 27, 2005, NBP had cash and cash equivalents of $33.9 million, including $3.9 million restricted to IRB approved expenditures.  As of August 28, 2004, NBP had cash and cash equivalents of $28.0 million, including $8.4 million restricted to IRB approved expenditures.

Allowance for Returns and Doubtful Accounts

The allowance for returns and doubtful accounts is NBP's best estimate of the amount of probable returns and credit losses in NBP's existing accounts receivable. NBP determines these allowances based on historical experience and management's judgments. Specific accounts are reviewed individually for collectibility.

Inventories

Inventories consist primarily of meat products and supplies. Product inventories are stated at the lower of cost or market. The cost of inventories of the beef-packing operation, except supply inventories, is determined using the first-in, first-out (FIFO) method or market. The cost of all other inventories is determined using FIFO, specific, or average cost methods. The components of inventories are as follows (amounts in thousands):

F-49



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

  

  

August 27, 2005

August 28, 2004

Product inventories:

  

  

       Dressed and boxed meat products

  

$

66,993

  

$

67,801

       Beef by-products

  

8,476

  

9,158

       Supplies

  

9,957

  

9,003

  

$

85,426

  

$

85,962

  

  

Property, plant and equipment

Property, plant and equipment purchased as part of the Transaction were recorded at estimated fair value, based on independent appraisals, to the extent of the approximately 71.2% change in ownership. Purchases of property, plant and equipment subsequent to the Transaction date, August 6, 2003, are recorded at cost. Accumulated depreciation as of the Transaction date was reclassified as a reduction of property, plant and equipment. Property, plant, and equipment are depreciated principally on a straight-line basis over the estimated useful life (based upon original acquisition date) of the individual asset by major asset class as follows:

Buildings and improvements

15 to 25 years

Machinery and equipment

  2 to 8 years

Trailers and automotive equipment

  2 to 4 years

Furniture and fixtures

  3 to 5 years

Upon disposition of these assets, any resulting gain or loss is included in operations. Major repairs and maintenance costs that extend the useful life of the related assets are capitalized. Normal repairs and maintenance costs are charged to operations.

NBP capitalizes the cost of interest on borrowed funds which are used to finance the construction of certain property, plant, and equipment. Such capitalized interest costs are charged to the property, plant, and equipment accounts and are amortized through depreciation charges over the estimated useful lives of the assets. Interest capitalized was $0.0 million, $0.1 million, $0.02 million, and $0.2 million for the fiscal years ended August 27, 2005 and August 28, 2004, the 24 days ended August 30, 2003, and the 340 days ended August 6, 2003, respectively.

NBP reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is assessed based on estimated undiscounted future cash flows. Impairment, if any, is recognized based on fair value of the assets. Assets to be disposed of are reported at the lower of cost or fair value less costs to sell, and are no longer depreciated.

Debt Issuance Costs

Costs related to the issuance of debt are capitalized and amortized to interest expense using the straight line method, which approximates the effective interest method, over the period the debt is outstanding. In fiscal year 2003, NBP capitalized $10.3 million in debt issuance costs associated with the credit facility and with the issuance of Senior Notes. Effective December 30, 2004, NBP amended and restated its existing senior credit facility with a consortium of banks, additionally capitalizing $1.7 million in debt issuance costs.  The amendment and restatement is within the scope of the Emerging Issues Task Force (EITF) 96-19, Debtor's Accounting for a Modification or Exchange of Debt Instruments as well as EITF 98-14, Debtor's Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements.  In accordance with that guidance, a portion of the unamortized loan costs of approximately $2.6 million from the previous credit facility as well as additional finance and legal charges associated with the new amended and restated credit facility of approximately $0.6 million were expensed during the fiscal year ended August 27, 2005.  The remaining costs are being amortized over the life of the related debt instruments.  Amortization of $1.2 million, $1.7 million and $0.1 million was charged to interest expense during the fiscal years ended August 27, 2005 and August 28, 2004 and the 24 days ended August 30, 2003, respectively, related to these costs.  During the 340 days ended August 6, 2003, the Predecessor expensed the unamortized portion of $1.6 million of debt issuance costs associated with the credit facility prior to its amendment.  The Company had unamortized costs of $7.2 million and $8.7 million for the fiscal years ended August 27, 2005 and August 28, 2004, respectively.

F-50



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Goodwill and Other Intangible Assets

SFAS No. 142, Goodwill and Other Intangible Assets, provides that goodwill and other intangible assets with indefinite lives shall not be amortized but shall be tested for impairment on an annual basis. Identifiable intangible assets with definite lives are amortized over their estimated useful lives.  NBP evaluates goodwill and other indefinite life intangible assets annually for impairment and, if there is impairment, the carrying amount of goodwill and other intangible assets is written down to the implied fair value.  For goodwill, this test involves comparing the fair value of each reporting unit to the unit's book value to determine if any impairment exists.  NBP calculates the fair value of each reporting unit using estimates of future cash flows.  In connection with the Transaction, NBP recognized excess cost over the fair value of the net tangible and identifiable intangible assets acquired, and recorded this excess as goodwill, which has been allocated to the Core Beef segment.  See Note 3 for a discussion of the purchase accounting associated with the Transaction and the determination of goodwill.  In accordance with SFAS 142, goodwill was tested for impairment and, as of August 27, 2005, management determined there was no impairment.

Goodwill prior to the Transaction related to the initial formation of FNBPC and subsequent acquisition of the Dodge City, Kansas facility and represented the excess of the cost over the fair value of the net assets acquired. Goodwill had been amortized on a straight-line basis over twenty-five years.

In connection with the Transaction, intangible assets were identified and valued by an independent third party. As a result of this valuation, to the extent of the approximately 71.2% change of ownership, Trademarks were recorded at $20.4 million and Customer Relationships were recorded at $11.3 million. Trademarks are not scheduled for amortization due to their expected indefinite useful life. NBP will amortize the recorded fair value of the Customer Relationships over 7 years on a straight-line basis. For the fiscal years ended August 27, 2005 and August 28, 2004 and for the 24 days ended August 30, 2003, NBP recognized $1.6 million, $1.5 million and $0.2 million, respectively, of amortization expense. The following table reflects the anticipated amortization expense relative to intangible assets recognized in NBP's balance sheet as of August 27, 2005, for each of the next five years and thereafter:

  

(Dollars in thousands)

Estimated amortization expense for fiscal years ended:

  

2006

  

$

1,613

2007

  

$

1,613

2008  (1)

  

$

1,644

2009

  

$

1,613

2010

  

$

1,505

Thereafter

  

$

-  

______

(1)

FYE 2008 consists of 53 weeks.

Overdraft Balances

The majority of NBP's bank accounts are zero balance accounts where cash needs are funded as checks are presented for payment by the holder. Checks issued pending clearance that result in overdraft balances for accounting purposes are included in the trade accounts payable and cattle purchases payable balances, and the change in the related balances are reflected in financing activities on NBP's statement of cash flows. Overdraft balances of $62.1 million and $56.3 million were included in trade accounts and cattle purchases payables at August 27, 2005 and August 28, 2004, respectively.

F-51



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Self-insurance

NBP is self-insured for certain losses relating to worker's compensation, auto liability, general liability and employee medical and dental benefits. NBP has purchased stop-loss coverage in order to limit its exposure to any significant levels of claims. Self-insured losses are accrued based upon NBP's estimates of the aggregate uninsured claims incurred using actuarial assumptions accepted in the insurance industry and NBP's historical experience rates.

Environmental Expenditures and Remediation Liabilities

Environmental expenditures that relate to current or future operations and which improve operational capabilities are capitalized at time of expenditure. Expenditures that relate to an existing or prior condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated.

Foreign Currency Translation

NBP has representative offices located in Tokyo, Japan and Seoul, South Korea. The primary activity of these offices is to assist customers with product and order related issues. For foreign operations, the local currency is the functional currency. Translation into U.S. dollars is performed for assets and liabilities at the exchange rates as of the balance sheet date. Income and expense accounts are translated at average exchange rates for the period. Adjustments resulting from the translation are reflected as a separate component of other comprehensive income.

Income Taxes

The provision for income taxes is computed on a separate legal entity basis. Accordingly, the separate legal entity of NBP does not provide for income taxes as the results of operations are included in the taxable income of the individual members. However, to the extent that subsidiary entities provide for income taxes, deferred tax assets and liabilities are recognized based on the differences between the financial statement and tax bases of assets and liabilities at each balance sheet date using enacted tax rates expected to be in effect in the year the differences are expected to reverse, and are thus included in the consolidated financial statements of NBP.

Fair Value of Financial Instruments

The carrying amounts of NBP's financial instruments, including cash and cash equivalents, short-term trade receivables and payables, approximate their fair values due to the short-term nature of the instruments. At August 27, 2005, the Senior Notes had a carrying value of $160.0 million and an approximate fair value of $166.7 million, based on a calculation using a weekly High Yield Market report prepared by Deutsche Bank.  The carrying value of other debt also approximates its fair value at August 27, 2005, as substantially all such debt has a variable interest rate.

Revenue Recognition

NBP recognizes revenue from the sale of products at the time of shipment, when NBP determines the risk of loss has transferred, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists, and the price is fixed or determinable. National Carriers, Inc. recognizes revenue when shipments are complete.

Shipping Costs

Pass-through finished goods delivery costs reimbursed by customers are reported in sales, while an offsetting expense is included in cost of sales.

F-52



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Advertising and Promotion Expenses

Advertising and promotion expenses are charged to operations in the period incurred and were $2.5 million in FYE 2005, $1.7 million in FYE 2004, $0.09 million in the 24 day period ended August 30, 2003, and $1.3 million in the 340 day period ended August 6, 2003.

Comprehensive Income

Comprehensive income consists of net income and foreign currency translation adjustments. NBP deems its foreign investments to be permanent in nature and does not provide for taxes on currency translation adjustments arising from converting the investment in a foreign currency to U.S. dollars.

Derivatives and Hedging Activities

NBP uses futures contracts in order to reduce exposure associated with entering into firm commitments to purchase live cattle at a price determined prior to the delivery of the cattle as well as firm commitments to sell certain beef at a sales price determined prior to shipment. In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, NBP accounts for these futures contracts and their related firm commitments at fair value. Most firm commitments are treated as "normal purchases and sales" and are not marked to market.  SFAS No. 133 imposes extensive record-keeping requirements in order to treat a derivative financial instrument as a hedge for accounting purposes. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the instrument and the related change in value of the underlying commitment. For derivatives that qualify as effective hedges, the change in fair value has no net impact on net income until the hedged transaction affects net income. For derivatives that are not designated as hedging instruments, or for the ineffective portion of a hedging instrument, the change in fair value does affect current period net earnings. While management believes each of these instruments help mitigate various market risks, they are not designated and accounted for as hedges under SFAS No. 133 as a result of the extensive record-keeping requirements of this statement. Accordingly, the gains and losses associated with the change in fair value of the instrument and the offsetting gains and losses associated with changes in the market value of certain of the firm commitments related to the futures contracts are recorded to income and expense in the period of change.

The fair value of derivative assets is recognized within other current assets, while the fair value of derivative liabilities is recognized within accrued liabilities. The net fair value of derivatives recognized within other current assets and other accrued liabilities at August 27, 2005 and August 28, 2004 is not significant.

NOTE 3.  PURCHASE ACCOUNTING 

The Transaction described in Note 1 has been accounted for using the purchase method of accounting as of August 6, 2003. The allocation of the purchase price to the net assets acquired has been performed in accordance with SFAS 141, giving consideration to EITF 88-16 and resulted in goodwill of approximately $78.9 million. Previously unamortized goodwill of $12.2 million was eliminated in the Transaction. The beginning equity of NBP reflects the predecessor basis of U.S. Premium Beef's interest in FNBPC plus the cash contributed by U.S. Premium Beef and the new members, and the contribution of earned deferred compensation by certain members of management. The calculation of the allocated purchase price for the Transaction, as presented below, reflects the net book value of the business as of August 6, 2003. In addition, the allocation of the purchase price reflects the fair value of the individual assets acquired and liabilities assumed to the extent of the approximate 71.2% change in ownership.

The purchase of the controlling interest was consummated by U.S. Premium Beef following the bankruptcy of Farmland in order to maintain its relationship with NBP.

F-53



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following details the adjustment to historical net book values based on the fair values of acquired assets and liabilities included in the Transaction. The adjustment to historical net book values of acquired assets and liabilities of the Acquired Interest is calculated as follows:

(in thousands)

Total purchase price and other consideration for Acquired Interest

  

$

232,000

Fees and expenses

  

4,821

  

  

$

236,821

Net book value of Acquired Interest on August 6, 2003

  

(114,635

  

Excess purchase price to be allocated

  

$

122,186

  

Amount allocated to:

  

Property, plant & equipment

  

51,738

Trademarks

  

20,438

Customer relationships

  

11,323

Goodwill

  

38,687

  

Excess purchase price allocated

  

$

122,186

  

U.S. Premium Beef basis in FNBPC

  

91,447

Net book value of U.S. Premium Beef interest on August 6, 2003

  

(51,276

  

Excess of U.S. Premium Beef basis over net book value at  August 6, 2003
   attributable to goodwill

  

40,171

  

Goodwill reconciliation:

  

Allocated to goodwill from Acquired Interest

  

38,687

Excess U.S. Premium Beef basis attributable to goodwill

  

40,171

  

Total goodwill

  

$

78,858

  

 

Prior to the Transaction, U.S. Premium Beef held an approximate 28.8% ownership interest in FNBPC that was acquired in two transactions with Farmland, the former parent of NBP. In connection with the acquisition of this interest, U.S. Premium Beef paid an amount in excess of the proportionate underlying book value of the net assets acquired that amounted to $40.2 million. Because U.S. Premium Beef held a minority interest in FNBC, this excess investment, which was attributed to goodwill, was not recorded in the FNBPC financial statements. As a result, U.S. Premium Beef's predecessor basis in FNBPC was $40.2 million higher than its proportionate 28.8% of the underlying net book value of FNBPC.

As a result of the Transaction and in accordance with EITF 88-16, U.S. Premium Beef carried over its predecessor basis, resulting in the recognition of the $40.2 million of goodwill in the Successor Entity's financial statements.

Pro forma revenue would be unchanged for the periods presented. Pro forma net income (unaudited) as if the Transaction occurred on the first day of the period presented below is as follows:

 

(in thousands)

340 day period ended August 6, 2003

  

$

51,442

 F-54



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4.  LONG-TERM DEBT AND LOAN AGREEMENTS

NBP entered into various debt agreements in order to finance the Transaction described in Note 1 and provide liquidity to operate the business on a going forward basis. As of August 27, 2005 and August 28, 2004, debt consisted of the following:

August 27,
 2005

  

August 28,
2004

(in thousands)

Short-term debt:

  

     Revolving credit facility (a)

$

-  

    $

-  

     Current portion of long-term debt (term loan) (a)

-  

  

9,375

     Current portion of capital lease obligations (d)

-  

  

78

-  

  

9,453

Long-term debt:

  

     Term loan facility, net of current portion (a)

120,000

  

109,375

     Senior notes (b)

160,000

  

160,000

     Industrial Development Revenue Bonds (c)

13,850

  

13,850

     Revolving credit facility (a)

15,000

  

42,059

     Long-term capital lease obligations & other (d)

-  

  

350 

308,850

  

325,634

Total debt

$

308,850

      $

335,087


(a)      Senior Credit Facilities- Effective December 30, 2004, NBP amended and restated its existing senior credit facility with a consortium of banks which allow borrowings from time to time under a $120.0 million term loan that matures in December 2014 and a $140.0 million revolving line of credit loan that is subject to certain borrowing base limitations and that matures in December 2009.  The amended and restated credit facility is secured by a first priority lien on substantially all of the Company's assets.  At the Company's election, interest may be computed at the Base Rate (as defined in the credit agreement) plus an applicable margin or a LIBOR rate plus an applicable margin.  As of August 27, 2005, the interest rate for the term loan was equal to LIBOR plus 275 basis points (6.1%) and the weighted average interest rate for the revolving loan was equal to LIBOR plus 250 basis points (6.0%).  The amended and restated credit facility also contains a provision for a conversion to more favorable interest rates and more restrictive financial covenants on the earlier of (a) June 1, 2006 or (b) NBP's election (the Conversion Date).  After the Conversion Date the interest rate for the term loan and revolving loan will be determined by reference to a matrix of rates keyed to NBP's funded debt to EBITDA ratio.  A fee of 0.5% per annum is payable quarterly on the daily average unused amount of the revolving credit facility, and this fee also will vary after the Conversion Date depending on the Company's funded debt to EBITDA ratio.

Availability. Availability under the revolving credit facility is subject to a borrowing base. The borrowing base is based on NBP's and certain of its domestic wholly owned subsidiaries' assets. The borrowing base consists of percentages of NBP's eligible accounts receivable, inventory and supplies less certain eligibility and availability reserves. NBP is required to report the borrowing base on a monthly basis and, as a result, the availability under the senior credit facilities is subject to change. At August 27, 2005, NBP's amended and restated credit facility consisted of a $120.0 million term loan, of which $120.0 million was outstanding, and a $140.0 million revolving line of credit loan, which had outstanding borrowings of $15.0 million, outstanding letters of credit of $44.0 million and available borrowings of $74.1 million, based on the most restrictive financial covenant calculation.

Repayment and Prepayment. The principal amount outstanding under the term loan is due and payable in equal quarterly installments of $6.0 million on the last business day of each March, June, September and December commencing on March 31, 2010 and ending on December 29, 2014.  Prepayment is allowed at any time.

F-55



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The revolving credit facility terminates and all amounts outstanding thereunder must be repaid in full on the fifth anniversary of the closing date.

Affirmative Covenants. NBP's senior credit facilities contain customary affirmative covenants, including providing financial statements, insurance, conduct of business, maintenance of properties, etc.

Negative Covenants. NBP's senior credit facilities contain customary negative covenants, including covenants restricting the Company's ability to incur additional indebtedness, sell or dispose of assets, make capital expenditures, pay certain dividends and prepay or amend certain indebtedness, among other restrictions.

Financial Covenants. These facilities also impose certain financial covenants.  From December 30, 2004 until the Conversion Date, NBP is required to  (i) have as of the end of each fiscal quarter a minimum four-quarter rolling EBITDA of $50.0 million and (ii) maintain at all times a minimum Borrowing Base Availability (as defined in the credit agreement) of at least $25.0 million.  As defined in the amended credit facility, EBITDA contains specified adjustments.  On August 27, 2005, NBP was in compliance with all financial covenants under its senior credit facilities.

After the Conversion Date, NBP will be subject to the following financial covenants:

(i)        A maximum Funded Debt to EBITDA Ratio, as follows:

Funded Debt

to EBITDA

Fiscal Quarter Ended

4.50 to 1.00

August 31, 2005 through May 31, 2006

4.25 to 1.00

August 31, 2006 through November 30, 2006

4.00 to 1.00

February 28, 2007 through May 31, 2007

3.75 to 1.00

August 31, 2007 and thereafter

(ii)       A maximum Senior Secured Funded Debt to EBITDA Ratio, as follows:

Senior Secured
Funded Debt

to EBITDA Ratio

Fiscal Quarter Ended

3.25 to 1.00

August 31, 2005 through May 31, 2006

2.75 to 1.00

August 31, 2006 and thereafter

(iii)      A minimum four-quarter rolling EBITDA as follows:

EBITDA

Fiscal Quarter Ended

$72,000,000

August 31, 2005 through May 31, 2006

$75,000,000

August 31, 2006 through May 31, 2007

$85,000,000

August 31, 2007 and thereafter

(iv)      A minimum four-quarter rolling Debt Service Coverage Ratio as follows:

Debt Service Coverage Ratio

Fiscal Quarter Ended

2.00 to 1.00

August 31, 2005 and thereafter

Effective July 7, 2005, the amended and restated senior credit facility was amended to allow NBP to purchase up to $30 million in cumulative purchase price (including any premium) of its 10‑1/2% Senior Notes due August 1, 2011 so long as NBP is not in default under the facility at the time of the purchase or as a result of the purchase.

F-56



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Effective October 14, 2005, the amended senior credit facility was further amended to reflect changes in the covenant limiting NBP's net capital expenditures.  There were no changes to the remaining covenants in the credit facility.  NBP's net capital expenditures are now limited to amounts in each period as follows:  $64 million in the combined period of FYE 2005 and FYE 2006, $35 million in FYE 2007 and $40 million in FYE 2008 and fiscal years thereafter.  Prior to this amendment, FYE 2005 and FYE 2006 were separately limited to $32 million each year.

(b)

Senior Notes-In connection with the Transaction, on August 6, 2003, NBP issued $160.0 million of its 10 1/2% Senior Notes due 2011. The Senior Notes will mature on August 1, 2011. Interest on the Senior Notes is payable semi-annually in arrears on August 1 and February 1 of each year, and commenced on February 1, 2004. The Senior Notes are senior unsecured obligations, ranking equal in right of payment with all other senior unsecured obligations of NBP. With limited exceptions, the Senior Notes are not redeemable before August 1, 2007. During the 12 month period commencing August 1, 2007 and August 1, 2008, the Senior Notes may be redeemed at 105.250% and 102.625%, respectively, of the principal amount. Thereafter, the Senior Notes may be redeemed at 100% of face value. The Indenture governing the Senior Notes contains certain covenants that restrict NBP's ability to:

  • incur additional indebtedness;

  • make restricted payments;

  • sell assets;

  • direct NBP's restricted subsidiaries to pay dividends or make other payments;

  • create liens;

  • merge or consolidate with another entity; and

  • enter into transactions with affiliates.

As of August 27, 2005, NBP was in compliance with all covenants associated with the Senior Notes.

NB Finance Corp., a wholly-owned finance subsidiary of NBP, is a co-issuer on a joint and several basis with NBP of the Senior Notes. NB Finance Corp. has nominal assets and conducts no business or operations. There are no significant restrictions on the ability of subsidiaries to transfer funds to NBP.

(c)

Industrial Development Revenue Bonds- In conjunction with the amendment and restatement of the Company's credit facility, effective December 30, 2004, NBP entered into a transaction with the City of Dodge City, Kansas, in order to provide property tax savings to NBP.  Under the transaction, the City purchased NBP's Dodge City facility (the "facility") by issuing $102.3 million in bonds due in December 2014, and leased the facility to NBP for an identical term under a capital lease.  The City's bonds were purchased by the Company using proceeds of its term loan under the amended and restated credit facility.  Because the City has assigned the lease to the bond trustee for the benefit of NBP as the sole bondholder, NBP, in effect, controls enforcement of the lease against itself.  As a result of the capital lease treatment, the facility will remain a component of property, plant and equipment in NBP's consolidated balance sheet.  As a result of the legal right of offset, the capital lease obligation and the corresponding bond investments have been eliminated in consolidation.  The transaction provides NBP with property tax exemptions for the leased facility, which, after netting payments to the City and local school district under payment in lieu of tax agreements, result in an annual property tax savings of approximately 25%.  The facility remains subject to a prior mortgage and security interest in favor of the lenders under the senior credit facility.  Additional revenue bonds may be issued to cover the costs of certain improvements to this facility.  The total amount of revenue bonds authorized for issuance is $120.0 million.

F-57



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In 1999 and 2000 the cities of Liberal and Dodge City, Kansas issued an aggregate of $13.8 million of industrial development revenue bonds on the Predecessor's behalf to fund the purchase of equipment and construction improvements at NBP's facilities in those cities. These bonds were issued in four series of $1.0 million, $1.0 million, $6.0 million and $5.8 million and are due on February 1, 2029, March 1, 2027, March 1, 2015 and October 1, 2009. These bonds were assumed by NBP in connection with the Transaction. Pursuant to a lease agreement, NBP leases the facilities, equipment and improvements from the respective cities and makes lease payments in the amount of principal and interest due on the bonds. After giving effect to the Transaction, each series of bonds are backed by a letter of credit under NBP's senior credit facilities.

The 1999 and 2000 issued bonds are variable rate demand obligations that bear interest at a rate that is adjusted weekly, which rate will not exceed 10% per annum. The per annum interest rate for each series of bonds was 2.3% in 2005, 1.3% in 2004 and 1.5% in 2003. NBP has the option to redeem a series of bonds at any time for an amount equal to the principal plus accrued interest to the date of such redemption. The holders of the bonds have the option to tender the bonds upon seven days' notice for an amount equal to par plus accrued interest. To the extent that the remarketing agent for the bonds is unable to resell any of the bonds that are tendered, the remarketing agent will use the letter of credit to fund such tender.

An event of default would occur under the lease agreements if NBP fails to make any lease payment or other required payment, if a petition of bankruptcy is filed by or against NBP, if a receiver is appointed on NBP's behalf, or if NBP fails to observe and perform any covenant, condition, obligation or agreement under the lease agreements.

(d)

Capital and Operating Leases-NBP leases a variety of buildings and equipment, as well as tractors and trailers subsequent to the acquisition of National Carriers in March 2003, under operating lease agreements that expire in various years. Future minimum lease payments required at August 27, 2005, under capital leases and non-cancelable operating leases with terms exceeding one year, are as follows:

 

Capital
Lease
Obligations

Non-cancelable
Operating Lease
Obligations

(in thousands)

 

For the fiscal years ended August

 

2006

$

-  

$

8,514

 

2007

-  

7,067

 

2008

-  

6,115

 

2009

-  

 

4,109

 

2010

-  

 

3,650

 

Thereafter

-  

 

5,507

 

 

 

Net minimum lease payments

-  

 

$

34,962

 

Less: Amount representing interest

-  

 

 

Present value of net minimum lease payments

$

-  

 

Effective August 31, 2005, NBP acquired a material handling system for its Liberal, Kansas, beef facility under a capital lease obligation for five years.  Future minimum lease payments are $1.0 million each year for the fiscal years ended 2006, 2007, 2008, 2009 and 2010, respectively.

Rent expense associated with operating leases was $10.6 million, $8.5 million, $0.4 million, and $5.0 million, for fiscal years 2005, 2004, the 24 days ended August 30, 2003, and the 340 days ended August 6, 2003, respectively. NBP expects that it will renew lease agreements or enter into new leases as the existing leases expire.

F-58



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Utilities Commitment-Not included in the table above are the obligations under an agreement for a utilities commitment at the Dodge City, Kansas, facility.  In orderable to meet the continuing growth needs for water and wastewater services of the Dodge City facility, effective December 30, 2004, NBP entered into a services agreement for the city to provide NBP water and wastewater services at a price and term sufficient to permit the city to recoup up to one-half of the capital cost of providing fresh water service from a parcel of land owned by NBP 11 miles south of Dodge City, and of providing upgraded city wastewater facilities to help service the needs of the Dodge City facility.  The city sold twenty year municipal bonds to pay for these improvements and NBP has committed to make a series of service charge payments totaling $19.3 million over a 20 year period, of which $0.8 million was paid in fiscal year 2005.  Payments under the commitment will be $1.2 million in fiscal year 2006, $1.4 million in fiscal year 2007, $1.4 million in fiscal year 2008, $1.4 million in fiscal year 2009, and $1.7 million in fiscal year 2010, with the remaining balance of $11.4 million to be paid in subsequent years. 

Additionally, NBP makes a verbal commitment to cattle producers to purchase cattle about one week in advance of delivery of the live animals to its plants, with the actual price paid for the cattle determined after the cattle are delivered and inspected at the Company's facilities.   NBP's estimated cattle commitments as of August 27, 2005 were $61.0 million.

The aggregate minimum principal maturities of the long-term debt for each of the five fiscal years and thereafter following August 27, 2005, are as follows:

  

Minimum Principal
Maturities

(in thousands)

Fiscal Year ending August:

  

2006

  

$

-  

2007

  

-  

2008

  

-  

2009

  

-  

2010

  

32,850

Thereafter

  

276,000

Total minimum principal maturities

  

$

308,850

As of August 27, 2005, NBP had approximately $148.8 million of secured debt outstanding, approximately $44.0 million of outstanding letters of credit and approximately $74.1 million of availability, based on the most restrictive financial covenant ratio calculation, under its revolving credit facility.

NOTE 5.  RETIREMENT PLANS

NBP, and prior to the Transaction, the Predecessor, maintain a tax-qualified employee savings and retirement plan (together, the 401(k) Plan) covering NBP's non-union employees. Pursuant to the 401(k) Plan, eligible employees may elect to reduce their current compensation by up to the lesser of 75% of their annual compensation or the statutorily prescribed annual limit and have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan provides for additional matching contributions by NBP, based on specific terms contained in the 401(k) Plan. The trustee of the 401(k) Plan, at the direction of each participant, invests the assets of the 401(k) Plan in designated investment options. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code. Expenses related to the 401(k) Plan totaled approximately $0.7 million for the fiscal year ended August 27, 2005, $0.5 million for fiscal year ended August 28, 2004, $0.0 million for the 24 days ended August 30, 2003 and $0.5 million for the 340 days ended August 6, 2003. 

NBP has agreed to make contributions to the United Food & Commercial Workers International Union-Industry Pension Fund (the UFCW Plan) for employees covered by a collective bargaining agreement as provided for in that agreement.  Expenses related to the UFCW Plan totaled approximately $0.6 million for fiscal year ended August 27, 2005, $0.6 million for fiscal year ended August 28, 2004, $0.0 million for the 24 days ended August 30, 2003 and $0.5 million for the 340 days ended August 6, 2003.

F-59



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Postretirement Benefits- Certain former employees are covered by an unfunded postretirement benefit plan that provides medical and dental benefits.  Costs associated with this plan, which relate primarily to insurance premiums, benefit payments and changes in the accumulated benefit obligation were approximately $0.1 million, $1.9 million, $0.0 million, and $0.2 million for fiscal years 2005 and 2004, the 24 days ended August 30, 2003, and the 340 days ended August 6, 2003, respectively, and are included in cost of sales. 

The health care trend rate used to value the accumulated benefit obligation at August 27, 2005 is a rate of 9% per year, declining by 1% per year to an ultimate rate of 5% in 2009 and thereafter.  The discount rate used to value the accumulated benefit obligation is 6.25%.  The unfunded accumulated benefit obligation was $3.6 million and $3.7 million at August 27, 2005 and August 28, 2004, respectively, and has been recorded as a liability in the financial statements.

NOTE 6.  OTHER INCOME

Investments-Other income includes income and expense related to NBP's investment in aLF Ventures, LLC. aLF Ventures, LLC was formed on August 2, 2001 and since that date FNBPC and NBP have accounted for this investment using the equity method. Losses for the fiscal years 2005 and 2004 and for the 24 days ended August 30, 2003 were $0.6 million, $0.8 million and $0.0 million, respectively. A loss of $1.3 million was recorded for the 340 days ended August 6, 2003.

Miscellaneous- Other, net expenses were $2.6 million in FYE 2005 compared to income of $2.2 million in FYE 2004, a variance of $4.8 million.   Fiscal year ended August 27, 2005 includes approximately $3.2 million in expense for the write-off of unamortized loan costs associated with amending and restating NBP's existing senior credit facility, offset by $0.5 million gain related to the securities received through the demutualization of a company which held annuities for NBP employees.  Fiscal year ended August 28, 2004 includes approximately $1.1 million gain NBP received through the demutualization of a company which held annuities for NBP employees.  Other income for the 24 days ended August 30, 2003 includes fees associated with a bridge loan commitment obtained in connection with the Transaction of approximately $1.7 million.  Other income includes approximately $2.3 million for the 340 days ended August 6, 2003, which represents the proceeds from the settlement of a class action lawsuit against the manufacturers of certain vitamins.

criteria.

     

F-60



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7.  INCOME TAXES  

Income tax expense/(benefit) includes the following current and deferred provisions (amounts in thousands):

Successor Entity

Predecessor Entity

National Beef Packing Company, LLC and Subsidiaries

Farmland National Beef Packing Company, L.P. and Subsidiaries

52 weeks ended

52 weeks ended

24 days ended

340 days ended

August 27, 2005

August 28, 2004

August 30, 2003

August 6, 2003

Current Provision

Federal

$

1,177

$

480

$

(70

)

$

501

State

359

75

(12

)

89

Foreign

12

20

(3

)

4

Total current tax expense

1,548

575

(85

)

594

Deferred Provision

Federal

263

131

9

(252

)

State

48

23

2

(45

)

Foreign

-

-

-

-

Total deferred tax expense

311

154

11

(297

)

Total income tax expense/(benefit)

$

1,859

$

729

$

(74

)

$

297

Income tax expense differed from the "expected" income tax (computed by applying the federal income tax rate of 35% to earnings before income taxes) as follows:

Successor Entity

Predecessor Entity

National Beef Packing Company, LLC and Subsidiaries

Farmland National
Beef Packing Company, L.P. and
Subsidiaries

52 weeks ended

52 weeks ended

24 days ended

340 days ended

August 27, 2005

August 28, 2004

August 30, 2003

August 6, 2003

Computed "expected" income tax expense

$

7,923

$

15,659

$

3,674

$

27,565

Passthrough income

(6,258

)

(14,999

)

(3,772

)

(27,265

)

State taxes, net of federal

269

64

(7

)

29

Foreign tax rate differential

-

-

(3

)

4

Surtax exemption

(47

)

(18

)

-

(8

)

Other

(28

)

23

34

(28

)

Total income tax expense/(benefit)

$

1,859

$

729

$

(74

)

$

297

F-61



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at August 27, 2005 and August 28, 2004 are presented below:

  

August 27, 2005

  

August 28,2004

(in thousands)

Deferred tax assets

  

  

     Accounts receivable, due to allowance for doubtful accounts

  

$

             172

  

$

            165

     Self-insurance and workers compensation accruals

  

              1,605

  

              2,270

  

  

Total gross deferred tax assets

  

              1,777

  

              2,435

  

  

Deferred tax liabilities

  

  

     Plant and equipment, principally due to differences in depreciation

  

              820

  

              1,167

  

  

Total gross deferred tax liabilities

  

              820

  

              1,167

  

  

Net deferred tax assets

  

$

         957

  

$

         1,268

  

  

Net deferred tax assets and liabilities at August 27, 2005 and August 28, 2004 are included in the consolidated balance sheet as follows:

  

August 27, 2005

  

August 28,2004

(in thousands)

  

  

Other current assets

  

$

1,777

  

$

2,435

Other liabilities

  

                  820

  

                1,167

  

$

957

  

$

1,268

Deferred tax assets and liabilities relate to the operations of National Carriers, Inc.

There was no valuation allowance provided for at August 27, 2005 and August 28, 2004. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets.

NOTE 8.  RELATED PARTY TRANSACTIONS

The Predecessor had transactions in the normal course of business with Farmland or affiliated companies. Sales transactions were based upon prevailing market prices, and purchases were on terms no less favorable to the Predecessor than would be obtained from an unaffiliated party.

NBP entered into various transactions with a company affiliated with NBPCo Holdings in the ordinary course of business. Sales transactions were based upon prevailing market prices, and purchases were on terms no less favorable to NBP than would be obtained from an unaffiliated party.

 F-62



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the fiscal years ended August 27, 2005 and August 28, 2004, the 24 days ended August 30, 2003, and the 340 days ended August 6, 2003, NBP had sales and purchases with the following related parties:

Successor Entity

 

Successor Entity

 

Successor Entity

 

Predecessor Entity

National Beef
Packing
 Company, LLC
and Subsidiaries 

 

National Beef
Packing
 Company, LLC
and Subsidiaries 

 

National Beef
Packing
 Company, LLC
 and Subsidiaries 

 

 Farmland
 National Beef
 Packing
Company, L.P.
and Subsidiaries 

52 weeks ended

 

52 weeks ended

 

24 days ended

 

340 days ended

August 27, 2005

 

August 28, 2004

 

August 30, 2003

 

August 6, 2003

(in thousands)

Sales to:

Beef Products, Inc. (1)

 $

61,227

 $

52,701

 $

1,865 

 $

                       -

Farmland Foods, Inc. (2)

-

-

-

47,689 

National Carriers, Inc. (3)

-

-

-

341 

Total sales to affiliates

 $

61,227 

 $

52,701 

 $

1,865 

 $

48,030 

Purchases from:

Beef Products, Inc. (1)

 $

19,139 

 $

16,746 

 $

1,145 

 $

                       -

Farmland Foods, Inc. (2)

-

-

-

37,431 

National Carriers, Inc. (3)

-

-

-

25,255 

Total purchases from affiliates

 $

19,139 

 $

16,746 

 $

1,145 

 $

62,686 

________

(1)

Beef Products, Inc. is an affiliate of NBPCo Holdings, LLC.

(2)

Farmland Foods, Inc. is no longer considered a related party as of August 7, 2003 due to the Transaction. Only those sales and purchases prior to August 7, 2003 are included.

(3)

National Carriers, Inc. was acquired by the Predecessor on March 28, 2003. Only those sales and purchases through that date are included.

Farmland Foods, Inc. was an affiliated company which was wholly owned by Farmland. Prior to its acquisition of National Carriers, the Predecessor contracted a significant portion of its freight services from National Carriers, a consolidated subsidiary as of March 28, 2003. Farmland Industries, Inc. and four of its subsidiaries, including Farmland Foods, Inc., filed voluntary petitions to reorganize under Chapter 11 of the United States Bankruptcy Code on May 31, 2002.

NBP subleased office space from Farmland. The Predecessor paid Farmland approximately $0.4 million for the 340 days ended August 6, 2003 for this office space.

NBP rents office space and a shop area to National Carriers for which it received rental payments from National Carriers in the amount of approximately $0.2 million for the 340 days ended August 6, 2003.

At August 27, 2005 and August 28, 2004, the amounts due from Beef Products, Inc. were approximately $2.5 million and $2.9 million, respectively.  At August 27, 2005 and August 28, 2004, the amounts due to Beef Products, Inc. were approximately $0.4 million and $0.4 million, respectively.

At August 27, 2005 and August 28, 2004, amounts representing checks drawn on U.S. Premium Beef bank accounts included in cattle commitments payable were $0.0 million and $12.0 million, respectively.

In December 1997, FNBPC entered into a contract with U.S. Premium Beef to purchase a portion of its annual cattle requirements. In connection with U.S. Premium Beef's purchase of its interest in Farmland National Beef, U.S. Premium Beef obtained the right, and became subject to the obligation, to deliver cattle annually to National Beef relative to: (i) U.S. Premium Beef's ownership in National Beef and (ii) the number of cattle processed annually by National Beef.  At the beginning of FYE 2005, U.S. Premium Beef converted to a limited liability company.  U.S. Premium Beef now facilitates the delivery of cattle annually to NBP through its individual producer-owners.  The purchase price for the cattle is determined by NBP's pricing grid, which, under the terms of the agreement with U.S. Premium Beef, must be competitive with the pricing grids of NBP's competitors and may not be less favorable than pricing grids offered to other suppliers.  During the fiscal year ended August 27, 2005, NBP obtained approximately 19% of its cattle requirements through this pricing grid process from U.S. Premium Beef and its producer-owners.  During the fiscal year ended August 28, 2004, the 24 days ended August 30, 2003, and the 340 days ended August 6, 2003, NBP obtained approximately 18%, 17%, and 22%, respectively, of NBP's cattle requirements from U.S. Premium Beef.

F-63



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In December 1998, the Predecessor entered into an aircraft lease agreement under which it leases a business jet aircraft from John R. Miller Enterprises, L.L.C., a Utah limited liability company of which John R. Miller, NBP's Chief Executive Officer, is the majority member. The term of the lease was for five years and could have been terminated by either John R. Miller Enterprises, L.L.C. or NBP on 90 days' prior written notice. During the fiscal years ended August 27, 2005 and August 28, 2004, the 24 days ended August 30, 2003, and the 340 days ended August 6, 2003, NBP paid $0.07 million, $ 0.2 million, $0.02 million, and $0.2 million, respectively, to lease the aircraft and $0.03 million, $ 0.07 million, $0.0 million, and $0.06 million, respectively, into an engine replacement reserve account. The funds in the reserve account are to be used to finance new engines installed on the aircraft.   The lease expired on December 15, 2003.  NBP still uses this aircraft on an as-needed basis, with the payment terms, including the payments into the engine replacement reserve account, essentially identical to the lease agreement, except the monthly usage payment is calculated on the actual hours used, not to exceed the monthly lease payment NBP paid while the lease was active.  There is currently no lease agreement in effect for this aircraft.

In March 2001, the Predecessor entered into an aircraft lease agreement under which it leased a business jet aircraft from John R. Miller Enterprises, L.L.C., a Utah limited liability company of which John R. Miller, NBP's Chief Executive Officer, is the majority member. The term of the lease automatically renews every 11 months unless either John R. Miller Enterprises, L.L.C. or NBP requests termination within 90 days of the end of the lease term. During the fiscal year ended August 28, 2004, the 24 days ended August 30, 2003 and the 340 days ended August 6, 2003, NBP paid $ 0.4 million, $0.04 million, and $0.5 million, respectively, to lease the aircraft and $0.05 million, $0.01 million, and $0.07 million, respectively, into an engine replacement reserve account. The funds in the reserve account are to be used to finance new engines installed on the aircraft.  This lease was terminated effective at the end of May 2004.

In October 2003, NBP entered into an aircraft lease agreement under which NBP leased a business jet aircraft from John R. Miller Enterprises III, L.L.C., a Utah limited liability company of which John R. Miller, NBP's Chief Executive Officer, is the beneficial owner. The term of the lease is 81 months. The monthly lease payments will range from $25,400 in the first year of the lease to $45,380 in the fourth year of the lease and thereafter, and are adjusted quarterly based on the change in the three month LIBOR interest rate.  During the fiscal years ended August 27, 2005 and August 28, 2004, NBP paid $0.5 million and $0.3 million, respectively, to lease the aircraft and $0.1 million and $0.08 million, respectively, into an engine replacement reserve account.  The funds in the reserve account are to be used to finance new engines installed on the aircraft.

In December 2004, NBP entered into an aircraft lease agreement under which it leases a business jet aircraft from John R. Miller Enterprises, L.L.C., a Utah limited liability company of which John R. Miller, NBP's Chief Executive Officer, is the beneficial owner. The term of the lease is 72 months. This aircraft replaces an aircraft leased from John R. Miller Enterprises, L.L.C. in March 2001.  The base monthly lease payments will range from $35,400 in the first year of the lease to $45,380 in the fourth year of the lease and thereafter, and are adjusted quarterly based on the change in the three month LIBOR interest rate.  During the FYE August 27, 2005, NBP paid $0.5 million to lease the aircraft and $0.06 million into an engine replacement reserve account.  The funds in the reserve account are to be used to finance new engines installed on the aircraft.    

F-64



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9.  CAPITAL SUBJECT TO REDEMPTION

At any time after certain dates, the earliest being July 31, 2008, the latest being July 31, 2011, certain members of management and/or NBPCo Holdings have the right to request that NBP repurchase their interests, the value of which to be determined by a mutually agreed appraisal process. If NBP is unable to effect the repurchase within a specified time, the requesting member(s) have the right to cause a sale process to commence. NBP accounts for changes in the redemption value of these interests by accreting the change over the period from the date of issuance to the earliest redemption date of the interest using the interest method. At August 27, 2005, the "Capital subject to redemption" was revalued by an independent appraisal process, and the value was determined to be $64.2 million.  Under the interest method, the carrying value of the "Capital subject to redemption" approximates the fair value of $64.2 million, as reflected in the accompanying Consolidated Balance Sheet as of August 27, 2005.

NOTE 10.  LEGAL PROCEEDINGS

Schumacher v. Tyson Foods, et al.  On July 1, 2002, a lawsuit was filed against Farmland National Beef Packing Company, L.P. (FNBPC or the predecessor to NBP), ConAgra Beef Company, Tyson Foods, Inc. and Excel Corporation in the United States District Court for the District of South Dakota seeking certification of a class of all persons who sold cattle to the defendants for cash, or on a basis affected by the cash price for cattle, during the period from April 2, 2001 through May 11, 2001 and for some period up to two weeks thereafter. The case was filed by three named plaintiffs on behalf of a putative nationwide class that plaintiffs estimate is comprised of hundreds or thousands of members. The complaint alleges that the defendants, in violation of the Packers and Stockyards Act of 1921, knowingly used, without correction or disclosure, incorrect and misleading boxed beef price information generated by the USDA to purchase cattle offered for sale by the plaintiffs at a price substantially lower than was justified by the actual and correct price of boxed beef during this period. Plaintiffs also seek recovery against all defendants under a theory of unjust enrichment.  The case was certified as a class-action matter in June of 2004. The plaintiffs claim damages against FNBPC in the amount of approximately $4.5 million plus prejudgment interest, attorneys' fees and court costs.  The claim will be reduced in an unknown amount by the number of class members who have opted out of the class.  The opt-out deadline was October 31, 2005, but the number of opt outs will not be known to the Company until plaintiffs file a report, which is due November 30, 2005.  Discovery has been completed.  Trial is set for April 3, 2006.  Management believes that FNBPC acted properly and lawfully in dealings with cattle producers. Management is currently unable to evaluate the outcome of this matter or to estimate the amount of potential loss, if any. In accordance with SFAS No. 5, Accounting for Contingencies, NBP has not established a loss accrual associated with this claim.

NBP is also a party to a number of other lawsuits and claims arising out of the operation of its business. Management believes the ultimate resolution of such matters should not have a material adverse effect on NBP's financial condition, results of operations or liquidity.

NOTE 11.  BUSINESS SEGMENTS 

In connection with the Transaction, NBP executed a management reporting reorganization wherein it created the single role of Chief Executive Officer, who serves as the Chief Operating Decision Maker (CODM). The CODM measures segment profit as operating income for Core Beef and Other, NBP's two reporting segments, based on the definitions provided in SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.

Core Beef-the majority of NBP's revenues are generated from the sale of fresh meat, which include chuck cuts, rib cuts, loin cuts, round cuts, thin meats, ground beef, and other products. In addition, we also sell beef by-products to the variety meat, feed processing, fertilizer and pet food industries. Aggregation criteria were applied to determine the constituents of the Core Beef segment.

F-65



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other-the Other segment of NBP consists of the operations of National Carriers, Inc., a refrigerated and livestock contract carrier company, and Kansas City Steak Company, LLC, a portion control steak cutting operation.

Eliminations-this line item includes eliminations of inter-segment and intra-segment activity resulting from the consolidation process.

The following table represents segment results for the periods indicated (amounts in thousands):

Successor Entity

 Predecessor Entity

National Beef Packing Company, LLC and Subsidiaries

 Farmland National
Beef Packing
Company, L.P. 
and Subsidiaries

52 weeks ended
August 27, 2005

52 weeks ended
August 28, 2004

24 days ended
August 30, 2003

340 days ended
August 6, 2003

Net sales

Core Beef

 $

4,350,616 

 $

4,151,809 

 $

285,541 

 $

3,463,935 

Other

187,852 

163,866 

15,534 

76,463 

Eliminations

(199,548)

(222,194)

(18,243)

(161,775)

Total

 $

4,338,920 

 $

4,093,481 

 $

282,832 

 $

3,378,623 

Depreciation and
   amortization

Core Beef

22,837 

19,134 

1,845 

16,916 

Other

1,612 

2,036 

210 

1,452 

Total

24,449 

21,170 

2,055 

18,368 

Operating income

Core Beef

48,460 

65,527 

14,119 

83,154 

Other

5,642 

3,532 

(216)

1,785 

Total

54,102 

69,059 

13,903 

84,939 

Interest income

380 

549 

41 

511 

Interest expense

(28,552)

(25,909)

(1,690)

(5,560)

Other income (expense)

(3,132)

1,355 

(1,755)

(1,011)

Minority interest(160)

(313)

(2)

(121)

Total income before
   taxes

 $

22,638

 $

44,741

$                         10,497 

78,758

Capital Expenditures

Core Beef

16,778 

31,003 

1,674 

28,506 

Other

1,422 

1,468 

24 

3,490 

Total

18,200 

32,471 

1,698 

$

31,996 

 

 

 

 

August 27, 2005

August 28, 2004

 

 

Assets

Core Beef

 $

605,641 

 $

620,679 

Other

28,779 

26,426 

Eliminations

257 

(584)

Total

 $

634,677 

 $

646,521 

F-66



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Acquisition of National Carriers, Inc.

On March 28, 2003, the FNBPC acquired National Carriers, Inc., a contract carrier service with terminals in Liberal, Kansas, Dallas, Texas, and Denison, Iowa, for approximately $13.4 million, including the assumption of $8.4 million of indebtedness. The purchase price has been allocated to the assets acquired and liabilities assumed and the operating results of National Carriers are reflected in FNBPC's and NBP's consolidated financial statements subsequent to the date of acquisition. The effect of the acquisition of National Carriers was immaterial to the consolidated financial statements.

Customer Concentration

In the fiscal year ended August 27, 2005, one customer with its consolidated subsidiaries represented 7.0% of total sales, with no other customer representing more than 3.7% of total sales.  In the fiscal year ended August 28, 2004, one customer with its consolidated subsidiaries represented 9.1% of total sales, with no other customer representing more than 3.3% of total sales. In the fiscal year ended August 30, 2003, one customer with its consolidated subsidiaries represented approximately 10.3% of total sales with no other single customer representing more than 2.9% of total sales.

Sales to Foreign Countries

NBP had sales outside the United States of America in the fiscal years ended 2005 and 2004, the 24 days ended August 30, 2003, and the 340 days ended August 6, 2003 of approximately $295.2 million, $395.5 million, $48.9 million, and $580.1 million, respectively. No single country accounted for more than 10% of total sales. The amount of assets maintained outside the United States of America is not material.

NOTE 12.  UNITED STATES BSE OUTBREAK

The closure of U.S. borders to the importation of Canadian feeder and fattened (ready for slaughter) animals, which occurred in May 2003 following the discovery of bovine spongiform encephalopathy (BSE) in Alberta that same month, tightened the U.S. cattle supply.  The closure of the U.S. border to Canadian livestock resulted in higher overall feeder and fed cattle prices in the U.S., negatively impacting raw material prices.  Although the U.S. border opened to Canadian produced boxed beef in September 2003, the entire U.S. beef packing industry continued at a price disadvantage for both raw materials and boxed beef prices while the ban on importation of Canadian livestock was maintained.   The ban on the importation of Canadian cattle was in place from May 2003 to July 2005. 

On December 23, 2003, it was announced by the United States Department of Agriculture (USDA) that a single Holstein dairy cow was discovered in the state of Washington to have tested positive for BSE.  The origin of the animal was subsequently traced to a farm in Canada.  Shortly after the announcement, several countries, including Japan, representing a substantial share of NBP's export business, closed their borders to the importation of edible beef products from the United States.  Certain by-products have been classified as Specified Risk Materials (SRMs), and have been banned from use in feedstocks and the human food chain. Some of these products previously enjoyed a market in foreign countries.  The closure of most foreign markets to U.S. beef following the discovery of this cow in Washington state, and lack of alternative U.S. markets for many products which previously were exported, negatively impacted the revenue per head enjoyed by the U.S. packing industry. 

All of these challenges resulted in tremendous volatility in U.S. livestock market prices during FYE 2003, FYE 2004 and FYE 2005.  In FYE 2005, 2004 and 2003, NBP's total export sales were approximately 7%, 10% and 17%, respectively, of total net sales.

During the second quarter of FYE 2004, NBP recorded charges to sales and cost of sales totaling approximately $18.8 million due to the market impacts of the closure of international borders as a result of the BSE discovery in late December 2003. 

On December 29, 2004, the USDA announced it had established conditions under which it would allow imports into the U.S. of live cattle under 30 months of age and certain other commodities from regions with effective BSE prevention and detection measures.  Prior to being able to import to the U.S., each country must undergo a thorough risk assessment to be recognized as a "minimal-risk region."  Canada was the first country recognized as a minimal-risk region and, as such, would have been eligible to export to the U.S. live cattle under 30 months of age (subject to certain restrictions), as well as certain other animals and products.  The risk assessment conducted by the USDA, as part of the rulemaking process to determine Canada's status as a minimal-risk region, included consideration of the possibility that Canada could experience additional cases of BSE.  The final rule was published in the January 4, 2005 Federal Register and was to become effective March 7, 2005 but was delayed by litigation. 

F-67



NATIONAL BEEF PACKING COMPANY, LLC
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On March 2, 2005, the U.S. District Court in Billings, Montana granted a preliminary injunction to delay the implementation of USDA's minimal-risk regions rule, temporarily blocking the opening of the Canadian border to the importation of live cattle under 30 months of age into the U.S.  On March 17, 2005, the U.S. Department of Justice, on behalf of the USDA, filed a request with the U.S. Court of Appeals for the Ninth Circuit requesting that the court overturn the decision issued by the U.S. District Court in Montana, which would re-establish trade with Canada for beef products and live cattle under 30 months of age.  The National Meat Association along with the Canadian Cattlemen's Association and the Alberta Beef Producers, who were all denied leave to intervene in the trial court, also appealed seeking to overturn the preliminary injunction.  In July 2005, the U.S. Court of Appeals for the Ninth Circuit overturned the March 2005 preliminary injunction issued by the U.S. District Court in Billings, Montana, which had continued the closure of the Canadian border to imports of live cattle.  The U.S. Court of Appeals ruling resulted in the immediate reopening of the Canadian border to live cattle imports.  A petition for rehearing of the Ninth Circuit's ruling to the entire panel of Ninth Circuit judges was rejected by the Ninth Circuit on October 13, 2005.  Although the Court of Appeals action does not completely dispose of the action in the lower court, the lower court may or may not enter final rulings that will permit continued trade in live animals and beef products between the two countries.

Announcements of inconclusive, preliminary test results for BSE can be expected from time to time as a result of the sensitivity of the new screening regime.  Since the USDA enhanced surveillance program for BSE began in 2004, approximately 510,000 cattle have been tested for BSE using a rapid test.  Three of these animals tested inconclusive and were subsequently subjected to immunohistchemistry, or IHC, testing.  The IHC is an internationally recognized confirmatory test for BSE.  All three inconclusive samples tested negative using IHC.  The three samples were then tested by a second internationally recognized confirmatory test, referred to as the Western Blot test.  Of the three samples, two were negative but the third came back reactive.  Because of the conflicting results, the samples from the animal that tested reactive were sent to Weybridge, England for further testing and the results of that testing were confirmed on June 24, 2005 as positive for BSE.  In a USDA statement issued June 29, 2005, the cow was identified as born and raised in a herd in Texas and was approximately 12 years old.  In the USDA statement, USDA Chief Veterinarian John Clifford stated that the USDA believes, "it was most likely infected by consuming feed prior to the implementation of the ruminant-to-ruminant feed ban in 1997," and he emphasized "that this animal did not enter the human food chain."  Although the Secretary of the USDA has stated that there is no risk to animal or human health related to this case, the impact on the market created by this or other future tests is not possible to predict. Prior to this second confirmed case of BSE in the U.S., many countries had reopened their borders to allow the import of U.S. beef; however, this second confirmed case of BSE has led to uncertainty as to whether or when additional markets may reopen, and whether or when existing open markets may close.

On October 31, 2005, a Japanese food safety panel responsible for recommendations concerning the importation of beef concluded that the risk of BSE in cattle 20 months of age and younger from the United States was very low.  The recommendation sets in motion a series of actions, including a month-long period for public comments, which could lead to the resumption of U.S. beef imports potentially before the end of the calendar year.  There can be no assurance that this action will result in the resumption of trade, or if so, when this will occur.

NBP cannot presently assess the full economic impact of the consequences of BSE on the U.S. beef packingprocessing industry or on its operations. The Company'sCompany’s revenues and net income may be materially adversely affected in the event existing import restrictions continue indefinitely, additional countries announce similar restrictions, additional regulatory restrictions are put into effect or domestic consumer demand for beef declines substantially.

 


U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
August 26, 2006, August 27, 2005 and August 28, 2004

(15)     Quarterly Results (Unaudited)

     Selected quarterly financial data for FY’s 2006 and 2005 is set forth below (dollars in thousands):

   Operating Net Basic Diluted
   Income Income Earnings Per Earnings Per
 Net sales (Loss) (Loss) Linked Unit Linked Unit
2006 quarterly results:              
   November 26, 2005$1,095,738 $(4,792) $(6,401) $(9.25) $(9.25)
   February 25, 2006 1,080,026  (6,778)  (7,607) $(11.00) $(11.00)
   May 27, 2006 1,134,514  31,493   12,908  $18.66  $18.33 
   August 26, 2006 1,325,752  46,002   20,819  $28.29  $27.85 
 $4,636,030 $65,925  $19,719       
               
2005 quarterly results:              
   November 27, 2004$1,050,720 $1,860  $(2,982) $(4.31) $(4.31)
   February 26, 2005 1,026,727  (2,842)  (7,453) $(10.77) $(10.77)
   May 28, 2005 1,126,574  28,604   11,097  $16.04  $15.74 
   August 27, 2005 1,134,899  22,933   7,977  $11.53  $11.31 
 $4,338,920 $50,555  $8,639       

 

F-68