UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
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| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended November 24, 2007 |
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to . |
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Commission file number 333-115164
U.S. PREMIUM BEEF, LLC
(Exact name of registrant as specified in its charter)
DELAWARE |
| 20-1576986 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
12200 North Ambassador Drive
Kansas City, MO 64163
(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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o Accelerated Filer o Non-accelerated Filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The registrant’s units are not traded on an exchange or in any public market. As of December 29, 2007, there were 735,385 Class A units and 735,385 Class B units outstanding.
| TABLE OF CONTENTS
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PART I. | FINANCIAL INFORMATION | Page No. |
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Item 1. | 1 | |
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 9 |
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Item 3. | 13 | |
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Item 4T. | 14 | |
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PART II. | OTHER INFORMATION |
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Item 1. | 15 | |
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Item 1A. | 15 | |
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 15 |
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Item 3. | 15 | |
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Item 4. | 15 | |
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Item 5. | 15 | |
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Item 6. | 16 | |
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| 17 |
Unless the context indicates or otherwise requires, the terms “the Company”, “we”, “our” and “us” refer to U.S. Premium Beef, LLC (formerly known as U.S. Premium Beef, Ltd.) and its consolidated subsidiaries. As used in this report, the terms “NBP” and “National Beef” refer to National Beef Packing Company, LLC (formerly known as Farmland National Beef Packing Company, LP), a Delaware limited liability company, and “USPB” refers to U.S. Premium Beef, LLC (formerly known U.S. Premium Beef, Ltd.) prior to consolidation.
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PART I. FINANCIAL INFORMATION
1 |
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U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES | |||||||
Consolidated Balance Sheets | |||||||
(in thousands, except unit information) | |||||||
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| November 24, |
| August 25, | ||
Assets | 2007 |
| 2007 | ||||
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Current assets: |
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| Cash and cash equivalents | $ | 53,720 |
| $ | 62,869 | |
| Accounts receivable, less allowance for returns and doubtful accounts |
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| of $4,400 and $4,642, respectively | 174,961 |
| 189,728 | ||
| Due from affiliates | 4,206 |
| 4,609 | |||
| Other receivables | 9,931 |
| 8,389 | |||
| Inventories | 189,258 |
| 177,244 | |||
| Other current assets | 14,769 |
| 14,144 | |||
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| Total current assets | 446,845 |
| 456,983 | ||
Property, plant, and equipment, at cost | 383,950 |
| 372,404 | ||||
| Less accumulated depreciation | (107,865) |
| (99,575) | |||
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| Net property, plant, and equipment | 276,085 |
| 272,829 | ||
Goodwill | 80,042 |
| 80,042 | ||||
Other intangible assets, net of accumulated amortization |
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| of $7,737 and $7,214, respectively | 28,243 |
| 28,659 | |||
Other assets | 9,593 |
| 10,104 | ||||
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| Total assets | $ | 840,808 |
| $ | 848,617 |
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Liabilities and Capital Shares and Equities |
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Current liabilities: |
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| Current installments of long-term debt | $ | 4,543 |
| $ | 4,421 | |
| Cattle purchases payable | 79,604 |
| 62,995 | |||
| Accounts payable - trade | 72,822 |
| 60,257 | |||
| Due to affiliates | 122 |
| 977 | |||
| Accrued compensation and benefits | 15,167 |
| 18,785 | |||
| Accrued insurance | 14,873 |
| 14,550 | |||
| Other accrued expenses and liabilities | 17,590 |
| 11,757 | |||
| Distributions payable | 254 |
| 2,708 | |||
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| Total current liabilities | 204,975 |
| 176,450 | ||
Long-term liabilities: |
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| Long-term debt, excluding current installments | 427,411 |
| 438,544 | |||
| Other liabilities | 2,384 |
| 2,559 | |||
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| Total long-term liabilities | 429,795 |
| 441,103 | ||
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| Total liabilities | 634,770 |
| 617,553 | ||
Minority interest in National Beef Packing Company, LLC and Kansas City Steak Company, LLC | 66,315 |
| 77,890 | ||||
Capital shares and equities: |
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| Members' capital, 735,385 Class A units and 735,385 Class B units |
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| authorized, issued and outstanding | 89,016 |
| 102,472 | ||
| Patronage notices | 50,642 |
| 50,642 | |||
| Accumulated other comprehensive income | 65 |
| 60 | |||
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| Total capital shares and equities | 139,723 |
| 153,174 | ||
Commitments and contingencies | - |
| - | ||||
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| Total liabilities and capital shares and equities | $ | 840,808 |
| $ | 848,617 |
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See accompanying notes to consolidated financial statements. |
2 |
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U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES | ||||||||
Consolidated Statements of Operations | ||||||||
(in thousands, except per unit data) | ||||||||
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| 13 weeks ended |
| 13 weeks ended | ||
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| November 24, 2007 |
| November 25, 2006 | ||
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| (unaudited) |
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Net sales |
| $ | 1,398,102 |
| $ | 1,273,025 | ||
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Costs and expenses: |
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| Cost of sales | 1,393,692 |
| 1,269,925 | ||||
| Selling, general, and administrative expenses | 11,659 |
| 10,434 | ||||
| Depreciation and amortization | 8,829 |
| 7,868 | ||||
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| Total costs and expenses | 1,414,180 |
| 1,288,227 | |||
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| Operating loss | (16,078) |
| (15,202) | ||
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Other income (expense): |
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| Interest income | 528 |
| 557 | ||||
| Interest expense | (9,220) |
| (9,349) | ||||
| Minority owners' interest in net loss of National Beef |
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| Packing Company, LLC | 11,390 |
| 11,097 | |||
| Minority owners' interest in net income of Kansas City |
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| Steak Company, LLC | (25) |
| (52) | |||
| Equity in loss of aLF Ventures, LLC | (25) |
| (29) | ||||
| Other, net | 267 |
| 131 | ||||
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| Loss before taxes | (13,163) |
| (12,847) | ||
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Income tax expense | (549) |
| (228) | |||||
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| Net loss | $ | (13,712) |
| $ | (13,075) |
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Net loss per Class A and Class B linked unit: |
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| Basic |
| $ | (18.65) |
| $ | (17.78) | |
| Diluted |
| $ | (18.65) |
| $ | (17.78) | |
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Outstanding weighted-average Class A and Class B linked units: |
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| Basic |
| 735,385 |
| 735,505 | |||
| Diluted |
| 735,385 |
| 735,505 | |||
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See accompanying notes to consolidated financial statements. |
3 |
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U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES | |||||||||
Consolidated Statements of Cash Flows
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| 13 weeks ended |
| 13 weeks ended | ||
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| November 24, 2007 |
| November 25, 2006 | ||
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| (unaudited) |
| (unaudited) | ||
Cash flows from operating activities: |
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| Net loss |
| $ | (13,712) |
| $ | (13,075) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
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| Depreciation and amortization | 8,829 |
| 7,868 | ||||
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| (Gain) losss on disposal of property, plant, and equipment | (2) |
| 27 | ||||
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| Minority interest | (11,373) |
| (11,045) | ||||
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| Changes in assets and liabilities: |
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| Accounts receivable | 14,767 |
| 9,001 | |||
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| Due from affiliates | 403 |
| 792 | |||
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| Other receivables | (1,542) |
| 1,321 | |||
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| Inventories | (12,014) |
| 6,298 | |||
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| Other assets | (229) |
| (1,649) | |||
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| Cattle purchases payable | 6,679 |
| 4,604 | |||
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| Accounts payable | 2,520 |
| (2,933) | |||
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| Due to affiliates | (855) |
| (492) | |||
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| Accrued compensation and benefits | (3,618) |
| (13,124) | |||
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| Accrued insurance | 323 |
| 109 | |||
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| Other accrued expenses and liabilities | 6,124 |
| 2,264 | |||
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| Net cash used in operating activities | (3,700) |
| (10,034) | ||
Cash flows from investing activities: |
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| Capital expenditures, including interest capitalized | (11,558) |
| (9,931) | |||||
| Proceeds from sale of property, plant, and equipment | 6 |
| 55 | |||||
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| Net cash used in investing activities | (11,552) |
| (9,876) | ||||
Cash flows from financing activities: |
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| Net (payments) receipts under revolving credit lines | (9,648) |
| 15,536 | |||||
| Payments of term notes payable | (257) |
| (258) | |||||
| Repayments of other indebtedness / capital leases | (1,106) |
| (823) | |||||
| Change in overdraft balances | 19,975 |
| 13,184 | |||||
| Distributions to minority interest owners in National Beef Packing Company, LLC | (2,866) |
| (5,039) | |||||
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| Net cash provided by financing activities | 6,098 |
| 22,600 | ||
| Effect of exchange rate changes on cash | 5 |
| 8 | |||||
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| Net (decrease) increase in cash | (9,149) |
| 2,698 | ||
Cash and cash equivalents at beginning of the period | 62,869 |
| 58,434 | ||||||
Cash and cash equivalents at end of the period | $ | 53,720 |
| $ | 61,132 | ||||
Supplemental cash disclosures: |
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| Cash paid during the period for interest | $ | 5,428 |
| $ | 7,123 | |||
| Cash paid during the period for taxes, net of refunds | $ | 525 |
| $ | 53 | |||
Supplemental non-cash disclosures of investing and financing activities: |
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| Receivable for final Brawley purchase price adjustment | $ | - |
| $ | 1,302 | |||
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See accompanying notes to consolidated financial statements. | |||||||||
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4 |
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) Interim Financial Statements
Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting 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 using management’s best estimates and judgments where appropriate. These estimates and judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results could differ materially from these estimates and judgments. 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 25, 2007. 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, as further discussed in the most recent Annual Report on Form 10-K.
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 NBP’s senior unsecured obligations, ranking equal in right of payment with all of its 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 NBP.
(2) New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 157 (SFAS 157), Fair Value Measurements. This statement establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair value measurements. SFAS 157 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” SFAS 157 will apply to fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact SFAS 157 may have, if any, on its Consolidated Financial Statements.
In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159 (SFAS 159), The Fair Value Option for Financial Assets and Financial Liabilities. This statement provides companies with an option to report selected financial assets and liabilities at fair value. SFAS 159 will apply to fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact SFAS 159 may have, if any, on its Consolidated Financial Statements.
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(3) Inventories
Inventories at November 24, 2007 and August 25, 2007 consisted of the following (in thousands):
November 24, 2007 | August 25, 2007 | |||||
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Dressed and boxed meat products | $ | 155,410 |
| $ | 144,766 | |
Beef by-products | 18,584 |
| 19,540 | |||
Supplies | 15,264 |
| 12,938 | |||
| Total inventories | $ | 189,258 |
| $ | 177,244 |
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(4) Comprehensive Loss
Comprehensive loss, which consists of net loss and foreign currency translation adjustments, was as follows for the periods indicated (in thousands):
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| 13 weeks ended November 24, 2007 |
| 13 weeks ended November 25, 2006 | ||
Net loss | $ | (13,712) |
| $ | (13,075) | |
Other comprehensive income: |
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Foreign currency translation adjustments | 5 |
| 8 | |||
| Comprehensive loss | $ | (13,707) |
| $ | (13,067) |
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(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 and/or NBPCo Holdings, LLC have the right to request that NBP repurchase their interests, the value of which is to be determined by a mutually agreed appraisal process. If NBP is unable to effect the repurchase within a specified time, the requesting member(s) have the right to cause a sale process to commence. The Company accounts for changes in the redemption value of these interests by accreting the change in value over the current period through the earliest redemption date of the respective interests. At November 24, 2007, the minority interest in National Beef was revalued by an independent appraisal process, and the value was determined to be $66.2 million, which was in excess of its carrying value. Accordingly, the carrying value of the minority interest in National Beef increased by approximately $0.2 million through accretion during the thirteen weeks ended November 24, 2007, resulting in a carrying value of $65.3 million, which is included in the accompanying Consolidated Balance Sheet as of November 24, 2007.
(6) Income Taxes
On August 26, 2007, the Company adopted FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes. FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classifications, interest and penalties, accounting in interim periods, disclosures and transition. As a result of the adoption, tax reserves in the amount of approximately $0.5 million were reversed.
Prior to the adoption of FIN 48, the Company did not recognize accrued interest or penalties on uncertain tax positions. Should the Company be required to accrue interest and penalties in the future, it will likely record the interest accrual to interest expense and record the penalties accrual to selling, general and administrative expense. As of August 26, 2007, the Company did not have any amounts recorded for accrued interest and penalties on uncertain tax positions.
The Company’s subsidiary, National Carriers, Inc. (NCI), has concluded an examination of its U.S. federal income taxes for fiscal year 2005. Based on federal income tax statute of limitations, NCI remains subject to examination of its income taxes for fiscal years 2006 and 2007. USPB does not currently have any ongoing income tax examinations with the Internal Revenue Service or other tax authorities.
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(7) Legal Proceedings
Schumacher v. Tyson Foods, et al. On July 1, 2002, a lawsuit was filed against Farmland National Beef Packing Company, L.P. (FNBPC or the predecessor to NBP), ConAgra Beef Company, Tyson Foods, Inc. and Excel Corporation in the United States District Court for the District of South Dakota seeking certification of a class of all persons who sold cattle to the defendants for cash, or on a basis affected by the cash price for cattle, during the period from April 2, 2001 through May 11, 2001 and for some period up to two weeks thereafter. The case was filed by three named plaintiffs on behalf of a putative nationwide class that plaintiffs estimate is comprised of hundreds or thousands of members. The complaint alleged 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 sought recovery against all defendants under a theory of unjust enrichment. The case was certified as a class-action matter in June of 2004. The plaintiffs claimed damages against FNBPC in the amount of approximately $4.5 million plus prejudgment interest, attorneys' fees and court costs. The claim is subject to reduction in an unknown amount by the number of class members who have opted out of the class. Trial began March 31, 2006. On April 13, 2006, the jury returned a verdict in favor of FNBPC but against the other defendants. The other defendants have filed an appeal in the United States Court of Appeals for the Eighth Circuit. The appeal was argued on November 14, 2007. No decision has been made. The plaintiffs did not appeal the verdict for the Company but no final judgment will be entered until after the appeal is decided.
The Company’s wholly owned subsidiary, NCI, has various independent contractor drivers who are involved in accidents from time to time. Management believes the ultimate resolution of such matters should not have a material adverse effect on the Company’s financial condition, results of operations, or liquidity.
The Company is also a party to a number of other lawsuits and claims arising out of the operation of its business. Management believes the ultimate resolution of such matters should not have a material adverse effect on the Company’s financial condition, results of operations, or liquidity.
7 |
(8) Earnings Per Unit
Basic earnings per unit (EPU) excludes dilution and is computed by dividing income or loss 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 purchase rights were exercised or contractual appreciation rights were converted into units. Upon termination of the CEO employment agreement, at the election of the CEO, or upon mutual agreement of the Board of the Company and the CEO, the CEO may purchase up to 20,000 Class A and Class B units, or upon agreement of the CEO and the Board of Directors, the CEO may convert the contractual unit appreciation rights to up to 20,000 Class A and Class B units. The diluted EPU reflects the circumstances of termination of the CEO employment agreement, and the election of CEO or agreement by the Board of the Company and the CEO for the CEO to purchase or convert contractual rights to the maximum 20,000 units at $55 per linked Class A and Class B unit for the periods as provided for in the CEO employment agreement.
The diluted loss per linked unit calculation in the following table excludes the effect of the 20,000 unit purchase rights noted above for the 13 week period ending November 24, 2007 and November 25, 2006, respectively, as the effect of including them would have been anti-dilutive to the loss per linked unit calculation.
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Loss Per Linked Unit Calculation |
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(In thousands, except unit and per unit data) | 13 weeks ended November 24, 2007 |
| 13 weeks ended November 25, 2006 | ||
| (unaudited) |
| (unaudited) | ||
Basic loss per unit |
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Loss available to unitholders (numerator) | $ | (13,712) |
| $ | (13,075) |
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Weighted average outstanding units (denominator) | 735,385 |
| 735,505 | ||
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Per unit amount | $ | (18.65) |
| $ | (17.78) |
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Diluted loss per unit |
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Loss available to unitholders (numerator) | $ | (13,712) |
| $ | (13,075) |
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Weighted average outstanding units | 735,385 |
| 735,505 | ||
Effect of dilutive securities - unit options | - |
| - | ||
Units (demoninator) | 735,385 |
| 735,505 | ||
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Per unit amount | $ | (18.65) |
| $ | (17.78) |
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8 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this report.
Disclosure Regarding Forward-Looking Statements
This report contains “forward-looking statements,” which are subject to a number of risks and uncertainties, many of which are beyond our control. Forward-looking statements are typically identified by the words “believe,” “expect,” “anticipate,” “intend,” “estimate” and similar expressions. Actual results could differ materially from those contemplated by these forward-looking statements as a result of many factors, including economic conditions generally and in our principal markets, the availability and prices of live cattle and commodities, food safety, livestock disease, including the identification of cattle with Bovine Spongiform Encephalopathy (BSE), competitive practices and consolidation in the cattle production and processing industries, actions of domestic or foreign governments, hedging risk, changes in interest rates and foreign currency exchange rates, consumer demand and preferences, the cost of compliance with environmental and health laws, loss of key customers, loss of key employees, labor relations, consolidation among our customers and the potential inability to receive the anticipated benefits from the acquisition of the processing facility in Brawley, CA.
In light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward-looking information contained in this report will in fact transpire. Readers are cautioned not to place undue reliance on these forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statements. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. See also the Risk Factors in Item 1A. Business of the Company’s Annual Report for the year ended August 25, 2007 on Form 10-K filed with the Securities and Exchange Commission for other important factors that could cause actual results to differ materially from those in any such forward-looking statements, and which should be read in conjunction with this report.
Industry Outlook
The cattle herd in the United States (U.S.) remains in a no-growth phase. Following the drought of 2006 in the central region of the U.S., an extreme dryness in the southeastern region of the U.S. resulted in cow herd liquidation in the southeastern region during 2007. Retention of females to replenish and grow the U.S. cattle herd remains slow, resulting in long-term cattle supplies that show no appreciable sign of growth in overall fed cattle supplies over the next two to three years. Meanwhile, cattle on feed supplies have returned to approximately the same level as the same time last year. Anticipated higher live cattle weights should support expectations for year over year beef production gains during the first half of 2008 before trending back below 2007 levels for the remainder of 2008.
Recent Developments
Negotiations for the Collective Bargaining Agreement with the United Food and Commercial Workers Union, Local 2, for the Liberal, Kansas facility, to replace the prior agreement that expired on December 16, 2007, were completed in December 2007. The newly ratified agreement provides for a five-year term expiring in December 2012. The new agreement includes changes in wages and benefits that allow us to continue to be cost competitive within the beef industry while ensuring the ability to attract and retain employees.
Beef Export Markets
Export markets for U.S. beef products remain significantly constrained since the discovery of a case of BSE in the State of Washington in December 2003, as well as several other isolated cases. In July 2006, Japan agreed to reopen its market to U.S. beef from cattle aged 20 months and younger. In September 2006, South Korea announced a provisional opening of its border to U.S. beef from animals 30 months and younger; however, restrictions imposed with the reopening have prompted further border closings from time to time. These constraints and uncertainties have had a negative impact on beef margins.
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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. Existing or new import restrictions or additional regulatory restrictions or disruptions in domestic consumer demand for beef may continue to have a material adverse affect on the Company’s revenues and net income.
Results of Operations
Thirteen weeks ended November 24, 2007 compared to thirteen weeks ended November 25, 2006
General. Net loss for the thirteen weeks ended November 24, 2007 was $13.7 million compared to net loss of $13.1 million for the thirteen weeks ended November 25, 2006, an increased loss of $0.6 million. Sales and cost of sales were both higher in the thirteen weeks ended November 24, 2007 than those of the prior year period primarily due to an increase of approximately 5.9% in the number of cattle processed, higher live cattle prices that were approximately 4.9% more and heavier cattle at average weights 0.8% more than the same period of fiscal year 2007.
Although sales increased by approximately 9.8% compared to the same period in the prior year, cost of sales also increased by approximately 9.8%, along with an approximate 12.5% increase in selling, general, and administrative expenses and an approximate 11.4% increase in depreciation expense, resulting in an increase in operating loss of $0.9 million. The increase in cost of sales was primarily due to an increase in cattle processed at live cattle prices that were approximately 4.9% higher and cattle weighing an average of 0.8% more than the same period in the prior year. Total costs and expenses of $1,414.2 million and $1,288.2 million for the thirteen weeks ended November 24, 2007 and November 25, 2006, respectively, were 101.2% as a percent of sales for both periods.
Net Sales. Net sales were $1,398.1 million for the thirteen weeks ended November 24, 2007 compared to $1,273.0 million for the thirteen weeks ended November 25, 2006, an increase of $125.1 million or 9.8%. The increase in net sales principally resulted from an approximate 5.9% increase in the number of cattle processed during the thirteen weeks ended November 24, 2007.
Cost of Sales. Cost of sales was $1,393.7 million for the thirteen weeks ended November 24, 2007 compared to $1,269.9 million for the thirteen weeks ended November 25, 2006, an increase of $123.8 million or 9.8%. The increase was a result of a combination of increased cattle processing of approximately 5.9%, higher live cattle prices that were approximately 4.9% more and heavier cattle at average weights 0.8% more than the same period of fiscal year 2007. The 4.9% increase in cattle prices for this period resulted from a continued tight supply of market-ready cattle.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses were $11.7 million for the thirteen weeks ended November 24, 2007 compared to $10.4 million for the thirteen weeks ended November 25, 2006, an increase of $1.3 million or 12.5%. The increase reflects an increase in payroll and related expenses of approximately $0.7 million, an increase in marketing and advertising expense of approximately $0.3 million, an approximate $0.3 million increase in legal fees, an approximate $0.1 million increase in dues and subscription expense, and an increase in travel expenses of approximately $0.1 million, which were offset by a decrease of approximately $0.2 million in bad debt expense and a decrease in repairs and maintenance expense of approximately $0.2 million.
Depreciation and Amortization Expense. Depreciation and amortization expenses were $8.8 million for the thirteen weeks ended November 24, 2007 compared to $7.9 million for the thirteen weeks ended November 25, 2006, an increase of $0.9 million or 11.4%. Most of the increase was due to increased depreciation expense resulting from assets being placed into service, primarily at the Dodge City and Brawley beef plants, during fiscal year 2007.
Operating Loss. An operating loss of $16.1 million was incurred for the thirteen weeks ended November 24, 2007 compared to an operating loss of $15.2 million for the thirteen weeks ended November 25, 2006, an increased loss of $0.9 million or 5.9%. The increase resulted primarily from a lower sales volume at our portion control meat facility.
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Interest Expense. Interest expense was $9.2 million for the thirteen weeks ended November 24, 2007 compared to $9.3 million for the thirteen weeks ended November 25, 2006, a slight decrease of $0.1 million or 1.1%. The decrease in interest expense during the thirteen weeks ended November 24, 2007 as compared to the same period in fiscal year 2007 was due primarily to lower interest rates on our variable rate debt, a decrease of approximately 53 basis points, during the thirteen weeks ended November 24, 2007 as compared to the same period in fiscal year 2007. Offsetting this decrease in interest rates was an increase in the weighted average of variable rate debt outstanding of approximately $38.0 million at November 24, 2007 as compared to November 25, 2006.
Income Tax Expense. Income tax expense was $0.5 million for the thirteen weeks ended November 24, 2007 compared to $0.2 million for the thirteen weeks ended November 25, 2006. Income tax expense is recorded on income from National Carriers, Inc., which is organized as a Subchapter C Corporation.
Liquidity and Capital Resources
As of November 24, 2007, we had net working capital of $241.8 million, which included $0.3 million in distributions payable, and cash and cash equivalents of $53.7 million. As of August 25, 2007 we had net working capital of $280.5 million, which included $2.7 million in distributions payable, and cash and cash equivalents of $62.9 million. NBP’s primary sources of liquidity are cash flow from operations and available borrowings under its amended and restated credit facility.
As of November 24, 2007, we had $432.0 million of long-term debt, of which $4.5 million was classified as a current liability. As of November 24, 2007, NBP’s amended and restated credit facility consisted of a $202.6 million term loan, all of which was outstanding, and a $200.0 million revolving line of credit loan, which had outstanding borrowings of $28.7 million, outstanding letters of credit of $55.3 million and available borrowings of $116.0 million, based on the most restrictive financial covenant calculations. Cash flows from operations and borrowings under the amended and restated credit facility have funded working capital requirements, acquisitions, capital expenditures and other general corporate purposes. NBP was in compliance with all of the financial covenants under its amended and restated credit facility as of November 24, 2007.
In addition to outstanding borrowings under the amended and restated credit facility, the Company had outstanding senior notes of $160.0 million, borrowings under industrial revenue bonds of $20.7 million, a term loan with CoBank, of which approximately $3.9 million was outstanding, and capital leases and other obligations of $16.1 million as of November 24, 2007.
NBP believes that available borrowings under its amended and restated credit facility and cash provided by operating activities will be sufficient to support its working capital, capital expenditures and debt service requirements for the foreseeable future. NBP is authorized to purchase up to $50.0 million of its outstanding Senior Notes from time to time in accordance with the limits imposed under the amended and restated credit facility. NBP’s ability to generate sufficient cash, however, is subject to certain general economic, financial, industry, legislative, regulatory and other factors beyond its control. For a review of the 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 Annual Report on Form 10-K for the year ended August 25, 2007.
USPB may purchase a portion of its outstanding Class A and Class B units from time to time in accordance with the limits imposed under the CoBank Credit Agreement.
Operating Activities
Net cash used in operating activities in the thirteen weeks ended November 24, 2007 was $3.7 million compared to net cash used in operating activities of $10.0 million in the thirteen weeks ended November 25, 2006. The $6.3 million change was primarily due to a larger decrease in working capital items in the current period, as compared to the same period a year ago, resulting primarily from an increase in accounts receivable collections, partially offset by an increase in beef inventory levels and a smaller decrease in accrued compensation.
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Investing Activities
Net cash used in investing activities was $11.6 million in the thirteen weeks ended November 24, 2007 compared to $9.9 million in the thirteen weeks ended November 25, 2006. This 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 $6.1 million in the thirteen weeks ended November 24, 2007 compared to $22.6 million in the thirteen weeks ended November 25, 2006. The change was primarily attributed to $9.6 million in net payments in revolving credit borrowings during the current thirteen week period as compared to $15.5 million in net receipts in revolving credit borrowings during the same period of last year, partially offset by a $6.8 million change in the overdraft balance.
Amended and Restated Senior Credit Facility
Effective July 25, 2007, NBP amended and restated its existing senior credit facility with a consortium of banks. The facility now consists of a $202.6 million term loan that matures in May 2016 and a $200.0 million revolving line of credit loan that matures in July 2012 and is subject to certain borrowing base limitations.
Borrowings under the facility bear interest at LIBOR or the Base Rate, plus the applicable margin. The applicable margin for the revolving line of credit will be based on borrowing base availability with grids greater than $150.0 million, $50.0 to $150.0 million and less than $50.0 million. As of November 24, 2007, the interest rate for the revolving loan was approximately 6.7%. The applicable margin for the term loan was also revised to a grid basis with different margins for Funded Debt to EBITDA Ratios greater than 3.50 to 1.00 and less than 3.50 to 1.00. As of November 24, 2007, the interest rate for the term loan was approximately 6.8%.
The revolving line of credit and the term loan will have no financial covenants unless the borrowing base availability is less than $50.0 million for five consecutive business days or less than $35.0 million on any single business day during any fiscal quarter. If the borrowing base availability falls below these amounts, a fixed charge ratio of 1:15 to 1:00 must be maintained at the end of each subsequent fiscal quarter until the borrowing base availability has been greater than or equal to $50.0 million for 90 consecutive days. NBP was not subject to the fixed charge ratio test at November 24, 2007. The advance rates under the borrowing base are 90% on eligible accounts and 70% on eligible inventory.
The borrowings under the revolving loan are available for the 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 installments of approximately $3.5 million on the last business day of each June and December commencing on June 30, 2011. All outstanding amounts of the term loan are due and payable on May 30, 2016. Prepayment is allowed at any time.
The amended and restated credit facility contains customary affirmative covenants, including, without limitation, conduct of business, the maintenance of insurance, compliance with laws, maintenance of properties, keeping of books and records, and the furnishing of financial statements. The facility also contains customary negative covenants, including without limitation, restrictions on the following: distributions, mergers, sale of assets, investments and acquisitions, encumbrances, indebtedness, affiliate transactions, and ERISA matters.
The amended and restated credit facility contains customary events of default, including without limitation, failure to make payment when due, materially incorrect representations and warranties, breach of covenants, events of bankruptcy, default of other indebtedness that would permit acceleration of such indebtedness, the occurrence of one or more unstayed or undischarged judgments in excess of $3.0 million, changes in custody or control of the Company’s property, changes in control of the Company, the failure of any of the loan documents to remain in full force, and the Company’s failure to properly fund its employee benefit plans. The facility also includes customary provisions protecting the lenders against increased cost or loss of yield resulting from changes in tax, reserve, capital adequacy and other requirements of law.
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Item 3. Quantitative and Qualitative Disclosures About Market 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 NBP presently believes that it 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 NBP’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, NBP 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. NBP may hedge the commodity price risk associated with these activities in order to mitigate this price risk. While this may tend to limit NBP’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, Accounting for Derivative Instruments and Hedging Activities, as amended, NBP accounts for futures contracts and their related firm purchase commitments at fair value. Certain firm commitments for live cattle purchases and all firm commitments for boxed beef sales 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 that statement. Accordingly, the gains and losses associated with the change in fair value of all futures contracts and the gains and losses associated with changes in the market value of certain of the firm commitments not designated as normal purchases are recorded to income and expense in the period of change.
NBP uses a sensitivity analysis to evaluate the effect that changes in the market value of commodities will have on these commodity derivative instruments. As of November 24, 2007, the potential change in fair value of applicable commodity prices, assuming a hypothetical 10% decrease in the underlying commodity price, was $16.3 million. As of August 25, 2007, the potential change in fair value of applicable commodity prices, assuming a hypothetical 10% decrease in the underlying commodity price, was $5.2 million.
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Foreign Operations. Transactions denominated in a currency other than an entity’s functional currency may expose that entity to currency risk. Although NBP operates in international markets including Japan and South Korea, product sales are predominately made in United States dollars, and therefore, currency risks are limited.
Interest Rates. As a result of the Company’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 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. As of November 24, 2007, the weighted average interest rate on our $255.9 million of variable rate debt was approximately 6.6%.
We had total interest expense of approximately $9.2 million during the thirteen week period ending November 24, 2007. The estimated increase in interest expense from a hypothetical 200 basis point increase in applicable variable interest rates would have been approximately $1.2 million in the thirteen week period ending November 24, 2007.
Item 4T. Controls and Procedures.
We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the Consolidated Financial Statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e) under supervision and with the participation of management, including our Chief Executive Officer and Chief Reporting and Compliance Officer. Based upon that evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Reporting and Compliance Officer concluded that our disclosure controls and procedures were effective in alerting them, in a timely manner, to material information required to be included in our periodic Securities and Exchange Commission filings. There have been no changes in our internal controls over financial reporting during the thirteen weeks ended November 24, 2007 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.
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PART II. OTHER INFORMATION
For information regarding legal proceedings, see Note 7. Legal Proceedings to our Consolidated Financial Statements included in Part I- Item 1 of this Form 10-Q.
The risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended August 25, 2007 have not materially changed. Please refer to the Company’s report on Form 10-K for the fiscal year ended August 25, 2007 to consider those risk factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of members of USPB was held on December 14, 2007. 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 three (3) directors to serve for three-year terms expiring after the 2010 fiscal year. The four nominees who stood for election to the Board of Directors were incumbent directors Mark Gardiner, Doug Laue, and Jerry Bohn and new candidate Joe Morgan. Biographical information regarding Messrs. Gardiner, Laue, Bohn, and Morgan has previously been included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 25, 2007.
At the Annual Meeting, under procedures established by the Company’s Nominating Committee, Messrs. Gardiner, Laue, Bohn, and Morgan stood for election for the three open seats on the USPB Board of Directors. USPB’s members elected Mark Gardiner, Doug Laue, and Joe Morgan to serve as directors on the Board of Directors for a term that will expire after fiscal year 2010. 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, out of 110 valid ballots, Mr. Gardiner received a total of 97 votes, Mr. Laue received a total of 96 votes, Mr. Bohn received a total of 47 votes and Mr. Morgan received a total of 63 votes. The other members of the Board of Directors, Mr. Fairleigh, Ms. Keiser, Mr. McCloy, and Mr. Ramsey continued in service as members of the USPB Board of Directors following the Annual Meeting.
None.
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(A) |
| Exhibits
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31.1 |
| Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
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31.2 |
| Certification of the Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
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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. | |
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32.2 |
| Certification of the Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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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 | |
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By: | /s/ Steven D. Hunt |
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| Steven D. Hunt (Principal Executive Officer) |
By: | /s/ Scott J. Miller |
Scott J. Miller (Principal Financial and Accounting Officer) |
Date: January 8, 2008
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