**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

 

| **(Mark one)** |
|----------------|
| þ         | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE	ACT OF 1934**
 

 

**For the quarterly period ended November 29, 2008**

**or**

 

	o

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

**For the transition period from                to              .**

**Commissionfile 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(Addressof principal executive offices)**

**Telephone:(866) 877-2525(Registrant’stelephone number, including area code)**

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes þ  No o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer or a small reporting company.  See definition of“accelerated filer”, “large accelerated filer” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filero
Accelerated Filer		 oNon-Accelerated Filer  þSmall Reporting Company  o
Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes þ No o

The registrant’s unitsare not traded on an exchange or in any public market.  As of December 27 , 2008, there were 735,385 Class A units and 735,385 Class B unitsoutstanding.     

 

 

 

 

 

 

 

 

**TABLE OF CONTENTS**

 

 

**PART I.**

**FINANCIAL INFORMATION**

**Page No.**

 

 

 

Item 1.

Financial Statements.

1

 

 

 

Item 2.

Management’s  Discussion and Analysis of Financial Condition and Results of Operations.

11

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

15

 

 

 

Item 4T.

Controls and Procedures.

17

 

 

 

 

 

 

**PART II.**

**OTHER INFORMATION**

 

 

 

 

Item 1.

Legal Proceedings.

18

 

 

 

   Item 1A.

Risk Factors.

18

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

18

 

 

 

Item 3.

Defaults Upon Senior Securities.

18

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders.

18

 

 

 

Item 5.

Other Information.

18

 

 

 

Item 6.

Exhibits. 

19

 

 

 

 

Signatures.

20

 

 

Unless the context indicates orotherwise 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 itsconsolidated subsidiaries. As used in this report, the terms “NBP” and“National Beef” refer to National Beef Packing Company, LLC (formerly known asFarmland National Beef Packing Company, LP), a Delaware limited liabilitycompany, and “USPB” refers to U.S. Premium Beef, LLC (formerly known U.S.Premium Beef, Ltd.) prior to consolidation. 

**                                                                                               **

 

 

ii

 

 

 

 

 

 

 

**PART I.  FINANCIAL INFORMATION**

** **

**Item 1.  Financial Statements.**

 

 

 

 

 

 

 

   

 

 

  

** **

 

 

 

 

1

                                                                                                

 

 

 

 

 

** **

** **

 

 

 

 

 

 

 

 

**Consolidated Balance Sheets**

(in thousands, except unit data)

 

 

 

 

 

 

 

 

 

 

 

**November 29,**

 

**August 30,**

**Assets**

 

**2008**

 

**2008**

 

 

 

 

**(unaudited)**

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

102,096 

 

$

77,399 

 

Accounts receivable, less allowance for returns and doubtful accounts

 

 

 

 

 

 

of $1,650 and $1,665, respectively

 

178,345 

 

218,023 

 

Due from affiliates

 

3,627 

 

5,827 

 

Other receivables

 

5,710 

 

5,392 

 

Inventories

 

200,078 

 

192,480 

 

Other current assets

 

32,702 

 

12,765 

 

 

Total current assets

 

522,558 

 

511,886 

Property, plant, and equipment, at cost

 

438,150 

 

431,584 

 

Less accumulated depreciation

 

(142,799)

 

133,436 

 

 

Net property, plant, and equipment

 

295,351 

 

298,148 

Goodwill

 

80,642 

 

80,642 

Other intangible assets, net of accumulated amortization

 

 

 

 

 

of $9,871 and $9,347, respectively

 

26,168 

 

26,690 

Other assets

 

9,185 

 

9,710 

 

 

Total assets

 

$

933,904 

 

$

927,076 

 

 

 

 

 

 

 

**Liabilities and Capital Shares and Equities**

 

 

 

 

Current liabilities:

 

 

 

 

 

Current installments of long-term debt

 

$

4,117 

 

$

4,620 

 

Cattle purchases payable

 

75,887 

 

65,378 

 

Accounts payable - trade

 

70,653 

 

71,321 

 

Due to affiliates

 

646 

 

1,004 

 

Accrued compensation and benefits

 

19,543 

 

49,320 

 

Accrued insurance

 

13,745 

 

12,918 

 

Other accrued expenses and liabilities

 

40,832 

 

10,152 

 

Distributions payable

 

364 

 

19,245 

 

 

Total current liabilities

 

225,787 

 

233,958 

Long-term liabilities:

 

 

 

 

 

Long-term debt, excluding current installments

 

396,557 

 

376,298 

 

Other liabilities

 

2,248 

 

2,327 

 

 

Total long-term liabilities

 

398,805 

 

378,625 

 

 

Total liabilities

 

624,592 

 

612,583 

Minority interest in National Beef Packing Company, LLC and Kansas City Steak Company, LLC

192,089 

 

187,997 

Capital shares and equities:

 

 

 

 

 

Members' capital, 735,385 Class A units and 735,385 Class B units

 

 

 

 

 

 

authorized, issued and outstanding

 

66,625 

 

75,831 

 

Patronage notices

 

50,642 

 

50,642 

 

Accumulated other comprehensive income

 

(44)

 

23 

 

 

Total capital shares and equities

 

117,223 

 

126,496 

Commitments and contingencies

 

- 

 

- 

 

 

Total liabilities and capital shares and equities

 

$

933,904 

 

$

927,076 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

** **

** **

2

                                                                                                

 

 

 

 

 

 

** **

 

 

 

 

 

 

 

 

 

**U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES**

**Consolidated Statements of Operations**

(in thousands, except per unit and per unit data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**13 weeks ended**

 

**13 weeks ended**

 

 

 

 

 

**November 29, 2008**

 

**November 24, 2007**

 

 

 

 

 

**(unaudited)**

 

**(unaudited)**

 

 

 

 

 

 

 

 

Net sales

 

 

$

1,428,977 

 

$

1,398,102 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

Cost of sales

 

1,404,038 

 

1,393,692 

 

Selling, general, and administrative expenses

 

12,886 

 

11,659 

 

Depreciation and amortization

 

9,969 

 

8,829 

 

 

Total costs and expenses

 

1,426,893 

 

1,414,180 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

2,084 

 

(16,078)

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

181 

 

528 

 

Interest expense

 

(6,852)

 

(9,220)

 

Minority owners' interest in net loss of National Beef

 

 

 

 

 

 

Packing Company, LLC

 

1,516 

 

11,390 

 

Minority owners' interest in net income of Kansas City

 

 

 

 

 

 

Steak Company, LLC

 

(172)

 

(25)

 

Equity in loss of aLF Ventures, LLC

 

(25)

 

(25)

 

Other, net

 

392 

 

267 

 

 

 

Loss before taxes

 

(2,876)

 

(13,163)

 

 

 

 

 

 

 

 

Income tax expense

 

(369)

 

(549)

 

 

 

Net loss

 

$

(3,245)

 

$

(13,712)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per Class A and Class B linked unit:

 

 

 

 

 

Basic

 

 

$

(4.41)

 

$

(18.65)

 

Diluted

 

 

$

(4.41)

 

$

(18.65)

 

 

 

 

 

 

 

 

Outstanding weighted-average Class A and Class B linked units:

 

 

 

 

Basic

 

 

735,385 

 

735,385 

 

Diluted

 

 

735,385 

 

735,385 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

** **

3

                                                                                                

 

 

 

 

 

** **

** **

 

 

 

 

 

 

 

 

 

 

**U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES**

**Consolidated Statements of Cash Flows**

(in thousands)

 

 

 

 

 

 

**13 weeks ended**

 

**13 weeks ended**

 

 

 

 

 

 

**November 29, 2008**

 

**November 24, 2007**

 

 

 

 

 

 

**(unaudited)**

 

**(unaudited)**

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

 

$

(3,245)

 

$

(13,712)

 

Adjustments to reconcile net loss to net cash provided by (used in)

operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

9,969 

 

8,829 

 

 

Gain on disposal of property, plant, and equipment

 

(57)

 

(2)

 

 

Minority interest

 

(1,344)

 

(11,373)

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

39,678 

 

14,767 

 

 

 

Due from affiliates

 

3,457 

 

403 

 

 

 

Other receivables

 

(318)

 

(1,542)

 

 

 

Inventories

 

(7,598)

 

(12,014)

 

 

 

Other assets

 

(19,413)

 

(229)

 

 

 

Cattle purchases payable

 

3,095 

 

6,679 

 

 

 

Accounts payable

 

(647)

 

2,520 

 

 

 

Due to affiliates

 

(362)

 

(855)

 

 

 

Accrued compensation and benefits

 

(29,777)

 

(3,618)

 

 

 

Accrued insurance

 

827 

 

323 

 

 

 

Other accrued expenses and liabilities

 

29,348 

 

6,124 

 

 

 

 

Net cash provided by (used in) operating activities

 

23,613 

 

(3,700)

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures, including interest capitalized

 

(6,952)

 

(11,558)

 

Proceeds from sale of property, plant, and equipment

 

360 

 

6 

 

 

Net cash used in investing activities

 

(6,592)

 

(11,552)

Cash flows from financing activities:

 

 

 

 

 

Net receipts (payments) under revolving credit lines

 

23,633 

 

(9,648)

 

Payments of term notes payable

 

(257)

 

(257)

 

Repayments of other indebtedness / capital leases

 

(1,280)

 

(1,106)

 

Purchase and cancellation of Senior Notes

 

(2,340)

 

- 

 

Change in overdraft balances

 

7,393 

 

19,975 

 

Distributions to minority interest owners in National Beef Packing Company, LLC

 

(19,406)

 

(2,866)

 

 

 

 

Net cash provided by financing activities

 

7,743 

 

6,098 

 

Effect of exchange rate changes on cash

 

(67)

 

5 

 

 

 

 

Net increase (decrease) in cash

 

24,697 

 

(9,149)

Cash and cash equivalents at beginning of the period

 

77,399 

 

62,869 

Cash and cash equivalents at end of the period

 

$

102,096 

 

$

53,720 

Supplemental cash disclosures:

 

 

 

 

 

Cash paid during the period for interest

 

$

2,723 

 

$

5,428 

 

Cash paid during the period for taxes, net of refunds

 

$

136 

 

$

525 

Supplemental non-cash disclosures of investing and financing activities:

 

 

 

 

 

Assets acquired through capital lease

 

$

44 

 

$

- 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

** **

4

                                                                                                

 

 

 

 

 

**U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**(1)Interim Financial Statements**

**Basisof Presentation**

The accompanying unaudited Consolidated FinancialStatements have been prepared in accordance with U.S. generally acceptedaccounting principles (GAAP) for interim financial information; therefore, theydo not include all of the information and footnotes required by GAAP forcomplete financial statements. In the opinion of management, all adjustmentsconsidered necessary for a fair presentation have been included usingmanagement’s best estimates and judgments where appropriate.  These estimatesand judgments affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements.  The estimates and judgments will also affect the reported amountsfor certain revenues and expenses during the reporting period.  Actual resultscould differ materially from these estimates and judgments.  For furtherinformation, refer to the audited Consolidated Financial Statements and Notesto Consolidated Financial Statements, which are included in the Company’s AnnualReport on Form 10-K on file with the Securities and Exchange Commission (SEC)for the fiscal year ended August 30, 2008.  The results of operations for theinterim periods presented are not necessarily indicative of the results for afull fiscal year.  

NB Finance Corp., a wholly-owned finance subsidiary ofNBP, 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 paymentwith all of its other senior unsecured obligations.  NB Finance Corp. hasnominal assets and conducts no business or operations. There are no significantrestrictions on the ability of subsidiaries to transfer funds to NBP.

**(2)New Accounting Pronouncements**

In February 2008, the Financial Accounting StandardsBoard (FASB) issued FASB Staff Position 157-2, which defers the effective dateof SFAS No. 157, *Fair Value Measurements* (SFAS 157) for nonfinancialassets and nonfinancial liabilities, except for items that are recognized ordisclosed at fair value in an entity’s financial statement on a recurring basis(at least annually).  FASB Staff Position 157-2 iseffective for fiscal years beginning after November 15, 2008.  Management believes the adoption of Staff Position 157-2 will not have a material impacton the Company’s financial position or net earnings.

In December 2007, the FASB issued SFAS No. 141R (SFAS141R), *Business Combinations. *This statement requires an acquirer torecognize the assets acquired, the liabilities assumed, and any noncontrollinginterest in the acquiree at the acquisition date to be measured at their fairvalue as of that date.  An acquirer is required to recognize assets orliabilities arising from all other contingencies (contractual contingencies) asof the acquisition date, measured at their acquisition-date fair values, onlyif it is more likely than not that they meet the definition of an asset or aliability in FASB Concepts Statement No. 6, *Elements of FinancialStatements.*  Any acquisition-related costs are to be expensed instead ofcapitalized.  This statement applies prospectively to business combinations forwhich the acquisition date is on or after the beginning of the first annualreporting period beginning on or after December 15, 2008.  The impact to the Company from the adoption of SFAS 141R in fiscal year 2010 will depend onacquisitions at the time.

In December 2007, the FASB issued SFAS No. 160 (SFAS160),*Noncontrolling Interests in Consolidated Financial Statements - anAmendment of ARB No. 51*.  SFAS 160 establishes accounting and reporting standardsfor the noncontrolling interest (minority interest) in a subsidiary.  SFAS160 requires noncontrolling interests held by parties other than the parent insubsidiaries be clearly identified, labeled, and presented in the consolidatedbalance sheet within equity, but separate from the parent's equity.  SFAS 160 is effective for fiscal years beginning after December 15, 2008.  The Company is currently assessing the impact SFAS 160 may have, if any, onits consolidated financial statements.

5

                                                                                                

 

 

 

 

 

In March 2008, the FASB issued SFAS No. 161 (SFAS 161),*Disclosures about Derivative Instruments and Hedging Activities - anamendment of FASB Statement No. 133*.  SFAS 161 establishes enhanceddisclosure requirements about: 1) how and why an entity uses derivative instruments;2) how derivative instruments and related hedged items are accounted for underStatement 133 and its related interpretations; and 3) how derivativeinstruments and related hedged items affect an entity’s financial position,financial performance and cash flows.  SFAS 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15, 2008.  The Company is currently assessing the impact SFAS 161 will have onits consolidated financial statements.

**(3)  Membership InterestPurchase Agreement with JBS**

On February 29, 2008, JBS, NBP, USPB and the other holders of membership interests in NBP, including NBPCO Holdings, LLC and parties controlled by three executive officers, John R. Miller, Timothy M. Klein and Scott H. Smith (Sellers), entered into a Membership Interest Purchase Agreement (MIPA), as amended from time to time. Under the MIPA, JBS will acquire all of the outstanding membership interests in NBP for a combination of approximately $488.4 million cash and $71.6 million in common stock of JBS (Purchase Price).

Pursuant to the MIPA, at closing USPB and certain other members of NBP will receive their proportionate share of the Purchase Price with (i) 80.0% to be paid in cash and 20.0% to be paid in shares of common stock of JBS (JBS Stock) or (ii) 100% to be paid in shares of JBS Stock, which will be freely transferable on the Novo Mercado segment of the BOVESPA stock exchange in Brazil. The number of shares of JBS Stock will be determined based on the volume weighted average of the closing per share price of the JBS Stock on the BOVESPA stock exchange during the 20 trading days prior to closing, subject to certain adjustments. Certain of NBP’s members have elected to receive or, under certain circumstances, have the right to receive their portion of the Purchase Price entirely in cash. If JBS is unable to deliver JBS Stock on an unencumbered and freely transferable basis at closing, the Sellers may still demand to close, but be paid entirely in cash.

Consummation of the MIPA is subject to customary conditions, including approval of the MIPA by the members of USPB and the shareholders of JBS and the expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and possible approvals by certain foreign jurisdictions.  On March 14, 2008, at a Special Meeting of Members, USPB’s members approved the MIPA and the transactions contemplated under the MIPA.  The shareholders of JBS approved the MIPA on April 11, 2008. On October 20, 2008, the U.S. Department of Justice (DoJ), joined by the state attorneys general from seventeen states, filed a civil antitrust suit in U.S. District Court for the Northern District of Illinois seeking a permanent injunction of the MIPA alleging that it would result in lower prices paid to cattle suppliers and higher beef prices for consumers.  A similar suit was filed on November 13, 2008 in the same court by the Ranchers Cattlemen Action Legal Fund, United Stockgrowers of America (R-CALF) and the Organization for Competitive Markets (OCM).  These actions were vigorously contested by USPB, NBP, and JBS, when the case was stayed in December 2008 to enable the parties to explore a settlement.  There can be no assurance that any settlement will be reached or that the transaction will be consummated.

The MIPA contains certain termination rights andprovides that under certain circumstances, JBS or NBP may be required to payNBP or JBS, respectively, a termination fee of $25 million plus certain costs. The parties have agreed on the payment of certain fees and expenses, includingthose related to antitrust filings and compliance.

 

 

 

 

6

                                                                                                

 

 

 

 

 

**(4)Inventories**

Inventories at November 29, 2008 and August 30, 2008 consisted of the following (in thousands):

 

 

 

 

**November 29, 2008**

 

**August 30, 2008**

 

 

 

 

 

 

 

Dressed and boxed meat products

 

$

153,947 

 

$

144,885 

Beef by-products

 

19,416 

 

20,886 

Supplies and other

 

26,715 

 

26,709 

 

 

 

 

$

200,078 

 

$

192,480 

 

 

 

 

 

 

 

** **

**(5)Comprehensive Loss**

Comprehensive loss, which consists of net loss andforeign currency translation adjustments, was as follows for the periodsindicated (in thousands): 

 

 

 

 

 

 

**13 weeks ended**

**November 29, 2008**

 

**13 weeks ended**

**November 24, 2007**

Net loss

 

 

 

$

(3,245)

 

$

(13,712)

Other comprehensive (loss) income:

 

 

 

 

        Foreign currency translation adjustments

(67)

 

5 

 

 

Comprehensive loss

 

$

(3,312)

 

$

(13,707)

 

 

 

 

 

 

 

 

 

** **

**(6)Minority Interest **

At any time after certain dates, the earliest beingJuly 31, 2008, the latest being July 31, 2011, certain members of NBPmanagement and/or NBPCo Holdings, LLC have the right to request that NBPrepurchase their interests, the value of which is to be determined by amutually agreed appraisal process. If NBP is unable to effect the repurchasewithin a specified time, the requesting member(s) have the right to cause asale process to commence.  The Company accounts for changes in the redemptionvalue of these interests by accreting the change in value over the currentperiod through the earliest redemption date of the respective interests.  At November 29, 2008, the value of the minority interest in National Beef was determined tobe $198.2 million, which was in excess of its carrying value.  Accordingly, thecarrying value of the minority interest in National Beef on the August 30, 2008balance sheet increased by approximately $6.0 million through accretion duringthe thirteen weeks ended November 29, 2008, resulting in the $190.5 millioncarrying value, which is included in the accompanying consolidated balance sheetas of November 29, 2008, as detailed in Note 8.

Generallyaccepted accounting principles require the Company to determine the fair valueof the minority owners’ interest at the end of each reporting period. To the extent that this value increases, thischange in fair value is accreted over the redemption period as discussed above. The Company uses Stern Brothers Valuation Advisors, to assist management inmeasuring fair value of the minority owners’ interest.  Key assumptions indetermining the fair value include the value offered by JBS under the MIPA,management’s estimate of the probability of the MIPA reaching a successfulconclusion, valuation multiples of publicly traded companies in the same orsimilar industries, management’s projections of future cash flows, and thediscount rate applied to the projected future cash flows.

The redemption value of the minority interest in NBPat November 29, 2008, decreased by approximately $22.1 million compared tothe value at August 30, 2008 primarily as a result of the deterioratingconditions in the financial markets and the decreased probability of theacquisition being completed.  Under theMIPA, JBS will acquire all of the outstanding membership interests in NBP foran aggregate value of $560.0 million.    

Thefair value of the minority interest would be impacted if the transactionscontemplated under the MIPA are not successfully completed.  Offsetting thechange in the redemption value of the minority interest is a correspondingchange in members’ capital.   (See Note 3 for further discussion of the MIPA.) 

 

7

                                                                                                

 

 

 

 

 

**(7)Legal Proceedings**

NBP’s wholly owned subsidiary, National Carriers,Inc., has various independent contractor drivers who are involved inaccidents from time to time, which in the aggregate could result in a material liabilityfor NBP.

NBP is a party to a number of other lawsuits andclaims arising out of the operation of its business. Management believes theultimate resolution of such matters should not have a material adverse effecton NBP’s financial condition, results of operations or liquidity.

The U.S. DoJ, joined by state attorneys general fromseventeen states (Arizona, Colorado, Connecticut, Iowa, Kansas, Minnesota,Mississippi, Missouri, Montana, New Mexico, North Dakota, Ohio, Oklahoma,Oregon, South Dakota, Texas, and Wyoming ), filed a civil antitrust suitagainst JBS and NBP on October 20, 2008 in the U.S. District Court for theNorthern District of Illinois, Eastern Division, seeking a permanent injunctionagainst the proposed acquisition of NPB by JBS, along with an award in theamount of their costs and attorneys’ fees.  The DoJ alleges that the proposedacquisition would substantially lessen competition in the purchase of fedcattle in the High Plains and the Southwest and in the production and sales ofUSDA-graded box beef in the U.S. generally, in violation of Section 7 of theClayton Act.  

On November 13, 2008, R-CALF and OCM filed a civilantitrust suit against JBS and NBP in the U.S. District Court for the NorthernDistrict of Illinois, Eastern Division, seeking a permanent injunction againstthe proposed acquisition of NBP by JBS, along with an award in the amount oftheir costs and attorneys’ fees.  R-CALF and OCM allege that the proposedacquisition would substantially lessen competition in the purchase of fedcattle in the High Plains and the Southwest and in the production and sales ofUSDA-graded boxed beef in the U.S. generally, in violation of Section 7 of theClayton Act.  

USPB, JBS and NBP were vigorously contesting these attempts by the DoJ, R-CALF and OCM to block the acquisition by JBS when the cases werestayed in December 2008 to enable the parties to explore a settlement. Therecan be no assurance that any settlement will be reached or that the transactionwill be consummated.

**(8) Fair Value Measurements**

In September 2006, the FASB issued SFAS No. 157 (SFAS157), *Fair Value Measurements*.  This statement establishes a singleauthoritative definition of fair value to be used when accounting rules requirethe use of fair value, sets out a framework for measuring fair value andrequires additional disclosures about fair value measurement.  SFAS 157clarifies that fair value is an exit price, representing the amount that wouldbe received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants.  

On August 31, 2008, the Company adopted portions ofSFAS 157, *Fair Value Measurements*, except for the non-financial assetsand liabilities within the scope of the deferral provided by FSP No. FAS 157-2 asdiscussed in Note 2.

SFAS 157 establishes a three-level fair valuehierarchy that prioritizes the inputs used to measure fair value.  The fairvalue hierarchy gives the highest priority to quoted market prices (Level 1)and the lowest priority to unobservable inputs (Level 3).  The three levels ofinputs used to measure fair value are as follows:

•   Level 1 – quoted prices in active markets foridentical assets or liabilities accessible by the reporting entity.

•   Level 2 – observable inputs other than quoted pricesincluded in Level 1, such as quoted prices for similar assets and liabilitiesin active markets; quoted prices for identical or similar assets andliabilities in markets that are not active; or other inputs that are observableor can be corroborated by observable market data.

•   Level 3 – unobservable inputs for an asset orliability.  Unobservable inputs should only be used to the extent observableinputs are not available.

	8

 

 

 

 

 

 

 

The following table details the assets and liabilitiesmeasured at fair value on a recurring basis as of November 29, 2008 and also the level within the fair value hierarchy used to measure each category of assets.

(in thousands)

 

 

 

 

 

 

 

 

**Description**

 

**November 29, 2008**

 

**Quoted Prices in**

**Active Markets for**

**Identical Assets**

**(Level 1)**

 

**Significant Other**

**Observable Inputs**

**(Level 2)**

 

**Significant**

**Unobservable**

**Inputs (Level 3)**

 

 

 

 

 

 

 

 

 

Other assets - derivatives

 

$

12,619 

 

$

12,619 

 

$

- 

 

$

- 

 

 

 

 

 

 

 

 

 

Other liabilities - derivatives

 

$

26,272 

 

$

16,065 

 

$

10,207 

 

$

- 

 

 

 

 

 

 

 

 

 

Minority owners' interest

 

$

190,453 

 

$

- 

 

$

- 

 

$

190,453 

 

 

 

 

 

 

 

 

 

 

Due to the fact the NBP’s equity is not traded, thereare significant unobservable inputs used in valuing redemption value of the minority interest in NBP.  For a more detailed discussion of minority owners’interest and the key inputs we use to value it, refer to Note 6.  The tablebelow represents the Company’s minority owners’ interest measured at fair valueon a recurring basis using significant unobservable inputs (level 3) as definedin SFAS 157 as of November 29, 2008.

**Fair Value Measurements Using Significant Unobservable Inputs Level 3)**

 

 

 

(in thousands)

 

Minority Owners' Interest

 

 

 

Balance at August 30, 2008

 

$

186,533 

Allocation of first quarter net loss

 

(1,516)

Class A priority distribution

 

(525)

Appraisal valuation adjustment

 

5,961 

Balance at November 29, 2008

 

$

190,453 

 

 

 

 

In February 2007, the FASB issued SFAS No. 159 (SFAS159), *The Fair Value Option for Financial Assets and Financial Liabilities*. This statement provides companies with an option to report selected financialassets and liabilities at fair value.  This statement was effective for theCompany as of August 31, 2008; however, the Company did not elect the option toreport any of the selected financial assets and liabilities at fair value.

**(9)Earnings Per Unit**

Basic earnings perunit (EPU) excludes dilution and is computed by dividing income or loss availableto unitholders by the weighted-average number of linked Class A and Class Bunits outstanding for the period.  Class A units and Class B units shall beissued, redeemed, and transferred together on a one for one basis until the Boardof Directors determines the extent and conditions under which Class A units andClass B units may be issued, redeemed, and transferred separately.

Diluted EPU reflects the potential dilution that couldoccur if potential unit purchase rights were exercised or contractualappreciation rights were converted into units.   Upon termination of the CEOemployment agreement, at the election of the CEO, or upon mutual agreement ofthe Board of the Company and the CEO, the CEO may purchase up to 20,000 Class Aand Class B units, or upon agreement of the CEO and the Board of Directors, theCEO may convert the contractual unit appreciation rights to up to 20,000 ClassA and Class B units.  The diluted EPU reflects the circumstances of terminationof the CEO employment agreement, and the election of CEO or agreement by theBoard of the Company and the CEO for the CEO to purchase or convert contractualrights to the maximum 20,000 units at $55 per linked Class A and Class B unitfor the periods as provided for in the CEO employment agreement. 

	9

                                                                                                

 

 

 

 

 

 

The diluted loss per linked unit calculation for the13 week periods ending November 29, 2008 and November 24, 2007 in the followingtable excludes the effect of the 20,000 unit purchase rights noted above as theeffect of including them would have been anti-dilutive to the calculation. 

* *

 

 

 

 

 

 

**Loss Per Linked Unit Calculation**

 

 

 

 

 

 

 

 

 

(In thousands, except unit and per unit data)

 

**13 weeks ended**

**November 29, 2008**

 

**13 weeks ended**

**November 24, 2007**

 

 

(unaudited)

 

(unaudited)

**Basic loss per unit**

 

 

 

 

Loss available to unitholders (numerator)

 

$

(3,245)

 

$

(13,712)

 

 

 

 

 

Weighted average outstanding units (denominator)

 

735,385 

 

735,385 

 

 

 

 

 

Per unit amount

 

$

(4.41)

 

$

(18.65)

 

 

 

 

 

**Diluted loss per unit**

 

 

 

 

Loss available to unitholders (numerator)

 

$

(3,245)

 

$

(13,712)

 

 

 

 

 

Weighted average outstanding units

 

735,385 

 

735,385 

Effect of dilutive securities - unit options

 

- 

 

- 

Units (demoninator)

 

735,385 

 

735,385 

 

 

 

 

 

Per unit amount

 

$

(4.41)

 

$

(18.65)

 

 

 

 

 

** **

	 

 

 

 

 

 

10

                                                                                                

 

 

 

 

 

**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

The following discussion shouldbe read in conjunction with our consolidated financial statements and relatednotes and other financial information appearing elsewhere in this report.

**DisclosureRegarding Forward-Looking Statements**

This report contains“forward-looking statements,” which are subject to a number of risks anduncertainties, many of which are beyond our control. Forward-looking statementsare typically identified by the words “believe,” “expect,” “anticipate,”“intend,” “estimate” and similar expressions. Actual results could differmaterially from those contemplated by these forward-looking statements as aresult of many factors, including the status of our proposed sale to JBS S.A.(JBS) in light of the United States (U.S.) Department of Justice (DoJ), theRanchers Cattlemen Action Legal Fund, United Stockgrowers of America (R-CALF)and the Organization for Competitive Markets (OCM) civil antitrust suits toblock it, economic conditions generally and in our principal markets, the availabilityand prices of live cattle and commodities, food safety, livestock disease,including the identification of cattle with BSE, competitive practices andconsolidation in the cattle production and processing industries, actions ofdomestic or foreign governments, hedging risk, changes in interest rates andforeign currency exchange rates, consumer demand and preferences, the cost ofcompliance with environmental and health laws, loss of key customers orsuppliers, loss of key employees, labor relations, and consolidation among ourcustomers.  

In light of these risks anduncertainties, there can be no assurance that the results and eventscontemplated by the forward-looking information contained in this report willin fact transpire. Readers are cautioned not to place undue reliance on theseforward-looking statements. We do not undertake any obligation to update orrevise any forward-looking statements. All subsequent written or oralforward-looking statements attributable to us or persons acting on our behalfare expressly qualified in their entirety by these factors.  See also the *RiskFactors* in *Item 1A. Business* of the Company’s Annual Report forthe year ended August 30, 2008 on Form 10-K filed with the Securities andExchange Commission for other important factors that could cause actual resultsto differ materially from those in any such forward-looking statements, andwhich should be read in conjunction with this report.

**Industry Outlook**

The U. S. cattle herd remains ina liquidation phase with fed steer and heifer supplies trending lower for thenext two to three years and possibly longer.  The extreme price volatility ofcattle input costs along with the sharp decline in commodity prices over thepast six months has reduced some of the financial stress at the ranch level. Major concerns about the overall economy, however, have blunted any thoughtthat expanding the U.S.’s cattle herd is imminent.  As a result of the weekglobal economic situation, trade in many export related beef products hasslowed dramatically.  It is anticipated that it will take several months forsome beef and beef by-product items to clear inventory and for these items toprovide any sustained financial support to the beef industry relative to thelevels realized over the past two years.  With year-to-year declines in fedcattle supplies and anticipated smaller 2009 pork and broiler proteinproduction, consumer ability or willingness to pay higher prices will be key tosupporting profitable cattle and beef prices over the coming months.

**RecentDevelopments**

The U.S. DoJ, joined by state attorneys general fromseventeen states (Arizona, Colorado, Connecticut, Iowa, Kansas, Minnesota,Mississippi, Missouri, Montana, New Mexico, North Dakota, Ohio, Oklahoma,Oregon, South Dakota, Texas, and Wyoming ), filed a civil antitrust suitagainst JBS and NBP on October 20, 2008 in the U.S. District Court for theNorthern District of Illinois, Eastern Division, seeking a permanent injunctionagainst the proposed acquisition of NPB by JBS, along with an award in theamount of their costs and attorneys’ fees.  The DoJ alleges that the proposedacquisition would substantially lessen competition in the purchase of fedcattle in the High Plains and the Southwest and in the production and sales ofUSDA-graded box beef in the U.S. generally, in violation of Section 7 of theClayton Act.  

11

                                                                                                

 

 

 

 

 

On November 13, 2008, R-CALF and OCM filed a civilantitrust suit against JBS and NBP in the U.S. District Court for the NorthernDistrict of Illinois, Eastern Division, seeking a permanent injunction againstthe proposed acquisition of NBP by JBS, along with an award in the amount oftheir costs and attorneys’ fees.  R-CALF and OCM allege that the proposedacquisition would substantially lessen competition in the purchase of fedcattle in the High Plains and the Southwest and in the production and sales ofUSDA-graded boxed beef in the U.S. generally, in violation of Section 7 of theClayton Act.  

USPB, JBS and NBP were vigorously contesting theseattempts by the DoJ, R-CALF and OCM to block the acquisition by JBS when the cases werestayed in December 2008 to enable the parties to explore a settlement.  

Recent world financial instability and foreigncurrency deviations have decreased the demand and value of certain industryproducts and inventories. 

**BeefExport Markets**

Exportmarkets for U.S. beef products remain constrained since the discovery of a caseof BSE in the State of Washington in December 2003, as well as other isolatedcases.  In July 2006, Japan agreed to reopen its market to U.S. beef from cattle aged 20 months and younger.  In April 2008, our Brawley facility wassuspended from shipping beef to Japan following the discovery of a short loinwhich included a portion of a spinal column, a specified risk material,prohibited by Japan.  Our Brawley facility was subsequently cleared to resumeshipments to Japan on September 19, 2008.  South Korea announced a provisionalopening of its border to U.S. beef from animals 30 months and younger inSeptember 2006; however, its border was subsequently closed in October 2007.  South Korea reopened its border and started inspecting U.S. beef near the end of June2008.  Our Dodge City facility was removed from the eligible supplier list to Mexico on December 23, 2008 for two days for an alleged ink issue in September 2008 whichwe believe to be untrue and unfounded.  These constraints and uncertaintieshave had a negative impact on beef margins.

We cannot presently assess the full economic impact ofthe consequences of BSE on the U.S. beef packing industry or on ouroperations.  Existing or new import restrictions or additional regulatoryrestrictions or disruptions in domestic consumer demand for beef may continueto have a material adverse affect on our revenues and net income.

**Resultsof Operations**

***Thirteen weeks ended November 29, 2008 compared to thirteen weeks ended November 24, 2007***

*General.*  Thenet loss for the thirteen weeks ended November 29, 2008 was approximately $3.2 million compared to a net loss of $13.7 million for the thirteen weeks ended November 24 , 2007, an improvement of $10.5 million.  While the average volume of cattleprocessed during the comparable thirteen-week periods fell by approximately3.1%, average sales prices per head increased approximately 6.0% during thecurrent quarter.  Improved demand of beef products during the first quarter offiscal year 2009 as compared to the same period of the prior year allowed theincrease in sales prices to cover the higher cost of the cattle that wereprocessed.

Total costs and expenses for the thirteen weeks ended November 29, 2008 were approximately $1,426.9 million, or 99.9% of sales compared toapproximately $1,414.2 million for the thirteen weeks ended November 24, 2007, or 101.2% of sales.  The increase in total costs and expenses wasprimarily due to an increase in cost of sales along with increases in selling,general, and administrative expenses and depreciation and amortizationexpenses.

*Net Sales*. Net sales were $1,429.0 million for the thirteen weeks ended November 29 , 2008 compared to $1,398.1 million for the thirteen weeks ended November 24 , 2007, an increase of $30.9 million, or 2.2%.  The increase in net salesprincipally resulted from an approximate 6.0% increase in the average sales pricesper head during the current thirteen week period of fiscal year 2009 ascompared to the same period a year ago while the average volume of cattleprocessed fell by approximately 3.1%.  Partially offsetting the increase inaverage sales prices per head was an approximate $21.6 million loss on the markto market adjustment on cattle futures contracts that NBP entered into during thefirst quarter of fiscal year 2009 to offset the risk of fixed price salescommitments. 

	12

                                                                                                

 

 

 

*Cost of Sales*. Cost of sales was $1,404.0 million for the thirteen weeks ended November 29 , 2008 compared to $1,393.7 million for the thirteen weeks ended November 24 , 2007, an increase of $10.3 million, or 0.7%.  The increase was primarily aresult of increased outbound freight costs by approximately 14.0% and increasedpackaging costs by approximately 16.2% during the current quarter as comparedto the same period of last year.  Also contributing to the increase in cost ofsales was an approximate 1.7% increase in cattle prices for the comparableperiods, resulting from a continued tight supply of market-ready cattle.  Partiallyoffsetting these increases was a decrease in the volume of cattle processed ofapproximately 3.1% during the quarter as compared to the same period of fiscalyear 2008.

*Selling, General and Administrative Expenses*.  Selling, general and administrative expenses were $12.9million for the thirteen weeks ended November 29, 2008 compared to $11.7 million for the thirteen weeks ended November 24, 2007, an increase of $1.2 million,or 10.3%.  The increase reflects an increase in payroll, bonus, and relatedexpenses of approximately $1.0 million and an increase in legal expenses ofapproximately $0.6 million, which were partially offset by a decrease ofapproximately $0.2 million in marketing and advertising expense.  

*Depreciation and Amortization Expense*.  Depreciation and amortization expenses were $10.0million for the thirteen weeks ended November 29, 2008 compared to $8.8 million for the thirteen weeks ended November 24, 2007, an increase of $1.2 million, or13.6%.  Depreciation expense increased mostly due to approximately $59.9million in fixed assets being placed into service primarily at our three beefplants and two case ready plants during fiscal year 2008.            

*Operating Income (Loss).*  Operating income was approximately $2.1 million forthe thirteen weeks ended November 29, 2008 compared to an operating loss of $16.1million for the thirteen weeks ended November 24, 2007, an improvement of $18.2 million. The significant improvement inoperating income during the first quarter of fiscal year 2009 was relatedprimarily to a more favorable market environment in the current period ascompared to same period of last year.  Improved customer demand allowed forincreased selling prices.

*Minority Owners’ Interest in NBP.*  Minority interest in the net lossof NBP for the thirteen weeks ended November 29 , 2008 was $1.5 million compared to a net loss for the thirteen weeks ended November 24, 2007 of $11.4 million, a change of $9.9 million. The minority interestin NBP represents the minority owners’ equity in NBP’s earnings.

*Interest Expense*.  Interest expense was $6.9 million for the thirteen weeks ended November 29 , 2008 compared to $9.2 million for the thirteen weeks ended November 24 , 2007, a decrease of $2.3 million, or 25.0%.  The decrease in interestexpense during the thirteen weeks ended November 29, 2008 as compared to the same period last year was due primarily to the purchase and cancellationof our Senior Notes of approximately $30.6 million and $2.3 million,respectively, during the fourth quarter of fiscal year 2008 and the firstquarter of fiscal year 2009.  Also contributing to the decrease in interestexpense was lower interest rates on our variable rate debt, a decrease ofapproximately 234 basis points, during the thirteen weeks ended November 29, 2009 as compared to the same period of last year.  In addition, the weightedaverage principal amount of our variable rate debt decreased by approximately$12.3 million at November 29, 2008 as compared to November 24, 2007.

*Income Tax Expense*.  Income tax expense was $0.4 million for the thirteen weeks ended November 29, 2008 compared to $0.5 million for the same period of fiscal year 2008, a decreaseof $0.1 million, or 20.0%.  Beginning in calendar year 2008, some states inwhich we conduct business, modified their business taxes, using net income, ora modification of net income, as the basis.  The modification of these statetaxes necessitated the inclusion of approximately $0.1 million of thesebusiness taxes in income tax expense during the thirteen weeks ended November 29, 2008 as compared to the same period of fiscal year 2008.  A decrease inincome taxes for the period of approximately $0.3 million was related to oursubsidiary, National Carriers, Inc. (NCI).  Income tax expense is recorded onincome from NCI, which is organized as a C Corporation.

** **

	13

                                                                                                

 

 

 

 

 

** Liquidityand Capital Resources**

As of November 29, 2008, we had net working capital of$296.8 million, which included $0.4 million in distributions payable, and cashand cash equivalents of $102.1 million.  As of August 30, 2008, we had net working capital of $277.9 million, which included $19.2 million in distributionspayable, and cash and cash equivalents of $77.4 million.  Our primary sourcesof liquidity are cash flow from operations and available borrowings under ouramended and restated credit facility (Credit Facility).

As of November 29, 2008, we had $400.7 million oflong-term debt, $4.1 million of which was classified as a current liability. Asof November 29, 2008, NBP’s Credit Facility consisted of a $202.6 million termloan, all of which was outstanding, and a $200.0 million revolving line ofcredit loan, which had outstanding borrowings of $35.0 million, outstandingletters of credit of $44.2 million and available borrowings of $120.8 million,based on the most restrictive financial covenant calculations.  Cash flows fromoperations and borrowings under NBP’s Credit Facility have funded its workingcapital requirements, acquisitions, capital expenditures and other generalcorporate purposes.  NBP was in compliance with all of the financial covenantsunder its Credit Facility as of November 29, 2008.

In addition to outstanding borrowings under the CreditFacility, the Company had outstanding borrowings under industrial revenue bondsof $20.7 million, senior notes of $127.1 million, a term loan with CoBank, ofwhich approximately $2.9 million was outstanding, and capital lease and otherobligations of $12.4 million as of November 29, 2008.

NBP believes that available borrowings under its CreditFacility and cash provided by operating activities will be sufficient tosupport working capital, capital expenditures and debt service requirements forthe foreseeable future.  NBP is authorized to purchase up to $50.0 million of itsoutstanding Senior Notes in the aggregate from time to time in accordance withthe limits imposed under the Credit Facility, of which $32.9 million have beenrepurchased to date.  NBP’s ability to generate sufficient cash, however, issubject to certain general economic, financial, industry, legislative,regulatory and other factors beyond its control.  For a review of theobligations that affect liquidity, please see the*Cash Payment Obligations*table in Item 7. *Management’s Discussion and Analysis of Financial Conditionand Results of Operations* of our Annual Report on Form 10-K for the yearended August 30, 2008.

*OperatingActivities*

Net cash provided by operating activities in thethirteen weeks ended November 29, 2008 was $23.6 million compared to net cashused in operating activities of $3.7 million in the thirteen weeks ended November 24 , 2007.  The $27.3 million change was due primarily to a lower net loss ofapproximately $10.5 million during the first quarter of fiscal year 2009 ascompared to the first quarter of fiscal year 2008.  Net cash was provided byoperating activities through accounts receivable and other accrued expenses andliabilities during the thirteen week period of the current year as compared tothe thirteen week period of last year while net cash was used in operatingactivities through other assets and accrued compensation and benefits.

*InvestingActivities*

Net cash used in investing activities was $6.6 millionin the thirteen weeks ended November 29, 2008 compared to $11.6 million in thethirteen weeks ended November 24, 2007.  This decrease in cash used wasprimarily attributable to a decrease in expenditures for property, plant andequipment during the first quarter of fiscal year 2009 as compared to the sameperiod of fiscal year 2008.

*FinancingActivities*

Net cash provided by financing activities was $7.7 millionin the thirteen weeks ended November 29, 2008 compared to net cash provided byfinancing activities of $6.1 million in the thirteen weeks ended November 24 , 2007.  The change was primarily the result of $23.6 million in net receiptsin revolving credit borrowings during the current thirteen week period ascompared to $9.6 million in net payments in revolving credit borrowings duringthe same period of last year and an increase of $7.4 million in the overdraftbalance. Partially offsetting this increase was an increase in distributions of$19.4 million. 

	14
 
                                                                                                

 

 

 

 

 

*Amendedand Restated Senior Credit Facility*

Effective July 25, 2007, NBP amended and restated its existing senior credit facility with a consortium of banks.  The Credit Facilitynow 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 that issubject to certain borrowing base limitations.    

Borrowingsunder the Credit Facility bear interest at LIBOR or the Base Rate, plus theapplicable margin.  The applicable margin for the revolving line of credit willbe 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 29, 2008, the interest rate for the revolving loan was approximately 3.8%.   The applicablemargin for the NBP’s term loan was also revised to a grid basis with differentmargins for Funded Debt to EBITDA Ratios greater than 3.50 to 1.00 and lessthan 3.50 to 1.00.  As of November 29, 2008, the interest rate for the termloan was approximately 4.3%.

The revolving line of credit and the term loan willhave 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 onany single business day during any fiscal quarter.  If the borrowing base availabilityfalls 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 borrowingbase availability has been greater than or equal to $50.0 million for 90consecutive days.  As of November 29, 2008, NBP had met the borrowing baseavailability requirements under its senior credit facilities and was notsubject to any financial covenants.

Theborrowings under the revolving loan are available for NBP’s working capitalrequirements, capital expenditures and other general corporate purposesincluding the purchase of a portion of its outstanding Senior Notes from timeto time in accordance with the limits imposed under the Credit Facility.  The CreditFacility is secured by a first priority lien on substantially all of NBP’sassets.  The principal amount outstanding under the term loan is due andpayable in equal installments of approximately $3.5 million on the lastbusiness 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 CreditFacility contains customary affirmative covenants, including, withoutlimitation, conduct of business, the maintenance of insurance, compliance withlaws, maintenance of properties, keeping of books and records, and thefurnishing of financial statements.  The facility also contains customarynegative covenants, including without limitation, restrictions on thefollowing:  distributions, mergers, sale of assets, investments andacquisitions, encumbrances, indebtedness, affiliate transactions, and ERISAmatters.

The Credit Facility contains customary events ofdefault, 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 permitacceleration of such indebtedness, the occurrence of one or more unstayed orundischarged judgments in excess of $3.0 million, changes in custody or controlof NBP’s property, changes in control of NBP, the failure of any of the loandocuments to remain in full force, and NBP’s failure to properly fund itsemployee benefit plans.  The facility also includes customary provisionsprotecting the lenders against increased cost or loss of yield resulting fromchanges in tax, reserve, capital adequacy and other requirements of law.

** **

**Item3. Quantitative and Qualitative Disclosures about Market Risk.**

The principal market risks affecting our business areexposure to changes in prices for commodities, such as livestock and boxedbeef, and interest rate risk.

*Commodities.*NBPuses various raw materials, many of which are commodities. Raw materials aregenerally available from several different sources, and NBP presently believesthat it can obtain them as needed.  Commodities are subject to pricefluctuations that may create price risk. When appropriate, NBP may hedgecommodities in order to mitigate this price risk. While this may tend to limit NBP’sability to participate in gains from commodity price fluctuations, it alsotends to reduce the risk of loss from changes in commodity prices. NBP reflectscommodity contract gains and losses as adjustments to the basis of underlyingcommodities purchased; gains or losses are recognized in the statement ofoperations as a component of costs of goods sold.

	15

                                                                                                

 

 
 
 

NBP purchases cattle for use in its processingbusinesses. When appropriate, NBP enters into forward purchase contracts atprices determined prior to the delivery of the cattle. The commodity price riskassociated with these activities can be hedged by selling (or buying) theunderlying commodity, or by using an appropriate commodity derivativeinstrument. The particular hedging instrument NBP uses depends on a number offactors, 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 pricerisk. When appropriate, NBP enters into forward sales contracts at pricesdetermined prior to shipment. NBP may hedge the commodity price risk associatedwith these activities in order to mitigate this price risk. While this may tendto limit NBP’s ability to participate in gains from commodity pricefluctuations, it also tends to reduce the risk of loss from changes incommodity beef prices. NBP reflects commodity contract gains and losses asadjustments to the basis of underlying commodities sold; gains or losses arerecognized in the statement of operations as a component of net sales.

NBP may use futures contracts in order to reduceexposure associated with entering into firm commitments to purchase live cattleat prices determined prior to delivery of the cattle as well as firmcommitments to sell certain beef products at sales prices determined prior toshipment. In accordance with SFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities*, as amended, NBP accounts for futurescontracts and their related firm purchase commitments at fair value. Certainfirm commitments for live cattle purchases and all firm commitments for boxedbeef sales are treated as “normal purchases and sales” and not marked tomarket.  SFAS No. 133 imposes extensive recordkeeping requirements in order totreat a derivative instrument as a hedge for accounting purposes. Derivativesqualify for treatment as hedges when there is a high correlation between thechange in fair value of the instrument and the related change in fair value ofthe underlying commitment. For derivatives that qualify as effective hedges,the change in fair value has no net effect on earnings until the hedgedtransaction affects earnings. For derivatives that are not designated ashedging 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 instrumentshelp mitigate various market risks, they are not designated and accounted foras hedges under SFAS No. 133 as a result of the extensive recordkeepingrequirements of that statement. Accordingly, the gains and losses associatedwith the change in fair value of all futures contracts and the gains and lossesassociated with changes in the market value of certain of the firm commitments notdesignated as normal purchases are recorded to income and expense in the periodof change.

NBP uses a sensitivity analysis to evaluate the effectthat changes in the market value of commodities will have on these commodityderivative instruments.  As of November 29, 2008, the potential change in fairvalue of applicable commodity prices, assuming a hypothetical 10% decrease inthe underlying commodity price, was $14.9 million.  As of August 30, 2008, the potential change in fair value of applicable commodity prices, assuming ahypothetical 10% decrease in the underlying commodity price, was $1.2 million.  Thissignificant change was primarily due to thecattle futures contracts that NBP entered into during the first quarter offiscal year 2009 to offset the risk of fixed-price sales commitments.

*Foreign Operations*.  Transactions denominated in a currency other than an entity’sfunctional currency may expose that entity to currency risk.  Although NBP operatesin international markets including Japan and South Korea, product sales arepredominately made in United States dollars, and therefore, currency risks arelimited.

*Interest Rates*.As a result of the Company’s normal borrowing and leasing activities, ouroperating results are exposed to fluctuations in interest rates, which wemanage primarily through our regular financing activities. We generallymaintain limited investments in cash and cash equivalents.  

	16

                                                                                                

 

 

 

 

 

We have long-term debt with variable interest rates.Short-term debt is primarily comprised of the current portion of long-term debtmaturing twelve months from the balance sheet date.  Our variable interestexpense is sensitive to changes in the general level of interest rates. As of November 29, 2008, the weighted average interest rate on our $261.2 million of variablerate debt was approximately 4.0%.

We had total interest expense of approximately $6.9million during the thirteen week period ending November 29, 2008.  The estimated increase in interest expense from a hypothetical 200 basis point increase inapplicable variable interest rates would have been approximately $1.3 millionin the thirteen week period ending November 29, 2008. 

** **

**Item 4T.  Controls and Procedures.**

We maintain asystem of controls and procedures designed to provide reasonable assurance asto the reliability of the Consolidated Financial Statements and otherdisclosures included in this report, as well as to safeguard assets fromunauthorized use or disposition. We evaluated the effectiveness of the designand operation of our disclosure controls and procedures as defined in theSecurities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e) undersupervision and with the participation of management, including our ChiefExecutive Officer and Chief Reporting and Compliance Officer. Based upon thatevaluation, as of the end of the period covered by this Quarterly Report onForm 10-Q, our Chief Executive Officer and Chief Reporting and ComplianceOfficer concluded that our disclosure controls and procedures were effective inalerting them, in a timely manner, to material information required to beincluded in our periodic Securities and Exchange Commission filings.  Therehave been no changes in our internal controls over financial reporting duringthe thirteen weeks ended November 29, 2008 that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.  The design of any system of controls and procedures is based inpart upon certain assumptions about the likelihood of future events. 

** **

	17

                                                                                                

 

 

 

 

 

**PARTII. OTHER INFORMATION**

** **

**Item 1. Legal Proceedings.**

For informationregarding legal proceedings, see Note 7. *Legal Proceedings* to our ConsolidatedFinancial Statements included in Part I- *Item 1* of this Form 10-Q. 

**Item 1A. Risk Factors.**

The risk factorsset forth in our Annual Report on Form 10-K for the fiscal year ended August 30, 2008 have not materially changed.  Please refer to the Company’s report on Form10-K for the fiscal year ended August 30, 2008 to consider those risk factors.

**Item 2. Unregistered Sales of EquitySecurities and Use of Proceeds.**

None.

**Item 3. Defaults Upon Senior Securities.**

None. 

**Item 4. Submission of Matters to a Vote ofSecurity Holders.**

TheAnnual Meeting of members of USPB was held on December 10, 2008. Other than approval of the minutes from the previous annual meeting, the only proposalpresented for member consideration at the Annual Meeting was the election of two(2) directors to serve for three-year terms expiring after the 2011 fiscalyear.  The three nominees who stood for election to the Board of Directors wereincumbent directors Carol Keiser and Rex McCloy and new candidate JeffSternberger.  Biographical information regarding Ms. Keiser and Messrs. McCloyand Sternberger has previously been included in the Company’s Annual Report on Form 10-K for the fiscal year ended August30, 2008.   

At the AnnualMeeting, under procedures established by the Company’s Nominating Committee, Ms.Keiser and Messrs. McCloy and Sternberger stood for election for the two openseats on the USPB Board of Directors.  USPB’s members elected Rex McCloy andJeff Sternberger to serve as directors on the Board of Directors for a termthat will expire after fiscal year 2011.  The election of the nominees wasby a majority of the members present and voting at the Annual Meeting,expressed by a written ballot.  In the election, out of 88 valid ballots, Ms.Keiser received a total of 17 votes, Mr. McCloy received a total of 79 votes andMr. Sternberger received a total of 77 votes.  The other members of the Boardof Directors, Messrs. Fairleigh, Gardiner, Laue, Morgan, and Ramsey continuedin service as members of the USPB Board of Directors following the AnnualMeeting.

**Item 5. Other Information.**

None.         

 

	18

                                                                                                

 

 

 

 

 

**Item 6. Exhibits.**

(A)

 

Exhibits

 

10.1

Contract Affirmation of  Second Amendment to Employment Agreement between U.S. Premium Beef, LLC and Steven  D. Hunt dated December 31, 2008 (filed herewith).
      10.2Employment Agreement dated  as of December 30, 2008 by and between the Company and John R. Miller (incorporated herein by reference to the Company’s Current Report on Form 8-K (File No. 333-111407) filed with the SEC on January 6, 2009).       
10.3
Amendment to Employment Agreement  for John R. Miller dated as of December 31, 2008 by and between the Company and John R. Miller (incorporated herein  by reference to Exhibit 21.1 to Form 10-K (File No. 333-111407) filed with  the SEC on January 13, 2009).      10.4Amendment to Employment Agreement  for Timothy M. Klein dated as of December 31, 2008 by and between the Company and Timothy M. Klein (incorporated  herein by reference to Exhibit 21.1 to Form 10-K (File No. 333-111407) filed  with the SEC on January 13, 2009).      31.1Certification of the Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 (filed herewith).
 

 

31.2 

Certification of the  Principal Financial and Accounting Officer pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 (filed herewith).

 

 

32.1 

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

 

 

32.2 

Certification of the  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 (filed herewith).

** **

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 

                                                                                            U.S. Premium Beef, LLC                    

 

 

 

 

By: 

 

/s/ Steven D. Hunt

 

 

 

 

 

Steven D. Hunt*Chief Executive Officer*

*(Principal Executive Officer)*

 

 

 

 

By: 

 

/s/ Scott J. Miller

 

 

 

 

 

Scott J. Miller* Chief Reporting and Compliance Officer*

*(Principal Financial and Accounting Officer)*

 

 

 

Date: January 13, 2009 

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