UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C.20549Form 10-Q
Form 10-Q
(Mark one)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November |
or |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from | ||
Commission file number 333-115164
U.S. PREMIUM BEEF, LLC
(Exact name of registrant as specified in its charter)
DELAWARE |
| |
(State or other jurisdiction of | (I.R.S. employer |
12200 North Ambassador Drive
Kansas City, MO 64163MO64163
(Address of principal executive offices)
Telephone: (866) 877-2525
(Registrant's telephone number, including area code)
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. Yes Xx No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No Xx
The Registrant's equity.equity is not traded on an exchange or in any public market. As of January 3, 2005,2006, there were 691,845 Class A units and 691,845 Class B units outstanding.
PART | FINANCIAL INFORMATION | |
1 | ||
9 | ||
Quantitative and Qualitative Disclosures About Market | 13 | |
15 | ||
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Item 1. | ||
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Item | 15 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 15 |
15 | ||
15 | ||
16 | ||
16 | ||
17 |
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
November 27, | August 28, | |||
Assets | 2004 |
| 2004 | |
(unaudited) | ||||
Current assets: | ||||
Cash and cash equivalents | $ | 48,347 | 43,611 | |
Accounts receivable, less allowance for returns and doubtful | ||||
accounts of $5,803 and $5,614 in 2005 and 2004, respectively | 162,088 | 177,614 | ||
Due from affiliates | 1,718 | 2,873 | ||
Other receivables | 2,920 | 4,513 | ||
Inventory | 76,359 | 85,962 | ||
Other current assets | 12,287 | 10,782 | ||
Total current assets | 303,719 | 325,355 | ||
Property, plant and equipment, at cost | 247,505 | 242,903 | ||
Less accumulated depreciation | (26,328) | (20,844) | ||
Net property, plant and equipment | 221,177 | 222,059 | ||
Goodwill | 78,858 | 78,858 | ||
Other intangible assets, net of accumulated amortization | ||||
of $2,125 and $1,722 in 2005 and 2004, respectively | 29,636 | 30,039 | ||
Other assets | 7,453 | 7,446 | ||
Total assets | $ | 640,843 | 663,757 | |
Liabilities and Capital Shares and Equities |
|
|
|
|
Current liabilities: | ||||
Current installments of long-term debt | $ | 11,226 | 10,483 | |
Cattle purchases payable | 52,909 | 37,586 | ||
Accounts payable | 40,040 | 51,438 | ||
Due to affiliates | 353 | 416 | ||
Patronage refunds payable in cash | 847 | 847 | ||
Accrued compensation and benefits | 16,053 | 20,828 | ||
Accrued insurance | 15,290 | 13,903 | ||
Other accrued expenses and liabilities | 11,595 | 7,690 | ||
Distributions payable | 412 | 2,296 | ||
Total current liabilities | 148,725 | 145,487 | ||
Long-term liabilities: | ||||
Long-term debt, excluding current maturities | 313,076 | 331,812 | ||
Interest rate exchange agreement | 27 | 105 | ||
Other liabilities | 4,934 | 5,237 | ||
Total long-term liabilities | 318,037 | 337,154 | ||
Total liabilities | 466,762 | 482,641 | ||
Minority interest in National Beef Packing Company and Kansas City Steak, LLC | 60,334 | 63,108 | ||
Capital shares and equities: | ||||
Members' capital, 691,845 class A units and 691,845 class B units | ||||
authorized, issued and outstanding | 62,966 | - | ||
Common stock, $0.01 par value; authorized 5,000,000 shares, | ||||
691,845 shares issued and outstanding | - | 7 | ||
Cooperative members' contributed capital | - | 39,531 | ||
Nondelivery fee | - | 1,330 | ||
Patronage notices | 50,752 | - | ||
Patronage refunds for reinvestment | - | 50,752 | ||
Unallocated equity | - | 26,375 | ||
Accumulated other comprehensive income | 29 | 13 | ||
Total capital shares and equities | 113,747 | 118,008 | ||
Total liabilities and capital shares and equities | $ | 640,843 | 663,757 | |
See accompanying notes to consolidated financial statements. |
Consolidated Statements of Operations | ||||||||||||||
(in thousands, except per unit data) | ||||||||||||||
|
| 13 weeks ended |
| 13 weeks ended | ||||||||||
|
| November 27, 2004 |
| November 29, 2003 | ||||||||||
|
| (unaudited) |
| (unaudited) | ||||||||||
Net sales | $ | 1,050,720 | 1,058,306 | |||||||||||
Costs and expenses: | ||||||||||||||
Cost of sales | 1,034,189 | 1,018,869 | ||||||||||||
Selling, general and administrative expenses | 8,992 | 7,854 | ||||||||||||
Depreciation and amortization | 6,038 | 6,669 | ||||||||||||
Total costs and expenses | 1,049,219 | 1,033,392 | ||||||||||||
Operating income | 1,501 | 24,914 | ||||||||||||
Other income (expense): | ||||||||||||||
Interest income | 145 | 178 | ||||||||||||
Interest expense | (6,854) | (6,428) | ||||||||||||
Minority owner's interest in net loss (income) | ||||||||||||||
of National Beef Packing Co., LLC | 2,382 | (8,620) | ||||||||||||
Minority owners' interest in net income | ||||||||||||||
of Kansas City Steak, LLC | (54) | (8) | ||||||||||||
Equity in loss of aLF Ventures, LLC | (122) | (311) | ||||||||||||
Interest rate exchange agreement | 78 | 351 | ||||||||||||
Other, net | 480 | 362 | ||||||||||||
(Loss) income before taxes | (2,444) | 10,438 | ||||||||||||
Income tax expense | (538) | (831) | ||||||||||||
Net (loss) income | $ | (2,982) | 9,607 | |||||||||||
Loss per unit | ||||||||||||||
Basic | $ | (4.31) | - | |||||||||||
Diluted | $ | (4.31) | - | |||||||||||
Outstanding weighted-average units | ||||||||||||||
Basic | 691,845 | - | ||||||||||||
Diluted | 691,845 | - | ||||||||||||
Pro forma amounts assuming the conversion | ||||||||||||||
to an LLC is applied retroactively: | ||||||||||||||
(Loss) earnings per unit | ||||||||||||||
Basic | $ | (4.31) | 13.89 | |||||||||||
Diluted | $ | (4.31) | 13.64 | |||||||||||
Outstanding weighted-average units | ||||||||||||||
Basic | 691,845 | 691,845 | ||||||||||||
Diluted | 691,845 | 704,512 | ||||||||||||
See accompanying notes to consolidated financial statements. | ||||||||||||||
Consolidated Statements of Cash Flows | |||||||
(in thousands) | |||||||
| 13 weeks ended |
| 13 weeks ended | ||||
| November 27, 2004 |
| November 29, 2003 | ||||
|
| (unaudited) |
| (unaudited) | |||
Cash flows from operating activities: | |||||||
Net (loss) income | $ | (2,982) | 9,607 | ||||
Adjustments to reconcile net (loss) income to net cash provided | |||||||
Depreciation and amortization | 6,038 | 6,669 | |||||
(Gain) loss on disposal of property, plant and equipment | (102) | 1 | |||||
Minority interest | (2,328) | 8,628 | |||||
Interest rate exchange agreement | (78) | (351) | |||||
Changes in assets and liabilities: | |||||||
Accounts receivable | 15,526 | (6,883) | |||||
Due from affiliates | 1,155 | (416) | |||||
Other receivables | 1,593 | 322 | |||||
Inventories | 9,603 | (15,498) | |||||
Other assets | (1,512) | (528) | |||||
Accounts payable | (9,247) | 3,058 | |||||
Due to affiliates | (63) | (77) | |||||
Accrued compensation and benefits | (4,775) | (11,139) | |||||
Accrued insurance | 1,387 | (2,288) | |||||
Other accrued expenses and liabilities | 3,602 | 1,584 | |||||
Cattle purchases payable | 22,263 | 10,661 | |||||
Net cash provided by operating activities | 40,080 | 3,350 | |||||
Cash flows from investing activities: | |||||||
Capital expenditures, including interest capitalized | (5,170) | (6,781) | |||||
Proceeds from sale of property, plant and equipment | 519 | 239 | |||||
Net cash used in investing activities | (4,651) | (6,542) | |||||
Cash flows from financing activities: | |||||||
Proceeds from membership and registration fees | - | 6 | |||||
Proceeds from nondelivery fees | - | 112 | |||||
Net payments under revolving credit lines and note payable | (17,733) | 16,105 | |||||
Payments of notes payable and fees | (260) | (244) | |||||
Change in overdraft balances | (10,420) | 6,292 | |||||
Partnership distributions | (2,296) | (14,629) | |||||
Net cash (used in) provided by financing activities | (30,709) | 7,642 | |||||
Effect of exchange rate changes on cash | 16 | 7 | |||||
Net increase in cash | 4,736 | 4,457 | |||||
Cash and cash equivalents at beginning of the period | 43,611 | 42,228 | |||||
Cash and cash equivalents at end of the period | $ | 48,347 | 46,685 | ||||
Supplemental information: | |||||||
Cash paid during the period for interest | $ | 2,134 | 426 | ||||
Cash paid during the period for taxes, net | $ | 7 | 281 | ||||
See accompanying notes to consolidated financial statements. |
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per unit data)
13 weeks ended | 13 weeks ended | ||||
November 26, 2005 | November 27, 2004 | ||||
(unaudited) | (unaudited) | ||||
Net sales | $ | 1,095,738 | $ | 1,050,720 | |
Costs and expenses: | |||||
Cost of sales | 1,084,545 | 1,034,189 | |||
Selling, general and administrative expenses | 9,390 | 8,633 | |||
Depreciation and amortization | 6,595 | 6,038 | |||
Total costs and expenses | 1,100,530 | 1,048,860 | |||
Operating (loss) income | (4,792) | 1,860 | |||
Other income (expense): | |||||
Interest income | 258 | 145 | |||
Interest expense | (7,373) | (7,213) | |||
Minority owner's interest in net loss | |||||
of National Beef Packing Co., LLC | 5,606 | 2,382 | |||
Minority owners' interest in net income | |||||
of Kansas City Steak, LLC | (14) | (54) | |||
Equity in loss of aLF Ventures, LLC | (47) | (122) | |||
Interest rate exchange agreement | - | 78 | |||
Other, net | 504 | 480 | |||
Loss before taxes | (5,858) | (2,444) | |||
Income tax expense | (543) | (538) | |||
Net loss | $ | (6,401) | $ | (2,982) | |
Net loss per Class A and Class B linked unit: | |||||
Basic | $ | (9.25) | $ | (4.31) | |
Diluted | $ | (9.25) | $ | (4.31) | |
Outstanding weighted-average Class A and Class B linked units: | |||||
Basic | 691,845 | 691,845 | |||
Diluted | 691,845 | 691,845 | |||
See accompanying notes to consolidated financial statements. |
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
13 weeks ended | 13 weeks ended | |||||
November 26, 2005 | November 27, 2004 | |||||
(unaudited) | (unaudited) | |||||
Cash flows from operating activities: | ||||||
Net loss | $ | (6,401) | $ | (2,982) | ||
Adjustments to reconcile net loss to net cash provided by / (used in) operating activities: | ||||||
Depreciation and amortization | 6,595 | 6,038 | ||||
Gain on disposal of property, plant and equipment | (83) | (102) | ||||
Minority interest | (5,592) | (2,328) | ||||
Interest rate exchange agreement | - | (78) | ||||
Changes in assets and liabilities: | ||||||
Accounts receivable | 813 | 15,526 | ||||
Due from affiliates | 412 | 1,155 | ||||
Other receivables | (192) | 1,593 | ||||
Inventories | (13,265) | 9,603 | ||||
Other assets | (232) | (1,478) | ||||
Accounts payable | 2,766 | (1,414) | ||||
Due to affiliates | (917) | (63) | ||||
Accrued compensation and benefits | (4,781) | (4,775) | ||||
Accrued insurance | (1,478) | 1,387 | ||||
Other accrued expenses and liabilities | 3,773 | 3,602 | ||||
Cattle purchases payable | 6,197 | 10,246 | ||||
Net cash (used in) / provided by operating activities | (12,385) | 35,930 | ||||
Cash flows from investing activities: | ||||||
Capital expenditures, including interest capitalized | (4,988) | (5,170) | ||||
Proceeds from sale of property, plant and equipment | 250 | 519 | ||||
Net cash used in investing activities | (4,738) | (4,651) | ||||
Cash flows from financing activities: | ||||||
Net receipts (payments) under revolving credit lines | 8,800 | (17,694) | ||||
Payments of notes payable and fees | (257) | (260) | ||||
Repayments of capital lease obligation | (209) | (39) | ||||
Change in overdraft balances | 5,306 | (6,270) | ||||
Distributions to minority interest owners in National Beef Packing Co. | (1,865) | (2,296) | ||||
Member distributions | (1,197) | - | ||||
Net cash provided by / (used in) financing activities | 10,578 | (26,559) | ||||
Effect of exchange rate changes on cash | 1 | 16 | ||||
Net (decrease) increase in cash | (6,544) | 4,736 | ||||
Cash and cash equivalents at beginning of the period | 54,428 | 43,611 | ||||
Cash and cash equivalents at end of the period | $ | 47,884 | $ | 48,347 | ||
Supplemental disclosures: | ||||||
Cash paid during the period for interest | $ | 2,746 | $ | 2,493 | ||
Cash paid during the period for taxes, net | $ | 81 | $ | 7 | ||
Supplemental non-cash disclosures: | ||||||
Assets acquired through capital lease | $ | 4,342 | $ | - | ||
See accompanying notes to consolidated financial statements. |
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Interim Financial Statements
Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with accounting principlesU.S. generally accepted in the United States of Americaaccounting principles (GAAP) for interim financial information; therefore, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. For further information, refer to the audited Consolidated Financial Statements and Notes to Consolidated Financial Statements, which are included in the Company's Annual Report on Form 10-K on file with the Securities and Exchange Commission (SEC) for the fiscal year ended August 28, 2004.27, 2005. The results of operations for the interim periods presented are not necessarily indicative of the results for a full fiscal year. Certain prior year amounts have been reclassified in order to conform to the current year presentation.
OnIn December 2004, Financial Accounting Standards Board (FASB) Statement No. 123 (revised 2004), Shared-Based Payment, was issued. Statement 123(R) requires an entity to recognize, in the statement of operations, the grant-date fair-value of stock options and other equity-based compensation issued to employees. The Company was required to adopt Statement 123R on August 18, 2004,28, 2005. The adoption of Statement 123R had no effect on the shareholdersCompany's consolidated financial statements.
The unaudited Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of U.S. Premium Beef, Ltd. approvedAmerica, using management's best estimates and judgments where appropriate. These estimates and judgments affect the mergerreported amounts of assets and liabilities and disclosure 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. Undercontingent assets and liabilities at the new ownership structure, each share of common stockdate of the cooperative was converted to one unit of Class A interestfinancial statements. The estimates and one unit of Class B interest. Immediately followingjudgments will also affect the conversion, there were 691,845 units of Class A interestsreported amounts for certain revenues and 691,845 units of Class B interests. For a period to be determined byexpenses during the board of directors, each Class A unit will be linked to its corresponding Class B unitreporting period. Actual results could differ materially from these estimates 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.
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's net cash flow when declared by the board of directors; to participate in the distribution of the Company'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 the Company'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's net cash flow when declared by the board of directors; to participate in the distribution of the Company'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 the Company's members. Holders of Class B interests have no cattle delivery commitment.
Patronage Notices. Holders of 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.judgments.
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, which are itsour senior unsecured obligations, ranking equal in right of payment with all of itsour other senior unsecured obligations. 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 USPB.NBP.
(2) Inventories
Inventories at November 27, 200426, 2005 and August 28, 200427, 2005 consisted of the following (in thousands):
November 27, 2004 |
| August 28, 2004 | November 26, | August 27, | ||||||
Dressed and boxed beef | $ | 59,313 |
| $ | 67,801 | |||||
2005 | 2005 | |||||||||
Dressed and boxed meat products | $ | 77,688 | $ | 66,993 | ||||||
Beef by-products | 7,489 |
| 9,158 | 10,294 | 8,476 | |||||
Supplies | 9,557 |
| 9,003 | 10,709 | 9,957 | |||||
Total inventory | $ | 76,359 |
| $ | 85,962 | |||||
$ | 98,691 | $ | 85,426 |
(3) Comprehensive (Loss) IncomeLoss
Comprehensive (loss) income,loss, which consists of net (loss) incomeloss and foreign currency translation adjustments, was as follows for the periods indicated (in thousands):
13 Weeks Ended November 27, 2004 | 13 Weeks Ended November 29, 2003 | 13 weeks ended | 13 weeks ended | ||||||
Net (loss) income | $ | (2,982) | $ | 9,607 | |||||
November 26, | November 27, | ||||||||
2005 | 2004 | ||||||||
Net loss | $ | (6,401) | $ | (2,982) | |||||
Other comprehensive income: | |||||||||
Foreign currency translation adjustments | 16 | 7 | 1 | 16 | |||||
Comprehensive (loss) income | $ | (2,966) | $ | 9,614 | |||||
Comprehensive loss | $ | (6,400) | $ | (2,966) |
(4) 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, which is 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 distribution. 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 first quarter 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.
Effective August 29, 2004, the Company was 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.
(5) 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 of NBP 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 electeffect 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 current period from the date of issuance tothrough the earliest redemption date of the respective interests. At November 27, 2004,26, 2005, the minority interest in National Beef included in the minority interest in the accompanying Condensed Consolidated Balance Sheet, was revalued by an independent appraisal process, and the value was determined to be $59.1 million.$58.6 million, which was in excess of its carrying value. Accordingly, the carrying value of the minority interest has been reducedin National Beef increased by accretion of approximately $0.03$0.02 million through accretion during the thirteen weeks ended November 27, 2004,26, 2005, resulting in the $59.6 milliona carrying value atof $58.3 million which is reflected in the accompanying Consolidated Balance Sheet as of November 27, 2004.
26, 2005.
(6)(5) Contingencies
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 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 plaintiffs seek damages in excess of $50.0 million from all defendants as a group on behalf of the class. FNB answered the complaint and joined with the three other defendants in moving to dismiss this action. An amended complaint was filed and FNB joined in the other defendants' motion to dismiss. The joint motion to dismiss was denied, and the judge ruled that the plaintiffs adequately alleged a violation of the Packers and Stockyards Act of 1921. The case was certified as a class-action matter in June of 2004. Accordingly,The plaintiffs claim damages against FNBPC in the lawsuitamount of approximately $4.5 million plus prejudgment interest, attorneys' fees and court costs. The claim will proceed to trial.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, and plaintiffs have filed their report of opt-outs which is now being evaluated for objections. Discovery has been completed. Trial is set for April 3, 2006. Management believes that FNBFNBPC 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, 5. Accounting for Contingencies, NBP has not established a loss accrual associated with this claim.
The Company is also a party to a number of other lawsuits and claims arising out of the operation of ourits business. Management believes the ultimate resolution of such matters should not have a material adverse effect on ourthe Company's financial condition, results of operations or liquidity.
(7) (6) United States BSE Outbreak
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 bovine spongiform encephalopathy (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. Responding to
In July 2005, the lossU.S. Court of export markets, live cattle pricesAppeals for the Ninth Circuit overturned a March 2005 preliminary injunction issued by the U.S. District Court in the United States declined by approximately 18% within 3 days. In fiscal 2004, NBP's total export sales were approximately 10% of total net sales.
During the second quarter of fiscal 2004, NBP recorded charges to earnings totaling approximately $18.8 million due to the market impacts ofBillings, Montana, which had continued the closure of international borders as a result of the BSE discovery in late December. These charges, recorded in sales and cost of sales in the Company's second quarter of fiscal 2004 Consolidated Statement of Operations, reflect: (1) volatility in the U.S. markets for finished goods and live cattle, with an impact noted in immediate margin erosion resulting from a rapid fall in cutout or sales values; (2) some product already destined for foreign markets re-routed for resale in the U.S., generally at prices lower than their original export value; and (3) lower value for certain inventory items which had been in the production pipeline and had not yet left the U.S. as they had no comparable domestic market. 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 impacts of BSE were positively offset, in part, by strong domestic demand for beef products.
In addition, the USDA and the Food Safety Inspection Service (FSIS) published new regulations in response to the discovery of BSE in the state of Washington. These new regulations, among other things, govern the removal of SRMs during slaughter, cover the ban on the slaughtering of non-ambulatory animals for human food use, set forth the prohibition on the production of mechanically separated meat and ban certain techniques used in the slaughter process. The USDA also issued a notice announcing that FSIS inspectors will not mark ambulatory cattle that have been targeted for BSE surveillance testing as "inspected and passed" until negative test results are obtained. The Company does not anticipate that these new regulations, individually or in the aggregate, will have a material adverse effect on its business.
While exports of some beef products have commenced once again to Mexico, NBP cannot anticipate the duration of other continuing beef import bans or whether additional countries may impose similar restrictions. Thus far, the effect of resumed export of beef products to Mexico has been marginal on the United States beef packing industry. Fed cattle slaughter levels in the United States for FYE 2004 fell approximately 8.9% below year-ago levels, reflecting constrained cattle supplies and reduced demand for export products.
The closure of U.S. borders to the importation of Canadian feeder and fattened (ready for slaughter) animals which occurred inborder, since May 2003, following the discovery of BSE in Alberta that same month tightened the U.S. cattle supply; and, 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 while the ban on importation of Canadian livestock was maintained. This continued closure of the U.S. border to Canadian livestock has resulted in higher overall feeder and fed cattle prices in the U.S., negatively impacting raw material prices and increased imports of boxed beef, negatively affecting boxed beef prices.
The USDA has published a proposed rule revising its policy to keep the U.S. border closed to live animals for processing in the U.S. The comment period for this proposed rule closed on April 7, 2004 and publication of a final rule was anticipated within a reasonable time following closure of the comment period. In the interim, Ranchers Cattlemen Action Legal Fund United Stockgrowers of America (R-CALF, a northern states cattle producer's organization) was successful in obtaining an injunction against the USDA allowing importation of certain beef products produced in Canada pursuant to this rule, because the USDA did not follow the "Administrative Procedures Act" prior to issuing its order allowing such action.
On December 29, 2004, the USDA announced it had established conditions under which it will allow imports of live cattle under 30 monthscattle. The U.S. Court of age and certain other commodities from regions with effective bovine spongiform encephalopathy (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 will be the first country recognized as a minimal-risk region and, as such, will be 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 final rule was publishedAppeals ruling resulted in the January 4, 2005 Federal Register and will be effective March 7, 2005 unless delayed by litigation, legislation or other reasons. The USDA estimates that up to two million live cattle under 30 months of age could be exported to the U.S. from Canada in the first twelve months after the rule takes effect.
On January 2, 2005, the Canadian Food Inspection Agency confirmed that an older dairy cow from Alberta has tested positive for BSE. The infected animal was born in 1996, prior to the introduction of the 1997 feed ban. As stated in the USDA press release of December 30, 2004, the U.S. would not alter the implementation of its rule to resume trade with Canada, although NBP can provide no assurance regarding this statement. On January 3, 2005, the USDA issued a statement expressing confidence in the animal and public health measures that Canada has in place, noting that the risk assessment, conducted by the USDA as part of the rulemaking process to determine Canada's status as a minimal-risk region, included the consideration of the possibility that Canada could experience additional cases of BSE.
A United States/Japanese Commission was formed to look at the optimal "science based" approach to resolving the issues between the U.S. and Japan. The commission held its last meeting in July 2004. Following this meeting, trade representatives from the United States and Japan continued their discussions onimmediate reopening of the Japanese marketCanadian border to importedlive cattle imports under the age of 30 months. 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. The Court of Appeals action does not completely dispose of the action in the lower court and the lower court may or may not enter final rulings that will permit continued trade in live animals and beef products frombetween the United States.
On October 23, 2004, the USDA announced that Japan and the U.S. had reached an agreement on opening the border for export to Japan. Over the coming months, many details will have to be worked out by both governments. Part of the agreement involves the tracking of animals of known age from the ranch so that only meat from animals less than 21 months of age can be shipped to Japan. It may require considerable effort and resources for NBP to develop and implement such a system over the coming months. It is expected that the markets will begin to open for some products mid-year in calendar 2005, although no assurance can be given that this will occur. 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. Prior to a second case of BSE in the U.S., which was confirmed in June 2005, many countries had reopened their borders to allow the import of U.S. beef; however, this second confirmed case of BSE led to uncertainty as to whether or when additional markets may reopen, and whether or when existing open markets may close.
On December 8, 2005, the Japanese Food Safety Commission issued its final report, concluding that U.S. beef under 20 months of age is safe for Japanese consumers. On December 11, 2005, Japan reopened its market to U.S. and Canadian beef from cattle 20 months of age or younger, where prior to the border closing, there were no age restrictions on cattle used in beef products imported to Japan. Beef from cattle that will qualify for export to Japan must comply with requirements for age verification of cattle and removal of specified risk materials (SRMs). Initially, industry estimates of market-ready cattle that will qualify for export to Japan range between 5% to 15% of the total fed cattle slaughter. The Company believes availability of market-ready cattle to its beef processing facilities will be similar to industry expectations. We cannot as yet determine the impact on profitability as a result of the opening of the Japanese market created by such uncertainty is not possible to predict.or the potential opening of other less significant export markets.
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 continue to be materially adversely affected in the eventdue to existing or new import restrictions continue indefinitely, additional countries announce similar restrictions,or additional regulatory restrictions, are put into effect or disruptions in domestic consumer demand for beef declines substantially.
beef.
(8) Bank Covenant Compliance(7) Long-term Debt and Loan Agreements
Senior Credit Facilities
Effective November 19, 2004, NPB'sOctober 14, 2005, NBP's amended and restated senior credit facility was further amended to reflect changes in financial covenants. The amended credit facility, as amended, contained the following financialcovenant limiting NBP's net capital expenditures. There were no changes to the remaining covenants as of November 27, 2004:
• Maximum funded debt to four quarter rolling EBITDA (as defined in the credit agreement) ratio of 7.25x; • Maximum senior secured funded debt to four quarter rolling EBITDA ratio of 4.50x; • Minimum four quarter rolling EBITDA of $50 million; • Minimum working capital of $92.25 million; • Maximum annual capital expenditures of $30 million.
As defined infacility. NBP's amended credit facility, EBITDA contains specified adjustments. On November 27, 2004, NBP was in compliance with all financial covenant ratios.
Effective December 30, 2004, NBP amended and restated its existing senior credit facility with a consortium of banks. The facility now consists of a $120.0 million term loan that matures in December 2014 and a $140.0 million revolving line of credit loan that matures in December 2009 that is subject to certain borrowing base limitations. 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 $2.5 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 will be written off during the Company's second quarter of fiscal year 2005. At the closing of the transaction, NBP borrowed $120.0 million under the term loan and $4.6 million under the revolving loan with an additional $43.0 million of the revolving loan used in the form of letters of credit.
The borrowings under the revolving loan are available for NBP's working capital requirements, capital expenditures and other general corporate purposes. The amended and restated credit facility is secured by a first priority lien on substantially all of NBP's assets. 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.
NBP's amended and restated credit facility contains covenants that limit its ability to incur additional indebtedness, sell or dispose of assets, pay certain dividends and prepay or amend certain indebtedness among other matters. The amended and restated credit facility also contains a provision for a conversion to more favorable interest rate and more restrictive financial covenants on the earlier of (a) June 1, 2006 or (b) the election of NBP (the Conversion Date). Currently the interest rate for the term loan is either the greater of (a) the Base Rate (as defined in the credit agreement) plus 75 basis points or (b) LIBOR plus 275 basis points. Currently the interest rate for the revolving loan is either the greater of (a) the Base Rate plus 50 basis points or (b) LIBOR plus 250 basis points. After the Conversion Date, the interest rate for the term loan and revolving loan is determined by reference to a matrix of rates that are keyed to NBP's funded debt to EBITDA ratio.
The amended and restated credit facility imposes 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. After the Conversion Date, NBP is required to maintain 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. In addition, NBP's annual net capital expenditures are now limited to amounts ranging from $32in each period as follows: $64 million in fiscalthe combined period of FYE 2005 toand FYE 2006, $35 million in FYE 2007 and $40 million in fiscalFYE 2008 and fiscalsfiscal years thereafter. Prior to this amendment, FYE 2005 and FYE 2006 were separately limited to $32 million each year.
(9) Subsequent Events
Industrial Revenue BondsCapital and Operating Leases
In conjunction with the amendment and restatement of NBP's creditEffective August 31, 2005, NBP financed a material handling system for its Liberal, Kansas, beef 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 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 NBP using proceeds of its term loanlease obligation for five years. Future minimum lease payments under the amended and restated credit facility. Because the City has assigned thethis lease to the bond trusteeare $1.0 million each year 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, plantfiscal years ended 2006, 2007, 2008, 2009 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 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 payments in lieu of tax agreements, results in an annual savings of approximately 25% in property taxes. 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.2010, respectively.
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, NBP has committed to make a series of service charge payments totaling $19.3 million over a 20 year period. Payments under the commitment will be $0.8 million in fiscal year 2005, $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 with the balance of $13.1 million to be paid in subsequent years.
(10)(8) Earnings (Loss) 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 lease 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 will be distributed to unitholders based on their proportionate share of underlying equity, and, as a result, earnings per unit has been presented in the accompanying Consolidated Statement of Operations, along with the pro forma amounts for the prior year first quarter assuming the conversion to an LLC was retroactively applied.
Basic earnings per unit (EPU)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.
Diluted EPU reflects the potential dilution that could occur if potential unit optionspurchase rights were exercised or contractual appreciation rights were converted into units. OptionsUpon 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 forat $55 were issued and outstanding for both periods. Options were excluded from the 2005 diluted earnings per unit calculationsfor the periods as provided in the CEO employment agreement.
The diluted loss per unit calculation in the following table excludes the effect of the 20,000 unit purchase rights noted above for the periods ending November 26, 2005 and November 27, 2004, respectively, as the effect of their inclusionincluding them would have been anti-dilutive onto the loss per linked unit calculation.
(In thousands except per unit data) | November 27, 2004 | ||||||
(Loss) Earnings | Units | Per-Unit | |||||
(Numerator) | (Denominator) | Amount | |||||
Basic loss per unit | |||||||
Income available to unitholders | $ | (2,982) | 691,845 | $ | (4.31) | ||
Effect of dilutive securities - unit | - | ||||||
Diluted loss per unit | |||||||
Income available to unitholders | |||||||
including assumed conversion | $ | (2,982) | 691,845 | $ | (4.31) | ||
Pro Forma November 29, 2003 | |||||||
Earnings | Units | Per-Unit | |||||
(Numerator) | (Denominator) | Amount | |||||
Basic earnings per unit | |||||||
Income available to unitholders | $ | 9,607 | 691,845 | $ | 13.89 | ||
Effect of dilutive securities - unit | 12,667 | ||||||
Diluted earnings per unit | |||||||
Income available to unitholders | |||||||
including assumed conversion | $ | 9,607 | 704,512 | $ | 13.64 | ||
Loss Per Linked Unit Calculation | |||||
(In thousands, except unit and per unit data) | 13 Weeks Ended | ||||
November 26, 2005 | November 27, 2004 | ||||
(unaudited) | (unaudited) | ||||
Basic loss per unit | |||||
Income available to unitholders (numerator) | $ | (6,401) | $ | (2,982) | |
Outstanding units (denominator) | 691,845 | 691,845 | |||
Per unit amount | $ | (9.25) | $ | (4.31) | |
Diluted loss per unit | |||||
Income available to unitholders (numerator) | $ | (6,401) | $ | (2,982) | |
Outstanding units | 691,845 | 691,845 | |||
Effect of dilutive securities - unit options | - | - | |||
Units (demoninator) | 691,845 | 691,845 | |||
Per unit amount | $ | (9.25) | $ | (4.31) |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Operations
Disclosure Regarding Forward-Looking Statements
Industry Outlook
The USDACyclically low cattle supplies, along with limited access to key export markets, has established conditions which allowprovided a difficult environment for beef industry participants. In general, domestic cattle supplies are anticipated to improve over the Canadian bordernext two to become eligible for re-opening in early March 2005 for importation of live cattle under 30 months of age, subject to certain restrictions. Also, while there is a framework of an agreement for the resumption of tradethree years, but with Japan, it appears trade will not resume for several months. Currently live weights of cattle being slaughtered are considerably higher than last year, implying supplies of cattle in the near term will be larger; however, untilquestions remaining regarding international market access, is restored and live cattle are permitted from Canada, margins willcan be expected to continue to be negatively impacted.
Recent Developments
Effective December 30, 2004, our amended credit facility was further amended and restated to reflect changes in loan amounts, interest rates and financial covenants. In conjunction with the amendment and restatement of NBP's credit facility, the City of Dodge City, Kansas issued $102.3 million of industrial revenue bonds that effectively results in annual savings of approximately 25% in property taxes. These transactions are more fully described in "Liquidity and Capital Resources" below.
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 bovine spongiform encephalopathy (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. Responding to
In July 2005, the lossU.S. Court of export markets, live cattle pricesAppeals for the Ninth Circuit overturned a March 2005 preliminary injunction issued by the U.S. District Court in the United States declined by approximately 18% within 3 days. In FYE 2003, NBP's total export sales were approximately 17% of total sales, including sales of non-food beef products such as hides. In FYE 2004, NBP's total export sales were approximately 10% of total net sales.
During the second quarter of FYE 2004, NBP recorded charges to earnings totaling approximately $18.8 million due to the market impacts ofBillings, Montana, which had continued the closure of international borders as a result of the BSE discovery in late December. These charges, recorded in sales and cost of sales in our second quarter of fiscal 2004 Consolidated Statement of Operations, reflect: (1) volatility in the U.S. markets for finished goods and live cattle, with an impact noted in immediate margin erosion resulting from a rapid fall in cutout or sales values; (2) some product already destined for foreign markets re-routed for resale in the U.S., generally at prices lower than their original export value; and (3) lower value for certain inventory items which had been in the production pipeline and had not yet left the U.S. as they had no comparable domestic market. 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 impacts of BSE were positively offset, in part, by strong domestic demand for beef products.
In addition, the USDA and the Food Safety Inspection Service (FSIS) published new regulations in response to the discovery of BSE in the state of Washington. These new regulations, among other things, govern the removal of SRMs during slaughter, cover the ban on the slaughtering of non-ambulatory animals for human food use, set forth the prohibition on the production of mechanically separated meat and ban certain techniques used in the slaughter process. The USDA also issued a notice announcing that FSIS inspectors will not mark ambulatory cattle that have been targeted for BSE surveillance testing as "inspected and passed" until negative test results are obtained. We do not anticipate that these new regulations, individually or in the aggregate, will have a material adverse effect on our business.
While exports of some beef products have commenced once again to Mexico, we cannot anticipate the duration of other continuing beef import bans or whether additional countries may impose similar restrictions. Thus far, the effect of resumed export of beef products to Mexico has been marginal on the United States beef industry. Fed cattle slaughter levels in the United States for FYE 2004 fell approximately 8.9% below year-ago levels, reflecting constrained cattle supplies and reduced demand for export products.
The closure of U.S. borders to the importation of Canadian feeder and fattened (ready for slaughter) animals which occurred inborder, since May 2003, following the discovery of BSE in Alberta that same month tightened the U.S. cattle supply; and, 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 while the ban on importation of Canadian livestock was maintained. This continued closure of the U.S. border to Canadian livestock has resulted in higher overall feeder and fed cattle prices in the U.S., negatively impacting raw material prices and increased imports of boxed beef, negatively affecting boxed beef prices.
The USDA has published a proposed rule revising its policy to keep the U.S. border closed to live animals for processing in the U.S. The comment period for this proposed rule closed on April 7, 2004 and publication of a final rule was anticipated within a reasonable time following closure of the comment period. In the interim, Ranchers Cattlemen Action Legal Fund United Stockgrowers of America (R-CALF - a northern states cattle producer's organization) was successful in obtaining an injunction against the USDA allowing importation of certain beef products produced in Canada pursuant to this rule, because the USDA did not follow the "Administrative Procedures Act" prior to issuing its order allowing such action.
On December 29, 2004, the USDA announced it had established conditions under which it will allow imports of live cattle under 30 monthscattle. The U.S. Court of age and certain other commodities from regions with effective bovine spongiform encephalopathy (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 will be the first country recognized as a minimal-risk region and, as such, will be 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 final rule was publishedAppeals ruling resulted in the January 4, 2005 Federal Register and will be effective March 7, 2005 unless delayed by litigation, legislation or other reasons. The USDA estimates that up to two million live cattle under 30 months of age could be exported to the U.S. from Canada in the first twelve months after the rule takes effect.
On January 2, 2005, the Canadian Food Inspection Agency confirmed that an older dairy cow from Alberta has tested positive for BSE. The infected animal was born in 1996, prior to the introduction of the 1997 feed ban. As stated in the USDA press release of December 30, 2004, the U.S. would not alter the implementation of its rule to resume trade with Canada, although NBP can provide no assurance regarding this statement. On January 3, 2005, the USDA issued a statement expressing confidence in the animal and public health measures that Canada has in place, noting that the risk assessment, conducted by the USDA as part of the rulemaking process to determine Canada's status as a minimal-risk region, included the consideration of the possibility that Canada could experience additional cases of BSE.
A United States/Japanese Commission was formed to look at the optimal "science based" approach to resolving the issues between the U.S. and Japan. The commission held its last meeting in July 2004. Following this meeting, trade representatives from the United States and Japan continued their discussions onimmediate reopening of the Japanese marketCanadian border to importedlive cattle imports under the age of 30 months. 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. The Court of Appeals action does not completely dispose of the action in the lower court and the lower court may or may not enter final rulings that will permit continued trade in live animals and beef products frombetween the United States.
On October 23, 2004, the USDA announced that Japan and the U.S. had reached an agreement on opening the border for export to Japan. Over the coming months, many details will have to be worked out by both governments. Part of the agreement involves the tracking of animals of known age from the ranch so that only meat from animals less than 21 months of age can be shipped to Japan. It may require considerable effort and resources for NBP to develop and implement such a system over the coming months. It is expected that the markets will begin to open for some products mid-year in calendar 2005, although no assurance can be given that this will occur. 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. Prior to a second case of BSE in the U.S., which was confirmed in June 2005, many countries had reopened their borders to allow the import of U.S. beef; however, this second confirmed case of BSE led to uncertainty as to whether or when additional markets may reopen, and whether or when existing open markets may close.
On December 8, 2005, the Japanese Food Safety Commission issued its final report, concluding that U.S. beef under 20 months of age is safe for Japanese consumers. On December 11, 2005, Japan reopened its market to U.S. and Canadian beef from cattle 20 months of age or younger, where prior to the border closing, there were no age restrictions on cattle used in beef products imported to Japan. Beef from cattle that will qualify for export to Japan must comply with requirements for age verification of cattle and removal of specified risk materials (SRMs). Initially, industry estimates of market-ready cattle that will qualify for export to Japan range between 5% to 15% of the total fed cattle slaughter. The Company believes availability of market-ready cattle to its beef processing facilities will be similar to industry expectations. We cannot as yet determine the impact on profitability as a result of the opening of the Japanese market created by such uncertainty is not possible to predict.or the potential opening of other less significant export markets.
WeThe Company cannot presently assess the full economic impact of the consequences of BSE on the U.S. beef packing industry or on ourits operations. OurThe Company's revenues and net income may continue to be materially adversely affected in the eventdue to existing or new import restrictions continue indefinitely, additional countries announce similar restrictions,or additional regulatory restrictions, are put into effect or disruptions in domestic consumer demand for beef declines substantially.beef.
Results of Operations
Thirteen weeks ended November 27, 200426, 2005 compared to thirteen weeks ended November 29, 200327, 2004
General. Net loss for the thirteen weeks ended November 27, 200426, 2005 was $3.0$6.4 million compared to net income of $9.6 million for the thirteen weeks ended November 29, 2003, a decrease of $12.6 million. Sales were lower in the thirteen weeks ended November 27, 2004 than those of the prior year period primarily due to a decrease in boxed beef and beef product prices of approximately 8.1%, offset in part by an increase in the number of cattle processed. The loss of key export markets due to BSE continued to pressure beef margins.
Total costs and expenses as a percent of sales were 99.9%$3.0 million for the thirteen weeks ended November 27, 2004, a change of $3.4 million or 113.3%. Sales were higher in the thirteen weeks ended November 26, 2005 than those of the prior year period partially due to an increase in the number of cattle processed of approximately 1.4%, at weights that averaged 1.0% higher than the same period in the prior year. Additionally, while sales prices improved by approximately 2.4% compared to 97.6%the same period in the prior year, cost of sales increased at a higher rate, due in part to an increase in live cattle prices of approximately 3.7% resulting from the tightened supply of market-ready cattle.
Total costs and expenses of $1,100.5 million and $1,048.9 million for the thirteen weeks ended November 29, 2003. Costs26, 2005 and November 27, 2004, respectively, were higher due100.4% as a percent of sales for the thirteen weeks ended November 26, 2005 compared to 99.8% for the thirteen weeks ended November 27, 2004. Tightened supply of market-ready cattle and lower plant capacity utilization contributed to a 5.9% increasedecline in the numbergross margin, resulting in a decrease in operating income of cattle NBP processed from 2004, offset in part by lower live cattle prices. Operating income decreased $23.4 million due to lower boxed beef and beef product prices and to a continuing unfavorable pricing environment for products traditionally marketed outside the U.S.$6.7 million.
Net Sales. Net sales were $1,095.7 million for the thirteen weeks ended November 26, 2005 compared to $1,050.7 million for the thirteen weeks ended November 27, 2004, compared to $1,058.3 million for the thirteen weeks ended November 29, 2003, a decreasean increase of $7.6$45.0 million or 0.7%4.3%. The decreaseincrease resulted primarily from a decreasean increase in boxed beef and beef product prices of approximately 8.1%, mostly offset by a 5.9%2.4% combined with an approximate 1.4% increase in the number of cattle NBP processed in 2005. Boxed beef and beef productthe thirteen weeks ended November 26, 2005 at weights that averaged 1.0% higher than the same period in the prior year. Sales prices continued to be pressured by the loss of key export markets closed to U.S. beef productsimproved due to BSE.an improved product sales mix and continued growth in value-added sales for the thirteen weeks ended November 26, 2005 as compared to November 27, 2004.
Cost of Sales. Cost of sales was $1,084.5 million for the thirteen weeks ended November 26, 2005 compared to $1,034.2 million for the thirteen weeks ended November 27, 2004, compared to $1,018.9an increase of $50.3 million or 4.9%. The increase resulted primarily from a 3.7% increase in live cattle prices resulting from tightened supply of market-ready cattle, combined with an increase in the number of cattle processed from 2004 of 1.4% and an increase in average live weights of 1.0%.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $9.4 million for the thirteen weeks ended November 29, 2003, an increase of $15.3 million or 1.5%. The increase resulted primarily from an increase in the number of cattle NBP processed from 2004 of 5.9%, offset by lower live cattle prices.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $9.026, 2005 compared to $8.6 million for the thirteen weeks ended November 27, 2004, compared to $7.9an increase of $0.8 million or 9.3%. The increase reflects an increase in payroll and related expenses of approximately $0.4 million and an increase in travel and related expenses of approximately $0.3 million.
Depreciation and Amortization Expense. Depreciation and amortization expenses were $6.6 million for the thirteen weeks ended November 29, 2003, an increase of $1.1 million or 13.9%. The current year reflects expenses for state franchise taxes of approximately $0.3 million due26, 2005 compared to the restructuring of NPB as a limited liability company, and an increase in payroll and related expenses and professional services of $0.7 million.
Depreciation and Amortization Expense. Depreciation and amortization expenses were $6.0 million for the thirteen weeks ended November 27, 2004, comparedan increase of $0.6 million or 10.0%. Depreciation expense increased due largely to $6.7assets being placed into service, primarily at the Dodge City and Liberal beef plants, during the second, third and fourth quarters of fiscal year 2005.
Operating (Loss) Income. Operating loss was $4.8 million for the thirteen weeks ended November 29, 2003, a decrease26, 2005 compared to operating income of $0.7 million or 10.4%. The decrease is attributable to revised estimates that had been previously utilized in the calculations for depreciation expense in the thirteen weeks ended November 29, 2003 relative to assets acquired when we acquired a controlling interest in Farmland National Beef Packing Company, L.P. on August 7, 2003 and formed National Beef Packing Company, LLC.
Operating Income. Operating income was $1.5$1.9 million for the thirteen weeks ended November 27, 2004, compared to $24.9a decrease of $6.7 million or 352.6%. The decrease resulted primarily from a tightened supply of market-ready cattle and lower plant capacity utilization.
Interest Expense. Interest expense was $7.4 million for the thirteen weeks ended November 29, 2003, a decrease of $23.4 million. The decrease resulted from the lower boxed beef and beef product prices due in part26, 2005 compared to the loss of key export markets closed to U.S. beef products due to BSE. The continued closure of the U.S. border to Canadian livestock and the corresponding reduction in the number of live cattle available for processing, along with the loss of key export markets, has resulted in compressed margins in the U.S. beef packing industry. Operating income, as a percentage of net sales, was 0.1% for the thirteen weeks ended November 27, 2004 and 2.4% for the thirteen weeks ended November 29, 2003.
Interest Expense. Interest expense was $6.9$7.2 million for the thirteen weeks ended November 27, 2004, compared to $6.4 million for the thirteen weeks ended November 29, 2003, an increase of $0.5$0.2 million or 7.8%2.8%. The increase was due primarily to higher interest rates on our variable rate debt in the thirteen weeks ended November 27, 200426, 2005 as compared to the same period in fiscal 2004.2005.
Income Tax Expense. Income tax expense ofwas $0.5 million for both the thirteen weeks ended November 26, 2005 and for the thirteen weeks ended November 27, 2004 compared to $0.8 million for the thirteen weeks ended November 29, 2003, a decrease of $0.3 million. The decrease was primarily due to the conversion from a cooperative to an LLC offset by increased2004. Income tax expense as the result of higher income for the period for National Carriers, Inc. and the associated income tax expenseis recorded on income from that entity,National Carriers, Inc., which is organized as a C Corporation.
Liquidity and Capital Resources
As of November 27, 2004, the Company26, 2005, we had net working capital of $155.0$175.2 million, which included $1.3$0.3 million in partner and member payables,distributions payable, and cash and cash equivalents of $48.3 million. At$47.9 million, including $3.9 million restricted to IRB approved expenditures. As of August 28, 2004,27, 2005, we had net working capital of $179.9$178.6 million, which included $3.1$1.9 million in partner and member payables,distributions payable, and cash and cash equivalents of $43.6 million.$54.4 million, including $3.9 million restricted to IRB approved expenditures. Our primary sourcesources of liquidity isare cash flows from operations and available borrowings under our amended and restated credit facility.
As of November 27, 2004, the Company26, 2005, we had $324.3$327.7 million of long-term debt, of which $11.2$1.8 million was classified as a current liability. As of November 27, 2004, there were26, 2005, NBP's amended and restated credit facility consisted of a $120.0 million term loan, all of which was outstanding and a $140.0 million revolving line of credit loan, which had outstanding borrowings of $24.4$23.8 million, outstanding letters of credit of $43.0$44.0 million and available borrowings of $57.8$51.2 million, under NBP's $140.0 million amended credit facility.based on the most restrictive financial covenant calculations. Cash flow from operations and borrowings under NBP's amended and restated credit facility havehas funded our working capital requirements, capital expenditures and other general corporate purposes. . NBP wasWe were in compliance with all of itsour financial covenants under theour amended and restated credit facility as of November 27, 2004.26, 2005.
In addition to outstanding borrowings under the amended and restated credit facility, wethe Company had outstanding senior notes of $160.0 million, borrowings under industrial revenue bonds of $13.8 million, senior notesa term loan with CoBank, of $160.0which $5.9 million term loanswas outstanding, and a capital lease of $125.7 million and capital leases and other obligations of $0.4$4.2 million as of November 27, 2004.
Amended Senior Credit Facility
Effective December 30, 2004,26, 2005. On August 31, 2005, NBP amended and restated its existing senior credit facility with a consortium of banks. The facility now consists of a $120.0financed $4.3 million term loan that matures in December 2014 and a $140.0 million revolving line of credit loan that matures in December 2009 that is subject to certain borrowing base limitations. The amendment and restatement is within the scope of the Emerging Issues Task Force (EITF) 96-19, Debtor's Accountingunder this capital lease obligation for a Modification or Exchange of Debt Instruments as well as EITF 98-14, Debtor's Accountingmaterial handling system at its Liberal, Kansas, beef facility. Future minimum lease payments under this lease are $1.0 million each year for Changes in Line-of-Credit or Revolving-Debt Arrangements. In accordance withthe fiscal years ended 2006, 2007, 2008, 2009 and 2010, respectively.
We believe that guidance, a portion ofavailable borrowings under the unamortized loan costs of approximately $2.5 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 millionand cash provided by operating activities will be written off duringsufficient to support working capital, capital expenditures and debt service requirements for the Company's second quarterforeseeable future. Our ability to generate sufficient cash, however, is subject to certain general economic, financial, industry, legislative, regulatory and other factors beyond our control. For a review of our obligations that affect liquidity, please see the Cash Payment Obligations table in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our report on Form 10-K for the fiscal year ended August 27, 2005.
Operating Activities
Net cash used in operating activities in the thirteen weeks ended November 26, 2005 was $12.4 million compared to net cash provided by operating activities $35.9 million in the thirteen weeks ended November 27, 2004. The $48.3 million decrease was primarily due to an increase in working capital requirements in the current period resulting partially from increased inventory valuation, combined with a larger net loss in the current year compared to the same period last year.
Investing Activities
Net cash used in investing activities was $4.7 million in the thirteen weeks ended November 26, 2005 compared to $4.7 million in the thirteen weeks ended November 27, 2004. This slight increase in cash used was primarily attributable to an increase in expenditures for property, plant and equipment in the current year.
Financing Activities
Net cash provided by financing activities was $10.6 million in the thirteen weeks ended November 26, 2005 compared to net cash used in financing activities of $26.6 million in the thirteen weeks ended November 27, 2004. The change was primarily attributed to a $26.5 million difference in the thirteen week change of fiscal year 2005. At2006 as compared to the closing of the transaction, NBP borrowed $120.0 million under the term loan and $4.6 million under thethirteen week change in fiscal year 2005 in revolving loancredit borrowings, combined with an additional $43.0$11.6 million of the revolving loan usedincrease in the form of letters of credit.overdraft balance.
The borrowings under the revolving loan are available for NBP's working capital requirements, capital expendituresAmended and other general corporate purposes. The amended and restated credit facility is secured by a first priority lien on substantially all of NBP's assets. 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. Restated SeniorCredit Facility
NBP's amended and restated credit facility contains covenants that limit its ability to incur additional indebtedness, sell or dispose of assets, pay certain dividends and prepay or amend certain indebtedness among other matters. The amended and restated credit facility also contains a provision for a conversion to more favorable interest raterates and more restrictive financial covenants on the earlier of (a) June 1, 2006 or (b) the election of NBP (the Conversion Date). CurrentlyAt the election of NBP, interest rate for the term loan is either the greater of (a)may be computed at the Base Rate (as defined in the credit agreement) plus 75 basis pointsan applicable margin or (b)a LIBOR rate plus an applicable margin. As of November 26, 2005, the interest rate for the term loan was equal to LIBOR plus 275 basis points. Currentlypoints (6.6%) and the weighted average interest rate for the revolving loan is either the greaterwas equal to a combination of (a) the Base RateLIBOR plus 250 basis points plus Prime plus 50 basis points or (b) LIBOR plus 250 basis points.(a combined weighted average of 7.1%). After the Conversion Date, the interest rate for the term loan and the revolving loan iswill be determined by reference to a matrix of rates that are keyed to NBP's funded debt to EBITDA (as defined in the credit agreement) ratio.
The amended and restated credit facility also imposes 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. NBP was in compliance with all of the financial covenants under its amended and restated credit facility as of November 26, 2005.
After the Conversion Date, NBP is requiredwill be subject to maintain at all times a specifiedthe following financial covenants:
(i) A maximum funded debtFunded Debt to EBITDA ratio, aRatio (as defined in the credit agreement), 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 debtSenior Secured Funded Debt to EBITDA ratio, a minimum four-quarter rolling EBITDA and a minimum four-quarter rolling debt service coverage ratio. In addition, NBP's annual net capital expenditures are limited to amounts ranging from $32 millionRatio (as defined in fiscal 2005 to $40 million in fiscal 2008 and fiscals years thereafter.the credit agreement), 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 defined in the credit agreement) as follows: | ||
Debt Service | ||
Coverage Ratio | Fiscal Quarter Ended | |
2.00 to 1.00 | August 31, 2005 and thereafter |
Industrial Revenue Bonds
In conjunction with the amendment and restatement of NBP's credit 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 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 NBP using proceeds of its term loan underEffective October 14, 2005, 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 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 payments in lieu of tax agreements, results in an annual savings of approximately 25% in property taxes. 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.
Capital spending through November 27, 2004 was approximately $5.2 million. NBP expects to spend approximately $30 million in total on capital expenditures during fiscal year 2005, primarily for plant expansion, renewals and improvements.
We believe that available borrowings under the NBP amended and restated credit facility and cash provided by operating activities will be sufficient to support working capital, capital expenditures and debt service requirements for the foreseeable future. Our ability to generate sufficient cash, however, is subject to certain general economic, financial, industry, legislative, regulatory and other factors beyond our control.
Operating Activities
Net cash provided by operating activities in the thirteen weeks ended November 27, 2004 increased to $40.1 million compared to $3.4 million in the thirteen weeks ended November 29, 2003, primarily as the result of an decrease in working capital requirements, offset by the decrease in net earnings in the current year period.
Investing Activities
Net cash used in investing activities was $4.7 million in the thirteen weeks ended November 27, 2004 compared to $6.5 million in the thirteen weeks ended November 29, 2003. This decrease in cash used was primarily attributable to $1.6 million less in expenditures for property, plant and equipment in the current year.
Financing Activities
Net cash used in financing activities was $30.7 million in the thirteen weeks ended November 27, 2004 compared to net cash provided by financing activities of $7.6 million in the thirteen weeks ended November 29, 2003. The change was attributed to a $33.8 million decrease in revolving credit borrowings and a $16.7 million reduction in the overdraft balance, partially offset by a $12.3 million decrease in cash distributions for member taxes.
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, NBP has committed to make a series of service charge payments totaling $19.3 million over a 20 year period. Payments under the commitment will be $0.8 million in fiscal year 2005, $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 with the balance of $13.1 million to be paid in subsequent years.
Bank Covenant Compliance
USPB's outstanding CoBank term debt of approximately $6.9 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 (4.557% at November 27, 2004 and 4.10% at August 28, 2004). 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 (not required if working capital falls above the greater of one half the aggregate commitment or $4 million and NBP is in compliance with their loan covenants). • a minimum net worth of $70.0 million • restrictions on transactions with related parties; and, • restrictions on dividend payments;
The Company was in compliance with all CoBank debt covenants as of November 27, 2004. The debt is secured by USPB's interest in NBP.
Effective November 19, 2004, NBP's amended credit facility was further amended to reflect changes in financial covenants. The amendedthe covenant limiting NBP's net capital expenditures. There were no changes to the remaining covenants in the credit facility, as amended, contains the following financial covenants, effective throughout fiscal year 2005:
Beginning with fiscal year 2006, the financial covenants (except for the limitation on maximum annual capital expenditures) will revertare now limited to and be adjustedamounts in accordance with, those containedeach period as follows: $64 million in the amended credit facility ascombined period of FYE 2005 and FYE 2006, $35 million in effect immediately priorFYE 2007 and $40 million in FYE 2008 and fiscal years thereafter. Prior to the November 19, 2004 amendment. The financial covenants which will be in place in fiscal yearthis amendment, FYE 2005 and FYE 2006 under the amended credit facility as of August 6, 2003, will be more restrictive than those covenants in place in fiscal year 2005 under the November 19, 2004 amendment and more restrictive than those covenants in place in fiscal year 2004.
As defined in NBP's amended credit facility, EBITDA contains specified adjustments. On November 27, 2004, they were in compliance with all financial covenant ratios.
<backseparately limited to Table of Contents>
$32 million each year.
Item 3. Quantitative and Qualitative Disclosures About Market Risk. Risk
The principal market risks affecting our business are exposure to changes in prices for commodities, such as livestock and boxed beef, and interest rate risk.
Commodities. NBP uses various raw materials, many of which are commodities. Raw materials are generally available from several different sources, and weNBP presently believebelieves that weit can obtain them as needed. Commodities are subject to price fluctuations that may create price risk. When appropriate, NBP may hedge commodities in order to mitigate this price risk. While this may tend to limit ourNBP's ability to participate in gains from commodity price fluctuations, it also tends to reduce the risk of loss from changes in commodity prices. NBP reflects 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 cattle for use in its processing businesses. When appropriate, itNBP enters 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 uses depends on a number of factors, including availability of appropriate derivative instruments.
NBP sells commodity beef products in its business. Commodity beef products are subject to price fluctuations that may create price risk. When appropriate, NBP enters into forward sales contracts at prices determined prior to shipment. While this may tend to limit itsNBP's 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 reflects 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.
NBP 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, 133. Accounting for Derivative Instruments and Hedging Activities, as amended, NBP accounts for futures contracts and their related firm commitments at fair value. Most firm commitments are treated as "normal purchases and 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 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 commitments related to the futures contracts are recorded to income and expense in the period of change.
The following table describes the number of futures positions and the fair value of those positions and related firm commitments at November 27, 200426, 2005 and August 28, 2004.27, 2005. 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.beef (dollars in thousands).
November 27, 2004 | Positions expiring within 1 year | Fair Value | ||||
Positions expiring | ||||||
within one year | Fair Value | |||||
November 26, 2005 | ||||||
Live Cattle | ||||||
Futures long | 582 | $ | 475 | - | ||
Futures short | 1,442 | (1,437) | 1,761 | (1,573) | ||
Firm Commitments Purchase | 1,203 | 1,452 | ||||
Firm Commitments Sale | - | - | ||||
August 28, 2004 | ||||||
August 27, 2005 | ||||||
Live Cattle | ||||||
Futures long | - | - | - | |||
Futures short | 55 | $ | 96 | 443 | (51) | |
Firm Commitments Purchase | (96) | 62 | ||||
Firm Commitments Sale | - | - |
Interest Rates. As a result of ourthe Company's 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. Short-term debt is primarily comprised of the current portion of long-term debt maturing twelve months from the balance sheet date. Our variable interest expense is sensitive to changes in the general level of interest rates.
Our exposure to interest rate risk has not materially changed since NovemberAugust 27, 2004.2005.
Item 4. Controls and Procedures.
We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the consolidated financial statementsConsolidated 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 FinancialReporting and Compliance Officer. Based upon that evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief FinancialReporting 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 controls over financial reporting during the thirteen weeks ended November 27, 200426, 2005 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For information regarding legal proceedings, see Note 4, "Contingencies"6. Contingencies to our consolidated financial statementsConsolidated Financial Statements included in Part I -I- Item 1 of this Form 10-Q.
The risk factors set forth in our Annual Report on Form 10-K for the year ended August 27, 2005 have not materially changed. Please refer to Table of Contents>the Company's report on Form 10-K for the period ended August 27, 2005 to consider those risk factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.<back to Table of Contents>
Item 3. Defaults Upon Senior Securities
None.<back to Table of Contents>
Item 4. Submission of Matters to a Vote of Security Holders
None. <backThe Annual Meeting of members of USPB was held on November 30 , 2005. Other than approval of the minutes from the previous annual meeting, the only proposal presented for member consideration at the Annual Meeting was the election of two (2) directors to Tableserve for three-year terms expiring after the 2008 fiscal year. The four nominees who stood for election to the Board of Contents>Directors were incumbent directors John Adams and Kelly K. Giles and new candidates Carol Keiser and Rex McCloy. Biographical information regarding Mr. Adams and Mr. Giles has previously been included in the Company's filings with the Securities and Exchange Commission, while information regarding Ms. Keiser and Mr. McCloy is presented in the following paragraphs.
Carol Keiser is president of C-BAR Cattle Company, Inc. which she established and currently manages operations for feeding 5,000 to 6,000 head of cattle in feedlots in Texas, Kansas, Nebraska, and Western Illinois. Prior to C-BAR Cattle Company she developed health and well-being procedures for Loveless Feedlot in Illinois. Previously, Ms. Keiser taught vocational agriculture and served as a Future Farmers of America advisor. Ms. Keiser is a Certified Livestock Manager, Certified Livestock Dealer and served on the Board of Directors of the Council of Food and Agricultural Research (C-FAR), Illinois Beef Association Check-off Division, past chairperson of the University of Illinois Alumni Association and the University of Illinois Agriculture, Consumer and Environmental Sciences Alumni Board. She is also a member of the National Cattlemen's Beef Association and has served on NCBA's animal health and tax committees. In addition, Ms. Keiser is a professional member of the American Society of Animal Science and American Meat Science Association. Currently, Ms. Keiser represents food animal commodity producers on the National Agricultural Research, Extension, Education, and Economics Advisory Board, which is a primary advisory board to the U.S. Secretary of Agriculture. In addition, she serves as Chair of the Farm Foundation, Roundtable Steering Committee. Ms. Keiser also serves on the Steering Committee of the Future of Animal Agriculture Project, specifically representing beef producers on the Food Safety and Animal Health Subcommittee. Ms. Keiser holds a Bachelors degree in Animal Science from the University of Illinois.
Rex 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.
At the Annual Meeting, under procedures established by the Company's nominating committee, Mr. Adams and Ms. Keiser stood for election to the same seat on the USPB Board of Directors and Mr. Giles and Mr. McCloy stood for election to the other open seat on the Board of Directors. USPB's members elected Carol Keiser and Rex McCloy to serve as directors on the Board of Directors for a term that will expire after fiscal year 2008. The election of the nominees was by a majority of the members present and voting at the Annual Meeting, expressed by a written ballot. In the election between Mr. Adams and Ms. Keiser, out of a total of 96 votes, Mr. Adams received a total of 46 votes and Ms. Keiser received a total of 50 votes, winning election to the Board of Directors. In the election between Mr. Giles and Mr. McCloy, Mr. Giles received a total of 35 votes and Mr. McCloy received a total of 61 votes to win election to the Board of Directors. The other members of the Board of Directors, Mr. Ryan, Mr. Gardiner, Mr. Fairleigh, Mr. Laue and Mr. Bohn continued in service as members of the USPB Board of Directors following the Annual Meeting.
Item 5. Other Information
None. <backNBP may purchase a portion of its outstanding Senior Notes from time to Table of Contents>
time in accordance with the limits imposed under its senior credit facility.
Item 6. ExhibitsExhibits
(A) | Exhibits | |
10.1 |
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| Fourth Amended and Restated Credit Agreement dated as of | ||
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31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2 | Certification of the | ||
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. | ||
32.2 | Certification of the |
|
During the quarter ended November 27, 2004, the Company furnished a Report on Form 8-K under Items 1 and 9, dated October 6, 2004, relating to our amended debt agreement and another Report on Form 8-K under Item 7, dated October 14, 2004, for our quarterly newsletter.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
U.S. Premium Beef, LLC
U.S. Premium Beef, LLC | ||
| By: | /s/ Steven D. Hunt |
Steven D. Hunt |
By: | /s/ Scott J. Miller | |
|
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| |
(Principal Financial and Accounting Officer) |
Date: January 10, 20059, 2006