**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**Form 10-K**

**(Mark one)**

| þ |   | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
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| **For the fiscal year ended August 28, 2010** |
| **or**                                        |

 

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|--------|--------|-----------------------------------------------------------------------------------------------|
| o      |   | **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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**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  number)** |

**12200 North Ambassador Drive, Kansas City, MO 64163 (Addressof principal executive offices)**

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

Securitiesregistered pursuant to Section 12(b) of the Act:  NoneSecuritiesregistered pursuant to Section 12(g) of the Act:  None

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

 

 Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Act.  Yes þ Noo

 

 Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes þ  No  o

 

 Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).   Yes  No

 

 Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.   þ

 

 Indicate by check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and“smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer  o | Accelerated Filer 		o
Non-Accelerated Filer  þ
Smaller reporting company  o
 

 Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o   No þ

 

Theregistrant’s equity is not traded on any exchange or other public market;however, there have been private transactions.  As of October 27, 2010, therewere 735,385 Class A units and 755,385 Class B units outstanding.    

   

**DOCUMENTS INCORPORATED BY REFERENCE**

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**TABLE OF  CONTENTS**

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**PART I.**

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**Page No.**

Item 1.

Business.

4

Item 1A.

Risk Factors

15

Item 1B.

Unresolved Staff Comments

23

Item 2.

Properties.

23

Item 3.

Legal Proceedings.

24

Item 4.

Submission of Matters to a Vote of Security Holders.

24

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**PART II.**

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Item 5.

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

24

Item 6.

Selected Financial Data.

25

Item 7.

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

27

Item 7A.

Quantitative and Qualitative Disclosures About Market  Risk.

39

Item 8.

Financial Statements and Supplementary Data.

41

Item 9.

Changes in and Disagreements  with Accountants on Accounting and Financial Disclosure.

41

Item 9A.

Controls and Procedures.

41

Item 9B.

Other Information.

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**PART III.**

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Item 10.

Directors, Executive Officers and Corporate Governance.

42

Item 11.

Executive Compensation.

45

Item 12.

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

54

Item 13.

Certain Relationships and Related Transactions, and  Director Independence.

55

Item 14.

Principal Accounting Fees and Services.

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**PART IV.**

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Item 15.

Exhibits, Financial Statement Schedules.

59

 

Signatures

67

 

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**MARKET AND INDUSTRY DATA AND FORECASTS**

Market data and certain industry forecasts usedthroughout this report were obtained from internal surveys, market research,consultant surveys, publicly available information and industry publicationsand surveys. Industry surveys, publications, consultant surveys and forecastsgenerally state that the information contained therein has been obtained fromsources believed to be reliable, but that the accuracy and completeness of suchinformation is not guaranteed. We have not independently verified any of thedata from third-party sources nor have we ascertained the underlying economicassumptions relied upon therein. Similarly, internal surveys, industryforecasts and market research, which we believe to be reliable, based upon ourmanagement’s knowledge of the industry, have not been independently verified.Forecasts are particularly likely to be inaccurate, especially over longperiods of time. In addition, we do not know what assumptions regarding generaleconomic growth were used in preparing the forecasts we cite.

**DISCLOSURE REGARDING 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 economic conditions generally and in ourprincipal markets, the availability and prices of live cattle and commodities,food safety, livestock disease, including the identification of cattle with BSE,competitive practices and consolidation in the cattle production and processingindustries, actions of domestic or foreign governments, hedging risk, changesin interest rates and foreign currency exchange rates, consumer demand andpreferences, the cost of compliance with environmental and health laws, loss ofkey customers or suppliers, loss of key employees, labor relations, andconsolidation among our customers.

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 oral forward-lookingstatements attributable to us or persons acting on our behalf are expresslyqualified in their entirety by these factors.  Please review Item 1A. *RiskFactors* in this report, for other important factors that could cause actualresults to differ materially from those in any such forward-looking statements.

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 term “NBP” refers toNational Beef Packing Company, LLC (formerly known as Farmland National BeefPacking Company, LP (FNB)), a Delaware limited liability company and “USPB”refers to U.S. Premium Beef, LLC (formerly known as U.S. Premium Beef, Ltd.)prior to consolidation.  As used in this report, the terms “fiscal year” or “fiscalyear ended” refers to our fiscal year, which ends on the last Saturday inAugust.

 

 

 

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**PART I**

**ITEM 1.                 BUSINESS  **

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

**Overview**

U.S. Premium Beef, LLC (USPB) wasorganized in July 1996 as a Kansas cooperative by a steering committee ofcattle producers. USPB’s goal is to provide market access and improve themarketing and processing of beef products requiring higher quality cattle forwholesale and retail customers and consumers while providing higher returns tocattle producers. USPB operates an integrated cattle processing and beefmarketing enterprise where consumer and processor demands and requirements areimplemented through changes in genetics, feeding, and management. USPB’sunitholders benefit from its supplier alliance with National Beef Packing Company,LLC (NBP) through (i) premiums received in excess of cash market prices forhigher quality cattle, (ii) allocations of profits and potential distributions,(iii) potential unit price appreciation, and (iv) information that permitsunitholders to make informed production decisions.  

On June 12, 2003, USPB enteredinto an agreement with Farmland Industries, Inc. (Farmland) to acquire all ofthe partnership interests in Farmland National Beef Packing Company (FNB) heldby Farmland. USPB formed NB Acquisition, LLC (NB Acquisition) to consummate theacquisition. To finance the acquisition, USPB, NBPCo Holdings, LLC (NBPCoHoldings) and certain members of FNB’s management team purchased equity in NBAcquisition for $46.0 million in cash.  FNB issued $160.0 million of senior notes,amended its credit facility and transferred a portion of the proceeds of theoffering of the senior notes and borrowings under its amended credit facilityto NB Acquisition.  Subsequently, NB Acquisition merged into FNB, and FNB thenconverted into a limited liability company under Delaware law and became knownas National Beef Packing Company, LLC.  These transactions closed on August 6,2003.  

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

USPB holdsapproximately 69.3% of the Class B interests, as well as Class A and Class A1 interestswith an aggregate face amount of approximately $150.5 million, NBPCo Holdingsowns approximately 24.8% of the Class B interests, as well as Class A andClass A1 interests with an aggregate face amount of approximately $51.2million, and affiliates of Timothy M. Klein own approximately 5.9% of the ClassB interests, as well as Class A interests with an aggregate face amount ofapproximately $2.3 million.

**Products and Production**

USPB provides an integrated cattle production,processing and marketing system for the benefit of its unitholders andassociates. As the basis of that system, USPB’s unitholders have a guaranteedright plus**an obligation (on a one head per Class A unit per year basis)to deliver cattle to USPB, pursuant to the Uniform Cattle Delivery and MarketingAgreement (see *Cattle Delivery Arrangements*). USPB facilitates thedelivery of cattle to NBP for processing and subsequent product distributionand marketing. Shortly after the cattle are processed, cattle suppliersreceive, at no extra charge, individual animal carcass data previouslyconsidered proprietary by many processors. This carcass data assists producersin refining production methodologies, thereby improving the product quality andsubsequently enhancing the return to the producer. 

We believe the primary advantage of USPB’sownership in NBP centers around USPB’s ability to provide NBP with a consistentsupply of quality beef from a verified source, allowing NBP to target highermargin value-added markets. Consumers have historically demonstrated theirwillingness and desire to buy branded products that offer better value in otherconsumer product markets, with the Certified Angus Beef® productline being an example in the beef industry. 

**Cattle Producers’ Uniform Cattle Delivery and Marketing Agreements**

USPB facilitates the delivery ofcattle from its unitholders and associates to NBP. Under the cooperativestructure, each share of common stock held by a shareholder entitled andobligated that shareholder to deliver one head of cattle per year to thecooperative. Each shareholder was required to enter into a Uniform Delivery andMarketing Agreement with the cooperative whereby the shareholder was committedto supply a designated number of cattle on an annual basis to be deliveredduring the delivery periods set forth in the delivery agreement. In the LLCstructure, each Class A unit held by a unitholder entitles and obligates thatunitholder to deliver one head of cattle per year to USPB.  The initialdelivery agreement was for a term of 10 years, with the term of thecooperative’s agreements continuing following the Conversion. Subsequent renewalsof the delivery agreement are for a term of 5 years with an evergreen renewalprovision. These arrangements are described in greater detail in *CattleDelivery Arrangements*. 

 

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**Company Background**

USPB was originally organized asa tax exempt cooperative within the meaning of Section 521(b)(l) of theInternal Revenue Code. The cooperative began operations on December 1, 1997, when the cooperative acquired its initial interest in Farmland National Beef,now known as National Beef Packing Company, LLC. In connection with thecooperative’s purchase of its interest in Farmland National Beef, thecooperative owned the right and was subject to the obligation to deliver cattleannually to NBP relative to: (i) USPB’s ownership in NBP and (ii) the number ofcattle processed annually by NBP.  That arrangement continues following the Conversion. Under that arrangement, USPB has delivered nearly 8.4 million head of cattleto NBP for processing since it commenced deliveries.   

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

On August 18, 2004, the shareholders of U.S. Premium Beef, Ltd. approved the conversion of the cooperativeinto a Delaware LLC.  Under the new ownership structure, each share of commonstock of the cooperative was converted to one unit of Class A interest and oneunit of Class B interest.  Immediately following the Conversion, there were691,845 units of Class A interests and 691,845 units of Class B interests.  Initially,each Class A unit was linked to its corresponding Class B unit and each pair oflinked units, if transferred, were required to be transferred together.  OnMarch 27, 2010, the board of directors amended the USPB’s LLC Agreement toenable the Class A and Class B units to be transferred separately.  PatronageRefunds for Reinvestment in the cooperative were carried over at their faceamount into the LLC as Patronage Notices.  

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

On April 14, 2009, NBP, U.S.Premium Beef, LLC’s majority owned subsidiary, redeemed all of the membershipinterests in NBP that were owned or controlled by its former Chief ExecutiveOfficer, John R. Miller, and an affiliate of its former General Counsel,Scott H. Smith, as well as 25% of the membership interests in NBP that were owned by affiliates of its current President and Chief Executive Officer,Timothy M. Klein.  In order to partially finance such redemptions, USPB contributedcash of approximately $55.8 million in exchange for a higher ownershippercentage in NBP.

On June 4, 2010, NBP, U.S.Premium Beef, LLC’s majority owned subsidiary, redeemed 164,631 NBP Class Bunits held by affiliates of its current President and Chief Executive Officer,Timothy M. Klein.  As a result of the redemption, our ownership percentagein NBP increased.

When the Conversion occurred, holdersof USPB Class A units were entitled to a pro rata share of 33% of the profitsand losses; to receive distributions of USPB’s net cash flow when declared bythe board of directors; to participate in the distribution of USPB’s assets ifit dissolves or liquidates after payment of the Patronage Notices, and to voteon matters submitted to a vote of USPB’s unitholders.  On November, 9, 2009,USPB members approved an amendment to USPB’s limited liability companyagreement that changed the allocation of profits and losses to Class Aunitholders to 10%.  Holders of USPB Class A units, committed under Uniform CattleDelivery and Marketing Agreements, have the right and obligation to deliver onehead of cattle to USPB annually for each unit held.  

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When the Conversion occurred, holdersof USPB Class B units were entitled to a pro rata share of 67% of the profitsand losses; to receive distributions of USPB’s net cash flow when declared bythe board of directors; to participate in the distribution of USPB’s assets ifit dissolves or liquidates after the payment of the Patronage Notices, and tovote on matters submitted to a vote of USPB’s unitholders.  On November, 9,2009, USPB members approved an amendment to USPB’s limited liability company agreementthat changed the allocation of profits and losses to Class B unitholders to90%.  Holders of USPB Class B units have no cattle delivery commitment.

Patronage Notices do notconstitute units or membership interests in USPB, and holders will not be unitholdersor associates of USPB by virtue of holding Patronage Notices.  As was the casein the cooperative, Patronage Notices will be paid by USPB at such time and insuch amounts as may be determined by the board of directors in its sole andabsolute discretion.  Upon liquidation, holders of Patronage Notices will bepaid before holders of Class A and Class B units.  Patronage Notices carry noother or additional rights.

**Employees**

USPB has nine employees. USPB’s governance andstrategic oversight responsibilities with NBP and the complexity of USPB’sobligations under its various contracts with NBP require USPB to retain theservices of key senior management personnel with the experience, skill andexpertise necessary to manage an enterprise competitive with othersophisticated participants in the beef and meat industries. Each employee iscompensated through the payment of a base salary with management being eligiblefor incentive and discretionary bonuses. In addition, each employee is eligibleto participate in benefits programs maintained by USPB. These programs includegroup medical insurance, accidental death and dismemberment insurance andsimilar programs. 

USPB’s employees are notunionized and USPB believes that its relationship with its employees is good. 

**Governmental Regulation and Environmental Matters**

The Company is subject to federal and stateregulations relating to grading of animals, quality control, labeling, sanitarycontrol and waste disposal. However, as many of the Company’s operationalactivities are conducted through its majority-owned subsidiary, NBP, and asUSPB does not directly operate any processing facilities itself, thesignificant efforts with respect to governmental and environmental regulationare conducted by NBP. See *Business of National Beef Packing Company,LLC - Government Regulation and Environmental Matters*. 

**Sales, Marketing, and Customers**

USPB’s sole customer is its majority-ownedsubsidiary, NBP. The ultimate customers of and the market for the productsresulting from the processing of cattle supplied by USPB’s unitholders and associatesare described in *Business of National Beef Packing Company, LLC – General*. 

**Beef Industry, Markets, and Competition**

As indicated above, USPB’s business activitiesare focused on facilitating the delivery of cattle produced by its unitholders andassociates to USPB’s majority-owned subsidiary, NBP. Information regarding thebeef industry, the market for beef and beef products and competition within thebeef industry are described in *Business of National Beef Packing Company,LLC - Industry Overview*. 

**Intellectual Property**

USPB owns little intellectual property becauseUSPB’s sales are transacted through NBP. However, USPB maintains a trademark ona U.S. Premium Beef logo that it uses periodically on certain, selectedproducts. 

**Research and Development**

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

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**CATTLEDELIVERY ARRANGEMENTS**

**Cattle Producers’ Uniform Cattle Delivery and Marketing Agreements andPayments to Unitholders and Associates for Cattle**

USPB facilitates the delivery of cattlefrom its unitholders and associates to NBP. Under the cooperative structure,each share of common stock held by a shareholder entitled and obligated thatshareholder to deliver one head of cattle per year to the cooperative. Eachshareholder was required to enter into a Uniform Delivery and Marketing Agreementwith the cooperative whereby the shareholder was committed to supply adesignated number of cattle on an annual basis to be delivered during thedelivery periods set forth in the delivery agreement.  In the LLC structure, followingthe conversion from a cooperative, each Class A unit held by a unitholderentitles and obligates that unitholder to deliver one head of cattle per yearto USPB.  The initial delivery agreement was for a term of 10 years, withthe term of the cooperative’s agreements continuing following the Conversion. Atthe termination of the initial delivery agreement, unitholders are required toenter into a Uniform Cattle Delivery and Marketing Agreement.  The newagreement is for a term of 5 years with an evergreen renewal provision.

Cattle delivered by USPB’s unitholdersand associates are delivered to NBP for processing (with the effect that NBP isUSPB’s sole customer). The resulting beef and beef products are marketed byNBP. Each unitholder or associate is paid for the cattle delivered to USPBbased on a market-based purchase price that is subject to the agreementsbetween USPB and NBP. 

Pursuant to the Uniform Cattle Deliveryand Marketing Agreement, payment for cattle is based on the individual carcassquality of cattle delivered. In addition to the payments described in thissection, the cooperative paid patronage dividends from its taxable income, inaccordance with its bylaws. Such patronage dividends were based on thecooperative’s taxable income and were distributed to the cooperative’sshareholders and associate members in proportion to the number of cattledelivered to the cooperative by its shareholders and associate members. As aresult, the patronage dividends received by the cooperative’s shareholders andassociate members reflected the benefits and profits, if any, obtained fromvalue-added marketing of the beef and beef products created from the cattledelivered to the cooperative for processing. As a limited liability company,allocations of profits and losses and potential distributions are not tied tocattle delivery, but rather to the number of Class A and Class B units held andthe respective rights of those units.

**BUSINESS OF NATIONAL BEEF PACKING COMPANY, LLC**

**General**

NBP is one of the largest beef processingcompanies in the United States (U.S.), accounting for approximately 14% of thefederally inspected steer and heifer slaughter during fiscal year ended August 28,2010, as reported by the United States Department of Agriculture (USDA). During the fiscal year ended August 28, 2010, NBP generated approximately $5.8billion in total net sales and had net income of approximately $248.0 million. 

Led by an entrepreneurial management team, NBPbegan operations in 1992 with a single facility in Dodge City, Kansas.  Sincethen, it has successfully grown through internal expansion, selective facilityacquisitions, process improvements and a focus on increasing its value-addedproduct offerings consisting of branded boxed beef, case ready beef, portioncontrol beef and further processed hides.  NBP has invested approximately $410million from the beginning of fiscal year 2001 through the end of fiscal year 2010to expand its operations, modernize and increase the capacity of itsfacilities, and increase its ability to produce and sell higher margin, value-addedproducts.  In 1997, USPB entered into a strategic relationship with NBP.  Infiscal year 2010, USPB members supplied NBP with approximately 20% of thecattle NBP processed pursuant to its contractual arrangement with USPB.  NBP believesits relationship with USPB provides it with a competitive advantage through aconsistent and dependable supply of high-quality cattle, including forprocessing in NBP’s value-added and other programs. 

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NBP processes, packages and delivers fresh andfrozen beef and beef by-products for sale to customers in the U.S. andinternational markets. NBP’s products include boxed beef, ground beef, hides,tallow, and other beef and beef by-products.  NBP emphasizes the sale ofhigher-margin, value-added beef products including branded boxed beef,case-ready beef, portion control beef, and further processed hides.  NBPmarkets its branded products under several trade names including *BlackCanyon*® *Angus Beef ,Black Canyon*® *Premium Reserve, CertifiedPremium Beef®, Naturewell® Natural Beef, NatureSource® Natural Angus Beef,Vintage Natural Beef®*and *Imperial Valley® Premium Beef. *In addition to the brands we own, also part of its value-added product line isthe *Certified Angus Beef ®,*a registered trademark (used withpermission) of Certified Angus Beef LLC, a wholly-owned subsidiary of theAmerican Angus Association; and *Certified Hereford Beef**® and NuestroRancho®,*registered trademarks**(used with permission) of CertifiedHereford Beef, LLC.  In addition, NBP is amajority owner of Kansas City Steak Company, LLC (Kansas City Steak), whichsells portioned beef and other products directly to customers in the foodservice and retail channels as well as direct to consumers through theinternet, direct mail and QVC.

NBP markets its products to retailers, foodservice providers, distributors, further processors, and the U.S. military. Value-added products represented approximately 35% of NBP’s total net sales,and a substantially higher proportion of its operating profit, during fiscalyear 2010.  NBP currently exports its products to more than 25 countries and hasdedicated sales offices in Japan, South Korea, and China.  NBP’s export salesrepresented approximately 11% of its net sales for the fiscal year ended August28, 2010.  According to export data from PIERS, NBP is currently the largestexporter of chilled beef produced in the U.S. to Japan.

NBP believes its Dodge City, Kansas and Liberal,Kansas beef processing facilities are among the highest capacity and mostefficient plants in the U.S.  In addition, NBP believes its beef processingfacility in Brawley, California is among the newest in the industry.  Thesethree beef processing facilities are located to provide efficient access to aready supply of high quality cattle.  NBP’s two case-ready facilities, whichtake primal cuts and further process and package meat to customerspecifications, are located in Hummels Wharf, Pennsylvania and Moultrie,Georgia and service key customers in readily accessible high density populationcenters.  NBP also owns and operates a refrigerated and livestocktransportation company, National Carriers, Inc., or National Carriers, as partof its commitment to provide high service levels to its customers andsuppliers.

**Competitive Strengths**

*SignificantValue-Added Product Portfolio.*  NBP is a leading producer ofvalue-added beef products. Its customers market these products under its brandsas well as through their own premium private label programs. NBP’s believes itsvalue-added products are able to command higher prices because of its abilityto consistently meet product specifications, based on quality, trim, weight, size,breed or other factors, tailored to the needs of its customers.  NBP alsoprovides marketing support for its value-added programs.  NBP believes itsvalue-added products and programs not only provide higher profitability, butalso improve customer acquisition and retention.

In March2009, NBP expanded its value-added product portfolio through its acquisition ofa wet blue tanning facility in Saint Joseph, Missouri.  NBP sells its wet bluetanned hides to processors that produce finished leather for high qualityapplications in industries such as automotive, luxury goods, apparel, andfurniture.  NBP believes supplementing its value-added product portfoliothrough further processing of a portion of its hides will generate additionalprofit for NBP.  

NBP’s totalvalue-added sales in fiscal year 2010 were approximately $2,038.4 million,comprising approximately 35% of its total net sales. This represents a compoundannual growth rate of 17% from approximately $595.2 million of totalvalue-added sales in fiscal year 2002.  NBP believes its value-added productswill continue to be an important contributor to its profitability.  Margins onNBP’s value-added products historically have been less volatile than margins onits commodity products. 

*DifferentiatedCattle Supply. *USPB is contractually obligated to deliver approximately735,000 head of cattle per year to NBP.  NBP believes the cattle it receivesfrom USPB members are of high quality, which is important for NBP’s value-addedprograms.  In fiscal year 2010, pursuant to the contractual arrangement withNBP, USPB members provided NBP with approximately 20% of the total cattle NBPprocessed.  NBP believes this supply relationship with USPB provides it withsignificant competitive advantages, including: (i) the ability to consistentlyprovide NBP’s customers with higher margin, value-added products and (ii) apredictable supply of cattle that enhances production efficiencies.

 

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NBP’s twolargest beef processing facilities, which represent approximately 86% of itsslaughter capacity, are located in southwest Kansas.  The primary market areafor the purchase of cattle for those facilities includes Kansas, Texas andOklahoma.  According to information from the USDA, cattle on feed in theKansas, Texas and Oklahoma area represented approximately 48% of the cattle onfeed in the U.S. during fiscal year 2010.  A significant portion of USPB’s unitholdersand associates are located in this area.  NBP’s third beef processing facilityis located in southeastern California.  An important source of cattle for thisfacility is an alliance of cattle producers in Arizona and California with whomNBP has cattle supply agreements.

The closeproximity of NBP’s facilities to large supplies of cattle gives its buyers theability to visit feedlots on a regular basis, which enables NBP to developstrong working relationships with its suppliers, reduces its reliance on anyone cattle supplier and lowers in-bound transportation costs.

*Modern andEfficient Facilities.*NBP has invested more than $410 million from thebeginning of fiscal year 2001 through the end of fiscal year 2010 to expand itsoperations, modernize and increase the capacity of its facilities, and increaseits ability to produce and sell higher margin, value-added products. NBPbelieves its beef processing facilities in Dodge City, Kansas and Liberal,Kansas are among the largest, most modern and efficient processing facilitiesin the U.S. With the acquisition of the Brawley, California plant in June 2006,NBP expanded its daily processing capacity to approximately 14,000 cattle perday and gained a strategic location to access more efficiently Western U.S. andAsian export markets. NBP’s two case-ready facilities in Hummels Wharf, Pennsylvaniaand Moultrie, Georgia, which began operating in 2001, are outfitted withstate-of-the-art processing and packaging equipment that allows NBP to servekey customers in high density population centers in the Eastern U.S.  NBP is in the process of an expansionproject (budgeted at approximately $28.5 million) at its tannery in St. Joseph,Missouri, which is expected to be completed in 2012. This project, which wascontemplated as part of the acquisition plan for the tannery assets in March2009, is designed to increase the capacity and product capabilities of thetannery facility. NBP believes this facility will be one of the largest andmost efficient wet blue processing plants in the world once this expansion iscompleted.

*Customerand Channel Diversification.*NBP has a diversified sales mix acrossdistribution channels and customers.  This approach provides multiple avenuesof potential growth and reduces its dependence on any one market or customer. NBP sells its products to retailers, food service providers, distributors,further processors, the U.S. military and through other channels.  Across thesechannels, NBP serves over 1,100 customers worldwide, which represent most majorretailers and food service providers in the U.S.  In fiscal year 2010, no onecustomer represented more than 3% of its total net sales, other than Wal-Martand its affiliate Sam’s Club, which together represented approximately 10% ofits total net sales.  NBP’s top 10 customers represented approximately 31% of itstotal net sales in fiscal year 2010.  

Exportproducts provide NBP with geographic diversification and reduce its reliance onthe U.S. market.   Of NBP’s export sales for fiscal year 2010, approximately 57%were meat and offal products.  The balance was hides and other by-products,which are not generally subject to animal health, food safety or politicalrisks.

*Disciplined Financial Management.*NBP’s indebtedness of $246.5 million as ofAugust 28, 2010 represents approximately 0.8 times its earnings before interest,taxes, depreciation and amortization, or EBITDA, for the 52 weeks ended August28, 2010 (EBITDA is calculated in a substantially similar manner under NBP’samended and restated credit facility, or the Credit Facility).  This relativelylow leverage provides NBP with significant operating and financial flexibilityto respond to market conditions and to capitalize on business opportunities. Acore aspect of NBP’s disciplined approach to financial management is itsproprietary management information systems that enable it to make data driven,analytical decisions to operate efficiently, allocate capital prudently andmanage risk.

*Experienced Management Team and Workforce withEntrepreneurial CompanyCulture.*NBP is led by anexperienced management team. Timothy M. Klein, its Chief Executive Officer, hasmore than 30 years of experience in the beef processing industry and is afounding member and significant owner of NBP. The rest of NBP’s executivemanagement team has, on average, over 24 years of industry experience and over12 years with NBP. NBP believes its entrepreneurial company culture,advancement opportunities, benefits, training programs and employee safetypolicies contribute to relatively low employee turnover rates. Itsentrepreneurial culture is evidenced by its record of growth, emphasis onindividual employee accountability and company-wide focus on profitability. NBPhas never experienced a work stoppage at any of its facilities.

**NBP’s Business Strategy**

*ExpandSales of Value-Added Products.*NBP’s value-added sales grew toapproximately $2,038.4 million in fiscal year 2010 from approximately $595.2million in fiscal year 2002, representing a compound annual growth rate of approximately17%. NBP intends to continue expanding sales of value-added products byincreasing its penetration with existing customers, targeting new customersthat are well-suited for its value-added programs and expanding the number ofvalue-added products NBP offers. NBP believes that the investments it hasalready made in its value-added business, including in retail merchandisingexpertise, customer service and fulfillment capabilities andoperational/processing technologies, along with its differentiated cattlesupply chain, position it well to capitalize on this strategy. For example, NBPhas been a leader in establishing the case-ready market, and believes itsexperience will enable it to benefit from increased customer interest in theadvantages case-ready products provide, such as reducing labor costs andworkplace injuries associated with slicing beef, reducing food safety risks andshifting the square footage currently used by ‘‘back-of-the-store’’ portioningand packaging to higher profit uses. In addition to beef products, NBP’svalue-added initiatives also include its wet blue tanning business. NBP is inthe process of expanding its tanning operation, which is expected to becompleted in 2012.  When the project is completed, NBP expects to be able toprocess nearly all of the hides it produces at its Kansas beef processingplants.

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*PursueAdditional Export Opportunities.*NBP believes international markets presenta significant growth and profit opportunity. NBP believes protein demand willincrease in the long term due to rising living standards and a growing middle classin developing countries.  As a leading producer of beef products, NBP believes itis well-positioned to serve this growing global demand.  According to exportdata from PIERS, NBP is currently the largest exporter of chilled beef producedin the U.S. to Japan. South Korea is another significant market for U.S. beef,and NBP believes it can leverage its existing relationships to grow itsbusiness there. Although the margins NBP realizes on export sales can varysignificantly by product and market, on average NBP currently realizes highermargins on export sales than on domestic sales.

*MaintainHighly Disciplined Approach to Acquisitions and Capital Expenditures.*NBP’smanagement team has a history of following a disciplined approach to capitalinvestment. NBP has effectively executed and integrated several acquisitions incore and complementary businesses, as well as numerous capital expenditureinitiatives. NBP believes the success of these activities is reflected in itsrates of return on invested capital. NBP plans to continue to pursueopportunities that generate attractive returns on invested capital.

*ContinuingFocus on Margin Expansion.*NBP’s operating philosophy is to seek tomaximize its profits on all cattle it processes regardless of prevailingcommodity prices or stage of the cattle cycle. NBP endeavors to accomplish thisthrough management actions, such as reduction of operating costs, increasingprice realization across the entire carcass and improving product yields. NBPbelieves its proprietary management information systems allow it to moreaccurately measure costs and yields against relevant benchmarks and to makebetter processing decisions with respect to the cattle it procures in order toincrease profitability.

**Industry Overview**

Beef productsrepresent the largest segment of the U.S. meat industry based on retail salesand the U.S. is the largest producer of beef in the world, producingapproximately 25.4 billion pounds of beef in calendar year 2009. According tothe USDA, beef consumption in the United States increased from approximately24.3 billion pounds in 1992 to approximately 26.9 billion pounds in calendar year2009, representing a compound annual growth rate of 0.6%.

Beefproduction, from the birth of the animal through the delivery of beef productsto the end customer, is comprised of two primary segments: production andprocessing.  The production segment raises cattle for slaughter and theprocessing segment slaughters cattle and packages beef for delivery tocustomers.  Beef processors seek to procure cattle through multiple methods,including spot market purchases and a variety of contractual arrangements. Theowners of the cattle bear the cost of feeding the cattle to the appropriatemarket weights and have direct financial exposure to the volatility in grainand other input costs. Beef processors are primarily ‘‘spread’’ operators,earning margin between the price they realize for their products and the costof procuring and processing the cattle. 

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The domesticbeef industry is characterized by prices that change daily based on seasonalconsumption patterns and overall supply and demand for beef and other proteinsin the U.S. and abroad.  In general, domestic and worldwide consumer demand forbeef products determines beef processors’ long-term demand for cattle.  Inorder to operate profitably, beef processors seek to acquire cattle at thelowest possible cost and to minimize processing costs by optimizing plantutilization and minimizing the cost of packaging and other input costs.  Cattleprices vary seasonally and are affected by cattle inventory levels, weather andother factors.  In addition to seasonal factors, cattle prices are impacted bythe longer term nature of the cattle cycle.  Cattle supply in the beef industrytypically follows a ten to twelve year cycle, consisting of about six to sevenyears of expansion followed by one to two years of consolidation and three tofour years of contraction. This cycle is unique to cattle among major proteinsources as other animals (such as hogs and chickens) can generate multipleoffspring and have shorter incubation periods.

During thepast few decades, consumer demand for beef products in the U.S. has generally grownin line with population growth, which is a key driver of aggregate demand.  Webelieve consumer demand for U.S. exports in international markets is driven notonly by population growth, but also by economic growth. As internationalconsumers’ economic circumstances improve, they increasingly shift their dietsto protein.  The ability of the U.S. beef industry to supply the growinginternational demand has been hindered in certain international marketsfollowing the discovery of isolated cases of Bovine Spongiform Encephalopathy,or BSE (also commonly referred to as mad cow disease), in 2003 and 2004, thatresulted in the temporary closing of those markets to U.S. beef.  Industry-wideexport sales, however, have been increasing from 2004 through mid-2010,trending toward their pre-2003 levels. 

In recent years, one U.S. beef processoreliminated approximately two million head per year of slaughter capacity infour plants.  These eliminations represented a reduction of approximately 7% oftotal U.S. industry-wide capacity based on information from Cattle BuyersWeekly, and industry publication, and have helped improve the supply/demandbalance of beef in the U.S. and export markets.  We currently do not expect theindustry to experience a material increase in capacity for the foreseeablefuture.  

**Competition**

The beef processing industry is highlycompetitive. Competition exists both in the purchase of live cattle, as well asin the sale of beef products. NBP’s products compete with a large number ofother protein sources, including pork and poultry, but NBP’s principal competitioncomes from other beef processors, including Tyson Foods, Inc., CargillIncorporated, and JBS USA LLC.  NBP management believes the principalcompetitive factors in the beef processing industry are price, quality, foodsafety, customer service, product distribution, technological innovations andbrand loyalty.  In particular, NBP focuses on quality, food safety, customerservice and the offering of value-added programs on an ongoing basis. Some of NBP’scompetitors have substantially larger beef operations, greater financial andother resources and wider recognition for their consumer branded products than NBPdoes.

**Regulation**

NBP’s operations are subject to extensiveregulation by the USDA, the Grain Inspection Packers and StockyardsAdministration (GIPSA), the Food and Drug Administration (FDA), the U.S. EnvironmentalProtection Agency (EPA) and other state, local and foreign authoritiesregarding the processing, packaging, storage, distribution, advertising andlabeling of its products, including food safety standards.  Recently, the foodsafety practices and procedures in the beef processing industry have beensubject to more intense scrutiny and oversight by the USDA.  For example, onJanuary 12, 2004, Food Safety and Inspection Service (FSIS) published aninterim final rule on Specified Risk Materials (SRMs) and requirements fornon-ambulatory disabled cattle due to the finding of BSE in routine testing.  NBPimmediately implemented the appropriate programs/policies to ensure compliancewith FSIS rules. FSIS published a final rule on July 13, 2007, making permanentthe interim regulations issued in January 2004 that prohibits the slaughter ofnon-ambulatory disabled cattle, requires the description and removal of SRMsthat are considered to be inedible, and restricts the use of captive boltstunners that deliberately inject compressed air into the cranium of ananimal.  NBP works closely with the USDA and other regulatory agencies to helpensure its operations comply with all applicable food safety laws andregulations.

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NBP’sdomestic operations are subject to the Packers and Stockyards Act of 1921 (PSA).This statute generally prohibits meat packers in the livestock industry fromengaging in certain practices including violations of the PSA’s prompt paymentprovisions. In general (unless otherwise agreed in writing by NBP’s livestocksuppliers), this statute requires NBP to make full payment for livestockpurchases in the case of cash sales before the close of the next business dayfollowing the purchase and transfer of possession of the livestock it purchases,or, in the case of a cash purchase on a carcass or ‘‘grade and yield’’ basis,that NBP make full payment of the purchase price not later than the close ofthe first business day following determination of the purchase price. Any delayor attempt to delay payment as required by the PSA will be deemed an unfairpractice in violation of the statute. Under the PSA, NBP must hold in trust forthe benefit of its unpaid livestock suppliers all livestock it purchases incash sales (as well as all inventories of, or receivables for or proceeds from,meat, meat food products or livestock products derived from these cash sales)until the sellers have received full payment. As of August 28, 2010, NBP hassecured a bond of $35.9 million to satisfy these requirements.

            On June 22, 2010,GIPSA published a proposed rule that would add new regulations under the PSA.If adopted as written, the proposed rule appears to, among other things:
-  eliminate the requirement that GIPSA or livestock producersdemonstrate competitive harm to prove violations of Sections 202(a) and 202(b)of the PSA, which sections limit unfair, unjustly discriminatory or deceptivepractices and undue or unreasonable preferences or advantages in livestockpurchasing practices;
-  require packers to maintain written records justifying deviationsfrom standard price or contract terms offered to livestock producers;
-  prohibit packers from purchasing cattle from other packers ortheir affiliates; and
-  limit a packer’s ability to purchase cattle through dealersoperating as packer buyers.

If adoptedas written, the new regulations could have a significant impact on cattleprocurement and marketing practices in the beef processing industry. Inparticular, if adopted as written, the proposed regulations could impair NBP’sability to pay premiums for cattle that meet the quality standards for itsvalue-added or export programs, thus affecting how NBP (i) procures cattle forthese programs and (ii) processes and markets value-added and exportedproducts. We cannot predict whether the proposed rule or some modified rulewill be adopted or the extent of the effect of any such rule on the beefprocessing industry or on NBP’s operations or financial results.

NBP’s DodgeCity, Kansas and Liberal, Kansas facilities are subject to Title V permittingpursuant to the federal Clean Air Act and the Kansas Air Quality Act andimplementing regulations.  These permits expired on January 25, 2010, but wereadministratively extended pending renewal by the Kansas Department of Healthand Environment, (KDHE), of NBP’s renewal applications.  The Brawley and St.Joseph plants are subject to secondary air permits which are in place.  TheMoultrie and Hummels Wharf plants are subject only to certain reportingrequirements. NBP’s Dodge City, Liberal, Hummels Wharf, Moultrie and Brawley,facilities are subject to Clean Air Act Risk Management Plan requirementsrelating to the use of ammonia as a refrigerant. In February 2010, KDHErequested the Liberal plant submit a construction permit application and a‘‘Best Available Control Technology,’’ (BACT) analysis for a bone dryer thatwas installed in the Liberal plant in 1981 by a prior owner of the Liberalplant. NBP has completed the BACT analysis and has submitted a constructionpermit for the bone dryer pursuant to KDHE’s request.

All of NBP’splants are indirect dischargers of wastewater to publicly-owned treatment worksand are subject to requirements under the federal Clean Water Act and correspondingstate laws and implementing municipal laws as well as agreements or permitswith municipal or county authorities. NBP has an agreement with the City ofLiberal for wastewater and storm water treatment and are working with the Cityregarding expansion of the City’s treatment facilities to address new and morestringent discharge requirements that will apply to the City’s discharge in thecontext of the renewal of the City’s discharge permit. Depending upon theultimate cost of the required upgrade, there may be significant expendituresassociated with the expansion of the City’s treatment facilities. NBP has anagreement with the City of Moultrie and The Joint Development Authority ofBrooks, Colquitt, Grady, Mitchell and Thomas Counties for treatment ofwastewater from the Moultrie plant, and has a pretreatment permit from the Cityof Moultrie for treatment of wastewater from the Moultrie plant. This permitwas reissued in March 2010, and NBP is making the capital improvements neededto meet new phosphorus limits that are in the reissued permit. Estimatedcapital expenditures associated with the treatment of phosphorus in NBP’swastewater at Moultrie are estimated at approximately $3.2 million, of whichapproximately $1.6 million was spent during fiscal year 2010, with theremaining included in NBP’s fiscal year 2011 capital expenditure budget. TheEastern Snyder County Regional Authority has informed NBP that it will need toreduce nutrients in its wastewater in the future at the Hummels Wharf plant. NBPexpects to construct additional wastewater treatment facilities at the plant torespond to such request at a future date. NBP has upgraded its treatmentfacilities at the Brawley plant to provide treatment that meets the ammoniarequirements of the Brawley City Ordinance and is in the process of makingimprovements that will allow it to consistently meet the total suspended solidslimits in such Ordinance. The City of Brawley is in the process of upgradingits publicly-owned treatment works in order to comply with its direct dischargepermit, including requirements for ammonia and nutrient controls. The City hasincreased sewer rates to the Brawley Plant and has suggested that a capacitycharge may also be needed in connection with the required upgrades. Suchcharges may significantly increase NBP’s operational costs at Brawley.

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Storm waterdischarges from NBP’s plants are regulated pursuant to general permits issuedby the respective states with the exception of Missouri which does not have ageneral permit program available to the St. Joseph tannery. The MissouriDepartment of Natural Resources made a comprehensive storm water inspection atthe tannery in April-May 2009 and in an inspection report and Notice ofViolation requested that the plant submit an application for storm waterdischarges which previously had been determined to be discharged to the Citypublicly-owned treatment works and, thus, not requiring a permit. NBP submittedthe requested permit application in November 2009.

NBP’s DodgeCity, Liberal, Hummels Wharf, and St. Joseph plants are supplied by water fromsupply wells on its property. NBP purchases water from the City of Moultrie andthe City of Brawley and some water is purchased from the City of St. Joseph,all pursuant to municipal water rate structures. NBP purchased irrigation waterrights for the majority of water needed at the Dodge City plant and are in theprocess of converting the existing renewable term permits governing itsexercise of the irrigation rights to certificates of appropriation formunicipal use for a majority of the Dodge City plant water supply. NBP holdspublic water supply permits allowing it to supply potable water to itsemployees at its Dodge City, Kansas and Liberal, Kansas facilities. The publicwater supply permits do not have expiration dates.

All of NBP’sfacilities generate solid wastestreams, including small quantities of hazardouswastes. While NBP is subject to laws that provide for strict, and in certaincircumstances joint and several, liability for remediation of hazardoussubstances at contaminated sites, which could include current or formerfacilities or other sites where wastes NBP generated have been disposed, NBP hasnot received any demands nor are they aware that they have any liability atsuch sites under the Comprehensive Environmental Response, Compensation andLiability Act, or Superfund, or state counterparts.

NBP’s subsidiary,National Beef Leathers, is cooperating with governmental investigations relatedto the St. Joseph tannery.  The company’s operations began at this facility inMarch 2009.  Region 7 EPA, in cooperation with the Missouri Department ofNatural Resources, (MDNR), is investigating the land application of sludge fromthe tannery wastewater treatment facility to numerous parcels of farmland in afour county area in Northwest Missouri over many years by the former owner ofthe tannery. The sludge was classified as a fertilizer in Missouri.  NBP hascooperated with the investigations in providing records of land applicationprepared by the prior owner/operator of the tannery, Prime Tanning, and haveprovided assistance in interpreting those records. For a six and one-half weekperiod of time following NBP’s purchase of certain assets of Prime Tanning, NBPland applied wastewater treatment sludge to portions of two parcels of land. InApril-May, 2009, Region 7 EPA and MDNR conducted a multi-media inspection of theSt. Joseph tannery.  Following that inspection, EPA issued one informationrequest pursuant to the Comprehensive Environmental Response, Compensation, andLiability Act, the Resource Conservation and Recovery Act, the Clean Water Act,and the Clean Air Act; a second information request pursuant to the ResourceConservation and Recovery Act, and one Notice of Violation under the ResourceConservation and Recovery Act. The MDNR has issued a Storm Water Notice ofViolation (discussed above). NBP has responded to the information requests andto the Notices of Violation.  

NBP’s plantsare subject to community right to know reporting requirements under theSuperfund Amendments and Reauthorization Act of 1986, which requires yearlyfilings as to the substances used on the plant premises. NBP also reportsaccidental releases of hazardous substances pursuant to the Superfund law andamendments and state law counterparts.

In fiscal year 2010,NBP incurred expenses of approximately $4.4 million in environmentally-relatedcapital expenditures, of which approximately $1.6 million was spent forwastewater improvements at its Moultrie plant.  NBP anticipatesenvironmentally-related capital expenditures of approximately $4.4 million infiscal year 2011, of which approximately $1.6 million is budgeted forwastewater improvements at its Moultrie plant.

In additionto the environmental matters discussed above, from time to time NBP receivesnotices from regulatory authorities and others asserting that it are not incompliance with some laws and regulations. In some instances, litigationensues.

 

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**Employees**

 

As of August 28, 2010, NBP had approximately 9,100employees, of which approximately 43% are represented by collective bargainingagreements.  Approximately 2,700 employees at the Liberal, Kansas facility arerepresented by the United Food and Commercial Workers International Union undera collective bargaining agreement scheduled to expire on December 16, 2012.Approximately 1,100 employees at the Brawley, California facility are jointlyrepresented by the United Food and Commercial Workers International Union andthe Teamsters International Union under a collective bargaining agreementscheduled to expire December 8, 2013.  Approximately 80 of NBP’s employees atthe St. Joseph, Missouri facility are represented by the United Cereal Workersof the United Food and Commercial Workers International Union under acollective bargaining agreement scheduled to expire on May 18, 2014.  

NBP considersits relations with its employees and the United Food and Commercial WorkersInternational Union, the Teamsters International Union and the United CerealWorkers of the United Food and Commercial Workers International Union to begood.

**Food Safety**

Food safetyis one of NBP’s top priorities. NBP believes its food safety process utilizesmany of the industry’s most effective intervention technologies. Theseintervention technologies are coupled with NBP’s ongoing efforts to incorporateand promote ‘‘best practices’’ throughout NBP’s production process to enhanceproduct quality and to produce safe, wholesome beef products. NBP’s food safetysystem incorporates a multiple hurdle strategy that includes multiple hot waterthermal pasteurization cabinets, anti-microbial washes, organic rinses, in-linesteam vacuums, specific carcass trimming procedures, detailed carcass andproduct monitoring standard operating procedures, and a rigorous cold chainmanagement system. NBP supports its food safety process in each of its majorprocessing facilities with on-site microbiological laboratories. These on-sitelaboratories conduct microbial tests, monitor facility processes, testintervention efficacies, and validate that all of NBP’s processes are meetingdesign parameters.

**Intellectual Property**

NBP holds anumber of trademarks and domain names it believes are material to its businessand which are registered with the United States Patent and Trademark Office,including *National Beef®, BioLogic® Food Safety System, Black Canyon® AngusBeef, Black Canyon® Premium Reserve, Certified Premium Beef®, Naturewell®Natural Beef, NatureSource® Natural Angus Beef, Vintage Natural Beef®, ImperialValley® Premium Beef, Leading the Way in Quality Beef®, Royal BlueTM Leather,Regal Blue LeatherTM*, and *Radiant Blue LeatherTM*. NBP has alsoregistered the *National Beef®* trade name and trademark in most of theforeign countries to which it sells its products. Currently, NBP has a numberof trademark registrations pending in the U.S. and in foreign countries. Inaddition to trademark protection, NBP attempts to protect its unregisteredmarks and other proprietary information under trade secret laws, employee andthird-party non-disclosure agreements and other laws and methods of protection.All other trademarks or trade names referred to in this report are the propertyof their respective owners.****

**Management InformationSystems**

NBP hasdeveloped proprietary management information systems tailored to its businessprocesses which help enable it to make coordinated, data driven decisions andenable it to operate more profitably.  For example, NBP uses individual carcassdata (including information on weight, grade and breed as well as historicalinformation with respect to similar animals) to make decisions regarding theappropriate products to process from each carcass, taking into account currentsupply and demand.  Furthermore, coordinated information systems help theprocurement department to anticipate the quality and quantity of cattle itneeds to procure to fill sales orders in the short term, and the salesdepartment to tailor its sales efforts to take into account changes inavailable supply.  NBP’s sophisticated systems also permit its sales force toreadily compare orders by location to trailer capacity to reduce transportationcosts by better using trailer capacity.  In addition, its managementinformation systems at the plants have been developed to fit its operating andmaintenance needs, thereby reducing training time for NBP’s employees andsimplifying the work order process.

**Legal Proceedings**

 

National BeefLeathers, LLC, (NBL), a wholly-owned subsidiary of NBP, is a nameddefendant in two currently pending purported class actions involving NBL'stannery located in St. Joseph, Missouri, which NBL purchased in March 2009. These lawsuits were filed on July 22, 2009 in the U.S. District Court forthe Western District of Missouri. The lawsuits allege that NBL spreadwastewater sludge containing hexavalent chromium in four counties in northwestMissouri. The plaintiffs are seeking an unspecified amount of damages foreconomic damages, punitive damages, diminished property values and medical monitoring.On May 11, 2010, the court issued an order ruling that NBL is not liable undera successor liability theory for the conduct of the tannery’s previous ownerand another party prior to NBL’s purchase of the tannery.   As a result of thisruling, the plaintiffs in 15 lawsuits filed between April 22, 2009 and April29, 2010, in the Circuit Courts of Buchannan County, Clinton County, and DeKalbCounty, Missouri seeking damages for economic damages, punitive damages,diminished property values and medical monitoring voluntarily dismissed theirclaims against NBL in June 2010.  NBL believes it has meritorious defenses tothe claims in the remaining two lawsuits and intends to defend them vigorously.  

 

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NBP is a party to a number of other lawsuits andclaims arising out of the operation of its business. NBP’s management believesthe ultimate resolution of such matters should not have a material adverseeffect on its financial condition, results of operations or liquidity.

**ITEM 1A.              RISK FACTORS**

As described throughout this document, USPB’sbusiness involves the operation of an integrated cattle processing and beefmarketing enterprise in which USPB’s unitholders and associates supply cattlethat are processed at the facilities owned and operated by USPB’s majority-ownedsubsidiary, National Beef Packing Co, LLC.  NBP markets and distributes thebeef and beef products produced from both cattle supplied by USPB’s unitholdersand associates and other cattle purchased by NBP from other sources.  Thefinancial results of NBP’s operations therefore are the single largestinfluence on USPB’s financial performance.  Consequently, those factors andrisks that impact the performance of NBP’s business have a direct and immediateinfluence on USPB’s performance.  However, there are also some risks that areunique to USPB.  This *Risk Factors* section is divided into two parts,with one subsection focusing on the risk factors that influence the performanceof NBP and another subsection discussing certain risk factors that are directlyapplicable to USPB. ** **

USPB’s business operations and the implementationof our business strategy are subject to significant risks inherent in ourbusiness, including, without limitation, the risks and uncertainties describedbelow.  The occurrence of any one or more of the risks or uncertaintiesdescribed below could have a material adverse effect on our financialcondition, results of operations, and cash flows.  While we believe we haveidentified and discussed below the key risk factors affecting our business,there may be additional risks and uncertainties that are not presently known orthat are not currently believed to be significant that may adversely affect ourbusiness, operations, industry, financial position, and financial performancein the future.

**Risk Factors Associated With Operations of NBP**

***Outbreaks of diseaseaffecting livestock can adversely affect demand for NBP’s products and thesupply of cattle and thereby adversely affect its business.***

NBP issubject to risks relating to animal health and disease control. An outbreak ofdisease affecting livestock, such as BSE (also commonly referred to as mad cowdisease) or foot-and-mouth disease could result in restrictions on sales ofproducts to NBP’s customers or purchases of livestock from its suppliers. Also,outbreaks of these diseases, or the perception by the public that such anoutbreak has occurred or other concerns regarding such disease, whether or notresulting in regulatory action, can lead to cancellation of orders by NBP’s customersand create adverse publicity may have a material adverse effect on consumerdemand and, as a result, on NBP’s results of operations. Furthermore, anoutbreak of disease could lead to widespread destruction of cattle, which couldhave a negative impact on NBP.

***If NBP’s products orproducts made by others using NBP’s products become contaminated or are allegedto be contaminated, NBP may be subject to product liability claims and productrecalls that would adversely affect its business.***

NBP may besubject to significant liability potentially in excess of applicable liabilityinsurance policy limits if the consumption of any of its products or productsmade by others using its products causes injury, illness or death due tocontamination or otherwise, and NBP may in the future recall products in theevent its products are or may be contaminated, spoiled or inappropriatelylabeled. Contamination of NBP’s products or those of its competitors also maycreate adverse publicity or cause consumers to lose confidence in the safetyand quality of NBP’s products that could negatively affect its business. NBPmay encounter the same risks of contamination or negative publicity if a thirdparty tampers with NBP’s products. Allegations of contamination of NBP’sproducts may also be harmful to NBP even if such allegations are untrue. Theoccurrence of any of these risks may increase NBP’s costs and decrease demandfor its products, which could negatively affect its business, financialcondition, results of operations and cash flows. Organisms producing food borneillnesses are generally found in the environment and there is a risk that as aresult of food processing they could be present in NBP’s products. For example,*E. coli*is one of many food borne bacteria commonly associated with beefproducts. Once contaminated products have been shipped for distribution andconsumption, illness or death may result if pathogens are present, increase dueto handling or temperatures, and are not otherwise eliminated at the further processing,food service or consumer level. NBP cannot assure you that it will not berequired to perform product recalls, or that product liability claims will notbe asserted against NBP, in the future.

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***NBP’s margins may be negatively impacted byfluctuating raw material and utility costs, selling prices, changes in itsrelationships with its suppliers and other factors that are outside of NBP’scontrol.***

NBP’s margins are dependent on the price at whichits beef products can be sold and the price it pays for raw materials, amongother factors. These prices can vary significantly over a relatively shortperiod of time as a result of a number of factors, including the relativesupply and demand for live cattle and beef products, as well as the market forcompeting or complimentary products, such as pork and poultry.  In addition,closure of international markets to U.S. beef product exports as a result ofthe December 23, 2003 BSE discovery negatively affected U.S. beef productmargins, as certain by-products, classified as Specific Risk Materials, (SRMs),have been banned from use in feedstocks and the human food chain.  Some ofthese products previously enjoyed a market in foreign countries.

The supply and market price of the livestock thatconstitute NBP’s principal raw material and represent the substantial majorityof its cost of goods sold are dependent upon a variety of factors over which NBPhas little or no control, including fluctuations in the size of herdsmaintained by producers, the relative cost of feed and energy, weather andlivestock diseases.  Additionally, the closure of the U.S. border to Canadianlivestock from May 2003 until July 2005 constrained the supply of cattle in theU.S. which resulted in higher overall cattle prices in the U.S. compared toCanada, and the closure prompted Canada to increase its processingcapabilities, which may also have an adverse impact on NBP’s future margins. In addition, NBP purchases approximately 52% of the cattle it processes on theopen market.  If NBP does not attract and maintain acceptable relationshipswith growers, the quantity, quality or pricing of its supply of cattle could benegatively affected.

Severe price swings in raw materials, and theresulting impact on the prices NBP charges for its products, have at times had,and may in the future have, a material adverse effect on NBP’s financialcondition, results of operations and cash flows.  If NBP experiences increasedcosts, it may not be able to pass them along to its customers.  In addition, thecosts for utilities, such as energy and water may fluctuate over time.   

***NBP’s international operations expose it topolitical and economic risks in foreign countries, as well as to risks relatedto currency fluctuations and could negatively affect NBP’s sales to customersin foreign countries and its operations and assets in such countries.***

In fiscal year 2010, exports, primarily toMexico, Japan, South Korea, Canada, China (for hides), Hong Kong, Egypt, andTaiwan accounted for approximately 11% of NBP’s total net sales and these saleson average had a higher margin than its sales generally.   A reduction in itsinternational sales would likely adversely affect its margins.  In addition, NBP’sinternational activities expose it to risks not faced by companies that limitthemselves to the domestic market.  One significant risk is that theinternational operations may be affected by tariffs, other trade protection orfood safety measures and import or export licensing requirements.  

An example ofa risk related to NBP’s international operations is BSE, as discussed above in *Item1, Business – Industry Overview – Beef Export Markets*.  

Other risks associated with NBP’sinternational activities include:
-  changes in foreign currency exchange rates and inflation ordeflation in the foreign countries in which NBP operates;
-  the closing of borders by foreign countries to the import of NBP’sproducts due to disease or other perceived health or food safety issues; 
-  exchange controls; 
-  changes in tariffs; 

 

 

 

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-  changes in political or economic conditions in a specific countryor region, particularly in emerging markets;
-  trade restrictions imposed by countries with respect to theimportation of NBP’s products, including actions taken in connection with tradedisputes;
-  potentially negative consequences from changes in regulatoryrequirements; and
-  international conflict, including terrorist acts, which couldsignificantly impact NBP’s financial condition and results of operations. 

The occurrence of any of these events couldincrease NBP’s costs, lower demand for its products or limit its operations,which could have a material adverse effect on NBP’s business, financialcondition, results of operations or prospects.

***Compliance with environmental regulationscould result in significant costs and failure to comply with environmentalregulations and the use of hazardous substances, including at National BeefLeather’s tannery facility, could result in civil as well as criminalpenalties, liability for damages and negative publicity.***

NBP’s operations are subject to extensive andincreasingly stringent regulations, including those relating to wastewater andstorm water discharges, air emissions, waste handling and disposal andremediation of soil and groundwater contamination that are administered by theU.S. Environmental Protection Agency, (EPA) and state, local and otherauthorities.  In many areas, these laws and regulations are becomingincreasingly stringent.  Failure to comply with these laws and regulations canhave serious consequences for NBP, including criminal as well as civil andadministrative penalties and negative publicity. NBP has incurred and willcontinue to incur significant capital and operating expenditures to adapt tomore stringent regulations and to avoid violations of these laws andregulations. Additional environmental requirements imposed in the future couldresult in currently unanticipated investigations, assessments or expenditures,and may require NBP to incur significant additional costs. Because the natureof these potential future charges is unknown, management is not able toestimate the magnitude of any future costs and NBP has not accrued any reservefor any potential future costs.

Some of NBP’s facilities have been in operationfor many years. During that time, NBP and previous owners of these facilitieshave generated and disposed of wastes that are or may be considered hazardousor may have polluted the soil or groundwater at NBP’s facilities, includingadjacent properties. The discovery of previously unknown contamination ofproperty underlying or in the vicinity of NBP’s present or former properties ormanufacturing facilities and/or waste disposal sites could require NBP to incurmaterial unforeseen expenses. Occurrences of any of these events may have amaterial adverse effect on NBP’s business, financial condition, results ofoperations and cash flows. 

In mostlocations, NBP’s processing facilities rely on municipal or other regionalgovernmental agencies for its water supply and for the treatment of itswastewater discharges. These entities themselves are subject to environmentallaws regarding the quality of their water discharges, and must meet permitlimits. If permit limits become more stringent, upgrades and capitalimprovements to these municipal treatment facilities are likely. In thoselocations where NBP is a significant volume discharger, it is possible it maybe asked to contribute toward the costs of such upgrades, or NBP may becomesubject to significant increases in water or sewer charges in order for suchupgrade costs to be recouped.

As describedin *Item 1, Business – Legal Proceedings*, NBL, a wholly-owned subsidiaryof NBP, is a named defendant in two currently pending purported class actionsinvolving NBL's tannery located in St. Joseph, Missouri, which NBLpurchased in March 2009.  These lawsuits were filed on July 22, 2009 inthe U.S. District Court for the Western District of Missouri. The lawsuitsallege that NBL spread wastewater sludge containing hexavalent chromium in fourcounties in northwest Missouri. The plaintiffs are seeking an unspecifiedamount of damages for economic damages, punitive damages, diminished propertyvalues and medical monitoring.   NBL believes it has meritorious defenses tothe claims in the two lawsuits and intends to defend them vigorously.

***NBP’s indebtedness could adversely affect itsbusiness and liquidity position.***

As of August 28, 2010, NBP had $246.5 million oflong-term debt, of which $21.4 million was classified as a current liability. As of August 28, 2010, NBP’s Credit Facility consisted of a $375.0 million termloan, $200.0 million of which was outstanding, a $250.0 million revolving lineof credit loan, which had outstanding borrowings of $27.0 million, outstandingletters of credit of $26.0 million and available borrowings of $197.0 million,based on the most restrictive financial covenant calculations.  In addition, asof August 28, 2010, NBP had outstanding industrial revenue bonds of $12.2million and capital leases and other obligations of $7.3 million. 

17

 

 

 

 

NBP’s indebtedness mayincrease from time to time in the future for various reasons, includingfluctuations in operating results, capital expenditures and potentialacquisitions.

NBP’s indebtedness, togetherwith additional future indebtedness it may incur, and restrictive covenantscontained in the Credit Facility could:
-  make it difficult for NBP to satisfy its obligations, includingmaking interest payments on its debt obligations;
-  limit NBP’s ability to obtain additional financing to operate itsbusiness;
-  require NBP to dedicate a substantial portion of its cash flow topayments on its debt, reducing its ability to use cash flows to fund capitalexpenditures and working capital and other general operational requirements; 
-  limit NBP’s flexibility to plan for and react to changes in itsbusiness and the beef processing industry;
-  place NBP at a competitive disadvantage relative to some of itscompetitors that have less debt than NBP; 
-  limit NBP’s ability to pursue acquisitions; and 
-  increase NBP’s vulnerability to general adverse economic andindustry conditions, including changes in interest rates, changes in cattleprices or a downturn in NBP’s business or the economy.

The occurrence of any one of these events couldhave a material adverse effect on NBP’s business, financial condition andresults of operations or cause a significant decrease in its liquidity andimpair its ability to pay amounts due on its indebtedness.

The Credit Facility contains,among other things, restrictive covenants that will limit NBP’s and itssubsidiaries’ ability to finance future operations or capital needs or toengage in other business activities.  The Credit Facility restricts, amongother things, its ability and the ability of its subsidiaries to:
-  incur additional indebtedness or issue guarantees; 
-  create liens on NBP’s assets; 
-  make distributions on or redeem equity interests; 
-  make investments;
-  transfer or sell properties or other assets; and 
-  engage in mergers, consolidations or acquisitions. 

In addition, the Credit Facilityrequires NBP to meet specified financial ratios and tests under certaincircumstances.

            If NBP’s cash flowand capital resources are insufficient to fund its debt service obligations, NBPmay be forced to reduce or delay capital expenditures, sell material assets oroperations, obtain additional capital or restructure debt. NBP’s ability togenerate cash and make scheduled payments or refinance NBP’s obligationsdepends on its successful financial and operating performance, which dependupon prevailing economic conditions and other factors, many of which are beyondits control. 

***NBP’s operating resultscould be negatively impacted by its hedging and derivative positions.***

NBP usesderivative financial instruments and other hedging strategies in an attempt toreduce its exposure to various market risks, including changes in commodityprices. NBP holds certain positions that do not qualify as hedges for financialreporting purposes. These positions are marked to fair value, and theunrealized gains and losses are reported in earnings at each reporting date.Therefore, losses on these contracts will adversely affect NBP’s reportedoperating results. The use of such instruments may ultimately limit NBP’sability to benefit from favorable commodity price movements, which mayadversely affect reported operating results.

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

18

 

 

 

 

 

 

NBP generally does not have long-term salesarrangements with its customers and, as a result, the prices at which it sellsproducts to them are determined in large part by market forces. NBP’scustomers, mostly excluding those with which NBP has long-term contracts, placeorders for products on an as-needed basis and, as a result, their order levelshave varied from period to period in the past and may vary significantly in thefuture. The loss of one or more of NBP’s key customers, a significant declinein the number of orders from one or more of its key customers or a significantdecrease in beef product prices for a sustained period of time could have amaterial adverse effect on NBP’s business, financial condition or results ofoperations.

***Wal-Mart’s failure to continue purchasing fromNBP could have a material adverse effect on its sales.***

Sales to Wal-Mart Stores, Inc., (Wal-Mart), andits affiliate, Sam’s Club, represented approximately 10% of total net sales infiscal year 2010.  NBP’s contractual agreement with Wal-Mart expired on January31, 2004, and NBP has not entered into a new agreement.  If Wal-Mart and itsaffiliates do not continue to purchase from NBP, it could have a materialadverse effect on NBP’s sales, financial position, results of operations andcash flows.

***NBP is subject to extensive governmentalregulation and its noncompliance with or changes in applicable requirementscould adversely affect its business, financial condition, results of operationsand cash flows.***

In additionto the environmental regulations discussed above, our operations are subject toextensive regulation and oversight by the USDA (including GIPSA), the FDA, andother state, local and foreign authorities regarding the processing, packaging,storage, distribution, advertising and labeling of our products, including foodsafety standards.  Our domestic operations are subject to the PSA.  This statute generally prohibits meatpackers in the livestock industry from engaging in certain practices includingviolations of the PSA’s prompt payment provisions.  In general (unlessotherwise agreed in writing by our livestock suppliers), this statute requiresus to make full payment for our livestock purchases in the case of cash salesbefore the close of the next business day following the purchase and transferof possession of the livestock we purchase, or, in the case of a cash purchaseon a carcass or ‘‘grade and yield’’ basis, that we make full payment of thepurchase price not later than the close of the first business day followingdetermination of the purchase price. On June 22, 2010, GIPSA published aproposed rule that would add new regulations under the PSA. If adopted aswritten, the proposed rule appears to, among other things:
-  eliminate therequirement that GIPSA or livestock producers demonstrate competitive harm toprove violations of Sections 202(a) and 202(b) of the PSA, which sections limitunfair, unjustly discriminatory or deceptive practices and undue orunreasonable preferences or advantages in livestock purchasing practices; 
-  require packers tomaintain written records justifying deviations from standard price or contractterms offered to livestock producers;
-  prohibit packers frompurchasing cattle from other packers or their affiliates; and
-  limit a packer’sability to purchase cattle through dealers operating as packer buyers.

Ifadopted as written, the new regulations could have a significant impact oncattle procurement and marketing practices in the beef processing industry. Inparticular, if adopted as written, the proposed regulations could impair NBP’s abilityto pay premiums for cattle that meet the quality standards for its value-addedor export programs, thus affecting how NBP (i) procures cattle for theseprograms and (ii) processes and markets value-added and exported products. Wecannot predict whether the proposed rule or some modified rule will be adoptedor the extent of the effect of any such rule on the beef processing industry oron NBP’s operations or financial results.

Recently, the food safety practices andprocedures in the meat processing industry have been subject to more intensescrutiny and oversight by the USDA. Food safety standards, processes andprocedures are subject to the USDA Hazard Analysis Critical Control Pointprogram, which includes compliance with the Public Health Security andBioterrorism Preparedness and Response Act of 2002.  In hopes of reducing thedevelopment and spread to humans of dangerous antibiotic-resistant bacteria,the Obama administration announced in July 2009 that it would seek to ban routineuse of antibiotics, which are fed to farm animals to encourage growth.

19

 

 

 

 

 

 

NBP is also subject to a variety of immigration,labor and worker safety laws and regulations, including those relating to thehiring and retention of employees.  NBP’s failure to comply with applicablelaws and regulations could subject it to administrative penalties andinjunctive relief, civil remedies, including fines, injunctions, interruptionof its operations, recalls of its products or seizures of its properties, aswell as potential criminal sanctions or personal injury or other damage claims.These remedies, changes in the applicable laws and regulations or discovery ofcurrently unknown conditions could increase NBP’s costs and limit its businessoperations. 

***Failure to successfully implement NBP’sbusiness strategy may impede its plans to increase revenues, margins and cashflow.***

NBP’s revenues, margins and cash flows will notincrease as planned if it fails to implement the key elements of its strategy,and its ability to successfully implement this strategy is dependent at leastin part on factors beyond NBP’s control.  For example, the willingness ofconsumers to purchase value-added products depends in part on economicconditions.  In periods of economic uncertainty, consumers tend to purchasemore private label or less-expensive products.  Thus, if NBP encounters periodsof economic uncertainty, the sales volume for its value-added products couldsuffer.  Also, NBP may not be successful in identifying favorable internationalexpansion opportunities. 

***Changes in consumer preferences couldadversely affect NBP’s business.***

The food industry in general is subject tochanging consumer trends, demands and preferences. NBP’s products compete withother protein sources, such as pork and poultry, and other foods. Trends withinthe food industry change often and the failure to anticipate, identify or reactto changes in these trends could lead to, among other things, reduced demandand price reductions for NBP’s products, and could have a material adverseeffect on NBP’s business, financial condition, results of operations and cashflows. In addition, NBP does not have any other material lines of business orother sources of revenue to rely upon if it is unable to efficiently processand sell beef products or if the market for beef declines. This lack ofdiversification means that NBP may not be able to adapt to changing marketconditions or withstand any significant decline in the beef industry.

***The beef processing industry is highlycompetitive and NBP’s customers might not continue to purchase its products orprices it receives for its products could fluctuate or be adversely impaired byactions taken by NBP’s competitors.***

The beef processing industry is highlycompetitive. Competition exists both in the purchase of live cattle and in thesale of beef products. In addition, NBP’s products compete with a number ofother protein sources, including pork and poultry.

NBP’s principal competition arises from otherbeef processors, including Tyson Foods, Inc., Cargill Meat Solutions and JBSUSA LLC. The principal competitive factors in the beef processing industry areprice, quality, food safety, product distribution, technological innovationsand brand loyalty. NBP’s ability to be an effective competitor will depend on itsability to compete on the basis of these characteristics. Some of itscompetitors have substantially larger beef operations, greater financial andother resources and wider recognition for their consumer branded products than NBPdoes. NBP cannot assure you that it will be able to compete effectively withthese companies and its ability to compete could be adversely affected by NBP’ssignificant debt levels.

***Extreme weather or otherforces beyond NBP’s control could negatively impact its business.***

Naturaldisasters, fire, bioterrorism, pandemic or extreme weather, including droughts,floods, excessive cold or heat, hurricanes or other storms, could impair thehealth or growth of livestock or interfere with NBP’s operations due to poweroutages, fuel shortages, water shortages, damage to its production andprocessing facilities or disruption of transportation channels, among otherthings.  Any of these factors, as well as disruptions in its informationsystems, could have an adverse effect on NBP’s financial results.

***The sales of NBP’s beef products aresubject to seasonal variations and, as a result, NBP’s quarterly operatingresults may fluctuate.***

The beef industry is characterized by prices thatchange based on seasonal consumption patterns. Thehighest period of demand for our products is usually the summer and springmonths when weather patterns permit more outdoor activities and there isincreased demand for higher value items that are grilled, such as steaks. Inaddition, because of higher consumption, more favorable growing conditions andthe housing of animals in feedlots for the winter months, there are generallymore cattle available in the summer and fall. As a result of these seasonalfluctuations, our revenue and profitability tend to be higher for our third andfourth fiscal quarters ended May and August, respectively, than for our firstand second fiscal quarters ended November and February, respectively. Howeverthese seasonal patterns may vary substantially from year to year.

20

 

 

 

 

***NBP depends on the service of keyindividuals, the loss of whom could materially harm its business.***

NBP’s success will depend, in part, on theefforts of its officers and other key employees.  In addition, the market forqualified personnel is competitive and NBP’s future success will depend on itsability to attract and retain these personnel. With the exception of its ChiefExecutive Officer, NBP does not have long-term employment agreements with itsofficers or maintain key-person insurance on any officer.  The loss of the servicesof any of NBP’s key employees or the failure to attract and retain employeescould have a material adverse effect on its business, results of operations andfinancial condition. 

***NBP’s performance depends on favorablelabor relations with its employees. Any deterioration of those relations orincrease in labor costs could adversely affect NBP’s business.***

As ofAugust 28, 2010, NBP had approximately 9,100 employees worldwide. Approximately2,700 employees at its Liberal, Kansas facility are represented by the UnitedFood and Commercial Workers International Union under a collective bargainingagreement that expires on December 16, 2012. Approximately 1,100 employees at itsBrawley, California facility are jointly represented by the United Food andCommercial Workers International Union and Teamsters International Union undera collective bargaining agreement that expires on December 8, 2013.Approximately 80 employees at NBP’s St. Joseph, Missouri facility are representedby the United Cereal Workers of the United Food and Commercial WorkersInternational Union under a collective bargaining agreement scheduled to expireon May 18, 2014. In November 2009, the United Food and Commercial Workers Unionfiled a petition with the Regional Office of the National Labor Relations Boardin Kansas City, Missouri seeking to represent employees who work at NBP’s DodgeCity, Kansas facility. This union withdrew its petition in January 2010.

A labor-related work stoppage by NBP’s unionizedemployees could limit NBP’s ability to process and ship its products orincrease its costs, which could adversely affect its results of operations andfinancial condition.  In addition, it is possible that any labor union effortsto organize employees at NBP’s non-unionized facilities might be successful andthat any labor-related work stoppages at these non-unionized facilities in thefuture could adversely affect NBP’s results of operations and financialcondition.  In general, any significant increase in labor costs, deteriorationof employee relations, slowdowns or work stoppages at any of NBP’s locations,whether due to union activities, employee turnover or otherwise, could have amaterial adverse effect on its business, financial condition, results ofoperations and cash flows. 

***The consolidation of NBP’s retail and food servicecustomers may put pressures on NBP’s operating margins.***

In recent years, the trend among retail and food servicecustomers, such as supermarkets, warehouse clubs and food service distributors,has been towards consolidation.  These consolidations, along with the entry ofmass merchants into the grocery industry, have resulted in customers withincreasing negotiating strength who tend to exert pressure on NBP with respectto pricing terms, product quality and new products.  As the customer basecontinues to consolidate, competition for the business of fewer customers isexpected to intensify.  If NBP does not negotiate favorable terms of sale with itscustomers and implement appropriate pricing to respond to these trends, or if NBPloses its existing large customers, NBP’s profitability could decrease.

***NBP may not be able to successfullycomplete acquisitions, affecting its ability to grow, or integrate completedand future acquisitions, which could result in failure to achieve its expectedacquisition benefits, the disruption of NBP’s business and an increase in itscosts.***

NBP continually explores opportunities to acquirerelated businesses, some of which could be material to it. NBP’s ability tocontinue to grow may depend upon identifying and successfully acquiringattractive companies, effectively integrating these companies, achieving costefficiencies and managing these businesses as part of NBP.  

21

 

 

 

 

 

 

NBP may not be able to effectively execute onacquisitions or integrate acquired companies and successfully implementappropriate operational, financial and management systems and controls toachieve the benefits expected to result from these acquisitions.  NBP’s effortsto integrate these businesses could be affected by a number of factors beyond itscontrol, such as regulatory developments, general economic conditions andincreased competition. In addition, the process of integrating these businessescould cause the interruption of, or loss of momentum in, the activities of itsexisting business. The diversion of management’s attention and any delays ordifficulties encountered in connection with the integration of these businessesor relating to legacy liabilities of businesses acquired by NBP couldnegatively impact its business and results of operations.  Further, thebenefits NBP anticipates from acquisitions may not develop.

***NBP’s operations aresubject to the general risks of litigation.***

NBP isinvolved on an ongoing basis in litigation arising in the ordinary course ofbusiness or otherwise. Trends in litigation may include class actions involvingconsumers, stockholders, employees or injured persons, and claims related tocommercial, labor, employment, antitrust, securities or environmental matters.These actions could also divert the attention of NBP’s management team andexpose it to significant liability and adverse publicity, which might adverselyaffect its brands, reputation and/or customer preference for its products.  Dueto the unpredictable nature of litigation, it is not possible to predict theultimate outcome of any potential lawsuits, and NBP may be held liable forsignificant judgments, or other losses, that are not fully covered by itsinsurance, which could have a material adverse effect on NBP’s business.

***Deterioration of economicconditions could negatively impact NBP’s business.***

NBP’sbusiness may be adversely affected by changes in national or global economicconditions, including inflation, interest rates, availability of capitalmarkets, consumer spending rates, energy availability and costs (including fuelsurcharges) and the effects of governmental initiatives to manage economicconditions. Any such changes could adversely affect the demand for NBP’sproducts or the cost and availability of its needed raw materials and packagingmaterials, thereby negatively affecting NBP’s financial results.

A downturn inthe U.S. economy may result in reduced demand for certain of NBP’s products,downward pressure on prices and shifts to less profitable private labelproducts. Moreover, any material reduction in demand for NBP’s products in itskey export markets (Japan and South Korea) could have an adverse effect on itsresults of operations.  

            The recent disruptionsand instability in credit and other financial markets and deterioration ofnational and global economic conditions, could, among other things: 
-  make it more difficult or costly for NBP to obtain financing for itsoperations or investments or to refinance its debt in the future;
-  cause NBP’s lenders to depart from prior credit industry practiceand make more difficult or expensive the granting of any technical or otherwaivers under NBP’s credit agreements to the extent it may seek them in thefuture;
-  impair the financial condition of some of NBP’s customers,suppliers or counterparties to its derivative instruments, thereby increasingcustomer bad debts, non-performance by suppliers or counterparty failuresnegatively impacting NBP’s treasury operations; and
-  negatively impact global demand for beef products, which couldresult in a reduction of sales, operating income and cash flows.

**Risk Factors Associated with USPB**

**USPB facilitates the delivery of the cattle providedby its unitholders and associates to NBP and does not have arrangements foralternative markets for its unitholders and associates cattle.**

USPB’s sole customer for thecattle provided by its unitholders and associates is NBP.  Given USPB’sownership of a majority interest in NBP, USPB has not developed alternativecustomers for the cattle provided by USPB’s unitholders and associates.  Ifevents were to occur which would prevent NBP from purchasing and processing thecattle supplied by USPB’s unitholders and associates, USPB would need to exerciseprovisions in its agreements with both NBP and USPB’s unitholders that wouldpermit USPB to reduce the number of cattle acquired from unitholders and soldto NBP.  While such provisions would mitigate harm to USPB, it is likely thatthe value of the linked Class A and Class B units and the associated deliveryrights held by USPB’s unitholders would be impaired.

 

22

 

 

 

 

 

 

***The other members of NBP do not deliver cattle toNBP for processing, creating the possibility that the interests of those othermembers of NBP could conflict with the interests of USPB and its unitholders. ***

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

***The Internal Revenue Service could assert that USPBshould be treated as a corporation for federal income tax purposes.***

Under applicable regulations,an unincorporated entity such as a limited liability company is treated as apartnership for federal income tax purposes unless the entity is considered a“publicly traded partnership” or the entity affirmatively elects to be taxed asa corporation.  USPB has not elected to be taxed as a corporation, and USPBbelieves that it should be treated as a partnership not taxable as acorporation for federal income tax purposes.  USPB has not requested and willnot request any ruling from the IRS, however, with respect to itsclassification as a partnership for federal income tax purposes.  If the IRSwere to assert successfully that USPB were taxable as a corporation for federalincome tax purposes in any taxable year, holders of linked Class A units andClass B units would not be required to report on their federal income taxreturns their allocable share of USPB’s items of income, gain, deduction, andloss for that year and USPB would be subject to tax on its net income for thatyear at corporate tax rates.  In addition, any distributions would be taxableto holders of linked Class A units and Class B units as dividend income. Taxation of USPB as a corporation could materially reduce the after−taxreturn on an investment in units and could substantially reduce the value ofyour units.

***Failure to achieve and maintain effective internalcontrols could have a material adverse effect on USPB’s business, operating resultsand financial condition.***

USPB is in the process ofdocumenting and testing its internal control procedures in order to satisfy therequirements of Sarbanes-Oxley Act, which requires annual managementassessments of the effectiveness of its internal controls over financialreporting. This process is both costly and challenging.  If USPB fails toachieve and maintain the adequacy of its internal controls, as such standardsare modified, supplemented or amended from time to time, it may not be able to ensurethat it can conclude on an ongoing basis that it has effective internalcontrols over financial reporting in accordance with the Sarbanes-Oxley Act.Moreover, effective internal controls are necessary for USPB to producereliable financial reports and are important to helping prevent financialfraud.  If USPB cannot provide reliable financial reports or prevent fraud, itsbusiness and operating results could be harmed, investors could lose confidencein its reported financial information, and its business, results of operationand financial condition could be adversely affected.  

***USPB depends on theservice of key senior management personnel, the loss of which could materiallyharm its business.***

USPB’s success will depend, inpart, on the efforts of its key senior management personnel. The market forqualified personnel is competitive and USPB’s future success will depend on itsability to attract and retain these personnel. USPB does not have long-termemployment agreements with most of its senior management. USPB may not be ableto negotiate either new contracts or renewals of any existing long-termemployment agreements on terms favorable to USPB or at all. The loss of theservices of any of USPB’s key senior management personnel or the failure to attractand retain highly skilled personnel in the future could have a material adverseeffect on USPB’s business, results of operations and financial condition.

 

**ITEM 1B.               UNRESOLVED STAFF COMMENTS**

Not applicable.

** **

**ITEM 2.                  PROPERTIES**

23

 

 

 

 

 

 

USPB’s corporate office is located at 12200 Ambassador Drive, Suite 501, Kansas City, Missouri, in proximity to thecorporate offices of NBP.  The Company leases its office space from the KansasCity Aviation Department, with offices at 601 Brasilia Avenue, Kansas City, Missouri 64153.

NBP owns its Liberal, Kansas, Dodge City, Kansas,Brawley, California, Hummels Wharf, Pennsylvania, Moultrie, Georgia, and St.Joseph, Missouri facilities. It leases its headquarters facility in KansasCity, Missouri and its Kansas City Steak processing facility in Kansas City,Kansas. NBP also has short-term leases in place for its offices in Chicago,Illinois, Denison, Iowa, Dallas, Texas, Springdale, Arkansas, Tokyo, Japan,Seoul, South Korea, and Beijing, China.  The Credit Facility is secured by afirst priority lien on substantially all of NBP’s real and personal property. The table below provides additional information regarding NBP’s primaryfacilities:

 

 

 

 

**Location**

 

**Daily Processing Capacity**

Processing Facilities:

 

 

 

Liberal, Kansas

 

6,000 head

 

Dodge City, Kansas

 

6,000 head

 

Brawley, California

 

2,000 head

 

 

 

 

 

 

 

 

**Location**

 

**Approximate Square Footage**

Case Ready Facilities:

 

 

 

Hummels Wharf, Pennsylvania

 

79,000 square feet

 

Moultrie, Georgia

 

112,000 square feet

Tannery Facility:

 

 

 

St. Joseph, Missouri

 

221,000 square feet

Kansas City Steak Facility:

 

 

 

Kansas City, Kansas

 

63,000 square feet

 

**ITEM 3.                 LEGAL PROCEEDINGS**

For information regardinglegal proceedings, see Note 14. *Legal Proceedings* to our consolidatedfinancial statements included in Item 8 of this report.****In addition, seeItem 1, *Business – Government Regulation and Environmental Matters*forinformation regarding information requests, investigations and proceedingspertaining to environmental matters.

** **

**ITEM 4.                 SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

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

** **

**PART II**

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

There is no established publictrading market for any class of common equity of U.S. Premium Beef, LLC.  As ofOctober 27, 2010, there were 458 record holders of Class A units and 459 recordholders of Class B units.  The sales prices by quarter and since the end of thefiscal year were as follows:

 

 

24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Affiliated Sales**

 

**Third Party Sales**

 

 

**Low**

 

**High**

 

**Low**

 

**High**

**Fiscal Year 2010**

 

 

 

 

 

 

 

Quarter ending:

 

 

 

 

 

 

 

 

November 28, 2009

$

60.00 

 

$

60.00 

 

$

140.00 

 

$

155.00 

 

February 27, 2010

$

130.00 

 

$

149.38 

 

$

- 

 

$

- 

 

May 29, 2010

$

70.00 

 

$

245.75 

 

$

- 

 

$

- 

 

August 28, 2010

$

150.00 

 

$

150.00 

 

$

- 

 

$

- 

Subsequent to August 28, 2010

$

80.00 

 

$

154.00 

 

$

- 

 

$

- 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Fiscal Year 2009**

 

 

 

 

 

 

 

Quarter ending:

 

 

 

 

 

 

 

 

November 29, 2008

$

110.00 

 

$

200.00 

 

$

- 

 

$

- 

 

February 28, 2009

$

55.00 

 

$

120.00 

 

$

- 

 

$

- 

 

May 30, 2009

$

60.00 

 

$

60.00 

 

$

135.00 

 

$

150.00 

 

August 29, 2009

$

43.55 

 

$

235.00 

 

$

135.00 

 

$

140.00 

Subsequent to August 29, 2009

$

60.00 

 

$

60.00 

 

$

140.00 

 

$

155.00 

 

 

 

 

 

 

 

 

 

 

 The affiliated sales representsales that were not at arms length and, therefore, the sales priceranges disclosed above are not necessarily indicative of the marketvalue of the combined Class A and Class B units during the periods inquestion. 

On January 12, 2010, February 26, 2010, March11, 2010, and March 26, 2010, USPB made cash distributions to each of its unitholdersin the amount of $14.21, $17.23, $10.62, and $12.43, respectively, for each linkedClass A unit and Class B unit held by its unitholders, and distributions of$11.40, $15.46, $9.53, and $11.16, respectively, to one unitholder that onlyowns Class B units.  On June 9, 2010 and September 10, 2010, USPB made cashdistributions to each of its Class A unitholders in the amount of $2.51 and $1.83,respectively, and to each of its Class B unitholders in the amount of $21.97and $16.00, respectively.

The payment of cash distributions are made onlyfrom assets legally available for that purpose and depend on the Company’sfinancial condition, results of operations, and other factors then deemedrelevant by USPB’s board of directors.  Cash distributions are paid to theholders of Class A and Class B units at the discretion of the board ofdirectors and to the extent permitted by USPB’s senior lenders.  

For a discussion of equity compensation plans, seeItem 12*. Security Ownership of Certain Beneficial Owners and Management andRelated Unitholder Matters*.

**ITEM 6.                  SELECTED FINANCIAL DATA**

The following table sets forth selectedconsolidated financial and other data for, and as of the end of, each of thefiscal years in the five-year period ended August 28, 2010.  The selected consolidatedfinancial information for the three fiscal years ended August 28, 2010(statement of operations data) and as of the fiscal years ended August 28, 2010and August 29, 2009 (balance sheet data) has been derived from our auditedconsolidated financial statements included elsewhere in this filing.  Theselected consolidated financial information for the two fiscal years endedAugust 25, 2007 (statements of operations data) and as of the fiscal yearsended August 28, 2008, August 25, 2007, and August 26, 2006 (balance sheetdata) has been derived from our audited financial statements for those yearswhich are not included in this filing, as adjusted for the presentationrequirements of Accounting Standards Codification (ASC) 810 – *Consolidation*, which was adopted by the Company as of August 30, 2009 with retrospectiveapplication to the historical years presented.  Our fiscal year ends on thelast Saturday in August.

The following table should be read in conjunctionwith Item 7. *Management’s Discussion and Analysis of Financial Condition andResults of Operations* and Item 8. *Financial Statements and SupplementaryData* (including the accompanying notes) contained elsewhere in this report.

25

 

 

 

 

 

 

 

 

**Fiscal Years Ended (1)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**August 28,**

**August 29,**

**August 30,**

**August 25,**

**August 26,**

 

 

 

 

**2010**

**2009**

**2008**

**2007**

**2006**

 

 

 

 

**(millions of dollars, except unit, share, and per unit data)**

**Statement of Operations Data:**

 

 

 

 

 

 

 

Net sales

 

 

$

5,807.9 

$

5,449.3 

$

5,847.3 

$

5,578.5 

$

4,636.0 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of sales

 

 

5,438.0 

5,187.1 

5,612.4 

5,444.0 

4,503.8 

 

Selling, general, and administrative

 

55.5 

49.1 

51.7 

46.1 

37.6 

 

Depreciation and amortization

 

 

53.0 

45.7 

36.4 

32.4 

28.7 

Operating income

 

 

261.4 

167.4 

146.8 

56.0 

65.9 

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

- 

0.3 

1.4 

2.1 

1.3 

 

Interest expense

 

 

(14.9)

(23.6)

(34.2)

(39.8)

(32.4)

 

Termination Fee

 

 

- 

14.6 

- 

- 

- 

 

Other, net

 

 

(7.3)

(6.4)

5.8 

1.3 

3.3 

Total other expense

 

 

(22.2)

(15.1)

(27.0)

(36.4)

(27.8)

 

Income tax expense

 

 

(0.9)

(1.0)

(1.8)

(1.9)

(1.6)

Net income

 

 

	238.43

151.3 

118.0 

17.7 

36.5 

Less: Net income attibutable to noncontrolling interest in:

 

 

 

 

 

 

 

Kansas City Steak Company, LLC

 

(1.0)

(1.3)

(0.7)

(0.3)

(0.2)

 

National Beef Packing Company, LLC

 

(76.5)

(50.0)

(55.1)

(7.8)

(16.6)

Net income attributable to U.S. Premium Beef, LLC

 

$

	160.9 

$

100.0 

$

62.2 

$

9.6 

$

19.7 

 

 

 

 

 

 

 

 

 

 

**Selected Balance Sheet Data:**

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

35.4 

$

18.9 

$

77.4 

$

62.9 

$

54.4 

 

Total assets

 

 

$

986.7 

$

872.9 

$

927.1 

$

848.6 

$

784.8 

 

Long-term debt, less current maturities

 

$

225.1 

$

293.4 

$

376.3 

$

438.5 

$

380.5 

 

Noncontrolling interest in NBP and KC Steak

 

$

294.5 

$

185.8 

$

188.0 

$

77.9 

$

73.0 

 

Capital shares and equities

 

 

$

166.9 

$

159.8 

$

126.5 

$

153.2 

$

148.8 

 

 

 

 

 

 

 

 

 

 

 

Units outstanding

 

 

 

 

 

 

 

 

 

Class A units

 

 

735,385 

735,385 

735,385 

735,385 

735,505 

 

 

Class B units

 

 

755,385 

755,385 

735,385 

735,385 

735,505 

 

 

 

 

 

 

 

 

 

 

**Per Unit Data:**

 

 

 

 

 

 

 

Earnings Per Unit

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

Class A Units

 

 

$

30.74 

$

44.87 

$

27.92 

$

4.33 

$

9.28 

 

 

Class B Units

 

 

$

183.15 

$

90.89 

$

56.68 

$

8.79 

$

18.78 

 

Diluted

 

 

 

 

 

 

 

 

 

Class A Units

 

 

$

30.25 

$

44.35 

$

27.51 

$

4.26 

$

9.11 

 

 

Class B Units

 

 

$

183.15 

$

90.89 

$

55.86 

$

8.65 

$

18.45 

 

 

 

 

 

 

 

 

 

 

Outstanding weighted-average units

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

Class A Units

 

 

735,385 

735,385 

735,385 

735,455 

702,843 

 

 

Class B Units

 

 

755,385 

737,052 

735,385 

735,455 

702,843 

 

Diluted

 

 

 

 

 

 

 

 

 

Class A Units

 

 

747,334 

744,039 

746,176 

747,067 

715,385 

 

 

Class B Units

 

 

755,385 

737,052 

746,176 

747,067 

715,385 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Our fiscal year ends on the last Saturday in August.  Fiscal years 2010 and 2009 consisted of a 52 week year; fiscal year 2008

 

consisted of a 53 week year; and 2007 and 2006 each consisted of a 52 week year.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26

 

 

 

 

 

 

**ITEM 7.                  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

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

**Overview**

USPB was formed as a closed marketing cooperativeon July 1, 1996. Its mission is to increase the quality of beef andlong-term profitability of cattle producers by creating a fully integratedproducer-owned beef processing system that is a global supplier of highquality, value-added beef products responsive to consumer desires. 

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

In December 1997, FNB acquired what became a75% interest in Kansas City Steak Company, LLC (Kansas City Steak), aportion control steak cutting operation.  In March 2003, FNB acquiredNational Carriers, Inc. (National Carriers), a refrigerated and livestocktransportation company from Farmland.  

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

In connection with the cooperative’s purchase ofits interest in FNB, the cooperative owned the right and was subject to theobligation to deliver cattle annually to NBP relative to: (i) USPB’s ownershipin NBP and (ii) the number of cattle processed annually by NBP.  Thatarrangement continues following the conversion of the cooperative into theLLC.   The price received for cattle is based upon a price grid determined by USPBand NBP, which reflects current market conditions. The cattle purchaseagreement is effective as long as USPB is an owner in NBP. Cattle delivered by USPBunitholders and associates are processed in NBP’s three processing plants. 

USPB fulfills its annual obligation to delivercattle to NBP through its unitholders and associates. Under Uniform Cattle Deliveryand Marketing Agreements, unitholders are obligated to deliver a designatednumber of cattle to USPB during specified delivery periods, as defined. Theoriginal agreements were for a term of ten years; the renewal agreements carrya term of five years and have an evergreen renewal provision.  Both agreementsprovide for minimum quality standards, delivery variances, and terminationprovisions, as defined. Cattle acquired pursuant to the agreements are deliveredto NBP pursuant to the cattle purchase agreement. Sales transactions are basedupon prevailing cash market prices, and purchases are on terms no lessfavorable to NBP than would be obtained from an unaffiliated party. 

27

 

 

 

 

 

 

On June 12, 2003, the cooperative entered into an agreement with Farmland to acquire all of the partnership interestsin FNB held by Farmland, which approximated 71.2%. As a result of thisacquisition, the cooperative gained voting control of FNB and converted it to alimited liability company, National Beef Packing Company, LLC, under Delaware law. These transactions (Acquisition) closed on August 6, 2003. NBP assumed both the Uniform Delivery and Marketing Agreements and the cattle purchaseagreement. NBP continues to hold all of the same assets as its predecessor heldbefore the consummation of the transactions, including equity in subsidiaries,except that Farmland retained a 49% interest in a NBP subsidiary National Beef aLF,LLC, which holds a 47.5% interest in aLF Ventures, LLC. After the Acquisition,NBP holds a 24.2% interest in aLF Ventures, LLC through its 51% interestretained in National Beef aLF, LLC.  

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

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

National Beef Leathers, LLC, a wholly‐owned subsidiary of NBP, purchased certain assets of a wet blue tannery located in St. Joseph, Missouri from Prime Tanning in March 2009.

NBP is one of the largest beef processingcompanies in the U.S., accounting for approximately 14% of the federallyinspected steer and heifer slaughter during our fiscal year ended August 28,2010 as reported by the USDA.  NBP processes, packages and delivers fresh andfrozen beef and beef by-products for sale to customers in the United States andinternational markets.  NBP’s products include boxed beef, ground beef, hides,tallow and other beef and beef by-products.  In addition, NBP sells value-addedbeef products including branded boxed beef, case-ready beef, portion controlbeef, and further processed hides.  NBP markets its products to retailers, foodservice providers, distributors, further processors and the United Statesmilitary.  USPB believes that its relationship with NBP is a competitiveadvantage within the industry and provides NBP with a consistent and dependablesupply of high-quality cattle, including for processing in value-added andother programs. 

**NBP Results ofOperations**

The following table presents the historicalconsolidated statements of operations data for NBP for the periods indicated:   
   **52 weeks** **52 weeks** **53 weeks**   **ended** **ended** **ended**   **August 28,** **August 29,** **August 30,**   **2010** **2009** **2008**   **(millions of dollars)** Net sales $5,807.9  $5,449.3  $5,847.3  Costs and expenses:             Cost of sales  5,438.0   5,187.1   5,612.4     Selling, general, and administrative  49.3   43.1   43.7     Depreciation and amortization  49.6   44.4   36.4     Operating income  271.0   174.7   154.8  Other income (expense):             Interest income  -   0.2   0.5     Interest expense  (14.8)  (23.3)  (34.0)    Other, net  (7.2)  (6.5)  5.7  Total other expense, net  (22.0)  (29.6)  (27.8)    Income tax expense  (0.9)  (0.9)  (1.8) Net income  248.1   144.2   125.2  Less: Net income attibutable to noncontrolling interest in:             Kansas City Steak Company, LLC  (1.0)  (1.3)  (0.7) Net income attributable to National Beef Packing Company, LLC $247.1  $142.9  $124.5            
 

 

 

	28

 

 

 

 

 

 

NBP’s netincome for the fiscal year 2010 was $248.0 million compared to $144.2 millionfor the fiscal year 2009, an increase of $103.8 million. The improvementin operating income during the fiscal year ended August 28, 2010 resulted primarilyfrom an approximate 1.5% decrease in operating costs as a percentage of netsales from the fiscal year ended August 29, 2009.  Sales increasedapproximately $358.6 million or 6.6% in fiscal year 2010 compared to fiscalyear 2009 primarily due to an approximate 1.8% increase in the volume of cattleprocessed and an approximate 5.9% increase in the average sales price per headprocessed.  Cost of sales was approximately $5,438.0 million for fiscal year2010 compared to $5,187.1 million in fiscal year 2009, an increase ofapproximately $250.9 million, or 4.8%.  The increase in cost of sales for theperiod resulted primarily from an approximately 1.8% increase in the volume ofcattle processed during the fiscal year, and an increase of approximately 3.8%in average live cattle prices as compared to the prior fiscal year. Operatingincome increased $96.3 million over the prior year.  As a percent ofsales, operating income was 4.7% and 3.2% for fiscal years 2010 and 2009,respectively.

NBP’s net income for the fiscal year 2009 was $144.2 millioncompared to $125.2 million for the fiscal year 2008, an increase of $19.0 million.The improvement in operating income during the fiscal year ended August 28,2010 resulted primarily from increased profitability from sales of NBP’scommodity beef products, exports and value-added product offerings as comparedto fiscal year ended August 30, 2008.  Sales were lower, due in part to anapproximate 2.5% decrease in the average volume of cattle processed per weekand in part to the extra week in the prior reporting period as compared to fiscalyear 2009.  The average beef sales prices per head decreased approximately 2.3%during this reporting period as the demand for beef products during fiscal year2009 was not as strong compared to fiscal year 2008.  Cost of sales were lowerpartially due to a decrease of approximately 2.5% in the number of live cattlepurchased on a per week basis in addition to the additional week in the sameperiod of last year.  Also contributing to this decrease was a decrease in livecattle prices of approximately 7.4%.  Partially offsetting these decreases wasan increase in the average cattle weights by approximately 0.8% during fiscalyear ended August 29, 2009 as compared to the fiscal year ended August 30,2008.  Operating income increased $19.9 million over the prior year.  As apercent of sales, operating income was 3.2% and 2.6% for fiscal years 2009 and2008, respectively.  

**Financial Statement Accounts**

*Net Sales.*  NBP’s netsales are generated from sales of boxed beef, case-ready beef, chilled andfrozen export beef, portion control beef and beef by-products.  NBP’s net salesare affected by the volume of animals processed and the value extracted fromeach animal.  The value NBP extracts from cattle processed, referred to as thecut-out value, is affected by beef prices and product mix, as value-addedproducts and export sales typically generate higher prices and operatingmargins.  NBP’s value-added products contribute significantly more, in terms ofprofits, than its traditional boxed beef products and are an importantcomponent of NBP’s profitability.  Wholesale beef prices fluctuate seasonallybecause of higher demand during the summer months.  Wholesale beef prices alsofluctuate because of changes in supply and demand for competing proteins andother foods, as well as changes in cattle supply, which have typically followeda ten to twelve year cycle, consisting of about six to seven years of expansionfollowed by one to two years of consolidation and three to four years ofcontraction.  While we expect the supply of cattle to expand at some point in thenext few years, we do not expect any growth in the near term.  In addition,beef and by-product sales are affected by the general economic environment andother factors.

*Cost of Sales.* NBP’s cost of sales iscomprised of the cost of livestock and plant costs such as labor, packaging, andutilities, and other facility expenses.  Total livestock costs are a functionof the volume of animals processed and the price paid for each animal.  Cattleprices vary over time and are affected by production cycles, weather, feedprices and other factors that affect the supply of and demand for livestock. Cut-out value is a measure of the sales value of a beef carcass expressed on aper hundred weight basis.  Historically, changes in cut-out values andcorresponding livestock costs have been positively correlated. 

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

29

 

 

 

 

 

 

**Overall Industry Outlook**

Cattle on feed supplies for thefall quarter are expected to be near prior year supplies although, activemarketing during the summer months resulted in cattle weights below prior yearweights and fewer market ready cattle than in the fall of 2009.  Nationally,beef cow and bull slaughter levels remain above prior year levels resulting inthe continuation of herd liquidation.  Meanwhile, rising grain prices have keptexpansion of pork and poultry stable and per capita animal protein suppliessupportive to cattle and beef values.  Growing global demand for U.S. beefrealized over the past 18 months is expected to continue into calendar year2011.  Barring significant deterioration in current economic conditions,consumer demand is expected to be positive given available supplies andsupportive to recent beef and cattle price increases.

**Beef Export Markets**

Export markets for U.S. beefproducts remain constrained since the discovery of a single case of BSE in theState of Washington in December 2003, as well as other isolated cases.  In July2006, Japan agreed to reopen its market to U.S. beef from cattle aged 20 monthsand younger.  South Korea announced a provisional opening of its border to U.S.beef from animals 30 months and younger in September 2006, but subsequentlyclosed its border again in October 2007.  South Korea reopened its border andstarted inspecting U.S. beef near the end of June 2008.  These constraints anduncertainties have historically had a negative impact on beef demand during theperiods in which they occurred.

We cannotpresently assess the full economic impact of the consequences of BSE on theU.S. beef packing industry or on our operations.  Existing or new importrestrictions or additional regulatory restrictions or disruptions in domesticand foreign consumer demand for beef may have a material adverse effect on theCompany’s revenues and net income.

**Critical Accounting Policies and Estimates**

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

*Accounting for Investment in NBP.*  Inaccordance with accounting principles generally accepted in the United Statesof America, NBP’s financial position and results of operations are consolidatedinto our financial statements and all transactions between the two companiesare eliminated in the consolidation. A non-controlling interest is presentedwhich represents the earnings of NBP attributable to those holding a non-controllinginterest in NBP. 

*Allowance for Returns and Doubtful Accounts.*    Theallowance for returns and doubtful accounts reflects reserves for customerreceivables to reduce receivables to amounts expected to be collected.Management uses significant judgment in estimating uncollectible amounts. Inestimating uncollectible amounts, management considers factors such as currentoverall economic conditions, industry-specific economic conditions, historicalcustomer performance, and anticipated customer performance. Specific accountsare also reviewed for collectability. While management believes these processeseffectively address its exposure to doubtful accounts, changes in the economy,industry or specific customer conditions may require adjustment to the recordedallowance for doubtful accounts.  Management uses significant judgment inestimating amounts expected to be returned.  Management considers factors suchas historical performance and customer conditions in estimating return amounts.

*Inventory Valuation.*  Inventoriesconsist primarily of meat products and supplies.  Product inventories areconsidered commodities and are based on quoted commodity prices, whichapproximate net realizable value.  Supply and other inventories are valued onthe basis of first-in, first-out, specific or average cost methods.  Productinventories are relieved from inventory utilizing the first-in, first-outmethod.  Management periodically reviews inventory balances and purchasecommitments to estimate if inventories will be sold at amounts (net ofestimated selling costs) less than their carrying amounts. If actual resultsdiffer from management estimates with respect to the selling of inventories atamounts less than their carrying amounts, NBP would adjust its inventorybalances accordingly.

30

 

 

 

 

 

 

*Goodwill and Other Intangible Assets.*   Werecognize excess cost over the fair value of the net tangible and identifiableintangible assets acquired in a reporting unit, and record this excess asgoodwill.  We calculate the fair value of the applicable reporting unit usingestimates of future cash flows.  In accordance with the provisions includedwithin *Intangibles – Goodwill and Other*under ASC 350*,* we assessgoodwill and other indefinite life intangible assets annually for impairment.If there is impairment, the carrying amount of goodwill and other intangibleassets is written down to the implied fair value.  For goodwill, this testinvolves comparing the fair value of each reporting unit to the unit’s bookvalue to determine if any impairment exists.  Goodwill and other indefinitelife intangible assets were tested for impairment, and, as of August 28, 2010,management determined there was no impairment.

*Workers’ Compensation Accrual.*  NBPincurs certain expenses associated with workers’ compensation. In order tomeasure the expense associated with these costs, management must make a varietyof estimates including employee accidents incurred but not yet reported. Theestimates used by management are based on NBP’s historical experience as wellas current facts and circumstances. 

*Automobile Liability Accrual.*  NBPincurs certain expenses associated with automobile liability.  In order tomeasure the expense associated with these costs, management must make a varietyof estimates to determine the ultimate cost to NBP related to incurredaccidents.  The estimates used by management are based on NBP’s historicalexperience as well as current facts and circumstances. 

*Valuation of Non-controllingInterest.*  Historically, certain of NBP’s members have had the right torequire that NBP repurchase their interests.  The fair market value ofthose interests is classified as non-controlling interest.  At any time aftercertain dates, the earliest being July 31, 2010, the latest beingJuly 31, 2011, affiliates of NBP’s President and Chief Executive Officer,Timothy M. Klein, and/or NBPCo Holdings, Inc. have the right to requirethat NBP repurchase their interests, the value of which is to be determined bya specified formula or a mutually agreed process.  If NBP is unable toeffect the repurchase within a specified time, the requesting member(s) havethe right to cause a sale process to commence.  On April 13, 2009,NBP entered into two Unit Redemption Agreements (Unit RedemptionAgreements) pursuant to Section 12.5 of NBP’s limited liability companyagreement to redeem at agreed upon redemption prices all of the membershipinterests in NBP that were owned or controlled by NBP’s former ChiefExecutive Officer, John R. Miller, and an affiliate of NBP’s former GeneralCounsel, Scott H. Smith, as well as 25% of the membership interests in NBPthat were owned by affiliates of Mr. Klein.  As a result, Mr. Millerand Mr. Smith and their affiliates received approximately$91.3 million and $22.8 million, respectively, for their units andare no longer members of NBP.  Mr. Klein’s affiliates receivedapproximately $11.4 million for their redeemed units.  On June 2, 2010,NBP entered into a Unit Redemption Agreement to redeem at agreed uponredemption prices approximately 5% of the membership interests in NBP that wereowned by Mr. Klein’s affiliates.  As a result, Mr. Klein’s affiliates received$8.0 million for their redeemed units.  

USPB accounts for changes in theredemption value of these interests by accreting the change in value from thedate of change through the earliest redemption date of the respectiveinterests.  At August 28, 2010, the value of the non-controlling interest wasdetermined to be $297.2 million, which was in excess of its carrying value. The total value of the non-controlling interest at August 28, 2010, increasedby approximately $56.7 million compared to the value at August 29, 2009. Accordingly, the carrying value of the non-controlling increased byapproximately $82.7 million through accretion during fiscal year 2010,resulting in the $291.7 million carrying value, as reflected in theaccompanying consolidated balance sheet as of August 28, 2010.    Offsettingthe change in the value of the non-controlling interest is a correspondingchange in the members’ capital.

Generally accepted accountingprinciples require USPB to determine the fair value of the non-controllinginterest at the end of each reporting period.  To the extent this valueincreases, this change in fair value is accreted over the redemption period asdiscussed above.  Management hasconsidered previous redemption prices, valuations of peer companies and otherfactors in measuring the fair value of the non-controlling interest for unitsheld by NBPCo Holdings as of August 28, 2010.  The non-controlling interestheld by Mr. Klein’s affiliates as of August 28, 2010 was valued based upon acontractually stipulated valuation formula.

31

 

 

 

**Results of Operations**

Thefollowing table shows consolidated statements of operations data for the periodsindicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**52 weeks**

 

**52 weeks**

 

**53 weeks**

 

 

 

**ended**

 

**ended**

 

**ended**

 

 

 

**August 28,**

 

**August 29,**

 

**August 30,**

 

 

 

**2010**

 

**2009**

 

**2008**

 

 

 

**(millions of dollars)**

Net sales

$

5,807.9 

 

$

5,449.3 

 

$

5,847.3 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

Cost of sales

5,438.0 

 

5,187.1 

 

5,612.4 

 

 

Selling, general, and administrative

55.5 

 

49.1 

 

51.7 

 

 

Depreciation and amortization

53.0 

 

45.7 

 

36.4 

 

 

Operating income

261.4 

 

167.4 

 

146.8 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

Interest income

- 

 

0.3 

 

1.4 

 

 

Interest expense

(14.9)

 

(23.6)

 

(34.2)

 

 

Termination Fee

- 

 

14.6 

 

- 

 

 

Other, net

(7.3)

 

(6.4)

 

5.8 

Total other expense, net

(22.2)

 

(15.1)

 

(27.0)

 

 

Income tax expense

(0.9)

 

(1.0)

 

(1.8)

Net income

238.3 

 

151.3 

 

118.0 

Less: Net income attibutable to noncontrolling interest in:

 

 

 

 

 

 

 

Kansas City Steak Company, LLC

(1.0)

 

(1.3)

 

(0.7)

 

 

National Beef Packing Company, LLC

(76.5)

 

(50.0)

 

(55.1)

Net income attributable to U.S. Premium Beef, LLC

$

	160.9 

 

$

100.0 

 

$

62.2 

 

 

 

 

 

 

 

 

The results of operations of NBP for the fiscalyears ending August 28, 2010, August 29, 2009, and August 30, 2008 areconsolidated in the respective periods and transactions between USPB and NBPhave been eliminated. 

***Fiscal Year Ending August 28, 2010 compared to August 29,2009***

*Net Sales.*    Netsales increased approximately $358.6 million, or 6.6%, to $5,807.9 million infiscal year 2010 compared to $5,449.3 million in fiscal year 2009 primarily dueto an approximate 1.8% increase in the volume of cattle processed and anapproximate 5.9% increase in the average sales price per head processed.  

*Cost ofSales.*   Cost of sales was approximately $5,438.0 millionfor fiscal year 2010 compared to $5,187.1 million in fiscal year 2009, anincrease of approximately $250.9 million, or 4.8%.  The increase in cost ofsales for the period resulted primarily from an approximately 1.8% increase inthe volume of cattle processed during the fiscal year, and an increase ofapproximately 3.8% in average live cattle prices as compared to the priorfiscal year.  Cost of sales, as a percentage of net sales, was 93.6% and 95.2%for fiscal years 2010 and 2009, respectively.

*Selling,General, and Administrative Expenses.*  Selling, general, andadministrative expenses were $55.5 million for the year ended August 28, 2010compared to $49.1 million for the fiscal year ended August 29, 2009, anincrease of approximately $6.4 million, or 13.0%.  The increase for the periodis primarily attributable to an increase in bad debt expense of approximately$1.7 million, increase in legal expenses of $1.7 million, increase inconsulting of approximately $1.3 million, increase in marketing ofapproximately $1.3 million and an increase in travel related expense ofapproximately $0.6 million.  Selling, general, and administrative expenses, asa percentage of net sales, were 1.0% and 0.9% for the fiscal years 2010 and 2009,respectively.

 

32

 

 

 

 

 

 

*Depreciationand Amortization Expense.*  Depreciation and amortization expenseswere approximately $53.0 million in fiscal year 2010 compared to $45.7 millionin fiscal year 2009, an increase of approximately $7.3 million, or 16.0%. Depreciation expense increased due to approximately $36.7 million of assetsbeing placed in service, primarily at our three beef plants and two case readyplants, during fiscal year 2010 and as a result of depreciation andamortization expenses associated with the step up in assets that occurred as aresult of the purchase of minority interests in April 2009.  

*Operating Income.*  Operatingincome was $261.4 million for fiscal year 2010, an increase of $94.0 million,or 56.2%, from $167.4 million in fiscal year 2009.  Operating income, as apercentage of net sales, was 4.5% and 3.1% for fiscal years 2010 and 2009,respectively.  The increase in operating income for the fiscal year endedAugust 28, 2010, resulted primarily from decrease in operating costs as apercentage of net sales from the fiscal year ended August 29, 2009.

*InterestExpense.*  Interest expense was $14.9 million for fiscal year 2010compared to $23.6 million for fiscal year 2010, a decrease of $8.7 million, or36.9%.  The decrease in interest expense during fiscal year 2010 as compared tofiscal year 2009 was due primarily to the purchase and cancellation of anaggregate principal amount of our senior notes of approximately $66.9 millionduring the second quarter of fiscal year 2010.  

*TerminationFee*.  A termination fee in the amount of $14.6 million was received in fiscalyear 2009 as a result of the termination of the Membership Interest PurchaseAgreement dated February 29, 2008, between and among USPB, NBP, JBS S.A.(JBS), and the other holders of membership interests in NBP (MIPA).

*Other,net.*  Other, net non-operating expense was $7.3 million in fiscalyear 2010 compared to other, net non-operating expense of $6.4 million infiscal year 2009, an increase of $0.9 million, or 14.1%.  

*Income TaxExpense*.  Income tax expense was $0.9 million for fiscal year 2010 ascompared to $1.0 million for fiscal year 2009.  Income tax expense is recordedon taxable income from National Carriers, Inc. (NCI), which is organized as a CCorporation.  The effective tax rate for NCI was relatively consistent for bothfiscal years 2010 and 2009.

*Net Income.*  As a resultof the factors described above, net income for fiscal year 2010 wasapproximately $238.4 million compared to net income of approximately $151.3 millionfor fiscal year 2009, an increase of approximately $87.1 million.

*Net Income Attributable to Non-controllingInterest in NBP.*  Non-controlling interest in the net income of NBP for fiscal year 2010 was $76.5 million compared to non-controlling interest in the net incomefor fiscal year 2009 of $50.0 million, a change of $26.5 million. The non-controllinginterest in NBP represents the minority owners’ interest in NBP’s earnings.

***Fiscal Year Ending August 29, 2009 compared to August30, 2008***

*Net Sales*.  Net sales were$5,449.3 million in fiscal year 2009, a decrease of $398.0 million, or 6.8%,from $5,847.3 million in fiscal year 2008.  The decrease was due in part to anapproximate 2.5% decrease in the average volume of cattle processed per weekand in part to the extra week in fiscal year 2008 as compared to fiscal year2009.  The average beef sales prices per head decreased approximately 2.3%during this reporting period as the demand for beef products during fiscal year2009 was not as strong compared to fiscal year 2008.

*Cost ofSales.*   Cost of sales was $5,187.1 million for fiscal year2009, a decrease of $425.3 million, or 7.6%, from $5,612.4 million for fiscalyear 2008.  The decrease resulted partially from a decrease of approximately 2.5%in the number of live cattle purchased on a per week basis in addition to theadditional week in fiscal year 2008.  Also contributing to this decrease was a decreasein live cattle prices of approximately 7.4%.  Partially offsetting thesedecreases was an increase in the average cattle weights by approximately 0.8%during fiscal year 2009 as compared to fiscal year 2008.  Cost of sales, as apercentage of net sales, was 95.2% and 96.0% for fiscal years 2009 and 2008,respectively.

 

33

 

 

 

 

 

 

*Selling,General, and Administrative Expenses.*  Selling, general, andadministrative expenses were $49.1 million for fiscal year 2009, a decrease of$2.6 million, or 5.0%, from $51.7 million for fiscal year 2008.  The decreasefor this period is primarily due to a decrease in legal fees of approximately$4.2 million, a decrease in travel and related expenses of approximately $0.9million and a decrease in marketing expense of approximately $0.7 million.  Fiscalyear 2008 reflects an extra week of expense as compared to the same period of fiscalyear 2009 which contributed to the decreases in the marketing expensesdiscussed above as well as the selling, general and administrative expenses ingeneral.  Partially offsetting these decreases was an increase in payroll andbenefits of approximately $2.2 million and an increase in the provision for baddebts of approximately $0.4 million.  Selling, general, and administrativeexpenses, as a percentage of net sales, were 0.9% and 0.9% for the fiscal years2009 and 2008, respectively.  

*Depreciationand Amortization Expense.*  Depreciation and amortization expenseswere $45.7 million for fiscal year 2009 compared to $36.4 million forfiscal year 2008, an increase of $9.3 million, or 25.5%.  Depreciationexpense increased due to assets being placed into service, primarily at theDodge City and Liberal beef plants, during fiscal year 2009 and to assets beingplaced into service at NBP’s three beef plants and two case ready plants duringfiscal year 2008.  Partially offsetting these increases, fiscal year 2008reflects an extra week of expense as compared to fiscal year 2009.

*Operating Income.*  Operatingincome was $167.4 million for fiscal year 2009, an increase of $20.6 million,or 14.0%, from $146.8 million for fiscal year 2008.  Operating income, as apercentage of net sales, was 3.1% and 2.5% for fiscal years 2009 and 2008,respectively.  The improvement in operating income during fiscal year 2009 resultedprimarily from increased profitability from sales of our commodity beefproducts, exports and our value-added product offerings during fiscal year2009.   The improvement in profitability from sales of our commodity beefproducts was primarily attributable to the improvement in demand relative tothe price of cattle.

*InterestExpense.*  Interest expense was $23.6 million for fiscal year 2009compared to $34.2 million for fiscal year 2008, a decrease of $10.6 million, or31.0%.  The decrease in interest expense during the 52 week period of fiscal year2009 as compared to the 53 week period of fiscal year 2008 was due primarily tothe purchase and cancellation of an aggregate principal amount of NBP’s senior notesof approximately $62.5 million and $30.6 million during fiscal years 2009 and2008, respectively.  The repayment of approximately $25.7 million of NBP’s termnote in December 2008 also contributed to the decline in interest expense for fiscalyear 2009.  Also contributing to the decrease in interest expense was lowerinterest rates on variable rate debt, a decrease of approximately 189 basispoints, during the comparable periods and an approximate $11.3 million decreasein the weighted average principal amount of our variable rate debt for fiscalyear 2009 as compared to fiscal year 2008.  Also contributing to thesedecreases was an extra week of interest expense in fiscal year 2008 as comparedto fiscal year 2009.  

*TerminationFee*.  A termination fee in the amount of $14.6 million was received in fiscalyear 2009 as a result of the termination of the MIPA.

*Other,net.*  Other non-operating expense, net was $6.4 million in fiscalyear 2009 compared to other non-operating income, net of $5.8 million in fiscalyear 2008, a decrease of $12.2 million.  The decrease in other, net wasprimarily related to the write-off of approximately $5.6 million of legal feesrelated to the termination of the MIPA in February 2009 and approximately $1.5million related to the write-off of debt issuance costs.  Also contributing tothe decrease was the approximate $0.7 million write-off of obsolete parts at NBP’scase ready facilities during the second quarter of fiscal year 2009.  Fiscalyear 2008 included approximately $3.4 million in income for a settlement of alawsuit related to corrugated packaging materials and about $1.3 million inincome related to proceeds received in redemption of an investment interest inwhich NBP’s basis had previously been written down to zero, both of which didnot recur during the comparable period of this year.  Fiscal years 2009 and2008 also included $1.4 million and $0.4 million, respectively, in expense forthe write-off of unamortized loan costs associated with the repurchase andcancellation of NBP’s senior notes during fiscal years 2008 and 2009 andamending and restating the credit facility during fiscal year 2009.  

*Income TaxExpense*.  Income tax expense was $1.0 million for fiscal year 2009 ascompared to $1.8 million for fiscal year 2008, a decrease of $0.8 million, or 44.4%,primarily related to NBP’s subsidiary, NCI.  Income tax expense is recorded onincome from NCI, which is organized as a C Corporation.  The effective tax ratefor NCI was relatively consistent for fiscal years 2009 and 2008.

*NetIncome.*  As a result of the factors described above, net income for fiscalyear 2009 was approximately $151.3 million compared to net income ofapproximately $118.0 million for fiscal year 2008, an increase ofapproximately $33.3 million.

*Net IncomeAttributable to Non-controlling Interest in NBP.*  Non-controlling interestin the net income of NBP for fiscal year 2009 was $50.0 million compared to non-controllinginterest in the net income for fiscal year 2008 of $55.1 million, a change of $5.1million. The non-controlling interest in NBP represents the minority owners’interest in NBP’s earnings.  

34

 

 

 

 

 

 

 

**Liquidity and Capital Resources**

As of August 28, 2010, we had net working capital(the excess of current assets over current liabilities) of approximately $208.6million, which included cash and cash equivalents of $35.4 million, with $8.4million in distributions payable.  As of August 29, 2009, we had net workingcapital of approximately $163.3 million, which included cash and cashequivalents of $18.9 million, with $10.9 million in distributions payable.  Ourprimary sources of liquidity are cash flow from operations and availableborrowings under our amended and restated credit facility (Credit Facility). 

As of August 28, 2010, we had $247.5 million oflong-term debt, of which $22.4 million was classified as a current liability. As of August 28, 2010, NBP’s Credit Facility consisted of a $375.0 million termloan, of which $200.0 million was outstanding and a $250.0 million revolvingline of credit loan, which had outstanding borrowings of $27.0 million,outstanding letters of credit of $26.0 million and available borrowings of $197.0million, based on the most restrictive financial covenant calculations.  Wealso had a term loan with CoBank of which $1.0 million was outstanding and a $10.0million revolving line of credit with CoBank all of which was available.  Cashflows from operations and borrowings under NBP’s Credit Facility have funded itsacquisitions, working capital requirements, capital expenditures and othergeneral corporate purposes.  NBP was in compliance with all of the financialcovenants under its Credit Facility as of August 28, 2010 of which $27.0million was borrowed and $26.0 million was used to support letters of credit. USPB was in compliance with all of the financial covenants under its Amendedand Restated Credit Facility as of August 28, 2010.

Effective June 4, 2010, NBP amended andrestated the Credit Facility to increase the maximum borrowings under thefacility by increasing the revolving line of credit to $250 million and theavailability under the term loan to $375 million ($200 million of which wasoutstanding as of August 28, 2010). During the 52 weeks ended August 28, 2010and August 29, 2009, we retired all of our previously outstanding 10 1⁄2% seniornotes. Based on the borrowing base tests in NBP’s amended and restated CreditFacility, all of the revolving line of credit was available at August 28, 2010.

In addition to outstanding borrowingsunder the Credit Facility, NBP had outstanding borrowings under industrialrevenue bonds of $12.2 million and capital lease and other obligations of $7.3million as of August 28, 2010.

Capital spending through fiscal year 2011is expected to be approximately $75.0 million. These expenditures are plannedprimarily for plant expansion (including funding a portion of the expansioncosts for NBP’s St. Joseph plant), equipment renewals and improvements.  NBPbelieves available borrowings under the Credit Facility and cash provided byoperating activities will be sufficient to support its working capital, capitalexpenditures and debt service requirements for the foreseeable future. NBP’sability to generate sufficient cash, however, is subject to certain generaleconomic, financial, industry, legislative, regulatory and other factors beyondits control. For a review of the obligations that affect liquidity, please seethe ‘‘Cash Payment Obligations’’ table below.

*Operating Activities*

Net cashprovided by operating activities was $236.4 million in fiscal year 2010 ascompared to $259.3 million in fiscal year 2009.  The $22.9 million decrease wasprimarily due to changes in inventory and accounts receivable of approximately $74.8million and $55.4 million, respectively, which more than offset theapproximately $87.1 million in additional net income in fiscal year 2010 ascompared to fiscal year 2009.

 Net cashprovided by operating activities was $259.3 million in fiscal year 2009 ascompared to $155.3 million in fiscal year 2008.  The $104.0 million increase wasdue partially to an increase of approximately $33.3 million in net income infiscal year 2009 as compared to fiscal year 2008.  Also contributing to theimprovement was net cash being provided through inventory and accountsreceivable reductions during fiscal year 2009.

*Investing Activities*

35

 

 

 

 

 

 

Net cash used in investing activities was $48.1million in fiscal year 2010 as compared to $35.8 million in fiscal year 2009, anincrease of $12.3 million. The increase was primarily attributable to thereceipt of the $14.6 million termination fee received by the Company related tothe termination of the MIPA in fiscal year 2009 and approximately $8.7 millionadditional capital expenditures during fiscal year 2010 compared to fiscal year2009, partially offset by the acquisition of National Beef Leathers forapproximately $11.0 million during fiscal year 2009.

Net cash used in investing activities was $35.8million in fiscal year 2009 as compared to $58.9 million for fiscal year 2008,a decrease of $23.1 million.  The decrease in cash used was primarilyattributable to the receipt of the $14.6 million termination fee received bythe Company related to the termination of the MIPA.

*Financing Activities*

Net cash usedin financing activities was approximately $171.7 million in fiscal year 2010compared to net cash used in financing activities of $282.0 million in fiscal year2009.  The decrease in cash used in financing activities was primarilyattributable to an approximate $125.5 million redemption of member capital inthe prior fiscal year compared to an $8.0 million redemption in the currentyear, an additional $47.8 million in net borrowings on the term loan, primarilyrelated to the amended and restated Credit Facility on June 4, 2010, andapproximately $32.8 million change in overdraft balances at August 28, 2010 ascompared to August 29, 2009.  These decreases were partially offset by anapproximate $19.6 million member capital contribution during the fiscal yearended August 29, 2009, an approximate $35.1 million increase in partnership andnon-controlling interests’ distributions paid in the current year, a $25million reduction in net borrowings under the revolving loan, and the purchaseand cancellation of approximately $66.9 million in aggregate principal amountof NBP’s senior notes compared to the purchase and cancellation of only $62.5million of senior notes in the prior fiscal year.  

Net cash used in financing activities was $282.0million in fiscal year 2009 compared to net cash used in financing activitiesof $81.8 million in fiscal year 2008.  The change was primarily attributed toan approximate $125.5 million redemption of member capital, an approximate$52.9 million increase in member distributions, the purchase and cancellationof an additional $31.9 million of NBP’s senior notes, approximately $25.7million in repayments on NBP’s term note, and $11.7 million change in overdraftbalances at August 31 2009 as compared to August 30, 2008.  These changes werepartially offset by an approximate $49.8 million increase in net revolvercredit borrowings and by an approximate $19.6 million member capitalcontribution during fiscal year 2009.

***CoBank Debt***

USPB’s revolving line of credit was not drawnupon at August 28, 2010.  Borrowings under the facility will bear interest atLIBOR or the Base Rate, plus the applicable margin for revolving line of creditloans.  The applicable margin will be the same as NBP’s Credit Facility forLine of Credit Loans.

USPB’s CoBank term debt of approximately $1.0 millionis payable in quarterly installments with final payment due in July 1, 2011,bearing interest at the 90 day LIBOR index plus applicable margin (2.54% atAugust 28, 2010, 3.10% at August 29, 2009, and 5.29% at August 30, 2008).  Theapplicable margin is adjusted annually and is determined pursuant to a tablebased on the NBP leverage ratio, as of the end of each fiscal year of NBP.Based on the table, the rate margin was 2.00% for fiscal year ending August 28,2010 and 2.50% for fiscal years ending August 29, 2009 and August 30, 2008.

The debt agreement with CoBank contains certaincovenants which require, among other things:         
-  reporting requirements;   
-  a minimum consolidated working capital reserve;   
-  a minimum debt service coverage ratio (not required if workingcapital falls above the greater of one half the aggregate commitment or$4 million);
-  a minimum consolidated net worth of $70.0 million;  
-  restrictions on transactions with related parties; and	
-  restrictions on dividend payments;	

The debt is secured by USPB’s interest in NBP. 

36

 

 

 

 

 

 

***Credit Facility***

Effective as of June 4, 2010, NBP’s CreditFacility was amended and restated to: (1) increase the borrowings under theCredit Facility by providing for a term loan facility of up to $375 million anda revolving line of credit of up to $250 million; (2) reduce the applicablemargin on the rates of interest of the term loan and revolving line of credit;(3) revise the payment schedule of the term loan; (4) extend the maturity dateof the Credit Facility to June 4, 2015; (5) remove limitations on capitalexpenditures; (6) add new financial covenants regarding adjusted net worth anda fixed charge coverage ratio; and (7) add two wholly owned subsidiaries,National Beef California, LP and National Carriers, Inc., as loan parties andguarantors. The lender financing charges for the amended and restated CreditFacility of approximately $4.2 million are being amortized over the life of theloan.

The borrowings under the Credit Facilitybear interest at LIBOR or the Base Rate, plus the applicable margin. Theapplicable margin for the revolving line of credit and the term loan will be asset forth on a grid based on different ratios of funded debt to EBITDA. As ofAugust 28, 2010, the interest rates for the term loan and revolving loan wereapproximately 2.79% and 3.66%, respectively.

The borrowings under the revolving loanare available for NBP’s working capital requirements, capital expenditures andother general corporate purposes. The advance rates under the borrowing baseare 90% on eligible accounts and 70% on eligible inventory. The Credit Facilityis secured by a first priority lien on substantially all of NBP’s assets andthe assets of its subsidiaries.

The principal amount outstanding under theterm loan is due and payable in equal quarterly installments beginning inOctober 2010, based on a 10-year level amortization of the remaining amount ofthe term loan. All outstanding loan amounts are due and payable on June 4,2015. Prepayment of the loans is allowed at any time.

The Credit Facility contains customaryaffirmative covenants relating to NBP and its subsidiaries, including, withoutlimitation, conduct of business, maintenance of insurance, compliance withlaws, maintenance of properties, keeping of books and records, and thefurnishing of financial statements. The facility also contains customarynegative covenants relating to NBP and its subsidiaries, including, withoutlimitation, restrictions on: distributions, mergers, asset sales, investmentsand acquisitions, encumbrances, affiliate transactions, and ERISA matters. Theability of NBP and its subsidiaries to engage in other business, incur debt orgrant liens is also restricted.

The Credit Facility contains customaryevents of default, including, without limitation, failure to make payment whendue, 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, failure of any of the loandocuments to remain in full force, and NBP’s failure to properly fund itsemployee benefit plans. The Credit Facility also includes customary provisionsprotecting the lenders against increased costs or loss of yield resulting fromchanges in tax, reserve, capital adequacy and other requirements of law.

***Industrial Revenue Bonds***

In conjunction with the fourth amendment andrestatement of NBP’s Credit Facility, effective December 30, 2004, NBPentered into a transaction with the City of Dodge City, Kansas, in order toprovide NBP property tax savings.  Under the transaction, the City issued$102.3 million in bonds due in December 2019, used the proceeds to purchase theDodge City facility (facility) and leased the facility to NBP for an identicalterm under a capital lease.  The City’s bonds were purchased by NBP usingproceeds of its term loan under the Credit Facility.  Because the City hasassigned the lease to the bond trustee for the benefit of NBP as the solebondholder, NBP, in effect, controls enforcement of the lease.  As a result ofthe capital lease treatment, the facility will remain a component of property,plant and equipment in NBP’s consolidated balance sheet.  As a result of thelegal right of offset, the capital lease obligation and the corresponding bondinvestments will be eliminated in consolidation.  The transaction provides NBPwith property tax exemptions for the leased facility, which, after nettingpayments to the City and local school district under payment in lieu of taxagreements, result in an annual property tax savings of approximately 25%.  Thefacility remains subject to a prior mortgage and security interest in favor ofthe lenders under the Credit Facility.  Additional revenue bonds may be issuedto cover the costs of certain improvements to this facility.  The total amountof revenue bonds authorized for issuance is $120.0 million.

37

 

 

 

 

 

 

The cities of Liberal and Dodge City, Kansasissued an aggregate of $13.8 million of industrial development revenue bonds onNBP’s behalf to fund the purchase of equipment and construction of improvementsat NBP’s facilities in those cities. These bonds were issued in 1999 and 2000in four series of $1.0 million, $1.0 million, $6.0 million and $5.9 million andare due on demand or on February 1, 2029, March 1, 2027, March 1, 2015 andOctober 1, 2009, respectively. However, because each series of bonds is backedby a letter of credit under NBP’s Credit Facility, these bonds have beenpresented as non-current obligations until twelve months prior to theirmaturity.  As of August 28, 2010, the amount outstanding on the $6.0 millionseries of bonds had been reduced to $3.4 million.  In addition, the $5.9million series of bonds were paid off during the first quarter of fiscal year2010.  Pursuant to a lease agreement, we lease the facilities, equipment andimprovements from the respective cities and make lease payments in the amountof principal and interest due on the bonds. 

The bonds issued in 1999 and 2000 are variablerate demand obligations that bear interest at a rate that is adjusted weekly,which rate will not exceed 10% per annum. The average per annum interest ratefor each series of bonds was 0.5% in fiscal year 2010. NBP has the option toredeem a series of bonds at any time for an amount equal to the principal plusaccrued interest to the date of such redemption. The holders of the bonds havethe option to tender the bonds upon seven days’ notice for an amount equal topar plus accrued interest. To the extent the remarketing agent for the bonds isunable to resell any of the bonds that are tendered, the remarketing agent willuse the letter of credit to fund such tender. 

In connection with the BrawleyBeef acquisition, NBP assumed the obligation under a Trust Indenture securing$6.8 million in California Pollution Control Financing Authority Tax-Exemptvariable rate demand solid waste disposal revenue bonds dated as of October 1,2001.  The bonds bear a rate that is adjusted weekly, which rate will notexceed 12% per annum.  The average per annum interest rate for this series ofbonds for fiscal year 2010 was 0.4%.  These bonds have a maturity date ofOctober 1, 2016.  NBP has the option to redeem all or a portion of the bonds atany time for an amount equal to the principal plus accrued interest to the dateof such redemption.  The holders of the bonds have the option to tender thebonds upon seven days’ notice for an amount equal to par plus accruedinterest.  To the extent the remarketing agent for the bonds is unable toresell any of the bonds that are tendered, the remarketing agent will use theletter of credit to fund such tender. 

***Utilities Commitment***

Effective December 30, 2004, NBPfinalized an agreement with the City of Dodge City, Kansas, whereby inconsideration of certain improvements made to the city water and wastewatersystems, NBP has committed to make a series of service charge payments totaling$19.3 million over a 20 year period, of which $1.7 million, $1.4 million, and$1.4 million was paid in fiscal years 2010, 2009, and 2008, respectively. Payments under the commitment will be $0.8 million in each of the fiscal years2011, 2012, 2013, 2014 and 2015, with the remaining balance of $7.3 million tobe paid in subsequent years.  

***10 1⁄2% Senior Notes***

During fiscal year 2010, NBP purchased andcancelled the remaining approximately $66.9 million of its senior notes.  Duringfiscal year 2009, NBP purchased and cancelled approximately $62.5 million of itssenior notes.

***Cash Payment Obligations***

The followingtable describes our cash payment obligations as of August 28, 2010 (thousandsof dollars):

 

 

 

38

 

 

 

 

 

 

 

 

 

 

**Fiscal Year**

**Fiscal Year**

**Fiscal Year**

**Fiscal Year**

**Fiscal Year**

 

 

 

 

 

 

**Total**

**2011 (Year 1)**

**2012 (Year 2)**

**2013 (Year 3)**

**2014 (Year 4)**

**2015 (Year 5)**

**After Year 5**

Term loan facility

 

 

$

201,030 

$

21,030 

$

20,000 

$

20,000 

$

20,000 

$

120,000 

$

- 

Interest on long-term debt(1)

$

23,614 

$

6,133 

$

5,467 

$

4,827 

$

4,187 

$

3,000 

$

- 

Revolving credit facility

 

$

27,000 

$

- 

$

- 

$

- 

$

- 

$

27,000 

$

- 

Industrial Revenue Bonds

$

12,245 

$

- 

$

- 

$

- 

$

- 

$

	3,430 

$

	8,815 

Capital Leases (including interest)

$

8,206 

$

1,746 

$

1,717 

$

1,674 

$

3,069 

$

- 

$

- 

City of Brawley loan

 

$

120 

$

40 

$

40 

$

40 

$

- 

$

- 

$

- 

Operating leases

 

 

$

23,290 

$

10,115 

$

6,517 

$

3,534 

$

2,525 

$

599 

$

- 

Purchase commitments

 

$

17,143 

$

17,143 

$

- 

$

- 

$

- 

$

- 

$

- 

Cattle commitments(2)

 

$

70,208 

$

70,208 

$

- 

$

- 

$

- 

$

- 

$

- 

Utilities commitment

 

$

11,391 

$

818 

$

820 

$

818 

$

816 

$

816 

$

7,303 

 

 

Total

 

 

$

394,247 

$

127,233 

$

34,561 

$

30,893 

$

30,597 

$

	154,845 

$

16,118 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Computed based on scheduled maturities and current effective interest rates.

 

 

 

 

(2)  NBP makes a verbal commitment to cattle producers to purchase cattle about one week in advance of delivery of the live animals to its plants, with the actual price paid for the cattle determined after the cattle are delivered and inspected at its facilities.  This amount approximates	its outstanding cattle commitments at August 28, 2010.

 

 

 

 

 

 

 

**Off-Balance Sheet Arrangements**

As of August 28, 2010, we did not have anysignificant off-balance sheet arrangements as defined in Item 303(a)(4)(ii) ofSEC Regulation S-K.

**Inflation**

We believe our results of operations are notmaterially affected by moderate changes in the inflation rate. Inflation andchanging prices did not have a material effect on our operations in fiscal years2010, 2009, and 2008.  Severe increases in inflation, however, could affect theglobal and U.S. economies and could have an adverse affect on our business,financial condition and results of operations.

**Seasonality and Fluctuations in Operating Results**

The Company’s operating results are influenced byseasonal factors in the beef industry. These factors affect the price NBP paysfor livestock as well as the ultimate price at which NBP sells its products.The seasonal demand for beef products is highest in the summer and spring monthsas weather patterns permit more outdoor activities and there is an increaseddemand for higher value items that are grilled, such as steaks. Both livecattle prices and boxed beef prices tend to be at seasonal highs during thesummer and fall. Because of higher consumption, more favorable growingconditions and the housing of animals in feedlots for the winter months, thereare generally more cattle available in the summer and fall.

 

**ITEM 7A.               QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

The following discussion contains forward-lookinginformation that involves risks and uncertainties. Our actual results coulddiffer materially from those anticipated by such forward-looking informationdue to the factors discussed under *Disclosure Regarding Forward-LookingStatements*, Item 1A. *Risk Factors*, and elsewhere in this report.

**Market Risk Disclosures**

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

*Commodities.* NBP uses various raw materials, many of which are commodities. Rawmaterials are generally available from several different sources, and NBPpresently believes it can obtain them as needed.  Commodities are subject toprice fluctuations that may create price risk. From time to time, NBP may hedgecommodities in order to mitigate this price risk. While this may tend to limitits ability to participate in gains from commodity price fluctuations, it alsotends to reduce the risk of loss from changes in commodity prices.  To theextent the contracts are not designated as normal purchases, NBP reflectscommodity contract gains and losses as adjustments to the basis of underlying commoditiespurchased; gains or losses are recognized in the statement of operations as acomponent of costs of goods sold.

 

39

 

 

 

 

 

 

NBP purchasescattle for use in its processing businesses. From time to time, NBP enters intoforward purchase contracts at prices determined prior to the delivery ofcattle. The commodity price risk associated with these activities can be hedgedby selling (or buying) the underlying commodity, or by using an appropriatecommodity derivative instrument. The particular hedging instrument NBP usesdepends on a number of factors, including availability of appropriatederivative instruments.

NBP sellscommodity beef products in its business. Commodity beef products are subject toprice fluctuations that may create price risk. From time to time, NBP entersinto forward sales contracts at prices determined prior to shipment. NBP mayhedge the commodity price risk associated with these activities in order tomitigate this price risk.  While this may tend to limit its ability toparticipate in gains from commodity price fluctuations, it also tends to reducethe risk of loss from changes in commodity beef prices.  To the extent thecontracts are not designated as normal sales, NBP reflects commodity contractgains and losses as adjustments to the basis of underlying commodities sold;gains or losses are recognized in the statement of operations as a component ofnet sales. 

From time totime, NBP purchases cattle futures and options contracts.  NBP’s primary use ofthese contracts is to partially determine its future input costs when NBP hascommitted forward sales purchase orders from customers at a specified fixedprice.  The longest duration futures contract owned is sixteen months.  Inaccordance with *ASC 815 Derivatives and Hedging*, as amended, NBPaccounts for futures contracts and their related firm purchase commitments atfair value. Certain firm commitments for live cattle purchases and all firmcommitments for boxed beef sales are treated as “normal purchases and sales”and not marked to market.  ASC 815 imposes extensive recordkeeping requirementsin order to treat a derivative instrument as a hedge for accounting purposes.Derivatives qualify for treatment as hedges when there is a high correlationbetween the change in fair value of the instrument and the related change infair value of the underlying commitment. For derivatives that qualify aseffective hedges, the change in fair value has no net effect on earnings untilthe hedged transaction affects earnings. For derivatives that are not designatedas hedging instruments, or for the ineffective portion of a hedging instrument,the change in fair value does affect current period net earnings.

While NBP’smanagement believes each of these instruments help mitigate various marketrisks, they are not designated and accounted for as hedges under ASC 815 as aresult of the extensive recordkeeping requirements of this statement.Accordingly, the gains and losses associated with the change in fair value ofthe instrument and the offsetting gains and losses associated with changes inthe market value of certain of the firm purchase commitments related to thefutures contracts are recorded to income and expense in the period of change.

NBP uses a sensitivity analysisto evaluate the effect that changes in the market value of commodities willhave on these commodity derivative instruments.  NBP feels the sensitivityanalysis more appropriately reflects the potential market value exposureassociated with the use of derivative instruments.  As of August 28, 2010 andAugust 29, 2009, the potential change in the fair value of applicable commodityderivatives instruments assuming a hypothetical 10% decrease in the underlyingcommodity price in each year, was $0.3 million and $16.4 million,respectively.  This significant change was primarily due to the cattle futurescontracts that were entered into during the first quarter of fiscal year 2009to offset the risk of fixed-price sales commitments.

*Interest Rates.*    Asa result of our normal borrowing and leasing activities, our operating resultsare exposed to fluctuations in interest rates, which we manage primarilythrough our regular financing activities. We generally maintain limitedinvestments in cash and cash equivalents.

We have long-term debt with variable interestrates. Short-term debt is primarily comprised of the current portion oflong-term debt maturing twelve months from the balance sheet date.  Ourvariable interest expense is sensitive to changes in the general level ofinterest rates.   As of August 28, 2010, the weighted average interestrate on our $240.2 million of variable interest debt was approximately 2.77%. As of August 29, 2009, the weighted average interest rate on our $239.6 millionof variable rate debt was approximately 3.36%.

We had total interest expense of approximately $14.9million, $23.6 million, and $34.2 million in fiscal years 2010, 2009, and 2008,respectively.  The estimated increase in interest expense from a hypothetical200 basis point increase in applicable variable interest rates would have beenapproximately $5.6 million, $4.9 million, and $5.2 million in fiscal years 2010,2009 and 2008, respectively.  

 

** **

40

 

 

 

*Foreign Operations.*  Transactionsdenominated in a currency other than an entity’s functional currency may exposethat entity to currency risk.  Although NBP operates in international marketsincluding Japan, South Korea and China, product sales are predominately made inUnited States dollars, and therefore, currency risks are limited.

 

 

**ITEM 8.                  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

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

** **

**ITEM 9.                  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE**

**           **None.

** **

**ITEM 9A.               CONTROLS AND PROCEDURES**

We maintain a system of controls and proceduresdesigned to provide reasonable assurance as to the reliability of theconsolidated financial statements and other disclosures included in this report,as well as to safeguard assets from unauthorized use or disposition. Weevaluated the effectiveness of the design and operation of our disclosurecontrols and procedures as defined in the Securities Exchange Act of 1934Rules 13a-15(e) and 15d-15(e) under supervision and with the participationof management, including our Chief Executive Officer and Chief FinancialOfficer. Based upon that evaluation, as of the end of the period covered bythis Annual Report on Form 10-K, our Chief Executive Officer and Chief FinancialOfficer 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 control over financial reporting duringthe thirteen weeks ended August 28, 2010 that have materially affected, or arereasonably 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. 

**Management’s Report onInternal Control over Financial Reporting**

Management is responsible forestablishing and maintaining adequate internal control over financial reportingas defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, asamended.  The Company’s internal control over financial reporting is designedto provide reasonable assurance as to the reliability of the Company’s financialreporting and the preparation of financial statements in accordance with GAAP. Our internal control over financial reporting includes those policies andprocedures that:
-  Pertain to the maintenance of records that in reasonable detailaccurately and fairly reflect the transactions and dispositions of the assetsof the Company;
-  Provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withGAAP, and that receipts and expenditures of the Company are being made only inaccordance with authorizations of management and managers of the Company; and 
-  Provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use or disposition of the Company’sassets that could have a material effect on the Company’s consolidatedfinancial statements.

            Internal control over financial reporting, nomatter how well designed, has inherent limitations.  Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Therefore, internal control over financial reportingdetermined to be effective can provide only reasonable assurance with respectto financial statement preparation and may not prevent or detect allmisstatements.  Moreover, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

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Management has assessed theeffectiveness of the Company’s internal control over financial reporting as ofAugust 28, 2010.  In making this assessment, management used the criteriaestablished by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO) in *Internal Control – Integrated Framework.*

            Based on the Company’s processes and assessment,as described above, management has concluded that, as of August 28, 2010, theCompany’s internal control over financial reporting was operating effectively.

This annual report does not include anattestation report of our registered public accounting firm regarding internalcontrol over financial reporting.  Management’s report was not subject toattestation by our registered public accounting firm pursuant to rules of theSecurities and Exchange Commission that permit us to provide only management’sreport in this annual report.

** **

**ITEM 9B.               OTHER INFORMATION**

The Company may purchase a portion of itsoutstanding Class A and Class B units from time to time in accordance with thelimits imposed under the CoBank Credit Agreement.  

In September 2010, USPB’s Board of Directorsapproved an amendment to the previous management bonus plan and theimplementation of a management phantom unit plan.  USPB’s Board of Directorsalso amended the CEO’s Employment Agreement to provide clarity in thedetermination of, and remedies for, events of dilution.

** **

**PART III**

**ITEM 10.               DIRECTORS, EXECUTIVE OFFICERS AND CORPORATEGOVERNANCE**

**Board of Directors**

U.S. Premium Beef’s business and affairs aregoverned by its board of directors. The board of directors currently consistsof seven directors. The board of directors has full authority to act on behalfof USPB. The board of directors’ act collectively through meetings, committeesand executive officers it appoints. In addition, USPB employs a staff of professionalsto manage the day-to-day business of USPB. The members of the board ofdirectors, nominees to the board of directors and the executive officers are identifiedbelow.   There are no arrangements or understandings pursuant to which anydirector, nominee to become a director or executive officer was elected orappointed.

 

 

 

 

 

 

 

 

 

**Directors, Director Nominee and Executive Officers**

 

 

 

 

 

 

 

 

 

 

Term Expires

Name

 

Age

 

Positions and Offices with Registrant

 

After FY

Mark R. Gardiner

 

49 

 

Chairman of the Board

 

2010

Duane K. Ramsey

 

73 

 

Vice Chairman of the Board

 

2012

Joe M. Morgan

 

58 

 

Secretary

 

2010

Jerry L. Bohn

 

60 

 

Director

 

2012

Douglas A. Laue

 

59 

 

Director

 

2010

Rex W. McCloy

 

55 

 

Director

 

2011

Jeff H. Sternberger

 

50 

 

Director

 

2011

Steven D. Hunt

 

51 

 

Chief Executive Officer

 

—

Scott J. Miller

 

46 

 

Chief Financial Officer

 

—

Stanley D. Linville

 

51 

 

Chief Operating Officer

 

—

Danielle D. Imel

 

35 

 

Treasurer

 

—

 

42

 

 

 

 

 

 

*Mark R. Gardiner.* Mr. Gardiner isPresident of Gardiner Angus Ranch, Inc. (GAR), a family owned purebred andcommercial Angus operation headquartered at Ashland, Kansas, with 10seedstock satellite cowherds across the United States and Australia.  Mr. Gardiner has been involved with the management of GAR since 1983.  GARmarkets over 2,000 bulls and 700 females per year to both commercial andseedstock beef producers throughout the United States. GAR also runs an embryotransfer program that makes more than 3,500 transfers per year, including morethan 60% of GAR’s 1,500-plus head of registered Angus calves born each year. Apercentage of its calves are finished at commercial feedlots to provide carcassdata on all Gardiner sires. In addition to a native range program, GAR operatesa significant dryland farming enterprise. Mr. Gardiner is a member of theNational Cattlemen’s Beef Association, Kansas Livestock Association, AmericanAngus Association, Kansas Angus Association and the Beef ImprovementFederation. He also serves on the Board of Irsik & Doll Company, aprivately held company primarily involved in cattle feeding, grain and feed merchandising.Mr. Gardiner has served as a member of the Company’s Board of Directorssince 1996. He was elected Secretary/Treasurer of the Company’s Board in 2003,Vice Chairman of the Board in 2004 and Chairman of the Board in 2006.Mr. Gardiner holds a Bachelor’s degree from Kansas State University in Animal Sciences and Industry.  Asa member of USPB’s board of directors, Mr. Gardiner and the entities he isassociated with that deliver cattle to USPB are considered affiliates of USPB.

*Duane K. Ramsey.*Mr. Ramseyis Chairman of Security Bancshares Inc., a $300 million multi-bank holdingcompany. In addition, he has held an ownership interest in a commercial feedlotin southwest Kansas and a cow calf operation.  He has spent 45 years inbanking in Scott County, KS, and was involved in the organization anddevelopment of USPB as a founding stockholder through his feedlot and infinancing numerous USPB stockholders.  Mr. Ramsey is familiar with accounting,finance, audit, risk management and compensation matters.  He holds a Bachelorsdegree in Agricultural Economics from Kansas State University. Healso graduated from the Graduate School of Banking, Boulder, CO.  Mr. Ramseyhas served as a member of the Company’s board since 2006.  Mr. Ramsey also serves as a director ofthree banks, one of which he has been a director of for 35 years.  As amember of USPB’s board of directors, Mr. Ramsey is considered an affiliate ofUSPB.

*Joe M. Morgan.*Mr. Morganhas been managing commercial feedyards since 1981.  He has been Manager of PokyFeeders since 1985 and part owner since 1987.  Mr. Morgan has been involvedwith employee issues and the growth of Poky Feeders (starting with a capacity of 2,500 head to today of over70,000 head), plus ranches in eight states.  Mr. Morgan has had responsibilityfor all banking of Poky Feeders for over 25 years and has responsibility forrisk management of all feeding entities.  He also has farming interestsin Iowa and is a member of the National Cattlemen’s Beef Association and theKansas Livestock Association.  Mr. Morgan holds a Bachelor’s degree in AnimalScience from Iowa State University.  Mr. Morgan has served as a member of theCompany’s board since 2007 and as a Nominating Committee member prior to 2007.  Asa member of USPB’s board of directors, Mr. Morgan and the entities he isassociated with that deliver cattle to USPB are considered affiliates of USPB.

*Jerry L. Bohn*.  Mr. Bohnhas served as the General Manager of Pratt Feeders since 1982. Pratt Feedershas a one-time capacity of 115,000 head in four feedlots in Kansas andOklahoma. In this capacity he oversees more than 100 employees.  Mr. Bohnalso owns and manages a 2,000 to 3,000 head cattle operation which includesgrazing and finishing cattle.  Throughout Mr.Bohn has 38 years of agricultural business management experience, he has workedwith complex banking and financial data and is required to make decisionsinvolving several hundred thousand dollars, on a daily basis.  Mr. Bohnpreviously was employed as Director of Market Analysis for Cattle-Fax, anindustry market analysis firm. Mr. Bohn has served as president of the KansasLivestock Association. He has been a Board member of the Kansas Beef Council,the National Cattlemen’s Beef Association (NCBA) and Feeders Advantage, aprivate animal health product distribution company. Mr. Bohn has also served onthe NCBA’s Executive Committee and as chairman of NCBA’s Live Cattle Marketing.Mr. Bohn served on USPB’s Board from 2004 through 2007 and was reelectedin 2009. He was elected Secretary of USPB’s Board in 2006. He holds aBachelor’s degree in Animal Sciences and Industry from Kansas State University. As a member of USPB’s board of directors, Mr. Bohn and the entities he isassociated with that deliver cattle to USPB are considered affiliates of USPB.

*Douglas A. Laue.* Mr. Laueis a partner in Tiffany Cattle Company Inc. near Herington, Kansas, and runs agrazing program in the Kansas Flint Hills. Mr. Laue has been involved in everysector of cattle feeding for over twenty-five years.  He is a member of theNational Cattlemen’s Beef Association and Kansas Livestock Association (KLA).Mr. Laue previously served as the chairman of the KLA Feeders Council.Mr. Laue has been a member of the Company’s Board of Directors since 1996and served as vice chairman of the Board of Directors from 1996 through 2002.Mr. Laue holds a Bachelor’s degree in Animal Sciences and Industry from Kansas State  University.  As a member of USPB’s board of directors, Mr. Laue and theentities he is associated with that deliver cattle to USPB are consideredaffiliates of USPB.

43

 

 

 

 

 

 

*Rex W. McCloy*. Mr. McCloy has34 years of experience in the cattle business and is manager and part-owner ofMcLeod Farms Inc., a family-owned business headquartered in Morse, Texas. Theoperation includes a 6,500 head capacity feed yard, a 7,000 acre irrigatedfarm, a backgrounding operation and a 20,000 acre ranch in Harding Co., NewMexico. Mr. McCloy is a member of the National Cattlemen’s Beef Association,the Texas Cattle Feeder's Association (TCFA) and the Texas Southwestern CattleRaisers Association. He is a past Board member and marketing committee chairmanof TCFA. In addition he is a former member of U.S. Premium Beef’s Nominating Committee.Mr. McCloy holds a Bachelor’s degree in Agricultural Economics from Texas Tech University.  Mr. McCloy has served as a member of the Company’s board since2005.  Mr. McCloy is a former boardmember of the Hutchinson County Hospital District and is presently on the Boardof Managers at Adobe Walls Cotton Gin.  As a member of USPB’s board ofdirectors, Mr. McCloy and the entities he is associated with that delivercattle to USPB are considered affiliates of USPB.

*Jeff H. Sternberger*.  Mr.Sternberger is the manager and part owner of Midwest Feeders, Inc.  Mr. Sternberger has been the manager ofMidwest Feeders, Inc. for the past 18 years and has overseen large growth inhis company and directed the acquisition of other business to add to theirholdings.  Mr. Sternberger has been the direct contact during that timeframefor all banking and accounting relationships.  He also owns and operatesa farming and cattle operation in Oklahoma as well as a personal cattle feedingoperation.  He serves as a director of Midwest Feeders, Inc., CRI Feeders of GuymonLLC, and Conestoga Energy Partners and its two ethanol plants, Bonanza BioEnergy and Arkalon Energy.  Mr. Sternberger holds a Bachelor of Science Degreein Agricultural Economics from Oklahoma State University.  As a member ofUSPB’s board of directors, Mr. Sternberger and the entities he is associatedwith that deliver cattle to USPB are considered affiliates of USPB.

*Steven D. Hunt.*Mr. Hunt was named Chief Executive Officer in July 1996 and wasinstrumental in the development and establishment of U.S. Premium Beef. Priorto his employment with U.S. Premium Beef, Mr. Hunt owned and operated SDHCattle Company at Winfield, Kansas, until 1996. As Vice President of CorporateLending with CoBank, ACB from January 1987 to October 1988, Mr. Hunt alsohas experience in many areas of commercial banking, including directagricultural lending, commercial lending, finance, business analysis, training,marketing and personnel. Mr. Hunt has served on the Board of National BeefPacking Company, LLC, (NBP) since 1997 and was elected chairman of NBP’s Boardin 2003. Mr. Hunt holds a Bachelor’s degree in Agricultural Economics from  Kansas State University. 

*Scott J. Miller*. Mr. Miller has served asthe Company’s Chief Financial Officer since January 2010.  Prior to thisappointment, he served as the Company’s Chief Reporting and Compliance Officer,a position he held since joining the Company in 2005.  He oversees the financeand treasury functions and is directly responsible for financial reporting andensuring compliance with internal policies and regulatory requirements.  Beforejoining U.S. Premium Beef, he worked as the Manager, Capital Markets for SprintCorporation from 2001 to 2005 and, prior to that, in various finance andaccounting positions with Farmland Industries, Inc.  Mr. Miller earned aBachelor’s degree in Accounting from Benedictine College and an MBA with anemphasis in Finance from the University of Missouri-Kansas City.  He has passedthe Certified Public Accounting exam and the Certified Cash Managers exam.

*Stanley D. Linville.* Mr. Linville is theCompany’s Chief Operating Officer and joined the Company in 1997. He overseescattle scheduling and technical operations. Before joining U.S. Premium Beef,he operated a family farming operation near Holcomb, Kansas. He also worked inthe cattle division of Brookover Enterprises at Garden City, Kansas, and as agrain merchandiser for Bartlett Grain Co. in Kansas City. Mr. Linvilleholds a Bachelor’s degree in Agricultural Economics from Kansas State University. 

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

**Board of Directors**

Under USPB’s limited liability company agreement,the number of directors is set by the board of directors but may not be lessthan seven directors.  Directors must be unitholders of USPB.  Seven directorswill always be elected by unitholders holding Class A units.  

44

 

 

 

 

 

 

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

In the discretion of the board of directors, thenumber of directors may be increased by up to an additional five directors.Those additional directors will represent the Class B unitholders and may beelected or appointed by either the board of directors or by the holders ofClass B units.  

**Compensation of Directors**

The board of directors meets from time to time atsuch time and place as may be fixed by resolution adopted by a majority of thewhole board of directors. Members of the board of directors receive a per diempayment of $250 for each activity on behalf of USPB, as well as directreimbursement of travel expenses related to service on the board of directors. 

**Audit Committee**

The board of directors has an AuditCommittee consisting of Messrs. Gardiner, Ramsey, McCloy and Laue.  Subjectto the qualifications in the section headed “Directors who are unitholders” inItem 13 below, all members of the Audit Committee are considered independentwithin the meaning of the listing standards of the NASDAQ.  Mr. Gardiner isChairman of the Audit Committee.  The Board has identified Mr. Ramsey as an “auditcommittee financial expert”.  The Audit Committee selects and retainsindependent auditors and assists the board of directors in its oversight of theintegrity of U.S. Premium Beef’s financial statements, including theperformance of our independent auditors in their audit of our annual financialstatements.  The Audit Committee meets with management and the independentauditors, as may be required.  The independent auditors have full and freeaccess to the Audit Committee without the presence of management. 

**Code of Ethics**

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

** **

**ITEM 11.               EXECUTIVE COMPENSATION**

**COMPENSATION DISCUSSION AND ANALYSIS**

**Overview of Compensation Program**

This Compensation Discussion andAnalysis describes the material elements of compensation paid to our namedexecutive officers as well as the objectives and material factors underlyingour compensation program.  The compensation program places emphasis on USPB’sfinancial performance and the benefits received by USPB’s unitholders.    

45

 

 
**
The Compensation Committee(Committee) is responsible for developing and administering the compensationprogram for USPB’s named executive officers and professional staff.    

**Compensation Philosophy and Objectives**

USPB’s compensation program is akey element in attracting, retaining, and motivating named executive officerswith the skills necessary to create value for the unitholders.  To achieve thisgoal we have designed the compensation program with the following objectives:
-  *Attracting and retaining top talent*—The compensation ofUSPB’s executive officers must be commensurate with the competitive regionalmarketplace taking into consideration job responsibilities and supply ofcompetent employees with the education and background to perform at the highestlevels in their field.  
-  *Paying for financial and operational performance*—Thecompensation of USPB’s executive officers should motivate them to achievestrong financial and operational results.  USPB must achieve specific levels offinancial and operational performance to allow executives to earn this portionof their compensation.    
-  *Alignment with the equity interests of our unitholders*—Partof our executive officers’ compensation in fiscal year 2010 is based on theyear-over-year change in the weighted average selling price of USPB’s Class Aand Class B units.  A new management phantom unit plan, approved in September2010, further aligns management’s interest with the equity interests of USPB’sunitholders. 

Each element of our compensationprogram is designed to achieve one or more of these objectives.  The structureof a particular executive’s compensation may vary depending on the scope andlevel of that executive’s responsibilities. 

**Determining Executive Compensation**

The CEO makes recommendations tothe Committee regarding the salaries and bonus programs for the executiveofficers.  The Committee reviews the recommendations, taking into account eachelement of total compensation.  Based on the foregoing, the Committee uses itsjudgment in making compensation decisions that will best carry out USPB’sphilosophy and objectives for executive compensation.

**Fiscal Year 2010 Executive Compensation Elements**

The elements of our namedexecutive officers total compensation package are as follows:
-  base salary; 
-  annual cash bonuses; 
-  long-term cash bonus; 
-  full-term cash bonus; 
-  discretionary cash bonuses; 
-  retirement plans; and 
-  limited personal benefits. 

**Elements of our Compensation Program**

*Base Salary*.  Basesalaries are intended to provide a level of compensation sufficient to attractand retain an effective management team, when considered in combination withthe other components of our executive compensation program.  The relativelevels of base salary for named executive officers are designed to reflect eachexecutive officer’s scope of responsibility and accountability with USPB. Except for the CEO’s salary, base salaries are reviewed annually to determineif they are consistent with the performance of the individual executive andequitable relative to USPB’s other executive officers and professional staff.  

The CEO’s base salary is paid inaccordance with his employment agreement, which provides for the CEO to be paidan annual base salary of $775,000 for fiscal years 2010, 2011 and 2012, and anannual base salary of $825,000 for fiscal years ending 2013, 2014 and 2015. Salary surveys summarizing the compensation packages for positions ofequivalent responsibility in related industries were used to establish theCEO’s base salary.

 

46

 

 

 

*Annual Cash Incentive/Bonuses*. Cash incentive and bonus plans were designed to provide the financial incentiveto the CEO and other named executive officers to influence USPB unitholderbenefits and are only paid after certain levels of benefits have beenachieved.  

Under the terms of theemployment agreement effective September 1, 2009 through August 29, 2015, ifCEO is employed by USPB on the last day of any fiscal year (except as otherwiseprovided in the agreement) during the term of that employment agreement, CEOshall be paid an annual incentive compensation, equal to two percent (2.0%) ofthe sum of the total financial benefits to USPB (USPB Total Benefits) thatexceed $25,000,000.  USPB Total Benefits are: (1) audited fiscal year-end USPBearnings before tax; and (2) two times the fiscal year USPB grid premiums whichis the net sum of all USPB member grid premiums and discounts calculatedthrough all USPB grids.  

In fiscal year 2010, if theother named executive officers and the professional staff are employed on thelast day of the fiscal year, he or she is to be paid his or her proportionateshare of the Management Bonus Pool.  The Management Bonus Pool is: (1) theaudited fiscal year-end USPB earnings before tax plus current fiscal year USPBgrid premiums, less (2) prior year book equity threshold, multiplied by (3)management bonus factor, multiplied by (4) the equity multiplier, which is thecurrent fiscal year weighted average transfer price of third party sales (atarm’s length) divided by the prior fiscal year weighted average transfer priceof third party sales.  The bonus plan payments are vested over a two-yearperiod to provide an added incentive to remain with USPB.  The maximumManagement Bonus Pool for a given fiscal year is equal to the sum of thequalifying participants’ salaries in effect at the end of such fiscal year.

In fiscal year 2011, USPB’s Boardof Directors approved an amendment to the previous bonus plan for the othernamed executive officers and professional staff.  In fiscal year 2011, if theother named executive officers and the professional staff are employed on thelast day of the fiscal year, he or she is to be paid his or her proportionateshare of the Management Bonus Pool.  The Management Bonus Pool is: (1) theaudited fiscal year-end USPB earnings before tax plus current fiscal year USPBgrid premiums, less (2) $25,000,000, multiplied by (3) management bonusfactor.  The bonus plan payments are vested over a two-year period to providean added incentive to remain with USPB.  The maximum Management Bonus Pool fora given fiscal year is equal to 150% the sum of the qualifying participants’salaries in effect at the end of such fiscal year.

*Long-term Cash Bonuses*. Under the employment agreement effective September 1, 2009 through August 29,2015, if the CEO is employed by USPB through the end of fiscal year 2012, he isto be paid long-term incentive compensation equal to one and one-quarterpercent (1.25%) of the amount by which USPB’s Total Benefits from fiscal years2010, 2011 and 2012, exceed $100,000,000 but are equal to or less than$130,000,000; plus seventy-five one hundredths of a percent (0.75%) of theamount by which USPB’s Total Benefits from fiscal years 2010, 2011 and 2012exceed $130,000,000.  If CEO is employed by USPB as of the end of fiscal year2015, he is to be paid long-term incentive compensation equal to one andone-quarter percent (1.25%) of the amount by which USPB’s Total Benefits fromfiscal years 2013, 2014 and 2015, exceed $100,000,000 but are equal to or lessthan $130,000,000; plus seventy-five one hundredths of a percent (0.75%) of theamount by which USPB’s Total Benefits from fiscal years 2013, 2014, and 2015exceed $130,000,000.

*Full Term Cash Bonus*.  Asa part of the CEO’s employment agreement, effective September 1, 2003 throughAugust 31, 2009, the CEO was given the opportunity to earn a full term cashbonus.  Since the CEO was employed through August 31, 2009, a $700,000full-term cash bonus was earned. Under the employment agreement effectiveSeptember 1, 2009 through August 29, 2015, the CEO shall be paid full-termincentive compensation in the amount of $775,000 if CEO is employed through theend of fiscal year 2012, and $825,000 if CEO is employed through the end offiscal year 2015.

*Discretionary Cash Bonuses*. Discretionary bonuses are sometimes paid to named executive officers, otherthan the CEO, and professional staff to compensate for extraordinary cases ofindividual or Company performance.

*Retirement Plans*.  Qualifyingemployees are encouraged to participate in a Company sponsored 401(k) savingsplan.  Under USPB’s plan, employees may contribute up to the maximum amountpermissible by IRS limits.  USPB matches 100% of each dollar contributed by aparticipant up to a maximum of 4% of his or her qualifying compensation.

47

 

 

*Limited Personal Benefits*. We also provide certain benefits to all salaried employees that are notincluded as perquisites in the Summary Compensation Table for the namedexecutives because they are broadly available.  These include health andwelfare benefits, and disability and life insurance.

Under the CEO employmentagreement effective September 1, 2009 through August 29, 2015, the compensationfrom annual cash incentive, long term cash bonuses and full term cash bonusesshall be subject to a cumulative annual cap pro-rated over the term of theagreement not to exceed $2 million per year averaged over the term (as providedin the agreement) (“Incentive Cap”).

**Equity Compensation**

The Board implemented a phantomstock option plan for the CEO when USPB was formed in 1997 to provide the CEOthe incentive to create and grow share price in the new business venture.  The Board established 20,000 phantom shares, representing 2.7% of the total shares outstanding, anda strike price of $55 per share, the initial offering price for USPB.  Infiscal year 2004, when USPB converted to a limited liability company, the20,000 phantom shares converted to 20,000 Class A units, with an exercise priceof $55 per unit, and 20,000 phantom Class B Units, with an exercise priceof $0 per unit.  The options vested over a 4 year period and are now fullyvested.  In fiscal year 2009, the CEO exercised the 20,000 phantom Class Bunits.

In September 2010, USPB’s Boardof Directors approved a new management phantom unit plan.   The phantom unitplan provides for the award of unit appreciation rights to management employeesof USPB, other than the CEO.  USPB’s CEO shall administer the phantom unit planand award “Phantom Units” (Class A and Class B Units) to employees in amountsdetermined by the CEO, subject to the total Phantom Unit amount approved by theBoard of Directors of USPB.  

**Employment Agreements**

With the exception of the CEO,all of our executive officers are employed at-will, without employmentagreements, severance payment agreements or payment arrangements that would betriggered by a “change in control” of USPB.  

USPB entered into a new employmentagreement, effective September 1, 2009 through August 29, 2015, with its CEOthat provides for his base salary, annual cash bonus, long-term cash bonus,full-term cash bonus, all of which are discussed above.  The employmentagreement also provides for post termination compensation.  If Mr. Huntterminates the agreement for any or no reason, USPB need only pay salary earnedto the date of the termination, and the noncompetition compensation, unlesstermination is the result of death or permanent disability. If USPB terminatesthe agreement for any reason other than cause, death or disability, or ifMr. Hunt terminates the agreement for good reason, Mr. Hunt shall beentitled to salary and benefits through fiscal year 2015; payment of certain fringebenefits through fiscal year 2015; the annual incentive bonus for the year inwhich the termination occurs and each subsequent year through fiscal year 2015;the long-term incentive bonus that would have accrued had Mr. Hunt beenemployed through fiscal year 2015; the payment of the full-term bonuses thatwould have accrued if Mr. Hunt had remained employed through fiscal year2015; and the payment of the noncompetition compensation.

The compensation provided to Mr.Hunt in the form of annual cash bonus, long-term cash bonus and full-term cashbonus shall be subject to a cumulative annual cap pro-rated over the term ofhis contract not to exceed $2 million per year averaged over the term.

The employment agreement containsprovisions that require the agreement to be renegotiated in the event certaincircumstances occur.

In September 2010, the CEO’s employmentagreement was amended and restated to provide clarity to the CEO’s rights toexercise the phantom unit rights and options to purchase Class A units and theprocedures required and times at which the CEO may exercise such rights.  The amendmentalso established and clarified the CEO’s rights with respect to the phantomunit rights upon the occurrence of certain events that would dilute the CEO’sphantom unit rights.  

48

 

 

**Impactof Tax and Accounting Treatments**

We believethe compensation paid to our named executive officers is fully deductible underthe Internal Revenue Code at the time it is paid.  We further believe ASC 718 *Compensation– Stock Compensation* does not have a material effect on our consolidatedfinancial statements.

**Unit Ownership Guidelines**

USPB does not allow its namedexecutive officers, other than the CEO, to own USPB’s Class A units.  The CEOowns 20,000 Class A phantom unit options as discussed above.

**Compensation CommitteeReport**

            TheCommittee has reviewed and discussed the foregoing Compensation Discussion andAnalysis with USPB’s management.  Based on the Committee’s review anddiscussions with management, the Committee has recommended to the Board thatthis Compensation Discussion and Analysis be included in this Annual Report onForm 10-K.

**CompensationCommittee**

Mark Gardiner – Chairman

DuaneRamsey 

JoeMorgan

 

 

 

 

 

 

 

 

** **

49

 

 

 

 

 

 

**Summary Compensation Table**

The table below sets forthinformation regarding the fiscal year compensation for our named executiveofficers.  Non-Equity Incentive Plan Compensation amounts reflected in thistable are performance based awards and include amounts earned under our annualand long term cash bonus plans.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Non-Equity**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Incentive**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Plan**

 

 

**All Other**

 

 

 

 

 

 

 

**Fiscal**

 

 

 

 

 

 

**Compen-**

 

 

**Compen-**

 

 

 

**Name and Principal Position**

 

**Year**

 

**Salary ($)**

 

**Bonus ($)**

 

 

**sation ($)**

 

 

**sation ($)**

 

 

**Total ($)**

Steven D. Hunt

 

2010

 

802,077 

 

700,000 

(7)

 

 

 

2,000,000 

(6)

 

11,595 

(1)

 

3,513,672 

Chief Executive Officer

 

2009

 

710,810 

 

- 

 

 

 

 

1,792,741 

(5)

 

11,389 

(1)

 

2,514,940 

 

 

 

 

2008

 

725,614 

 

- 

 

 

 

 

2,517,995 

(4)

 

11,116 

(1)

 

3,254,725 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Scott J. Miller

 

2010

 

133,084 

 

10,000 

(2)

 

 

 

 

135,000 

(3)

 

10,093 

(1)

 

288,177 

Chief Financial Officer

 

2009

 

111,635 

 

- 

 

 

 

 

 

111,500 

(3)

 

 

 

 

223,135 

 

 

 

 

2008

 

109,805 

 

20,354 

(2)

 

 

 

 

107,000 

(3)

 

- 

 

 

237,159 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stanley D. Linville

 

2010

 

136,116 

 

- 

 

 

 

 

 

140,000 

(3)

 

13,104 

(1)

 

289,220 

Chief Operating Officer

 

2009

 

116,713 

 

- 

 

 

 

 

 

116,500 

(3)

 

- 

 

 

233,213 

 

 

 

 

2008

 

114,989 

 

21,333 

(2)

 

 

 

 

112,000 

(3)

 

- 

 

 

248,322 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Danielle D. Imel

 

2010

 

117,860 

 

- 

 

 

 

 

 

120,000 

(3)

 

- 

 

 

237,860 

Treasurer

 

2009

 

106,858 

 

- 

 

 

 

 

 

108,000 

(3)

 

- 

 

 

214,858 

 

 

 

 

2008

 

104,948 

 

19,767 

(2)

 

 

 

 

104,000 

(3)

 

- 

 

 

228,715 

 
(1)
Amount for Mr. Hunt includes Company match under our 401(k) plan and the cost of excess life insurance, $9,769 and $1,826, respectively, in fiscal year 2010, $9,563 and $1,826, respectively, in fiscal year 2009, and $9,290 and $1,826, respectively, in fiscal year 2008.  Amounts for Mr. Miller and Mr. Linville include Company match under our 401(k) plan.  None of the perqusites and other benefits paid to Mr. Miller or Mr. Linville	in fiscal year 2009 and 2008 and to Ms. Imel in fiscal years 2010, 2009 and 2008 exceeded $10,000.
(2)
This amount represents a discretionary bonus earned by the named executive officer.
(3)
This amount represents the executive's proportionate share of the Management Bonus Pool.  One half of this amount will not be paid unless the executive is employed at the end of following fiscal year.
(4)
This amount includes the annual cash bonus of $1,670,303 and amount earned through August 30, 2008 pursuant to the long-term cash bonus plan of $847,692.  The long-term cash bonus is calculated based on inputs actually known as of fiscal year end 2008 and will not be paid until the conclusion of fiscal year 2009.  The amount paid at that time will be based on actual inputs for fiscal years 2007, 2008, and 2009 and may higher or lower than the amount shown in the table.
(5)
	This amount includes the annual cash bonus of $2,550,929 and amounts earned during fiscal year 2009 pursuant to the long-term cash bonus	plan of $1,091,597 and is reduced by amounts in excess of the maximum allowable compensation per the CEO employment agreement of $1,849,785. 	The amount to be paid to Mr. Hunt under the annual cash bonus and long-term cash bonus plans is $2,640,433.
(6)
	The amount of non-equity incentive plan compensation, which is to include the annual cash bonus and amounts earned through August 28, 2010	pursuant to the long-term cash bonus plan, has been limited due to the cumulative annual-cap of $2,000,000 per year pursuant to Mr. Hunt's employment agreement. The limited amount represent annual cash bonus earned by Mr. Hunt for fiscal year 2010.
(7)
This amount represents a full-term cash bonus earned pursuant to the terms of Mr. Hunt's employment agreement effective September 1, 2003 through August 31, 2009.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

** **

50

 

 

 

 

 

 

**Grants ofPlan-Based Awards in Fiscal Year 2010**

The table below sets forthinformation regarding grants of non-equity plan-based awards made to our namedexecutive officers during fiscal year 2010.  Amounts actually earned pursuantto these plan-based awards will be reflected in the Summary Compensation Tablein subsequent years.    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Estimated Future Payouts under Non-Equity Incentive**

 

 

 

 

 

**Plan Awards**

**Name and Principal Position**

 

**Grant Date**

 

**Threshold ($)**

 

**Target ($)**

 

**Maximum ($)**

Steven D. Hunt

 

n/a 

 

 

 

 

 

 

 

 

Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Scott J. Miller

 

n/a 

 

 

 

 

 

 

 

 

Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stanley D. Linville

 

n/a 

 

 

 

 

 

 

 

 

Chief Operating Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Danielle D. Imel

 

n/a 

 

 

 

 

 

 

 

 

Treasurer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Discussion of SummaryCompensation Table and Grants of Plan-Based Awards**

**Performance Based Annual Cash Bonuses**

Our executive officers earn bonusawards made pursuant to various annual cash bonus plans.  The awards utilizeformulas set by the Compensation Committee.  The bonuses earned pursuant to theplans appear in the Non-Equity Incentive Plan Compensation in the SummaryCompensation Table.  Annual incentive bonuses awarded to executives, excludingMr. Hunt, also appear in the Grants of Plan Based Awards table. The CEO employment agreement, effective September 1,2009 through August 29, 2015, is included in the Grants of Plan Based Awardstable as the plan was awarded to him in fiscal year 2009.  The formulas used tocalculate the annual performance-based bonus awards to the Named ExecutiveOfficers were as follows:

 

 

 

**Name**

 

**Bonus Formula**

Steven D. Hunt

 

For fiscal year 2010:  2% of the sum of USPB Total Benefits that exceed $25

 

 

million.  USPB Total Benefits are audited fiscal year end USPB earnings before tax

 

 

plus two times the fiscal year USPB grid premiums, as defined in the CEO

 

 

Employment Agreement effective September 1, 2009 through August 29, 2015.

 

 

 

 

Scott J. Miller,

 

For fiscal year 2010:  The executive's proportionate share of the Management

Stanley D. Linville,

 

Bonus Pool, which is (1) audited fiscal year USPB earnings before tax plus the

Danielle D. Imel

 

fiscal year USPB grid premiums less (2) a set percentage of the prior year's book

 

 

equity multiplied by (3) a set management bonus factor multiplied by (4) the

 

 

current fiscal year weighted average unit transfer price of third party sales (at

 

 

arm's length) divided by the prior year weighted average unit transfer price of

 

 

third party sales.

 

 

 

 

 

For fiscal year 2011:  The executive's proportionate share of the Management

 

 

Bonus Pool, which is (1) the audited fiscal year-end USPB earnings before tax plus

 

 

current fiscal year USPB grid premiums, less (2) $25,000,000, multiplied by (3)

 

 

management bonus factor.  The bonus plan payments are vested over a two-year

 

 

period to provide an added incentive to remain with USPB.  The maximum

 

 

Management Bonus Pool for a given fiscal year is equal to 150% the sum of the

 

 

qualifying participants' salaries in effect at the end of such fiscal year.

 

 

 

 

51

 

 

 

 

 

 

**Other Bonuses**

We also pay discretionary cashbonuses to executive officers from time to time to reward elements ofperformance that are not reflected in the criteria for performance based cash bonuses. Mr. Miller was paid such bonuses in fiscal years 2010 and 2008.  Mr. Linvilleand Ms. Imel were paid such bonuses in fiscal year 2008.  No such bonuses werepaid in fiscal year 2009.  The bonuses are disclosed in the Bonus column in theSummary Compensation Table.

**Outstanding Equity Awardsat Fiscal Year End 2010**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Option Awards**

 

 

 

 

 

 

**Number of Securities**

 

 

 

 

 

 

 

 

 

**Underlying**

 

 

 

 

 

 

 

 

 

 

**Unexercised Options**

 

**Option Exercise**

 

**Option Expiration**

**Name and Principal Position**

 

**(#) Exercisable**

 

**Price ($)**

 

**Date**

Steven D. Hunt

 

20,000 Class A Units

 

 

$

55.00 

 

None

Chief Executive Officer

 

(1)

 

 

 

 

(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Scott J. Miller

 

 

 

- 

 

 

- 

 

- 

Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stanley D. Linville

 

 

 

- 

 

 

- 

 

- 

Chief Operating Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Danielle D. Imel

 

 

 

- 

 

 

- 

 

- 

Treasurer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Mr. Hunt is fully vested in the 20,000 Class A phantom rights on phantom units.

 

 

(2)

Mr. Hunt shall be entitled to exercise phantom unit rights at his election, at the time and under the conditions, and with the

 

same consequences as if he held similar unqualified options to purchase USPB Class A Units acquired at the same time as the

 

phantom unit rights.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Options Exercised**

** **

 

 

 

 

 

 

 

 

 

 

 

**Option Awards**

 

 

 

**Number of options**

 

**Value realized on**

**Name and Principal Position**

 

**acquired on exercise**

 

**exercise ($)**

Steven D. Hunt

 

 

 

- 

 

$

- 

Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Scott J. Miller

 

 

 

- 

 

- 

Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stanley D. Linville

 

 

 

- 

 

- 

Chief Operating Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Danielle D. Imel

 

 

 

- 

 

- 

Treasurer

 

 

 

 

 

 

** **

**Retirement Plans**

 

We do notmaintain a qualified or non-qualified defined benefit pension plan covering anyof our employees.  Our named executive officers are eligible to participate inour tax-qualified Profit Sharing and Savings Plan on the same basis as otheremployees under the plan.  The Company makes a matching contribution to thisplan equal to 100% of each participant’s own elective contributions up to 4% ofhis or her qualifying compensation.  The Company also has the discretion tomake annual profit sharing contributions that are allocated among all eligibleparticipants in proportion to their respective compensation.  The Company didnot make a profit sharing contribution to the plan in fiscal year 2010.  TheSummary Compensation Table above reflects the contributions to our ProfitSharing and Savings Plan for those employees whose All Other Compensationexceeds $10,000.

**Potential Payments UponTermination**

If the CEO’s employment agreement(“Agreement”) is terminated upon death or permanent disability, Mr. Hunt isentitled to:

 

52

 

 

 

 

 

 
-  Salary to the date of termination plus continued monthly paymentof salary through the earlier of the first anniversary of the termination orthe contract expiration date (“Deemed Termination Date”).  If Mr. Hunt wereterminated upon death or permanent disability in fiscal year 2011, his paymentwould be approximately $775,000;
-  Certain fringe benefits if terminated upon disability; 
-  Annual incentive through the employment year in which the DeemedTermination Date occurs pro-rated for the last employment year based upon theperiod through the Deemed Termination Date;
-  Long-term cash bonus that would have accrued if the CEO hadremained employed through the end of the Agreement;
-  Full-term cash bonus that would have been paid if the CEO hadremained employed through the end of fiscal year 2012 and 2015, pro-rated basedupon the period of CEO’s employment under the Agreement through the DeemedTermination Date versus the period of employment under the Agreement throughthe end of the contract period; and
-  Amounts paid under	the annual incentivebonuses, long-term cash bonus, and full-term cash bonus described above aresubject to the Incentive Cap and will be determined based on the financial andgrid premium performance for fiscal year 2010 through 2015.  The amount ofcompensation applied to toward the Incentive Cap through fiscal year 2010 is$2,000,000.

If the Agreement is terminated byUSPB for cause or by the CEO for other than good reason, Mr. Hunt is entitledto:
-  Salary accrued to the date of termination; and 
-  Noncompetition compensation, unless terminated due to beingconvicted of a felony or serious crime or for engaging in fraud, embezzlementor for the illegal conduct to the detriment of USPB,  for each of the eighteenmonths first following the termination of employment.  The amount ofnoncompetition compensation shall be paid monthly and is equal to the monthlysalary that would be paid to the CEO if he was employed or the CEO’s monthlysalary at the time of termination, whichever is greater.  USPB may terminatenoncompetition compensation prior to the end of the eighteen month period ifthe Board of Directors determines the CEO has violated the noncompetitionrestrictions as outlined in the Agreement.

If the Agreement is terminated byUSPB other than cause, death or disability or by CEO for reason, Mr. Hunt isentitled to:
-  Salary through the end of the contract period; 
-  Certain fringe benefits; 
-  Annual incentive bonuses that would have been earned through theend of the contract period;
-  Long-term cash bonus that would have been earned through the endof the contract period;
-  Full-term cash bonuses that would have been earned if CEO wereemployed at the end of fiscal year 2012 ($775,000) and fiscal year 2015($825,000);
-  Amounts paid under	the annual incentivebonuses, long-term cash bonus, and full-term cash bonus described above aresubject to the Incentive Cap and will be determined based on the financial andgrid premium performance for fiscal year 2010 through 2015.  The amount ofcompensation applied toward the Incentive Cap through fiscal year 2010 is $2,000,000;and
-  	Noncompetition compensation for each of the eighteen months first following	the termination of employment.  The amount of noncompetition	compensation shall be paid monthly and is equal to the monthly salary that	would be paid to the CEO if he was employed or the CEO’s monthly salary at	the time of termination, whichever is greater.  USPB may terminate noncompetitioncompensation prior to the end of the eighteen month period if the Board ofDirectors determines the CEO has violated the noncompetition restrictions asoutlined in the Agreement.

**Director Compensation Table**

Each director receives cash compensation formeetings attended. Directors are compensated $250 per diem for regularmeetings, special meetings, compensation committee meetings and audit committeemeetings.  We do not award any other type of compensation to our directors.

 

53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Fees Earned or**

**Name**

 

**Paid in Cash ($)**

Mark R. Gardiner

 

 

5,500 

Duane K. Ramsey

 

 

5,500 

Joe M. Morgan

 

 

5,250 

Jerry L. Bohn

 

 

3,250 

Douglas A. Laue

 

 

5,250 

Rex W. McCloy

 

 

5,250 

Jeff H. Sternberger

 

 

5,250 

 

**Compensation CommitteeInterlocks and Insider Participation**

None of themembers of our Compensation Committee is, or was, an officer or employee ofU.S. Premium Beef, LLC or its subsidiaries.  None of our executive officersserved as a director or was a member of the compensation committee of anyentity where a member of our Board or Compensation Committee was an executiveofficer.

** **

**ITEM 12.               SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED UNITHOLDER MATTERS**

**Equity Compensation Plan Information**

The table below sets forthinformation with respect to securities available for issuance under our equitycompensation plan.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Equity Compensation Plan Information**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Number of**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**securities**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**remaining available**

 

 

 

 

 

 

 

**Number of**

 

 

 

**for future issuance**

 

 

 

 

 

 

 

**securities to be**

 

 

 

**under equity**

 

 

 

 

 

 

 

**issued upon**

 

**Weighted-average**

 

**compensation plans**

 

 

 

 

 

 

 

**exercise of**

 

**exercise price of**

 

**(excluding**

 

 

 

 

**Type of**

 

**outstanding options,**

 

**outstanding options,**

 

**securities reflected**

**Plan Category**

 

**Equity**

 

**warrants and rights**

 

**warrants and rights**

 

**in column (2))**

Equity compensation plans approved

 

 

 

 

 

 

 

 

 

 

 

 

 

by security holders

 

 

 

 

 

 

 

 

- 

 

N/A 

 

 

- 

Equity compensation plans not

 

 

 

 

 

 

 

 

 

 

 

 

 

	approved by security holders (1)

 

Class A Units

 

 

 

 

20,000 

 

 

$55.00 

 

 

- 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) See Note 6 to our consolidated financial statements for a description of the equity compensation plan.

 

 

 

 

**Security Ownership of Certain Beneficial Owners**

The following table sets forthcertain information as of October 28, 2010 regarding the only persons known bythe Company to own directly or indirectly, more than 5% of its Class A andClass B units.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Number of Units**

 

 

 

 

 

 

 

 

**Beneficially**

 

 

**Name and Address of Beneficial Owner**

 

**Title of Class**

 

**Owned**

 

**Percent of Class**

Douglas A. Laue  (1)

Class A and Class B Units

 

 

95,000 

 

12.6% 

 

 

509 Country Lane

 

 

 

 

 

 

 

 

 

 

Council Grove, Kansas 66846

 

 

 

 

 

 

 

 

Fairleigh Corporation dba Fairleigh Feed Yard

Class A and Class B Units

 

 

54,288 

 

7.2% 

 

 

Box 560

 

 

 

 

 

 

 

 

 

 

Scott City, KS 67871

 

 

 

 

 

 

 

 

Desert Beef, LLC

Class A and Class B Units

 

 

44,160 

 

5.8% 

 

 

34673 E. County 9th Street

 

 

 

 

 

 

 

 

 

 

Wellton, AZ 85356

 

 

 

 

 

 

 

 

Crown H Cattle Co., Inc.

Class A and Class B Units

 

 

39,425 

 

5.2% 

 

 

PO Box 186

 

 

 

 

 

 

 

 

 

 

Scott City, KS 67871

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54

 

 

 

**Security Ownership of Management**

The following table furnishesinformation, as of October 20, 2010, regarding ownership of USPB’s Class Aand Class B units is furnished with respect to (i) each director anddirector nominee, (ii) each executive officer named in the Summary CompensationTable on page 49, and (iii) all current directors and executive officers as agroup. 

 

 

 

 

 

 

 

 

 

 

 

**Beneficial Ownership of**

 

 

**Class A and Class B Units**

**Name**

 

**Number(1)**

 

**Percentage(2)**

Douglas A. Laue  (3)

 

 

 

 

95,000 

 

12.6% 

Jeff H. Sternberger  (4)

 

 

 

 

34,500 

 

4.6% 

Jerry L. Bohn (5)

 

 

 

 

19,161 

 

2.5% 

Joe M. Morgan  (6)

 

 

 

 

17,865 

 

2.4% 

Rex W. McCloy  (7)

 

 

 

 

16,085 

 

2.1% 

Duane K. Ramsey  (8)

 

 

 

 

8,800 

 

1.2% 

Mark R. Gardiner  (9)

 

 

 

 

3,000 

 

0.4% 

Steven D. Hunt  (10)

 

 

 

 

20,000 

 

2.6% 

Scott J. Miller

 

 

 

 

- 

 

0.0% 

Stanley D. Linville

 

 

 

 

- 

 

0.0% 

Danielle D. Imel

 

 

 

 

- 

 

0.0% 

Directors, Nominees, and Executive Officers as a group (11 persons)  (11)

 

 

 

 

214,411 

 

28.4% 

 

 

 

 

 

 

 

 
   
 

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

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

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

(4) 
Includes i) 32,500 Class A and Class B units held by Midwest Feeders Inc., of which Mr. Sternberger is an owner and the General	Manager, and ii) 2,000 Class A and Class B units held by CRI Feeders of Guymon, LLC of which Mr. Sternberger is a director.	 34,500 of the Class A and Class B units are pledged as security.
   
	 

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

(6)
Includes 17,865 Class A and Class B units held by Mr. Morgan.
   
 

(7)
Includes 16,085 Class A and Class B units held by McLeod Farms, Inc., of which Mr. McCloy is an owner.  16,085 of the Class A and	Class B units are pledged as security.
   
	 

(8)
Includes 8,800 Class A and Class B units held by the Duane K. Ramsey Trust, over which Mr. Ramsey has sole voting and	investment power.
   
	 

(9) 
Includes 3,000 Class A and Class B units held by the Mark Gardiner Revocable Trust, over which Mr. Gardiner has sole voting and	investment power.
   
	 

(10)
Includes the option held by Mr. Hunt to purchase 20,000 Class A units and the 20,000 Class B units Mr. Hunt's spouse acquired in August 2009.
   
 

(11)
Reflects unit ownership by all seven directors, the nominees to the board, and the named executive officers of USPB.
   
 

 

**ITEM 13.               CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,AND DIRECTOR INDEPENDENCE**

**Related party transactions**

 

USPB’s board of directors has not adopted a formal policy or procedure that mustbe followed prior to any transaction, arrangement or relationship with a relatedperson, as defined by SEC regulations (e.g., directors, executive officers, any5 percent shareholder, or immediate family member of any of the foregoing).

 

	55

 

 

 

 

 

 

USPB has adopted a corporate Codeof Conduct that is enforced throughout all levels of management.  It deals withconflicts of interest, among other things.  The Code prohibits any conduct oractivities that conflict with the interests of the Company, or that mightinfluence or appear to influence our judgment or actions in performing ourduties.  The Code also requires directors and all levels of management to makefull written disclosure of any activity that may present a conflict of interestand receive prior written approval from the Company.  No waivers have beengranted.

Our directors and all levels ofmanagement are required each year to respond to a Related Party Questionnaire. The questionnaire requires each director and all levels of management to identifyif they or an immediate family member had been indebted to, or had been aparticipant in any material transactions with, the Company or any of itsaffiliates.  The questionnaire requires disclosure of the name of relatedparties if such parties have an ownership or management control relationshipwith the Company sufficient to exert significant influence over the Company’smanagement or operating policies which could cause significantly differentoperating results or financial position of the Company.

The standards applied pursuant tothe above-described procedures are to provide comfort that any conflict ofinterest or related party transition is on an arms-length basis which is fairto the Company.

**Directors who are unitholders**

USPB is not a listed company andas a result has chosen the NASDAQ independence listing standards to determinewhether our directors are independent.  The NASDAQ independence definitionsprovide that directors cannot be independent if they do not meet certainobjective standards.  

All of USPB’s directors holdunits of the LLC and are also agricultural producers. By virtue of theirunitholder status and ownership of Class A units, each of these individuals isobligated to deliver cattle to USPB. The amount and terms of the paymentsreceived by these individuals (or the entities they represent) for the deliveryof cattle are made on exactly the same basis as those received by other unitholdersand associates of USPB for the delivery of their cattle.  Based on the NASDAQ’sstandards and as a result of their equal treatment with respect to the deliveryof cattle, the following current directors were determined to be independent:Messrs. Bohn, Gardiner, Laue, McCloy, Morgan, Ramsey, and Sternberger.

**Certain Arrangements with Holders of NBP’s MembershipInterests**

 Simultaneouswith the ownership changes on August 6, 2003, all of the holders of NBP’smembership interests entered into a limited liability company agreement that providesfor, among other things, election of its board of managers, the powers of itsboard of managers and its officers, approval rights for certain of its equityholders, restrictions and rights related to the transfer, sale or purchase of itsmembership interests, and preemptive and repurchase rights. 

 Thelimited liability company agreement provides that NBPCo Holdings and themembers of NBP management who hold membership interests in NBP have the rightto request that NBP purchase their membership interests under certaincircumstances.  

**Unit Redemption Agreements**

On June 2,2010, the Company entered into a Unit Redemption Agreement pursuant to Section12.5 of its Limited Liability Company Agreement, dated as of August 6, 2003 (asamended from time to time) to redeem at an agreed-upon redemption price aportion of the membership interests in NBP that were owned or controlled byaffiliates of our President and Chief Executive Officer, Timothy M. Klein.  Asa result Mr. Klein’s affiliates received $8.0 million for their redeemed units.

At any time after certain dates,the earliest being July 31, 2010, the latest being July 31, 2011, affiliates ofMr. Klein and/or NBPCo Holdings have the right to require that the companyrepurchase their interests, the value of which is to be determined by aspecified formula or a mutually agreed process. If the Company is unable toeffect the repurchase within a specified time, the requesting member(s) havethe right to cause a sale process to commence.

	56

 

 

 

 

**Transactions with NBP** 

In December 1997, USPB entered into acontract with FNB to deliver cattle annually to NBP relative to: (i) USPB’sownership in NBP and (ii) the number of cattle processed annually by NBP. Duringfiscal year 2010, USPB and its owners and associates provided approximately 20%of NBP’s total cattle requirements.  The purchase price for the cattle isdetermined by pricing grids, which, under the terms of our agreement with NBP,must be competitive with the formula pricing of our competitors and may not beless favorable than formula pricing it offers to other suppliers. Any newpurchase agreements and payment formulas with NBP must be consistent with theagreement existing at the time U.S. Premium Beef acquired the majority interestin NBP on August 6, 2003.

**Transactions with Beef Products, Inc.** 

Since 1994, NBPhas had a business relationship with Beef Products, Inc. (BPI), which is anaffiliate of NBPCo Holdings, whereby NBP sells beef trimmings, referred to astrim, to BPI, primarily at a formula-based price, and NBP purchases processedlean beef from BPI at negotiated prices for use in NBP’s ground beefoperations.  NBP’s aggregate sales of trim to BPI totaled approximately $120.4million, $96.9 million, and $132.4 million, respectively, in fiscal years 2010,2009, and 2008.  NBP’s aggregate purchases of processed lean beef from BPItotaled approximately $40.6 million, $28.9 million, and $15.7 million,respectively, in fiscal years 2010, 2009, and 2008. 

In January 2007, NBP entered intoan agreement with BPI for BPI to manufacture and install a grinding system inone of NBP’s plants.  In accordance with the agreement with BPI, NBP pays BPI atechnology and support fee based on the number of pounds of product producedusing the grinding system.  The installation of the grinding system wascompleted in fiscal year 2008.  During fiscal years 2010, 2009 and 2008, NBPpaid approximately $1.9 million, $1.7 million, and $0.7 million, respectively,to BPI in technology and support fees.

 

**ITEM 14.               PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

KPMG LLP, an independentregistered public accounting firm, served as our auditors for the fiscal yearsended August 28, 2010 and August 29, 2009 (thousands of dollars).

 

 

 

 

 

 

 

 

 

**Fiscal Year Ended**

 

**Fiscal Year Ended**

**Type of Service**

 

**August 28, 2010**

 

**August 29, 2009**

 

 

 

 

 

Audit Fees

 

$

673 

 

$

550 

Audit Related Fees

 

92 

 

26 

Tax Fees

 

- 

 

- 

All Other Fees

 

905 

 

- 

    Total

 

$

1,670 

 

$

576 

**Audit Fees**

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

**Audit-Related Fees**

Audit-related fees in fiscal years 2010 and 2009 primarilyrelate to consultations on accounting related matters.

**Tax Fees**

Tax fees relate to tax compliance, tax advice andtax planning services.

**All Other Fees**

All other fees for fiscal year2010 relate to IPO preparation fees.  We did not pay any other type of fee anddid not receive any other services from KPMG LLP during fiscal year 2009. 

 

	57

 

 

 

 

 

 

Our Audit Committee appoints our independentauditors.  The Audit Committee is solely and directly responsible for theapproval of the appointment, re-appointment, compensation and oversight of ourindependent auditors.  The Audit Committee approves in advance all work to beperformed by the independent auditors.

 

 

 

 

 

 

 

 

 

 

** **

	58

 

 

 

 

 

 

**PART IV**

 

**ITEM 15.               EXHIBITS AND FINANCIALSTATEMENT SCHEDULES.**

**(a) Financial Statements and Financial StatementSchedules**
(1)
Theconsolidated financial statements filed as part of this report at Item 8 arelisted in the Index to the Consolidated Financial Statements on page F-1contained herein.
  		(2)
Thefinancial statement schedules required to be filed by Item 8 of this report is setforth in “Item 15(c) Financial Statement Schedules” contained herein.

 

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

2.1
Agreement and Plan ofMerger between U.S. Premium Beef, Ltd. and U.S. Premium Beef, Inc.(incorporated herein by reference to Appendix A to voting materials-prospectuscontained in U.S. Premium Beef, Inc. Registration Statement on Form S-4 (FileNo. 333-115164) filed with the SEC on August 5, 2004).

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

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

 
 
3.2(a)
LimitedLiability Agreement of U.S. Premium Beef, LLC (incorporated herein by referenceto Appendix D to the voting materials – prospectus contained in U.S. PremiumBeef, Inc. Registration Statement on Form S-4 (File No. 333-115164) filed withthe SEC on August 5, 2004).
  
3.2(b)
Amendedand Restated Limited Liability Company Agreement of U.S. Premium Beef, LLC,dated as of April 7, 2010 (incorporated herein by reference to Exhibit 3.1 toForm 10-Q (File No. 333-115164) filed with the SEC on April 9, 2010).
  
3.3(a)
LimitedLiability Company Agreement of National Beef Packing Company, LLC, dated as ofAugust 6, 2003 (incorporated herein by reference to Exhibit 3.1(a) to theQuarterly Report on Form 10-Q for the quarter ended May 27, 2006 (File No.333-111407), filed with the SEC on July 10, 2006).
  
3.3(b)
Amendment to the LimitedLiability Company Agreement of National Beef Packing Company, LLC, dated as ofJuly 7, 2005 (incorporated by reference to Exhibit 3.1(b) to the  QuarterlyReport on Form 10-Q for the quarter ended May 27, 2006 (File No. 333-111407),filed with the SEC on July 10, 2006).
  
3.3(c)
Amendmentof a portion of Section 6.6 to the Limited Liability Company Agreement ofNational Beef Packing Company, LLC (incorporated by reference to Exhibit 3.1(a)to the Quarterly Report on Form 10-Q for the quarter ended February 28, 2009(File No. 333-111407), filed with the SEC on April 15, 2009).
  
3.3(d)
Amendmentof a portion of Section 12.5 to the Limited Liability Company Agreement ofNational Beef Packing Company, LLC (incorporated by reference to Exhibit 3.1(b)to the Quarterly Report on Form 10-Q for the quarter ended February 28, 2009(File No. 333-111407), filed with the SEC on April 15, 2009).

 

 

	59

 

 

 

 

 

 
3.3(e)
Summary of Class A-1 Units (incorporated by reference to Exhibit 3.1(c) to theQuarterly Report on Form 10-Q for the quarter ended February 28, 2009 (File No.333-111407), filed with the SEC on April 15, 2009).
  3.3(f)
Fifth Amended Exhibit 3.1 to the Limited Liability Company Agreement of NationalBeef Packing Company, LLC, effective as of June 2, 2010 (incorporated herein byreference to Exhibit 10.3 to Company’s Current Report on Form 8-K (File No.333-111407) filed with the SEC on June 6, 2010).
  10.1
Cattle Purchase and Sale Agreement dated as of December 1, 1997 by and amongFarmland National Beef Packing Company, L.P. and U.S. Premium Beef, Ltd.(incorporated herein by reference to Exhibit 10.7 to Registration Statement onForm S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).
  10.2(a)
Form of Uniform Delivery and Marketing Agreement – Even Slots (incorporatedherein by reference to Exhibit 10.2 to U.S. Premium Beef Registration Statementon Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004)
  10.2(b)
Form of Uniform Cattle Delivery and Marketing Agreement – Even Slots(incorporated by reference to Exhibit 10.2(b) to Form 10-K (File No. 333-115164)filed with the Commission on November 14, 2007).
  10.3(a)
Form of Uniform Delivery and Marketing Agreement – Odd Slots (incorporatedherein by reference to Exhibit 10.3 to U.S. Premium Beef Registration Statementon Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004).
  10.3(b)
Form of Uniform Cattle Delivery and Marketing Agreement – Odd Slots(incorporated by reference to Exhibit 10.3(b) to Form 10-K (File No. 333-115164)filed with the Commission on November 14, 2007).
  10.4(a)*
U.S. Premium Beef, LLC Management Incentive Plan (incorporated herein byreference to Exhibit 10.8 to U.S. Premium Beef Registration Statement on FormS-4 (File No. 333-115164) filed with the SEC on August 5, 2004).
  10.4(b)*
U.S. Premium Beef, LLC Phantom Unit Bonus Compensation Policy adopted September28, 2010 (incorporated herein by reference to Exhibit 10.02 to Form 8-K (FileNo. 333-115164) filed with the SEC on October 4, 2010).
  10.5(a)
Amended and Restated Credit Agreement and Security Agreement dated as of June22, 2009 by and among U.S. Premium Beef, LLC and CoBank, ACB, as agent on behalfof the syndication parties (incorporated herein by reference to Exhibit 10.1 toForm 8-K (File No. 333-115164) filed with the SEC on June 25, 2009).
  10.5(b)
Pledge Agreement dated as of June 22, 2009 by and among U.S. Premium Beef, LLCand CoBank, ACB, as agent on behalf of the syndication parties (incorporatedherein by reference to Exhibit 10.2 to Form 8-K (File No. 333-115164) filed withthe SEC on June 25, 2009)
  10.6(a)*
CEO Employment Agreement by and between Steven D. Hunt and U.S. Premium Beef,LLC adopted September 1, 2004 (incorporated herein by reference to Exhibit 10.14to Form 10-Q (File No. 333-115164) filed with the SEC on August 5, 2004).
  10.6(b)*
Contract Affirmation of Second Amendment to Employment Agreement between U.S.Premium Beef, LLC and Steven D. Hunt dated December 31, 2008 (incorporatedherein by reference to Exhibit 10.1 to Form 10-Q (File No. 333-115164) filedwith the SEC on January 13, 2009).
  10.6(b)*
CEO Employment Agreement by and between Steven D. Hunt and U.S. Premium Beef,LLC dated July 10, 2009 (incorporated by reference to Exhibit 10.4 to Form 10-Q(File No. 333-115164) filed with the SEC on July 10, 2009).

 

 

	60

 

 

 

 

 

 

10.6(c)*
First Amendment to CEO Employment Agreement by and between Steven D. Hunt andU.S. Premium Beef, LLC adopted September 28, 2010 (incorporated herein byreference to Exhibit 10.02 to Form 8-K (File No. 333-115164) filed with the SECon October 4, 2010).

 
 
10.7(a)*
Employment Agreement dated as of August 6, 2003 by and between National BeefPacking Company, LLC and Timothy M. Klein (incorporated herein by reference toExhibit 10.4 to Registration Statement on Form S-4 (File No. 333-111407) filedwith the SEC on December 19, 2003).
  
10.7(b)* 
Amendment to Employment Agreement for Timothy M. Klein dated as of December 31,2008 by and between National Beef Packing Company, LLC and Timothy M. Klein(incorporated herein by reference to Exhibit 10.3 to Form 10-Q (File No.333-111407) for the quarter ended November 29, 2008, filed with the SEC onJanuary 13, 2010).
  
10.7(c)*
Second Amendment to Employment Agreement dated as of July 27, 2009, between theCompany and Timothy M. Klein (incorporated herein by reference to Exhibit 10.1to Form 10-Q (File No. 333-111407) for the quarter ended July 27, 2009, filedwith the SEC on July 28, 2009).
  
10.7(d)*
Deferred Equity Incentive Compensation Agreement dated August 6, 2003 by andbetween National Beef Packing Company, LLC and Timothy M. Klein (incorporatedherein by reference to Exhibit 10.5 to Registration Statement on Form S-4 (FileNo. 333-111407) filed with the SEC on December 19, 2003).
  
10.7(e)*
Supplemental Bonus Agreement dated October 27, 2010 by and between NationalBeef Packing Company, LLC and Jay D. Nielsen (incorporated herein by referenceto Exhibit 10.2 to Form 10-K (File No. 333-111407) filed with the SEC on October29, 2010).
  
10.7(f)* 
Supplemental Bonus Agreement dated October 27, 2010 by and between NationalBeef Packing Company, LLC and Terry L. Wilkerson (incorporated herein byreference to Exhibit 10.2 to Form 10-K (File No. 333-111407) filed with the SECon October 29, 2010).
  
10.7(g)*
Supplemental Bonus Agreement dated October 27, 2010 by and between NationalBeef Packing Company, LLC and David L. Grosenheider (incorporated herein byreference to Exhibit 10.2 to Form 10-K (File No. 333-111407) filed with the SECon October 29, 2010).
  
10.7(h)*
Supplemental Bonus Agreement dated October 27, 2010 by and between NationalBeef Packing Company, LLC and Monte E. Lowe (incorporated herein by reference toExhibit 10.2 to Form 10-K (File No. 333-111407) filed with the SEC on October29, 2010).
  
10.7(i)*
Unit Redemption Agreement dated as of June 2, 2010, among National Beef PackingCompany, LLC, TKK Investments, LLC and TMKCo., LLC (incorporated by reference toExhibit 2 to the Company’s Current Report on Form 8-K filed with the SEC on June8, 2010).
  
10.10(a)
Lease Agreement dated as of February 1, 1999 between City of Dodge City, Kansasand Farmland National Beef Packing Company, L.P. securing $1,000,000 City ofDodge City, Kansas Industrial Development Revenue Bonds (Farmland National BeefPacking Company, L.P. Project), Series 1999 (incorporated herein by reference toExhibit 10.8 to Registration Statement on Form S-4 (File No. 333-111407) filedwith the SEC on December 19, 2003).
  
10.10(b)
Indenture of Trust dated as of February 1, 1999 between City of Dodge City,Kansas and Commerce Bank, N.A., as trustee, securing $1,000,000 City of DodgeCity, Kansas Industrial Development Revenue Bonds (Farmland National BeefPacking Company, L.P. Project), Series 1999 (incorporated herein by reference toExhibit 10.9 to Registration Statement on Form S-4 (File No. 333-111407) filedwith the SEC on December 19, 2003).

 

	61

 

 

 

 

 

 

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

 
 
10.11(b)
Amendedand Restated Lease Agreement dated as of January 1, 1999 between City ofLiberal, Kansas and Farmland National Beef Packing Company, L.P. securing$1,000,000 City of Liberal, Kansas Industrial Development Revenue Bonds(Farmland National Beef Packing Company, L.P. Project), Series 1999(incorporated herein by reference to Exhibit 10.10 to Registration Statement onForm S-4 (File No. 333-111407) filed with the SEC on December 19, 2003).

 
 
10.14(a)
Leasedated as of December 1, 2004 between City of Dodge City, Kansas and NationalBeef Packing Company, LLC securing $102,300,000 City of Dodge City, KansasIndustrial Development Revenue Bonds, Series 2004 (National Beef PackingCompany, LLC Project) (incorporated by reference to Exhibit 10.2 to Form 8-K(File No. 333-111407) filed with the Commission on January 6, 2005).

 
 
10.14(b)
TrustIndenture dated as of December 1, 2004 between City of Dodge City, Kansas andCommerce Bank, N.A., as trustee, securing $102,300,000 City of Dodge City,Kansas Industrial Development Revenue Bonds, Series 2004 (National Beef PackingCompany, LLC Project) (incorporated by reference to Exhibit 10.3 to Form 8-Kfiled (File No. 333-111407) with the Commission on January 6, 2005).

 
 
10.19*
NationalBeef Packing Company, LLC Management Long Term Incentive Plan (incorporatedherein by reference to Exhibit 10.24 to Registration Statement on Form S-4(File No. 333-111407) filed with the SEC on December 19, 2003).

 
 
10.20
FMIGrinding System Lease Agreement by and between Beef Products, Inc. and NationalBeef Packing Company, LLC (incorporated herein by reference to Exhibit 10.16 toForm 10-K (File No. 333-111407) filed with the SEC on November 24, 2008). (1)

 
 
21.1
Subsidiariesof National Beef Packing Company, LLC (incorporated herein by reference toExhibit 21.1 to Form 10-K (File No. 333-111407) filed with the SEC on October 29,2010).

 
 
31.1
Certificationof the Chief Executive Officer pursuant to Section 302 of the Sarbanes-OxleyAct of 2002 (filed herewith).    

 
 
31.2
Certificationof the Chief Financial Officer pursuant to Section 302 of the Sarbanes-OxleyAct of 2002 (filed herewith).

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

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

_____________

*  Managementcontract or compensatory plan or arrangement.

 (1) Portions of this exhibit are omitted andwere filed separately with the Secretary of the SEC pursuant to NBP’sapplication requesting confidential treatment under Rule 246-2 of theSecurities Exchange Act of 1934.

 

 

	62

 

 

 

 

 

 

**(c) Financial Statement Schedules:**

**Schedule I – Parent Company Financial Statements**

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

**Balance Sheets of Parent Company**

(thousands of dollars, except unit information)

**Assets**

**August 28, 2010**

 

**August 29, 2009**

Current assets:

 

 

 

 

Cash and cash equivalents

$

15,034 

 

$

1,480 

 

Accounts receivable

3 

 

1 

 

Other receivables

130 

 

56 

 

 

Total current assets

15,167 

 

1,537 

Property, plant, and equipment, at cost

241 

 

248 

 

Less accumulated depreciation

(218)

 

(212)

 

 

Net property, plant, and equipment

23 

 

36 

Investments in National Beef Packing Company, LLC

406,921 

 

341,173 

Other assets

482 

 

474 

 

 

Total assets

$

422,593 

 

$

343,220 

**Liabilities and Capital Shares and Equities**

 

 

 

Current liabilities:

 

 

 

 

Current installments of long-term debt

$

1,030 

 

$

1,030 

 

Accounts payable

40 

 

230 

 

Due to affiliates

22 

 

8 

 

Accrued compensation and benefits

4,073 

 

5,696 

 

Other accrued expenses and liabilities

656 

 

575 

 

Distributions payable

44 

 

- 

 

 

Total current liabilities

5,865 

 

7,539 

Long-term liabilities:

 

 

 

 

Long-term debt, excluding current installments

- 

 

6,030 

 

 

Total long-term liabilities

- 

 

6,030 

 

 

Total liabilities

5,865 

 

13,569 

Capital shares and equities:

 

 

 

 

Members' capital, 735,385 and 735,385 Class A units and 755,385 and 755,385

 

 

 

 

 

Class B units authorized, issued and outstanding

368,046 

 

280,969 

 

Patronage notices

48,682 

 

48,682 

 

 

Total capital shares and equities

416,728 

 

329,651 

 

 

Total liabilities and capital shares and equities

$

422,593 

 

$

343,220 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

** **

 

 

 

	63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

**Statements of Operations of Parent Company**

(thousands of dollars, except per unit data)

 

 

 

 

 

 

 

 

 

 

 

 

 

**52 weeks ended**

 

**52 weeks ended**

 

**53 weeks ended**

 

 

 

 

**August 28, 2010**

 

**August 29, 2009**

 

**August 30, 2008**

Net sales

$

- 

 

$

- 

 

$

- 

Costs and expenses:

 

 

 

 

 

 

Cost of sales

- 

 

- 

 

- 

 

Selling, general, and administrative expenses

6,195 

 

6,055 

 

7,968 

 

Depreciation and amortization

13 

 

17 

 

13 

 

 

Total costs and expenses

6,208 

 

6,072 

 

7,981 

 

 

 

Operating loss

(6,208)

 

(6,072)

 

(7,981)

Other income (expense):

 

 

 

 

 

 

Interest income

7 

 

147 

 

978 

 

Interest expense

(85)

 

(211)

 

(247)

 

Equity in earnings of National Beef Packing

 

 

 

 

 

 

 

Company, LLC

167,253 

 

91,570 

 

69,441 

 

Termination Fee

- 

 

14,572 

 

- 

 

Other, net

34 

 

19 

 

40 

 

 

Total other income

167,209 

 

106,097 

 

70,212 

 

 

 

Income before taxes

161,001 

 

100,025 

 

62,231 

Income tax expense

(50)

 

(42)

 

(20)

 

 

 

Net income

$

160,951 

 

$

99,983 

 

$

62,211 

Earnings per unit:

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

Class A units

$

30.74 

 

$

44.87 

 

$

27.92 

 

 

Class B units

$

183.15 

 

$

90.89 

 

$

56.68 

 

Diluted

 

 

 

 

 

 

 

Class A units

$

30.25 

 

$

44.35 

 

$

27.51 

 

 

Class B units

$

183.15 

 

$

90.89 

 

$

55.86 

Outstanding weighted-average Class A and Class B units:

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

Class A units

735,385 

 

735,385 

 

735,385 

 

 

Class B units

755,385 

 

737,052 

 

735,385 

 

Diluted

 

 

 

 

 

 

 

Class A units

747,334 

 

744,039 

 

746,176 

 

 

Class B units

755,385 

 

737,052 

 

746,176 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

	64

 

 

 

 

 

 

 

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

**Statements of Cash Flows of Parent Company**

(thousands of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**52 weeks ended**

 

**52 weeks ended**

 

**53 weeks ended**

 

 

 

 

 

 

**August 28, 2010**

 

**August 29, 2009**

 

**August 30, 2008**

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

160,951 

 

$

99,983 

 

$

62,211 

 

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

 

 

 

operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

13 

 

17 

 

13 

 

 

 

Termination Payment

 

- 

 

(14,572)

 

- 

 

 

 

Equity in earnings of National Beef Packing Company, LLC

 

(167,253)

 

(91,570)

 

(69,441)

 

 

 

Distribution from National Beef Packing Company, LLC

 

101,505 

 

46,741 

 

24,826 

 

 

 

Changes in assets and liabilities (net of acquisition):

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(2)

 

- 

 

2 

 

 

 

 

Due from affiliates

 

(74)

 

(43)

 

202 

 

 

 

 

Other assets

 

(8)

 

(17)

 

(27)

 

 

 

 

Accounts payable

 

(190)

 

189 

 

(29)

 

 

 

 

Due to affiliates

 

14 

 

(122)

 

(492)

 

 

 

 

Accrued compensation and benefits

 

(1,623)

 

1,871 

 

2,168 

 

 

 

 

Other accrued expenses and liabilities

 

81 

 

(794)

 

1,105 

 

 

 

 

 

Net cash provided by operating activities

 

93,414 

 

41,683 

 

20,538 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures, including interest capitalized

 

- 

 

(27)

 

- 

 

Termination Fee

 

- 

 

14,572 

 

- 

 

Acquisition of minority interests in NBP

 

- 

 

(55,841)

 

- 

 

 

 

 

 

Net cash used in investing activities

 

- 

 

(41,296)

 

- 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net (payments) receipts under revolving credit lines

 

(5,000)

 

5,000 

 

- 

 

Payments of notes payable and fees

 

(1,030)

 

(1,029)

 

(1,030)

 

Repayment of patronage notices

 

- 

 

(1,960)

 

- 

 

Change in overdraft balances

 

44 

 

- 

 

- 

 

Partnership distributions

 

(73,874)

 

(52,851)

 

- 

 

 

 

 

 

Net cash used in financing activities

 

(79,860)

 

(50,840)

 

(1,030)

 

 

 

 

 

Net increase in cash

 

13,554 

 

(50,453)

 

19,508 

Cash and cash equivalents at beginning of period

 

1,480 

 

51,933 

 

32,425 

Cash and cash equivalents at end of period

 

$

15,034 

 

$

1,480 

 

$

51,933 

Supplemental cash disclosures:

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

95 

 

$

188 

 

$

268 

 

Cash paid during the period for taxes, net of refunds

 

$

50 

 

$

42 

 

$

20 

Supplemental non-cash disclosures of investing activities:

 

 

 

 

 

 

 

Issuance of Class B units for exercise of CEO's options

 

$

- 

 

$

1,040 

 

$

- 

 

** **

** **

** **

** **

	65

 

 

 

 

** **

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders

U.S. Premium Beef, LLC: 

Under date of October 29,2010, we reported on the consolidated balance sheets of U.S. Premium Beef,LLC and subsidiaries (Company) as of August 28, 2010 and August 29,2009, and the related consolidated statements of operations, comprehensiveincome, capital shares and equities and cash flows for each of the fiscal yearsin the three‐year period ended August 28, 2010, as contained in theAnnual Report on Form 10‐K for the fiscal year 2010. In connectionwith our audits of the aforementioned consolidated financial statements, wealso audited the related financial statement schedules in the Form 10‐K.These financial statement schedules are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatement schedules based on our audits.

In our opinion, such financialstatement schedules, when considered in relation to the basic consolidatedfinancial statements taken as a whole, present fairly, in all materialrespects, the information set forth therein.

 

/s/ KPMG, LLP

Kansas City, Missouri

October 29, 2010

 

 

 

 

 

	66

 

 

 

 

 

 

**SIGNATURES**

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

U.S. Premium Beef, LLC
 
By: /s/ Steven D. Hunt

                                                                     

Name: Steven D.Hunt

*ChiefExecutive Officer*

*(PrincipalExecutive Officer)*

 

Date: October 29, 2010 

*** * * ***

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed by the followingpersons on behalf of the registrant and in the capacity and on the datesindicated.

 

 
**Signature**

**Title**

**Date**

 
 

 /s/ Steven D. Hunt

Steven D. Hunt

** **

** **

** **

Chief Executive Officer

(Principal Executive Officer)

October  29, 2010

 
 

 /s/ Scott J. Miller

Scott J. Miller

 

** **

** **

Chief Financial Officer

(Principal Financial and Accounting Officer)

October 29, 2010

 
 

 /s/ Mark R. Gardiner

Mark R. Gardiner

 

** **

** **

Chairman of the Board

October 29, 2010

 

 /s/ Duane K. Ramsey

Duane K. Ramsey

 
   
Vice Chairman of the Board
October 29, 2010
 

	/s/ Joe M. Morgan

Joe M. Morgan
   
Secretary of the Board
October 29, 2010
 

/s/ Jerry L. Bohn

Jerry L. Bohn

 
   
Director
October 29, 2010
 

/s/ Douglas A. Laue

Douglas A. Laue

 
   
Director
October 29, 2010
 

	/s/ Rex W. McCloy

Rex W. McCloy

 
   
Director
October 29, 2010
 

/s/ Jeff H Sternberger

Jeff H. Sternberger

 
   
Director
October 29, 2010
	 

	 

	67

 

 

 

 

 

 

 

 

 

 

 

 

 

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

**INDEX TO CONSOLIDATED FINANCIALSTATEMENTS**

 

 

**Page**

 

 

**Audited Consolidated Financial  Statements:**

 

** **

 

Report of Independent Registered Public Accounting  Firm

F-2

 

 

Consolidated Balance Sheets at August 28, 2010, and August  29, 2009

F-3

 

 

Consolidated Statements of Operations for the years  ended August 28, 2010, August 29, 2009, and August 30, 2008

F-4

 

 

Consolidated Statements of Comprehensive Income for  the years ended August 28, 2010, August 29, 2009, and August 30, 2008

F-5

 

 

Consolidated Statements of Capital Shares and Equities  for the years ended August 28, 2010, August 29, 2009, and August 30, 2008

F-6

 

 

Consolidated Statements of Cash Flows for the years  ended August 28, 2010, August 29, 2009, and August 30, 2008

F-7

 

 

Notes to Consolidated Financial Statements

F-8

 

 

 

 

 

 

 

 

 

 

F-1

 

 

 

 

 

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

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

We have audited theaccompanying consolidated balance sheets of U.S. Premium Beef, LLCand subsidiaries (the Company) as of August 28, 2010 and August 29, 2009,and the related consolidated statements of operations, comprehensive income,capital shares and equities, and cash flows for each of the years in the three‐yearperiod ended August 28, 2010. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of U.S. Premium Beef, LLCand subsidiaries as of August 28, 2010 and August 29, 2009, and theresults of their operations and their cash flows for each of the years in thethree‐year period ended August 28, 2010, in conformity withU.S. generally accepted accounting principles.

As discussed in Note 2 to the accompanying consolidatedfinancial statements, effective August 30, 2009, the Company adopted AccountingStandards Codification 810-10-65, *Non-controlling Interests in ConsolidatedFinancial Statements – an amendment of ARB No. 51*.

/s/ KPMG, LLPKansas City, MissouriOctober 29, 2010

 

 

F-2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

**Consolidated Balance Sheets**

 

 

 

 

 

 

 

 

 

 

(thousands of dollars, except unit information)

 

 

 

**Assets**

**August 28, 2010**

 

**August 29, 2009**

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

35,439 

 

$

18,853 

 

Accounts receivable, less allowance for returns and doubtful

 

 

 

 

 

accounts of $2,891 and $1,511, respectively

182,237 

 

172,421 

 

Due from affiliates

 

5,089 

 

4,586 

 

Other receivables

 

7,399 

 

7,165 

 

Inventories

 

 

232,943 

 

175,300 

 

Other current assets

 

45,999 

 

16,602 

 

 

Total current assets

 

509,106 

 

394,927 

Property, plant, and equipment, at cost

 

546,756 

 

499,977 

 

Less accumulated depreciation

 

222,677 

 

175,103 

 

 

Net property, plant, and equipment

 

324,079 

 

324,874 

Goodwill

 

 

 

 

86,251 

 

86,251 

Other intangible assets, net of accumulated amortization of $16,128 and $12,123,

 

 

 

 

respectively

 

 

58,606 

 

62,302 

Other assets

 

 

 

8,695 

 

4,594 

 

 

Total assets

 

$

986,737 

 

$

872,948 

**Liabilities and Capital Shares and Equities**

 

 

 

Current liabilities:

 

 

 

 

 

Current installments of long-term debt

 

$

22,412 

 

$

12,488 

 

Cattle purchases payable

 

70,208 

 

49,806 

 

Accounts payable - trade

 

73,562 

 

69,303 

 

Due to affiliates

 

738 

 

1,048 

 

Accrued compensation and benefits

 

82,474 

 

56,553 

 

Accrued insurance

 

15,048 

 

16,344 

 

Other accrued expenses and liabilities

 

27,747 

 

15,160 

 

Distributions payable

 

8,350 

 

10,942 

 

 

Total current liabilities

 

300,539 

 

231,644 

Long-term liabilities:

 

 

 

 

 

Long-term debt, excluding current installments

225,090 

 

293,400 

 

Other liabilities

 

2,443 

 

2,364 

 

 

Total long-term liabilities

 

227,533 

 

295,764 

 

 

Total liabilities

 

528,072 

 

527,408 

 

Non-controlling interest in National Beef Packing Company, LLC

291,746 

 

183,407 

Capital shares and equities:

 

 

 

 

Members' capital, 735,385 and 735,385 Class A units and 755,385 and 755,385

 

 

 

 

Class B units authorized, issued and outstanding

115,452 

 

111,085 

 

Patronage notices

 

48,682 

 

48,682 

 

Accumulated other comprehensive (loss) income

23 

 

(1)

 

 

Total capital shares and equities attributable to USPB

164,157 

 

159,766 

 

Non-controlling interest in Kansas City Steak Company, LLC

2,762 

 

2,367 

 

 

Total Capital Shares and Equities

 

166,919 

 

162,133 

 

 

Total liabilities, non-controlling interest in NBP and capital shares and equities

$

986,737 

 

$

872,948 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

**Consolidated Statements of Operations**

(thousands of dollars, except unit and per unit data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**52 weeks ended**

 

**52 weeks ended**

 

**53 weeks ended**

 

 

 

 

 

 

 

 

**August 28, 2010**

 

**August 29, 2009**

 

**August 30, 2008**

Net sales

 

 

 

 

 

$

5,807,929 

 

$

5,449,278 

 

$

5,847,292 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

 

 

 

5,438,033 

 

5,187,119 

 

5,612,411 

 

Selling, general, and administrative expenses

 

 

55,461 

 

49,129 

 

51,660 

 

Depreciation and amortization

 

 

 

 

 

53,012 

 

45,654 

 

36,421 

 

 

Total costs and expenses

 

 

 

 

 

5,546,506 

 

5,281,902 

 

5,700,492 

 

 

 

Operating income

 

 

 

 

 

261,423 

 

167,376 

 

146,800 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

44 

 

320 

 

1,438 

 

Interest expense

 

 

 

 

 

(14,854)

 

(23,555)

 

(34,243)

 

Equity in loss of aLF Ventures, LLC

 

 

 

 

- 

 

(61)

 

(101)

 

Termination Fee

 

 

 

 

 

- 

 

14,572 

 

- 

 

Other, net

 

 

 

 

 

(7,310)

 

(6,388)

 

5,864 

 

 

Total other expense

 

 

 

 

 

(22,120)

 

(15,112)

 

(27,042)

 

 

 

Income before taxes

 

 

 

 

 

239,303 

 

152,264 

 

119,758 

Income tax expense

 

 

 

 

 

(939)

 

(965)

 

(1,771)

 

 

 

Net income

 

 

 

 

 

238,364 

 

151,299 

 

117,987 

Less: Net income attibutable to non-controlling interest in:

 

 

 

 

 

 

 

 

Kansas City Steak Company, LLC

 

 

 

 

(963)

 

(1,292)

 

(704)

 

National Beef Packing Company, LLC

 

 

 

(76,450)

 

(50,024)

 

(55,072)

Net income attributable to U.S. Premium Beef, LLC

 

 

$

160,951 

 

$

99,983 

 

$

62,211 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per unit:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

Class A units

 

 

 

 

 

$

30.74 

 

$

44.87 

 

$

27.92 

 

 

Class B units

 

 

 

 

 

$

183.15 

 

$

90.89 

 

$

56.68 

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

Class A units

 

 

 

 

 

$

30.25 

 

$

44.35 

 

$

27.51 

 

 

Class B units

 

 

 

 

 

$

183.15 

 

$

90.89 

 

$

55.86 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding weighted-average Class A and Class B units:

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

Class A units

 

 

 

 

 

735,385 

 

735,385 

 

735,385 

 

 

Class B units

 

 

 

 

 

755,385 

 

737,052 

 

735,385 

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

Class A units

 

 

 

 

 

747,334 

 

744,039 

 

746,176 

 

 

Class B units

 

 

 

 

 

755,385 

 

737,052 

 

746,176 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-4

 

 

 

 

 

 

 

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

**Consolidated Statements of Comprehensive Income**

(thousands of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**52 weeks ended**

 

**52 weeks ended**

 

**53 weeks ended**

 

 

 

 

 

 

**August 28, 2010**

 

**August 29, 2009**

 

**August 30, 2008**

Net income

 

 

 

 

$

238,364 

 

$

151,299 

 

$

117,987 

Other comprehensive income (expense):

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

 

24 

 

(24)

 

(37)

 

 

 

 

 

 

	 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

238,388 

 

151,275 

 

117,950 

Comprehensive income attibutable to non-controlling interest in:

 

 

 

 

 

 

 

 

Kansas City Steak Company, LLC

 

 

 

(963)

 

(1,292)

 

(704)

 

National Beef Packing Company, LLC

 

 

 

(76,450)

 

(50,024)

 

(55,072)

Comprehensive income attributable to USPB

 

 

 

$

160,975 

 

$

99,959 

 

$

62,174 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

**Consolidated Statements of Capital Shares and Equities**

(thousands of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Noncontrolling**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Accumulated**

**interest in**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**other**

 

**Kansas City**

 

**Total capital**

 

 

 

 

 

 

 

 

**Members'**

 

**Patronage**

 

**comprehensive**

 

**Steak**

 

**shares and**

 

 

 

 

 

 

 

 

**capital**

 

**notices**

 

**(loss) income**

 

**Company, LLC**

 

**equities**

Balance at August 25, 2007

 

 

$

102,472 

 

$

50,642 

 

$

60 

 

 

$

952 

 

$

154,126 

Foreign currency translation adjustment

 

 

- 

 

- 

 

(37)

 

 

- 

 

(37)

Allocation of net income for the year

 

 

 

 

 

 

 

 

 

 

 

 

 

ended August 30, 2008

 

 

62,211 

 

- 

 

- 

 

 

704 

 

62,915 

Adjustment to fair value of non-controlling interest

(89,318)

 

- 

 

- 

 

 

- 

 

(89,318)

Distributions to non-controlling interest in Kansas City

 

 

 

 

 

 

 

 

 

 

Steak Company, LLC

 

 

- 

 

- 

 

- 

 

 

(192)

 

(192)

Reversal of tax reserve

 

 

466 

 

- 

 

- 

 

 

- 

 

466 

Balance at August 30, 2008

 

 

$

75,831 

 

$

50,642 

 

$

23 

 

 

$

1,464 

 

$

127,960 

Foreign currency translation adjustment

 

 

- 

 

- 

 

(24)

 

 

- 

 

(24)

Allocation of net income for the year

 

 

 

 

 

 

 

 

 

 

 

 

 

ended August 29, 2009

 

 

99,983 

 

- 

 

- 

 

 

1,292 

 

101,275 

Step up accounting for acquisition of non-controlling

 

 

 

 

 

 

 

 

 

 

 

interests

 

 

 

 

63,027 

 

- 

 

- 

 

 

- 

 

63,027 

Equity issuance related to CEO option exercise

1,040 

 

- 

 

- 

 

 

- 

 

1,040 

Adjustment to fair value of non-controlling interest

(75,945)

 

- 

 

- 

 

 

- 

 

(75,945)

Partner distributions

 

 

(52,851)

 

- 

 

- 

 

 

- 

 

(52,851)

Distibutions to non-controlling interest in Kansas City

 

 

 

 

 

 

 

 

 

 

Steak Company, LLC

 

 

- 

 

- 

 

- 

 

 

(389)

 

(389)

Redemption of patronage notices

 

 

- 

 

(1,960)

 

- 

 

 

- 

 

(1,960)

Balance at August 29, 2009

 

 

$

111,085 

 

$

48,682 

 

$

(1)

 

 

$

2,367 

 

$

162,133 

Foreign currency translation adjustment

 

 

- 

 

- 

 

24 

 

 

- 

 

24 

Allocation of net income for the year

 

 

 

 

 

 

 

 

 

 

 

 

 

ended August 28, 2010

 

 

160,951 

 

- 

 

- 

 

 

963 

 

161,914 

Adjustment to fair value of non-controlling interest

(82,710)

 

- 

 

- 

 

 

- 

 

(82,710)

Distributions to non-controlling interest in Kansas City

 

 

 

 

 

 

 

 

 

 

Steak Company, LLC

 

 

- 

 

- 

 

- 

 

 

(568)

 

(568)

Partner distributions

 

 

(73,874)

 

- 

 

- 

 

 

- 

 

(73,874)

Balance at August 28, 2010

 

 

$

115,452 

 

$

48,682 

 

$

23 

 

 

$

2,762 

 

$

166,919 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-6

 

 

**U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES****Consolidated Statements of Cash Flows**(thousands of dollars)

 

 

 

 
       **52 weeks ended** **52 weeks ended** **53 weeks ended** **August 28, 2010** **August 29, 2009** **August 30, 2008**Cash flows from operating activities:           Net income$238,364  $151,299  $117,987 Adjustments to reconcile net income to net cash provided by (used in)             operating activities:                 Depreciation and amortization 54,528   45,654   36,421          Termination fee -   (14,572)  -          (Gain) loss on disposal of property, plant, and equipment (75)  (13)  24          Gain on disposal of investment -   -   (1,342)         Write-off of debt issuance costs 496   1,462   372          Changes in assets and liabilities (net of acquisitions):                    Accounts receivable (9,816)  45,602   (28,295)            Due from affiliates (501)  2,498   (2,475)            Other receivables (234)  (1,773)  2,997             Inventories (57,643)  17,180   (15,236)            Other assets (30,625)  990   1,237             Cattle purchases payable 4,425   (3,963)  (453)            Accounts payable 463   (615)  15,246             Due to affiliates (312)  40   31             Accrued compensation and benefits 25,921   8,273   30,535             Accrued insurance (1,296)  3,426   (1,632)            Other accrued expenses and liabilities 12,666   3,792   (117)               Net cash provided by operating activities 236,361   259,280   155,300 Cash flows from investing activities:           Capital expenditures, including interest capitalized (49,536)  (40,791)  (59,877)   Termination fee -   14,572   -   Acquisition of businesses -   (11,007)  (600)   Proceeds from sale of property, plant, and equipment 1,399   1,406   245    Proceeds from redemption of investment -   -   1,342                Net cash used in investing activities (48,137)  (35,820)  (58,890)Cash flows from financing activities:           Net (payments) receipts under revolving credit lines (7,168)  22,801   (27,001)   Borrowings under term note payable 275,000   -   -   Repayments of other indebtedness/capital leases (6,430)  (8,547)  (3,413)   Purchase and cancellation of Senior Notes (66,855)  (62,542)  (30,603)   Payments of patronage notices -   (1,960)  -    Payments of notes payable and fees (252,933)  (26,742)  (1,030)   Cash paid for financing costs (5,194)  (1,343)  -    Change in overdraft balances 19,817   (13,012)  (1,346)   Member capital redeemed (8,000)  (125,484)  -    Minority owner capital contribution -   19,643   - Distributions to non-controlling interests in National Beef Packing Company, LLC(46,025)  (31,945)  (18,450)   Partnership distributions and redemptions (73,874)  (52,851)  -                Net cash used in financing activities (171,662)  (281,982)  (81,843)Effect of exchange rate changes on cash 24   (24)  (37)               Net increase (decrease) in cash 16,586   (58,546)  14,530 Cash and cash equivalents at beginning of period 18,853   77,399   62,869 Cash and cash equivalents at end of period$35,439  $18,853  $77,399 Supplemental cash disclosures:           Cash paid during the period for interest$13,934  $23,250  $35,061 Cash paid during the period for taxes, net of $925, $0, and $0 refunds,             respectively$814  $(76) $2,074 Supplemental noncash disclosures of investing and financing activities:          Assets acquired through capital lease$139  $70  $98    Issuance of equity for the exercise of CEO's options$-  $1,040  $-          See accompanying notes to consolidated financial statements.        
 

 

 

 F-7

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

 

**(1)       Descriptionof Business**

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

On December 1, 1997, USPB became operational byacquiring 25.4966% of Farmland National Beef Packing Co., L.P. (FNB), apartnership owned by USPB and Farmland Industries, Inc. (Farmland). USPBacquired an additional 3.29% partnership interest in February 1998,bringing its ownership to 28.7866% of FNB. Farmland owned the remaining71.2134%.

On May 31, 2002, Farmland and four of itssubsidiaries filed voluntary petitions to reorganize under Chapter 11 of theUnited States Bankruptcy Code. FNB was not a party of these filings. Provisionsof FNB’s Operating Agreement and its financing agreement restricted partners’access to FNB’s assets. In the fourth quarter of fiscal year 2003, USPBacquired a controlling interest in the former FNB, now National Beef PackingCompany, LLC (NBP).

On August 18, 2004, the shareholders of U.S.Premium Beef, Ltd. approved the merger of the cooperative into a wholly-ownedsubsidiary, U.S. Premium Beef, Inc., a Delaware corporation.  The mergerwas effective on August 29, 2004. The Delaware corporation then, in a statutoryconversion authorized under Delaware law, converted into a Delaware limitedliability company (see Note 12).  Following the effective date of the mergerand the statutory conversion, the business of the cooperative continues in thelimited liability company form of business organization.

NBP and its subsidiaries sellmeat products to customers in the food service, international, furtherprocessor, and retail distribution channels. NBP also produces and sells by‐productsthat are derived from its meat processing operations and variety meats tocustomers in various industries.

NBP operates beef slaughterand fabrication facilities in Liberal and Dodge City, Kansas, and Brawley,California, case-ready beef processing facilities in Hummels Wharf,Pennsylvania and Moultrie, Georgia and holds a 75% interest in Kansas CitySteak Company, LLC (Kansas City Steak), a portion control processing facilityin Kansas City, Kansas.  National Carriers, Inc. (National Carriers), NBP’swholly-owned subsidiary located in Liberal, Kansas, provides trucking servicesto NBP and third parties and National Elite Transportation, LLC (NationalElite), a wholly-owned subsidiary located in Springdale, Arkansas, providesthird-party logistics services to the transportation industry.   National BeefLeathers, LLC (NBL), a wholly-owned subsidiary located in St. Joseph, Missouri,provides wet blue hide tanning services to the Company.

In connection with itsinitial acquisition of its interest in FNB, USPB owns the right and is subjectto the obligation to deliver cattle annually to NBP relative to:(i) USPB’s ownership in NBP and (ii) the number of cattle processedannually by NBP. This agreement remains in effect with NBP. The price receivedfor cattle is based upon pricing grids determined by USPB and NBP, which reflectcurrent market conditions. The Cattle Purchase Agreement is effective as longas USPB is a partner in NBP. Cattle delivered by USPB, which approximated 20%of NBP’s total cattle processed in fiscal year 2010, are processed in NBP’s threeprocessing facilities.

USPB sources all of its cattle requirements from its unitholdersand associates.  Unitholders enter into Uniform Cattle Delivery and MarketingAgreements and are obligated to deliver a designated number of cattle to USPBduring specified delivery periods, as defined. The original agreements were fora term of ten years; renewal agreements carry a term of five years and have anevergreen renewal provision.  Both agreements provide for minimum qualitystandards, delivery variances, and termination provisions, as defined.

F-8

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

 

Cattle acquired from unitholders pursuant to theUniform Cattle Delivery and Marketing Agreements are delivered to NBP pursuantto the Cattle Purchase Agreement.  Both agreements remain in effect under theLLC structure.

USPB, and NBPCo Holdings, LLC (NBPCo Holdings) holdClass A, Class A1, and Class B interests in NBP and affiliates of Timothy M.Klein hold Class A and Class B interests in NBP.

Capital Structure of NBP

 *ClassA Interests*. Class A interests are non-voting and are entitled to apriority distribution of 5% per year on the face amount of the Class A interests,payable not later than 30 days after the close of the NBP’s tax year quartersin cash to the extent permitted by the NBP’s senior lenders and the indenturegoverning the senior notes.  The face amount of the Class A interests, togetherwith all unpaid priority distributions, will be distributed on a priority basisupon liquidation. 

*Class A1 Interests*.Class A1 interests are non-voting and are entitled to a priority distributionof 7% per year on the face amount of the Class A1 interests, payable withpayment in kind Class A1 interests in lieu of cash if the NBP’s EBITDA does notmeet certain tests.  For purposes of determining Class B ownership forliquidation or redemption, the Class A1 interests will be deemed to beconverted to Class B interests at a ratio defined in NBP’s Limited Liability CompanyAgreement, but will remain A1 interests after such determination.

*Class B Interests*.Class B interests are entitled to receive all assets available for distributionupon liquidation after payment of the Class A and Class A1 face amountstogether with all unpaid Class A and Class A1 priority distributions. Class B interestswill also be allocated all items of income and loss earned or incurred by NBPafter allocation of income attributable to the Class A and Class A1 prioritydistributions.  In addition, the holders of Class B interests are entitled toreceive quarterly distributions to make tax payments which consist of 48% ofthe NBP’s remaining estimated taxable net income after the Class A and Class A1priority distributions are made. The voting power of the members (voting eitherdirectly or by action of the board of managers designated by the members) isdetermined based upon the number of Class B interests held. 

 USPB holds approximately 69.3% of the Class B interests, as well asClass A and Class A1 interests with an aggregate face amount of approximately$150.5 million, NBPCo Holdings owns approximately 24.8% of the Class B interests,as well as Class A and Class A1 interests with an aggregate face amount ofapproximately $51.2 million, and affiliates of Timothy M. Klein ownapproximately 5.9% of the Class B interests, as well as Class A interests withan aggregate face amount of approximately $2.3 million.

Non-controllinginterests in National Beef Packing Company, LLC on USPB balance sheet representsClass A, A1 and B interests held NBPCo Holding and Class A and Class Binterests held by affiliates of Timothy M. Klein (see Note 13).  

(2)       Basis ofPresentation and Accounting Policies

Basis of Presentation and Consolidation

The consolidated financialstatements include the accounts of USPB and its majority owned subsidiary, NBP,and its direct and indirect subsidiaries. All significant intercompany accountsand transactions have been eliminated in consolidation.

F-9

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

 

Effective August 30, 2009,the Company adopted ASC 810 – Consolidations, which includes ASC 810-10-65Noncontrolling Interests in Consolidated Financial Statements - an Amendment ofARB No. 51.  ASC 810-10-65 establishes accounting and reporting standards for the non-controllinginterest (minority interest) in a subsidiary. ASC 810-10-65 requires non-controllinginterests held by parties other than the parent in subsidiaries be clearlyidentified, labeled and presented in the consolidated balance sheet withinequity, but separate from the parent’s equity. The Company’s adoption of ASC810-10-65 as of August 30, 2009 changed the presentation of the non-controllinginterest. Minority owners’ interest in net income of National Beef PackingCompany, LLC and Kansas City Steak Company, LLC were previously presented as areduction in the calculation of net income in the Consolidated Statements ofOperations and are now presented as net income attributable to non-controllinginterest, which is presented as a reduction of net income to calculate netincome attributable to USPB. Corresponding changes have been made to theConsolidated Statements of Cash Flows and Capital Shares and Equities. TheCompany has applied the provisions of ASC 810-10-65 prospectively, except for thepresentation and disclosure requirements, which have been appliedretrospectively for all periods presented. 

Fiscal Year

The Company’s fiscal yearconsists of 52 or 53 weeks, ending on the last Saturday in August.  Fiscal years2010 and 2009 were 52 week fiscal years while fiscal year 2008 was a 53 weekfiscal year.  All references to years in these notes to consolidated financialstatements represent fiscal years unless otherwise noted.

Use of Estimates

Theconsolidated financial statements have been prepared in conformity withaccounting principles generally accepted in the United States of America, usingmanagement’s best estimates and judgments where appropriate. These estimatesand judgments affect the reported amounts of assets and liabilities anddisclosure of the contingent assets and liabilities at the date of thefinancial statements. The estimates and judgments will also affect the reportedamounts for certain revenues and expenses during the reporting period.  Actualresults could differ materially from these estimates and judgments. 

***Cash and Cash Equivalents***

 TheCompany considers all highly liquid investments with an original maturity ofthree months or less to be cash equivalents.  As of August 28, 2010 and August29, 2009, the Company had cash and cash equivalents of $35.4 million and $18.9million, respectively, as presented in the consolidated statements of cashflows.    

***Allowance for Returns andDoubtful Accounts***

 Theallowance for returns and doubtful accounts is NBP’s best estimate of theamount of probable returns and credit losses in NBP’s existing accountsreceivable.  NBP determines these allowances based on historical experience,customer conditions and management’s judgments. Management considers factorssuch as changes in the economy and industry.  Specific accounts are reviewedindividually for collectability.

The followingtable represents the rollforward of the allowance for returns and doubtfulaccounts for the fiscal years ended August 28, 2010, August 29, 2009, and August30, 2008 (thousands of dollars).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Beginning**

 

 

 

 

 

**Ending**

**Period Ending**

 

**Balance**

 

**Provision**

 

**Charge Off**

 

**Balance**

 

 

 

 

 

 

 

 

 

August 28, 2010

 

$

(1,511)

 

$

(9,211)

 

$

7,831 

 

$

(2,891)

August 29, 2009

 

$

(1,665)

 

$

(6,201)

 

$

6,355 

 

$

(1,511)

August 30, 2008

 

$

(4,642)

 

$

(5,399)

 

$

8,376 

 

$

(1,665)

 

 

 

 

 

 

 

 

 

 

***Inventories***

 

 Inventories consist primarily of meatproducts and supplies.  Product inventories are considered commodities and arerecorded based on quoted commodity prices, which approximate net realizablevalue.  Supply and other inventories are valued on the basis of first-in,first-out, specific or average cost methods.  Product inventories are relievedfrom inventory utilizing the first-in, first-out method.

 

F-10

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

 

 

Inventoriesat August 28, 2010 and August 29, 2009 consisted of the following (thousands ofdollars):

 

 

 

 

**August 28,**

 

**August 29,**

 

 

 

**2010**

 

**2009**

Product inventories:

 

 

 

 

 

 

Dressed and boxed meat products

 

 

$

154,927 

 

$

119,274 

 

Beef by-products

 

 

46,891 

 

29,756 

Supplies and other

 

 

31,125 

 

26,270 

 

Total Inventory

 

 

$

232,943 

 

$

175,300 

 

 

 

 

 

 

 

 

Property, Plant, and Equipment

Property, plant, andequipment are recorded at cost. Property, plant, and equipment are depreciatedprincipally on a straight-line basis over the estimated useful life (based uponoriginal acquisition date) of the individual asset by major asset class as follows:

 

 

 

 

Buildings and improvements

 

15 to 25 years

Machinery and equipment

 

2 to 8 years

 

Furniture and fixtures

 

3 to 5 years

 

Trailers and automotive equipment

2 to 4 years

 

 

 

 

 

 

 

 

 

 

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

NBP capitalizes the cost ofinterest on borrowed funds, which are used to finance the construction ofcertain property, plant, and equipment. Such capitalized interest costs arecharged to the property, plant, and equipment accounts and are amortizedthrough depreciation charges over the estimated useful lives of the assets.  Interestcapitalized was $0.3 million, $0.3 million, and $0.3 million for the fiscalyears 2010, 2009, and 2008, respectively.

NBP reviews its long-livedassets for impairment whenever events or changes in circumstances indicate thatthe carrying amount of an asset may not be recoverable. Recoverability ofassets held and used is assessed based on estimated undiscounted future cashflows. Impairment, if any, is recognized based on fair value of the assets.Assets to be disposed of are reported at the lower of cost or fair value lesscosts to sell, and are no longer depreciated.

 

 

 

 

F-11

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

 

A summary of cost andaccumulated depreciation for property, plant, and equipment as of August 28,2010 and August 29, 2009 follows (thousands of dollars):  

 

 

 

**August 28,**

 

**August 29,**

 

 

 

**2010**

 

**2009**

Land and improvements

 

$

27,310 

 

$

18,777 

Building and improvements

 

128,326 

 

125,095 

Machinery and equipment

 

334,270 

 

313,650 

Furniture and fixtures

 

10,115 

 

7,979 

Trailers and automotive equipment

 

5,008 

 

5,565 

Construction in process

 

41,727 

 

28,911 

 

Total property, plant, and equipment, at cost

 

546,756 

 

499,977 

Accumulated depreciation

 

222,677 

 

175,103 

 

Property, plant, and equipment, net

 

$

324,079 

 

$

324,874 

 

Debt Issuance Costs

On June 27, 2008, NBP amended its Credit Facility to increase the amountof allowable net capital expenditures. NBP capitalized an additional $0.1million in debt issuance costs associated with this amendment.  The remainingcosts are being amortized over the life of the related debt instruments.  

In July 2008, NBP repurchased and cancelled approximately $30.6 millionof its senior notes.  Associated with the repurchase and cancellation of thesesenior notes, a portion of the unamortized loans costs of approximately $0.4million were expensed in other, net in the consolidated statement of operationsduring the fiscal year ended August 30, 2008.

On April 13,2009, NBP’s Credit Facility was amended to permit the redemption of NBP’smembership interests in the amount of $125.5 million, including theauthorization and issuance of Class A1 interests to help fund the redemption. In addition, the terms of NBP’s Credit Facility were amended to:  (1) increasethe borrowings under NBP’s Credit Facility by up to $100.0 million, of which upto $75.0 million is under NBP’s term loan and $25.0 million is under NBP’srevolving line of credit; (2) increase the applicable margin on the rates ofinterest of the term loan and revolving line of credit; (3) revise the paymentschedule of the term loan; (4) shorten the maturity date of the term loan; (5)remove the restrictions on purchasing NBP’s senior notes and require therepurchase or redemption of $100 million aggregate principal amount of NBP’s seniornotes; (6) increase the amount of capital expenditures NBP can make in anyfiscal year from $50 million to $60 million, or $65 million if NBP expends lessthan $55 million in the immediately preceding fiscal year; and (7) add a financialcovenant requiring NBP to maintain a Funded Debt to EBITDA ratio.  The relatedfinancing charges, an upfront fee of approximately $0.8 million and anarrangement fee of approximately $0.5 million, was capitalized and is beingamortized over the life of the related debt instruments.  

During fiscal year 2009, NBP repurchased and cancelled approximately $62.5million of its senior notes.  Associated with the repurchase and cancellationof these senior notes, a portion of the unamortized loans costs of approximately$0.5 million were expensed in other, net in the consolidated statement ofoperations during the fiscal year ended August 29, 2009.

On June 4, 2010, NBP’s Credit Facility was amended and restated to:  (1)increase the borrowings under the Credit Facility by providing for a term loanfacility of up to $375 million and a revolving line of credit of up to $250million; (2) reduce the applicable margin on the rates of interest of the termloan and revolving line of credit; (3) revise the payment schedule of the termloan; (4) extend the maturity date of the Credit Facility to June 4, 2015; and (5)remove the limitations on capital expenditures; (6) add new financial covenantsregarding adjusted net worth and a fixed charge coverage ratio; and (7) add twowholly owned subsidiaries, National Beef California, LLP and National Carriers,Inc., as loan parties and guarantors.  The related financing charges, ofapproximately $4.2 million, will be amortized over the life of the loan.  

F-12

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

 

During fiscal year 2010, NBP repurchased and cancelled the remainingapproximately $66.9 million of its senior notes.  Associated with therepurchase and cancellation of these senior notes, the remaining unamortizedloans costs of approximately $0.4 million were expensed in other, net in theconsolidated statement of operations during the fiscal year ended August 28,2010.

Amortization of $1.5 million, $0.9 million and $1.0 million was chargedto interest expense during the fiscal years 2010, 2009 and 2008, respectively,related to these costs.  NBP had unamortized costs of $5.3 million and $3.1million included in other assets on the consolidated balance sheets for thefiscal years 2010 and 2009, respectively.

***Goodwill and OtherIntangible Assets ***

ASC 350, *Intangibles -Goodwill and Other,* provides that goodwill and other intangible assets withindefinite lives shall not be amortized but shall be tested for impairment onan annual basis. Identifiable intangible assets with definite lives areamortized over their estimated useful lives.  The Company evaluates goodwilland other indefinite life intangible assets annually for impairment and, ifthere is impairment, the carrying amount of goodwill and other intangibleassets is written down to the implied fair value.  For goodwill, this testinvolves comparing the fair value of each reporting unit to the unit’s bookvalue to determine if any impairment exists.  The Company calculates the fairvalue of each reporting unit using estimates of future cash flows.  

 In connection with NBP’sredemption of the minority interests in NBP (see Note 4 for further detail ofthe redemption), USPB recognized excess cost over the fair value of the nettangible and identifiable intangible assets acquired, and recorded an excess of$5.0 million as goodwill. 

In accordance with ASC 350,goodwill was tested for impairment and, as of August 28, 2010, managementdetermined there was no impairment.

The amounts of goodwill are asfollows (thousands of dollars):

 

 

**August 28,**

 

**August 29,**

 

 

**2010**

 

**2009**

Beginning balance

$

86,251 

 

$

80,642 

 

Adjustment of goodwill related to acquisitions

- 

 

5,609 

Ending balance

$

86,251 

 

$

86,251 

 

 

 

 

 

 

The amounts of otherintangibles assets are as follows (thousands of dollars):

 

 

 

 

 

 

 

 

**August 28, 2010**

 

**August 29, 2009**

 

 

**Weighted**

 

 

 

 

 

 

 

 

 

 

**Average**

 

**Gross**

 

 

 

**Gross**

 

 

 

 

**Amortization**

 

**Carrying**

 

**Accumulated**

 

**Carrying**

 

**Accumulated**

 

 

**Period**

 

**Amount**

 

**Amortization**

 

**Amount**

 

**Amortization**

Intangible assets subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer Relationships

17.1 years

 

$

51,964 

 

$

16,128 

 

$

51,655 

 

$

12,123 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets not subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

indefinite

 

22,770 

 

- 

 

22,770 

 

- 

Total intangible assets

 

 

 

 

 

 

$

74,734 

 

$

16,128 

 

$

74,425 

 

$

12,123 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships, includingcontractual and non-contractual relationships, are being amortized using thestraight-line method over their useful lives which range from four to 15years.  Trademarks are not scheduled for amortization due to their expectedindefinite useful life.  In accordance with ASC 350, these trademarks weretested for impairment and, as of August 28, 2010, management determined therewas no impairment.

F-13

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

 

For the fiscalyears 2010, 2009, and 2008, the Company recognized $4.0 million, $2.8 million, and$2.1 million, respectively, of amortization expense on intangible assets. Thefollowing table reflects the anticipated amortization expense relative tointangible assets recognized in NBP’s consolidated balance sheet as of August 28,2010, for each of the next five years and thereafter (thousands of dollars): 

 

 

 

 

 

 

 

 

 

2011

 

 

 

 

$

2,104 

2012

 

 

 

 

2,103 

2013		(1)

 

 

 

2,109 

2014

 

 

 

 

2,057 

2015

 

 

 

 

2,011 

Thereafter

 

 

25,452 

 

 

 

 

 

 

 

 

(1)

FYE 2013 consists of 53 weeks.

 

 

 

 

 

 

 

 

 

 

 

Overdraft Balances

USPB utilizes a controlleddisbursement account to fund cash distribution checks presented for payment bythe holder.  Checks issued pending clearance that result in overdraft balancesfor accounting purposes are included in distributions payable and the change inthe related balances are reflected in financing activities on the consolidatedstatement of cash flows.  

The majority of NBP’s bankaccounts are zero balance accounts where cash needs are funded as checks arepresented for payment by the holder. Checks issued pending clearance thatresult in overdraft balances for accounting purposes are included in the tradeaccounts payable and cattle purchases payable balances, and the change in therelated balances are reflected in financing activities on the consolidatedstatement of cash flows.  Overdraft balances of $79.1 million and $59.3 millionwere included in trade accounts and cattle purchases payables at August 28,2010 and August 29, 2009, respectively. 

Self-Insurance

NBP is self-insured forcertain losses relating to workers’ compensation, automobile liability, generalliability and employee medical and dental benefits.  NBP has purchasedstop-loss coverage in order to limit its exposure to any significant levels ofclaims. Self-insured losses are accrued based upon NBP’s estimates of theaggregate uninsured claims incurred using actuarial assumptions accepted in theinsurance industry and the Company’s historical experience rates.

Environmental Expenditures and Remediation Liabilities

Environmentalexpenditures that relate to current or future operations and which improveoperational capabilities are capitalized at the time of expenditure.Expenditures that relate to an existing or prior condition caused by pastoperations, and do not contribute to current or future revenue generation, areexpensed. Liabilities are recorded when environmental assessments and/orremedial efforts are probable and the costs can be reasonably estimated. 

Foreign Currency Translation

NBP has representativeoffices located in Tokyo, Japan, Seoul, South Korea and Beijing, China. Theprimary activity of these offices is to assist customers with product and orderrelated issues. For foreign operations, the local currency is the functionalcurrency. Translation into U.S. dollars is performed for assets and liabilitiesat the exchange rates as of the balance sheet date. Income and expense accountsare recorded at average exchange rates for the period.  Adjustments resultingfrom the translation are reflected as a separate component of othercomprehensive income.

 

F-14

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

 

Income Taxes

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

The provision for income taxes for NBP is computed on a separate legalentity basis.  Accordingly, NBP does not provide for income taxes as theresults of operations are included in the taxable income of the individualmembers.  However, to the extent that subsidiary entities provide for incometaxes, deferred tax assets and liabilities are recognized based on thedifferences between the financial statement and tax bases of assets andliabilities at each balance sheet date using enacted tax rates expected to bein effect in the year the differences are expected to reverse, and are thusincluded in the consolidated financial statements of the Company.  Based onfederal income tax statute of limitations, National Carriers remains subject toexamination of its income taxes for fiscal years 2010, 2009, and 2008. 

Fair Value of Financial Instruments

The carryingamounts of the Company’s financial instruments, including cash and cashequivalents, short-term trade receivables and payables, approximate their fairvalues due to the short-term nature of the instruments. At August 29, 2009, NBP’ssenior notes had a carrying value of $66.9 million and an approximate fairvalue of $66.9 million, or par, based on NBP’s ability to redeem the senior notes at 100% of face value after August 1, 2009. The carrying value of other debt approximates its fair value at August 28, 2010and August 29, 2009, as substantially all such debt has a variable interestrate. 

Revenue Recognition

NBP recognizesrevenue from the sale of products based on the terms of the sale, typicallyupon delivery to customers.  National Carriers, Inc. and National Eliterecognize revenue when shipments are complete.

Selling, General, and Administrative

Selling expenses consistprimarily of salaries, unit option expense, trade promotions, advertising,commissions and other marketing costs. General and administrative costs consistprimarily of general management, insurance and professional expenses.  Selling,general, and administrative costs consist of aggregated expenses for USPB andNBP.

***Shipping Costs***

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

*** Advertising and PromotionExpenses***

 Advertisingand promotion expenses are charged to operations in the period incurred andwere $5.3 million, $4.6 million, and $2.1 million in fiscal years 2010, 2009, and2008, respectively. 

***Comprehensive Income***

 Comprehensiveincome consists of net income and foreign currency translation adjustments.  NBPdeems its foreign investments to be permanent in nature and does not providefor taxes on currency translation adjustments arising from converting theinvestment in a foreign currency to U.S. dollars. 

 ***Derivatives andHedging Activities***

F-15

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

 

 NBP usesfutures contracts in order to reduce exposure associated with entering intofirm commitments to purchase live cattle at prices determined prior to thedelivery of the cattle as well as firm commitments to sell certain beefproducts at sales prices determined prior to shipment. In accordance with ASC815, *Derivatives and Hedging*, NBP accounts for futures contracts andtheir related firm purchase commitments at fair value. Certain firm commitmentsfor live cattle purchases and all firm commitments for boxed beef sales aretreated as “normal purchases and sales” and not marked to market.  ASC 815 imposesextensive recordkeeping requirements in order to treat a derivative financialinstrument as a hedge for accounting purposes. Derivatives qualify fortreatment as hedges when there is a high correlation between the change in fairvalue of the instrument and the related change in fair value of the underlyingcommitment. For derivatives that qualify as effective hedges, the change infair value has no net effect on earnings until the hedged transaction affectsearnings. For derivatives that are not designated as hedging instruments, orfor the ineffective portion of a hedging instrument, the change in fair valuedoes affect current period net earnings. 

Whilemanagement believes each of these instruments help mitigate various marketrisks, they are not designated and accounted for as hedges under ASC 815 as aresult of the extensive recordkeeping requirements of this statement.Accordingly, the gains and losses associated with the change in fair value ofthe instrument and the offsetting gains and losses associated with changes inthe market value of certain of the firm purchase commitments related to thefutures contracts are recorded to income and expense in the period of change. 

 The fairvalue of derivative assets is recognized within other current assets, while thefair value of derivative liabilities is recognized within accrued liabilities. 

Earnings Per Unit

Under the LLC structure, earnings of the Company are to be distributed tounitholders based on their proportionate share of underlying equity, and, as aresult, earnings per unit (EPU) has been presented in the accompanyingConsolidated Statement of Operations and in the table that follows.

Basic EPU excludes dilutionand is computed by first allocating a portion of net income attributable toUSPB to Class A units and the remainder is allocated to Class B units. OnNovember 2, 2009, the Company’s members approved changing the allocation ofincome from 33% to the Class A’s and 67% to the Class B’s to 10% to the ClassA’s and 90% to the Class B’s.  Accordingly, for fiscal year 2010, the pro-ratashare of income earned through November 1, 2009 was allocated 33% to the ClassA’s and 67% to the Class B’s and the remainder of the income for the fiscalyear was allocated 10% to the Class A’s and 90% to the Class B’s.  Incomeallocated to the Class A and Class B units is then divided by theweighted-average number of Class A and Class B units outstanding for the periodto determine the basic EPU for each respective class of unit.   On March 27,2010, the Class A and Class B units were de-linked, allowing the transfer ofeach class of units without a concurrent transfer of a unit of the other Class.

Diluted EPU reflects thepotential dilution that could occur if potential Class A unit purchase rightswere exercised or contractual appreciation rights were converted into units.  Upon termination of the CEO employment agreement and until eighteen monthsafter the termination of the CEO employment agreement, at the election of theCEO, or upon mutual agreement of the Board of the Company and the CEO, the CEOmay purchase up to 20,000 Class A units, or upon agreement of the CEO and theBoard of the Company, the CEO may convert the contractual unit appreciationrights to up to 20,000 Class A units.  The diluted EPU reflects thecircumstances of termination of the CEO employment agreement, and the electionof CEO or agreement by the Board of the Company and the CEO for the CEO topurchase or convert contractual rights to the maximum 20,000 Class A units at$55 per unit for the periods as provided in the CEO employment agreement.  DilutedEPU was not computed for fiscal years 2010 and 2009 for Class B units as theCEO exercised his right to purchase 20,000 Class B units at an exercise priceof $0 per unit in fiscal year 2009.

F-16

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

 

**Earnings Per Unit Calculation**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(thousands of dollars, except unit and per unit data)

 

**52 weeks ended**

 

**52 weeks ended**

 

**53 weeks ended**

 

 

 

 

**August 28, 2010**

 

**August 29, 2009**

 

**August 30, 2008**

Basic earnings per unit:

 

 

 

 

 

 

 

 

Income available to unitholders (numerator)

 

 

$

160,951 

 

$

99,983 

 

$

62,211 

 

 

 

 

 

 

 

 

 

 

 

Weighted average outstanding units (denominator)

 

 

 

 

 

 

 

 

 

Class A

 

 

735,385 

 

735,385 

 

735,385 

 

 

Class B

 

 

755,385 

 

737,052 

 

735,385 

 

 

 

 

 

 

 

 

 

 

 

Per unit amount

 

 

 

 

 

 

 

 

 

Class A

 

 

$

30.74 

 

$

44.87 

 

$

27.92 

 

 

Class B

 

 

$

183.15 

 

$

90.89 

 

$

56.68 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per unit:

 

 

 

 

 

 

 

 

Income available to unitholders (numerator)

 

 

$

160,951 

 

$

99,983 

 

$

62,211 

 

 

 

 

 

 

 

 

 

 

 

Weighted average outstanding Class A units

 

 

735,385 

 

735,385 

 

735,385 

 

Effect of dilutive securities - Class A unit options

 

 

11,949 

 

8,654 

 

10,791 

 

 

Units (denominator)

 

 

747,334 

 

744,039 

 

746,176 

 

 

 

 

 

 

 

 

 

 

 

Weighted average outstanding Class B units

 

 

755,385 

 

737,052 

 

735,385 

 

Effect of dilutive securities - Class B unit options

 

 

- 

 

- 

 

10,791 

 

 

Units (denominator)

 

 

755,385 

 

737,052 

 

746,176 

 

 

 

 

 

 

 

 

 

 

 

Per unit amount

 

 

 

 

 

 

 

 

 

Class A

 

 

$

30.25 

 

$

44.35 

 

$

27.51 

 

 

Class B

 

 

$

183.15 

 

$

90.89 

 

$

55.86 

 

(3)       New Accounting Pronouncements

On June 29, 2009, the Financial Accounting Standards Board (FASB) issued GenerallyAccepted Accounting Principles under ASC 105-10 as the source of authoritativeaccounting principles recognized by the FASB to be applied by nongovernmentalentities.  This pronouncement was effective for financial statements issued forinterim and annual periods ending after September 15, 2009 for most entities. On the effective date, all non-SEC accounting and reporting standards weresuperseded.  Rules and interpretive releases of the SEC under the authority offederal securities laws are also sources of authoritative GAAP for SECregistrants.  All other accounting literature is considered non-authoritative. The switch to ASC affects the manner in which companies refer to U.S. GAAP infinancial statements and note disclosures.  The Company adopted this body ofaccounting for the quarterly period ended November 28, 2009, as required, andadoption did not have a material impact on our consolidated financial statementstaken as a whole.  

In December 2007, the FASB issued *Business Combinations*under ASC805.* *This statement requires an acquirer to recognize the assetsacquired, the liabilities assumed, and any non-controlling interest in theacquiree at the acquisition date to be measured at their fair value as of thatdate.  An acquirer is required to recognize assets or liabilities arising fromall other contingencies (contractual contingencies) as of the acquisition date,measured at their acquisition-date fair values, only if it is more likely thannot that they meet the definition of an asset or a liability in FASB ConceptsStatement No. 6, *Elements of Financial Statements.*  Anyacquisition-related costs are to be expensed instead of capitalized.  TheCompany adopted ASC 805 on August 30, 2009 and the impact will depend on futureacquisitions at the time.

F-17

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

 

In February2008, the FASB issued *Fair Value Measurements and Disclosures* under ASC820-10, which deferred the effective date of fair value measurement for nonfinancialassets and nonfinancial liabilities, except for items that are recognized ordisclosed at fair value in an entity’s financial statements on a recurringbasis, at least annually.   There was no impact when the Company adopted forthese nonfinancial assets and nonfinancial liabilities on August 30, 2009. These assets and liabilities are measured at fair value on an ongoing basis butare reported at fair value only in certain circumstances.

 **(4)      Acquisitions**

On April14, 2009, NBP, USPB’s majority owned subsidiary, redeemed all of the membershipinterests in NBP that were owned or controlled by its then Chief ExecutiveOfficer, John R. Miller, and an affiliate of its then General Counsel,Scott H. Smith, as well as 25% of the membership interests in NBP that were owned by affiliates of its current President and Chief Executive Officer,Timothy M. Klein.

In order topartially finance such redemptions, NBP created a new series of Class A units(Class A1Units), a portion of which were issued to USPB for approximately $55.8million.  Class A1 Units are nonvoting and are entitled to a prioritydistribution of 7% per year on the face amount of the Class A1 Units.  Forpurposes of determining Class B ownership for liquidation or redemption, theClass A1 Units will be deemed to be converted to Class B units, but will remainClass A1 Units after such determination.  As a result, USPB’s ownership ofNBP’s Class B ownership for liquidation or redemption purposes increased by13.8385% to 69.3527%.

In addition to the $55.8 million cash consideration provided by USPB, NBPalso borrowed $50 million to finance a portion of the redemptions.  Ofthese borrowings, $34.3 million is deemed additional purchase price for USPB,which brings the Company’s share of the total purchase price to $90.1 million.

The acquisition was accounted for by USPB using the purchase method.  Thefollowing table summarizes the estimated fair values of the net assets acquiredat the date of the acquisition.

 

 

(thousands of dollars)

Current assets

 

$

52,342 

Investments

 

95 

Property, plant, and equipment

 

61,496 

Tradenames (20 year lives)

 

480 

Customer relationships (20 year lives)

 

36,091 

Tradenames (indifinite lives)

 

5,160 

Goodwill

 

5,009 

Other assets

 

1,215 

Current liabilities

 

(24,524)

Debt

 

(46,924)

Other liabilities

 

(299)

 

Total estimated fair value

 

$

90,141 

 

 

 

 

 

   

Had theacquisition of the membership interests occurred at the beginning of fiscalyear 2008, pro forma net income attributable to USPB for fiscal years 2008 and2009, would have been $78.8 million and $107.0 million, respectively.  Basicearnings per Class A unit for fiscal years 2008 and 2009 would have been $35.36and $48.03, respectively.  Basic earnings per Class B unit for fiscal years2008 and 2009 would have been $71.80 and $97.29, respectively.****

 

 

 

F-18

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

 

 (5)      Long‐TermDebt and Loan Agreements

The Company entered into various debtagreements in order to finance acquisitions and provide liquidity to operate thebusiness on a going forward basis.  As of August 28, 2010 and August 29, 2009,debt consisted of the following (thousands of dollars):

 

 

 

 

 

 

 

 

 

 

 

**August 28,**

 

**August 29,**

 

 

 

 

 

 

 

 

 

 

 

**2010**

 

**2009**

Short-term debt:

 

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt(a,b)

 

 

 

 

 

 

$

21,030 

 

$

6,030 

 

Industrial Development Revenue Bonds(d)

 

 

 

 

- 

 

4,075 

 

Current portion of capital lease obligations(e)

 

 

 

1,382 

 

2,383 

 

 

 

 

 

 

 

 

 

 

 

 

$

22,412 

 

$

12,488 

Long-term debt:

 

 

 

 

 

 

 

 

 

 

 

Term loan facility, net of current portion(a)

 

 

 

 

$

- 

 

$

1,030 

 

Term loan facility, net of current portion(b)

 

 

 

 

180,000 

 

171,903 

 

Senior Notes(c)

 

 

 

 

 

 

 

- 

 

66,855 

 

Industrial Development Revenue Bonds(d)

 

 

 

 

12,245 

 

12,245 

 

Revolving credit facility(a)

 

 

 

 

 

 

- 

 

5,000 

 

Revolving credit facility(b)

 

 

 

 

 

 

27,000 

 

29,168 

 

Long-term capital lease obligations and other(e)

 

 

5,845 

 

7,199 

 

 

 

 

 

 

 

 

 

 

 

 

	$

	225,090 

 

	$

	293,400 

 

 

Total debt

 

 

 

 

 

 

 

$

247,502 

 

$

305,888 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 **           (a)   *Amended and Restated CreditAgreement and Security Agreement***

The Company’s Amended andRestated Credit Agreement and Security Agreement (Agreement) with CoBank containscertain covenants which require, among other things:          
-  reporting requirements; 
-  a minimum consolidated working	capital reserve;  
-  a minimum debt service coverage ratio (not required if workingcapital falls above the greater of one half the aggregate commitment or$4 million);
-  a minimum consolidated net worth of	$70.0 million;    
-  restrictions on transactions with	related parties; and   
-  restrictions on dividend payments. 

The Company wasin compliance with all of the CoBank Agreement debt covenants as of August 28,2010.  

USPB’s CoBank term debt ofapproximately $1.0 million is payable in quarterly installments with finalpayment due in July 1, 2011, bearing interest at the 90 day LIBOR index plusapplicable margin (2.54% at August 28, 2010, 3.10% at August 29, 2009, and 5.29%at August 30, 2008).  The applicable margin is adjusted annually and isdetermined pursuant to a table based on the NBP leverage ratio, as of the endof each fiscal year of NBP. Based on the table, the rate margin was 2.00% atfiscal year ending August 28, 2010 and 2.50% at fiscal years ending August 29,2009 and August 30, 2008.

USPB’s Agreement alsoprovides for a $10 million revolving line of credit, all of which was availableat the end of fiscal year 2010.  Borrowings under the revolving line of creditbear interest at the base rate or LIBOR rate plus applicable margin. 

F-19

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

 

** (b)  *Senior Credit Facilities***

Effective as of June 4, 2010, NBP’s Credit Facility was amended andrestated to:  (1) increase the borrowings under the Credit Facility by providingfor a term loan facility of up to $375 million and a revolving line of credit ofup to $250 million; (2) reduce the applicable margin on the rates of interestof the term loan and revolving line of credit; (3) revise the payment scheduleof the term loan; (4) extend the maturity date of the Credit Facility to June 4,2015; and (5) remove limitations on capital expenditures; (6) add new financialcovenants regarding adjusted net worth and a fixed charge coverage ratio; and(7) add two wholly owned subsidiaries, National Beef California, LP andNational Carriers, Inc., as loan parties and guarantors.  The lender financingcharges for the amended and restated Credit Facility of approximately $4.2million are being amortized over the life of the loan.  

The borrowings under the Credit Facility bear interest at LIBOR or theBase Rate, plus the applicable margin.  The applicable margin for the revolvingline of credit and the term loan will be as set forth on a grid based ondifferent rations of funded debt to EBITDA as depicted in the table below:

 

 

 

 

 

 

 

**Base Rate**

 

 

 

 

 

 

 

 

 

 

 

 

 

**Advance Line**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**of Credit and**

 

 

 

 

 

 

 

**Borrowing Base**

 

 

 

 

**Swing Line**

 

**LIBOR Rate**

 

 

 

 

**Availability**

 

**Funded Debt to EBITDA**

 

**Loans and**

 

**Line of Credit**

 

 

 

 

**Level**

 

**Ratio**

 

**Term Loans**

 

**Loan**

 

**LC Fees**

 

**Non-Use Fee**

Level 1

 

Less than 1:00:1:00

 

 

 

1.25% 

 

2.25% 

 

2.25% 

 

0.250% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater than or equal to

 

 

 

 

 

 

 

 

 

 

Level 2

 

1:00:1:00 and less than

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2:00:1:00

 

 

 

1.50% 

 

2.50% 

 

2.50% 

 

0.375% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater than or equal to

 

 

 

 

 

 

 

 

 

 

Level 3

 

2:00:1:00 and less than

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3:00:1:00

 

 

 

1.75% 

 

2.75% 

 

2.75% 

 

0.500% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 4

 

Greater than or equal to

3:00:1:00

 

 

 

2.25% 

 

3.25% 

 

3.25% 

 

0.625% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of August 28, 2010, the interest rate for the termand revolving loans were equal to 2.79% and 3.66%, respectively.  As of August29, 2009, the interest rate for the term and revolving loans were equal to3.51% and 3.88%, respectively.

The borrowings under the revolving loan are availablefor NBP’s working capital requirements, capital expenditures and other generalcorporate purposes.  The advance rates under the borrowing base are 90% oneligible accounts and 70% on eligible inventory.  The Credit Facility issecured by a first priority lien on substantially all of the assets of NBP andits subsidiaries.  

The principal amount outstanding under the term loanis due and payable in equal quarterly installments, beginning in October 2010,based on a 10-year level amortization of the remaining amount of the termloan.  All outstanding loan amounts are due and payable June 4, 2015. Prepayment of the loans is allowed at any time.

The Credit Facility contains customary affirmative covenants relating toNBP and its subsidiaries, including, without limitation, conduct of business, maintenanceof insurance, compliance with laws, maintenance of properties, keeping of booksand records, and the furnishing of financial statements.  The facility alsocontains customary negative covenants relating to NBP and its subsidiaries,including, without limitation, restrictions on:  distributions, mergers, assetsales, investments and acquisitions, encumbrances, affiliate transactions, andERISA matters.  The ability of NBP and its subsidiaries to engage in otherbusiness, incur debt or grant liens is also restricted.

F-20

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

 

 

The CreditFacility contains customary events of default, including without limitation,failure to make payment when due, materially incorrect representations andwarranties, breach of covenants, events of bankruptcy, default of otherindebtedness that would permit acceleration of such indebtedness, theoccurrence of one or more unstayed or undischarged judgments in excess of $3.0million, changes in custody or control of NBP’s property, changes in control ofNBP, or failure of any of the loan documents to remain in full force, and NBP’sfailure to properly fund its employee benefit plans.  The Credit Facility alsoincludes customary provisions protecting the lenders against increased cost orloss of yield resulting from changes in tax, reserve, capital adequacy andother requirements of law.

***(c)   SeniorNotes***

During fiscal year 2010, NBP purchased and cancelled allremaining senior notes.  During fiscal years 2010, and 2009, NBP purchasedand cancelled approximately $66.9 million and $62.5 million, respectively, of itssenior notes.  No material gains or losses were incurred as a result of thepurchase and cancellation of these senior notes. 

***(d)   IndustrialDevelopment Revenue Bonds***

In conjunctionwith NBP’s fourth amended and restated credit facility, effective December 30,2004, NBP entered into a transaction with the City of Dodge City, Kansas,in order to provide NBP property tax savings.  Under the transaction, the Citypurchased NBP’s Dodge City facility (facility) by issuing $102.3 million inbonds due in December 2019, used the proceeds to purchase NBP’s Dodge Cityfacility and leased the facility to NBP for an identical term under a capitallease.  The City’s bonds were purchased by NBP using proceeds of its term loanunder the Credit Facility.  Because the City has assigned the lease to the bondtrustee for the benefit of NBP as the sole bondholder, NBP, in effect, controlsenforcement of the lease against itself.  As a result of the capital leasetreatment, the facility will remain a component of property, plant andequipment in NBP’s consolidated balance sheet.  As a result of the legal rightof offset, the capital lease obligation and the corresponding bond investmentshave been eliminated in consolidation.  The transaction provides NBP withproperty tax exemptions for the leased facility, which, after netting paymentsto the City and local school district under payment in lieu of tax agreements,result in an annual property tax savings of approximately 25%.  The facilityremains subject to a prior mortgage and security interest in favor of thelenders under the Credit Facility.  Additional revenue bonds may be issued tocover the costs of certain improvements to this facility.  The total amount ofrevenue bonds authorized for issuance is $120.0 million.

The cities ofLiberal and Dodge City, Kansas issued an aggregate of $13.8 million ofindustrial development revenue bonds on NBP’s behalf to fund the purchase ofequipment and construction improvements at NBP’s facilities in those cities.These bonds were issued in four series of $1.0 million, $1.0 million, $6.0million and $5.9 million and are due on demand or on February 1, 2029, March 1,2027, March 1, 2015 and October 1, 2009, respectively. However, because eachseries of bonds is backed by a letter of credit under NBP’s Credit Facility,these due on demand bonds have been presented as non-current obligations untiltwelve months prior to their maturity.  As of August 28, 2010, the amountoutstanding on the $6.0 million series of bonds had been reduced to $3.4million.  In addition, the $5.9million series of bonds were fully paid off during the first quarter of fiscalyear 2010. Pursuant to a lease agreement, NBP leased the facilities, equipmentand improvements from the respective cities and make lease payments in theamount of principal and interest due on the bonds.

The bondsissued in 1999 and 2000 are variable rate demand obligations that bear interestat a rate that is adjusted weekly, which rate will not exceed 10% per annum. Theaverage per annum interest rate for each series of bonds was 0.5% in fiscalyear 2010 and 1.5% in fiscal year 2009.  NBP has the option to redeem a seriesof bonds at any time for an amount equal to the principal plus accrued interestto the date of such redemption. The holders of the bonds have the option totender the bonds upon seven days’ notice for an amount equal to par plus accruedinterest. To the extent that the remarketing agent for the bonds is unable toresell any of the bonds that are tendered, the remarketing agent will use theletter of credit to fund such tender.  

F-21

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

 

 

In connectionwith the Brawley Beef acquisition, NBP assumed the obligation under a TrustIndenture securing $6.8 million in California Pollution Control FinancingAuthority Tax-Exempt variable rate demand solid waste disposal revenue bondsdated as of October 1, 2001.  The bonds bear a rate that is adjusted weekly,which rate will not exceed 12% per annum.  The average per annum interest ratefor this series of bonds for fiscal years 2010 and 2009 was 0.4% and 1.6%,respectively.  These bonds have a maturity date of October 1, 2016.  NBP hasthe option to redeem all or a portion of the bonds at any time for an amountequal to the principal plus accrued interest to the date of such redemption. The holders of the bonds have the option to tender the bonds upon seven days’notice for an amount equal to par plus accrued interest.  To the extent thatthe remarketing agent for the bonds is unable to resell any of the bonds thatare tendered, the remarketing agent will use the letter of credit to fund suchtender.  

**            (e)   *Capital and OperatingLeases ***

NBP leases a variety of buildings and equipment, someof which were acquired through the Brawley Beef acquisition, as well astractors and trailers through its subsidiary National Carriers, under capitaland operating lease agreements that expire in various years.  Future minimumlease payments required at August 28, 2010, under capital leases andnon-cancelable operating leases with terms exceeding one year, are as follows:   

 

 

 

 

 

 

 

 

 

**Non-Cancelable**

 

 

 

 

 

 

 

**Capital**

 

**Operating**

 

 

 

 

 

 

 

**Lease**

 

 

**Lease**

 

 

 

 

 

 

 

**Obligations**

 

**Obligations**

 

 

 

 

 

 

 

(thousands of dollars)

For the fiscal years ended August:

 

 

 

 

 

 

 2011

 

 

 

 

 

$

1,746 

 

 

$

10,115 

 

 2012

 

 

 

 

 

1,717 

 

 

6,517 

 

 2013

 

 

 

 

 

1,674 

 

 

3,534 

 

 2014

 

 

 

 

 

3,069 

 

 

2,525 

 

 2015

 

 

 

 

 

- 

 

 

599 

 

Thereafter

 

 

 

- 

 

 

- 

 

 

Net minimum lease payments

 

$

8,206 

 

 

$

23,290 

Less amount representing interest

 

(1,099)

 

 

 

 

 

Present value of net minimum lease payments

$

7,107 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rent expenseassociated with operating leases was $14.1 million, $14.5 million, and $14.3 million,for fiscal years 2010, 2009 and 2008, respectively.  NBP expects that it willrenew lease agreements or enter into new leases as the existing leases expire.

The aggregateminimum principal maturities of the long-term debt for each of the five fiscalyears and thereafter following August 28, 2010, are as follows:

 

 

 

 

 

 

 

 

Minimum

 

Principal

 

 

Maturities

 

(thousands of dollars)

Fiscal Year ending August:

 

 

 

 2011

 

 

$

22,412 

 2012

 

 

21,431 

 2013

 

 

21,479 

 2014

 

 

22,935 

 2015

 

 

150,430 

 Thereafter

 

 

	8,815 

 

 

 

$

247,502 

Fiscal year 2013 consists of 53 weeks

 

 

 

 

 

 

 

 

 

 

 

F-22

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

 

 

***(f)    OtherCommitments***

EffectiveDecember 30, 2004, NBP finalized an agreement with the City of Dodge City,Kansas, whereby in consideration of certain improvements made to the city waterand wastewater systems, NBP committed to make a series of service chargepayments totaling $19.3 million over a 20 year period, of which $1.7 million,$1.4 million and $1.4 million was paid in each of the fiscal years 2010, 2009and 2008, respectively.  Payments under the commitment will be $0.8 million ineach of the fiscal years 2011, 2012, 2013, 2014 and 2015, with the remainingbalance of $7.3 million to be paid in subsequent years.  

Additionally, NBPmakes a verbal commitment to cattle producers to purchase cattle about one weekin advance of delivery of the live animals to its plants, with the actual pricepaid for the cattle determined after the cattle are delivered and inspected at NBP’sfacilities.   NBP’s estimated cattle commitments as of August 28, 2010 were $70.2million.

(6)       EmployeeCompensation and Benefits 

The cooperative established a phantom stock option planwhich provided for the issuance of 20,000 phantom stock options with anexercise price of $55 per share, all of which had been issued and wereexercisable upon election. In connection with the conversion described in Note12, this phantom stock option plan was converted into a phantom unit plan in asimilar fashion as the conversion of cooperative shares to LLC units.  The20,000 phantom stock options converted into 20,000 phantom Class A units and20,000 phantom Class B units with an exercise price of $55 per unit and $0 perunit, respectively.  In August 2009, the CEO exercised 20,000 Class B units atan exercise price of $0 per unit.  The Company recognizes compensation expense forthe Class A phantom units for the difference between the fair market value forthe Class A units and the $55 exercise price.  A decrease in compensationexpense of $0.4 million was recognized in fiscal year 2010, an increase of $1.5million was recognized in fiscal year 2009 and a reduction in compensationexpense of $0.1 million was recognized for the fiscal year 2008.

The Company maintains atax-qualified employee savings and retirement plan (the 401(k) Plan) coveringthe Company’s non-union employees. Pursuant to the 401(k) Plan, eligibleemployees may elect to reduce their current compensation by up to the lesser of75% of their annual compensation or the statutorily prescribed annual limit andhave the amount of such reduction contributed to the 401(k) Plan. The 401(k)Plan provides for additional matching contributions by the Company, based onspecific terms contained in the 401(k) Plan. The trustee of the 401(k) Plan, atthe direction of each participant, invests the assets of the 401(k) Plan indesignated investment options.  The 401(k) Plan is intended to qualify underSection 401 of the Internal Revenue Code. Expenses related to the 401(k) Plantotaled approximately $0.9 million, $0.7 million, and $0.5 million for fiscalyears 2010, 2009, and 2008, respectively.  

NBP hasagreed to make contributions to the United Food and Commercial WorkersInternational Union-Industry Pension Fund (the UFCW Plan) for employees coveredby a collective bargaining agreement as provided for in that agreement. Expenses related to the UFCW Plan totaled approximately $0.8 million, $0.7 millionand $0.7 million for fiscal years 2010, 2009 and 2008, respectively. 

*PostretirementBenefits*—Certain former employees are covered by an unfunded postretirementbenefit plan that provides medical and dental benefits.  Costs associated withthis plan, which relate primarily to insurance premiums, benefit payments andchanges in the accumulated benefit obligation were approximately $0.0 million,$0.2 million and $0.3 million, for fiscal years 2010, 2009 and 2008,respectively, and are included in cost of sales. 

 

F-23

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

 

The healthcare trend rate used to value the accumulated benefit obligation at August 28,2010 is a rate of 8.5% per year, declining by 0.5% per year to an ultimate rateof 5% in 2017 and thereafter.  The discount rate used to value the accumulatedbenefit obligation is 5%.  The unfunded accumulated benefit obligation was $1.4million and $1.5 million at August 28, 2010 and August 29, 2009, respectively,and has been recorded in the consolidated financial statements as non-currentother liabilities.

 (7)      Other Income 

Othernon-operating expense, net was $7.3 million in fiscal year 2010 and $6.4million in fiscal year 2009, while other non-operating income, net was $5.9 millionin fiscal year 2008.  Other, net includes miscellaneous non-operating items ofincome and expense such as adjustments to unamortized loan costs as discussedin Note 2. *Basis of Presentation and Accounting Policies*, *DebtIssuance Costs,* adjustments to postretirement benefits costs as discussedin Note 6. *Employee Compensation and Benefits,* and gains or losses onthe disposal of fixed assets as discussed in Note 2. *Basis of Presentationand Accounting Policies, Property, Plant and Equipment,*and disclosed onthe consolidated statements of cash flows.  Other non-operating expense, netfor fiscal year 2010 primarily includes approximately $2.4 million in legalfees written off related to the tannery litigation and approximately $2.2million related to the write-off of IPO related costs.  In addition, othernon-operating expense, net includes approximately $3.3 million accrued for apotential settlement of a dispute with the city of Dodge City, Kansaspertaining to the transfer of certain water rights.  Other non-operatingexpense, net for fiscal year 2009 includes approximately $5.6 million in legalfees which was primarily related to the termination of a purchase agreement inFebruary 2009 and approximately $1.5 million related to the write-off of debtissuance costs.  In addition, approximately $0.7 million of obsolete parts werewritten off at our case ready facilities during fiscal year 2009.  Othernon-operating income for fiscal year 2008 includes approximately $3.4 millionfor the settlement of a lawsuit related to corrugated packaging materials andabout $1.3 million related to proceeds received in redemption of an investmentinterest in which our basis had previously been written down to zero.          

 (8)      Income Taxes  

Income tax expense includes thefollowing current and deferred provisions (dollars in thousands):

 

 

 

**52 weeks ended**

 

**52 weeks ended**

 

**53 weeks ended**

 

 

 

**August 28,**

 

**August 29,**

 

**August 30,**

 

 

 

**2010**

 

**2009**

 

**2008**

Current provision:

 

 

 

 

 

 

Federal

$

61 

 

$

144 

 

$

297 

 

State

958 

 

733 

 

638 

 

Foreign

80 

 

77 

 

18 

 

 

Total current tax expense

1,099 

 

954 

 

953 

 

 

 

 

 

 

 

 

Deferred provision:

 

 

 

 

 

 

Federal

(144)

 

32 

 

625 

 

State

(16)

 

(21)

 

193 

 

Foreign

- 

 

- 

 

- 

 

 

Total deferred tax expense

(160)

 

11 

 

818 

 

 

Total income tax expense

$

939 

 

$

965 

 

$

1,771 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

F-24

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

 

 

 

 

**52 weeks ended**

 

**52 weeks ended**

 

**53 weeks ended**

 

 

**August 28,**

 

**August 29,**

 

**August 30,**

 

 

**2010**

 

**2009**

 

**2008**

Computed “expected” income tax expense

$

56,661 

 

$

35,332 

 

$

22,394 

Passthrough “expected” income tax expense

(56,656)

 

(35,066)

 

(21,321)

State taxes, net of federal

928 

 

686 

 

770 

Other

5 

 

13 

 

(72)

 

Total income tax expense

$

938 

 

$

965 

 

$

1,771 

 

 

 

 

 

 

 

 

The tax effects oftemporary differences that give rise to significant portions of the deferredtax assets and deferred tax liabilities at August 28, 2010 and August 29, 2009 arepresented below (thousands of dollars): 

 

 

 

 

 

**August 28,**

 

**August 29,**

Deferred tax assets:

**2010**

 

**2009**

 

Accounts receivable, due to allowance for doubtful accounts

 

$

189 

 

$

94 

 

Intangible assets

 

370 

 

222 

 

Self-insurance and workers compensation accruals

 

1,044 

 

1,028 

 

Accrued vacation pay and bonuses

 

18 

 

- 

 

Employee benefit accruals

 

9 

 

- 

 

 

Total gross deferred tax assets

 

1,630 

 

1,344 

Deferred tax liabilities:

 

 

 

 

 

Prepaid assets

 

43 

 

- 

 

Property, plant, and equipment, principally due to differences in depreciation

 

718 

 

740 

 

 

Total gross deferred tax liabilities

 

761 

 

740 

 

 

 

Net deferred tax assets

 

$

869 

 

$

604 

 

 

 

 

 

 

 

 

 

Net deferred tax assets and liabilitiesat August 28, 2010 and August 29, 2009 are included in the consolidated balancesheet as follows (thousands of dollars):

 

**August 28,**

 

**August 29,**

 

**2010**

 

**2009**

Other assets

 

$

1,630 

 

$

1,344 

Other liabilities

 

761 

 

740 

 

 

$

869 

 

$

604 

 

Deferred taxassets and liabilities relate primarily to the operations of National Carriers,Inc.

There was novaluation allowance provided for at August 28, 2010 and August 29, 2009.  Managementbelieves it is more likely than not that the results of future operations willgenerate sufficient taxable income to realize the deferred tax assets. 

Beginning incalendar year 2008, some states in which the Company conducts business modifiedtheir business taxes, using net income, or a modification of net income, as thebasis.  The modification of these state taxes necessitated the inclusion ofapproximately $0.7 million of these business taxes in income tax expense duringfiscal year 2008 as compared to the same period of fiscal years 2010 and 2009.  

(9)       Related PartyTransactions

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

 

F-25

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

 

USPBfacilitates the delivery of cattle annually to NBP through its unitholders andassociates.  During the fiscal year 2010, USPB’s unitholders and associatesprovided approximately 20% of NBP’s cattle requirements. During the fiscalyears 2009 and 2008, USPB’s unitholders and associates provided approximately 20%and 19%, respectively, of NBP’s cattle requirements.  The purchase price forthe cattle is determined by NBP’s pricing grid, which, under the terms of theagreement with USPB, must be competitive with the pricing grids of NBP’scompetitors and may not be less favorable than pricing grids offered to othersuppliers.

At August 28, 2010 and August 29, 2009, the Companyhad payables to unitholders in the amount of $0.0 million and $0.0 million,respectively.  At August 28, 2010 and August 29, 2009, the Company hadreceivables from unitholders in the amount of $0.1 million and $0.1 million,respectively.    

NBP enteredinto various transactions with a company affiliated with NBPCo Holdings in theordinary course of business. Sales transactions were based upon prevailingmarket prices, and purchases were on terms no less favorable to NBP than wouldbe obtained from an unaffiliated party.  

During fiscalyears 2010, 2009, and 2008, NBP had sales and purchases with the followingrelated parties (thousands of dollars):

 

 

 

 

**52 weeks ended**

 

**52 weeks ended**

 

**53 weeks ended**

 

 

 

**August 28, 2010**

 

**August 29, 2009**

 

**August 30, 2008**

Sales to:

 

 

 

 

 

 

	Beef Products, Inc. (1)

$

120,362 

 

$

96,896 

 

$

132,415 

 

 

Total Sales to Affiliate

$

120,362 

 

$

96,896 

 

$

132,415 

 

 

 

 

 

 

 

 

Purchases from:

 

 

 

 

 

 

Beef Products, Inc.  (1)

$

40,649 

 

$

28,930 

 

$

15,710 

 

 

Total Purchases from Affiliate

$

40,649 

 

$

28,930 

 

$

15,710 

 

 

 

 

 

 

 

 

(1) Beef Products, Inc. (BPI) is an affiliate of NBPCo Holdings

 

 

 

 

 

 

 

 

 

 

 

At August 28,2010 and August 29, 2009, the amounts due from Beef Products, Inc. (BPI) forsale of beef trimmings were approximately $5.0 million and $4.5 million,respectively.  At August 28, 2010 and August 29, 2009, the amounts due to BPI forthe purchase of processed lean beef were approximately $0.7 million and $1.0million, respectively.

In January2007, NBP entered into an agreement with BPI for BPI to manufacture and installa grinding system in one of its plants.  In accordance with the agreement withBPI, NBP is to pay BPI a technology and support fee based on the number ofpounds of product produced using the grinding system.  The installation of thegrinding system was completed in fiscal year 2008.  During fiscal years 2010,2009 and 2008, NBP paid approximately $1.9 million, $1.7 million and $0.7million, respectively, to BPI in technology and support fees.       

**(10)     Fair Value Measurements**

The Company determines fair value utilizing 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 for identical assets orliabilities accessible by the reporting entity.
-  Level 2 – observable inputs other than quoted prices included inLevel 1, such as quoted prices for similar assets and liabilities in activemarkets; quoted prices for identical or similar assets and liabilities inmarkets that are not active; or other inputs that are observable or can becorroborated by observable market data.
-  Level 3 – unobservable inputs for an asset or liability. Unobservable inputs should only be used to the extent observable inputs are notavailable.

 

F-26

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

The following table details the assets and liabilities measured at fairvalue on a recurring basis as of August 28, 2010 and also the level within thefair value hierarchy used to measure each category of assets (thousands ofdollars).

 

 

 

 

 

**Quoted Prices in**

 

 

 

 

 

 

 

 

**Active Markets for**

 

**Significant Other**

 

**Significant**

 

 

 

 

**Identical Assets**

 

**Observable Inputs**

 

**Unobservable**

**Description**

 

**August 28, 2010**

 

**(Level 1)**

 

**(Level 2)**

 

**Inputs (Level 3)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current assets -derivatives

 

$

15,563 

 

$

61 

 

$

15,502 

 

$

- 

 

 

 

 

 

 

 

 

 

Other accrued expenses and

 

 

 

 

 

 

 

 

liabilities - derivatives

 

$

14,672 

 

$

14,672 

 

$

- 

 

$

- 

 

 

 

 

 

 

 

 

 

Non-controlling interests in NBP

$

291,746 

 

$

- 

 

$

61,854 

 

$

229,892 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Quoted Prices in**

 

 

 

 

 

 

 

 

**Active Markets for**

 

**Significant Other**

 

**Significant**

 

 

 

 

**Identical Assets**

 

**Observable Inputs**

 

**Unobservable**

**Description**

 

**August 29, 2009**

 

**(Level 1)**

 

**(Level 2)**

 

**Inputs (Level 3)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current assets -derivatives

 

$

1,442 

 

$

1,442 

 

$

- 

 

$

- 

 

 

 

 

 

 

 

 

 

Other accrued expenses and

 

 

 

 

 

 

 

 

liabilities - derivatives

 

$

5,087 

 

$

3,535 

 

$

1,552 

 

$

- 

 

 

 

 

 

 

 

 

 

Non-controlling interests in NBP

$

183,407 

 

$

- 

 

$

183,407 

 

$

- 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management has used certain agreed-upon contractual redemption prices inmeasuring the fair value of the Klein Affiliates non-controlling interest,which is included in level 2 as of August 28, 2010.  NBPCo Holdings non-controllinginterest is based upon unobservable inputs and was included in level 3 as ofAugust 28, 2010.  Management has used certain agreed-upon redemption prices inmeasuring the fair value of the non-controlling interest as of August 29,2009.  We have transferred the calculated fair value of NBPCo’s non-controllinginterest from level 2 to level 3 during the year ended August 28, 2010 basedupon adjustments in valuation techniques due to the amount of time lapsed andchanges in business from the previous agreed-upon redemption price.

**(11)     Disclosure About Derivative Instruments and HedgingActivities**

As part of NBP’s ongoing operations, NBP is exposed to market risks suchas changes in commodity prices.  To manage these risks, NBP may enter into thefollowing derivative instruments pursuant to our established policies:
-  Forward purchase contracts for cattle for use in our beef plants 
-  Exchange traded futures contracts for cattle	
-  Exchange traded futures contracts for grain	

While management believes each of these instruments help mitigate variousmarket risks, they are not designated and accounted for as hedges as a resultof the extensive recordkeeping requirements associated with hedge accounting. Accordingly, the gains and losses associated with the change in fair value ofthe instruments are recorded to net sales and cost of goods sold in the periodof change.  Certain firm commitments for live cattle purchases and all firmcommitments for boxed beef sales are treated as normal purchases and sales andnot recorded at fair value.

 

 

 

F-27

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

 

NBP entersinto certain commodity derivatives, primarily with a diversified group ofhighly rated counterparties.  The maximum amount of loss due to the credit riskof the counterparties, should the counterparties fail to perform according tothe terms of the contracts, is deemed to be immaterial as of August 28, 2010 asall derivatives in an asset position are exchange-traded contracts.  Theexchange-traded contracts have been entered into under a master nettingagreement.  None of the derivatives entered into have credit-related contingentfeatures.  NBP has $19.9 million and $6.0 million in cash collateral posted onits derivative liabilities included in other assets on the consolidated balancesheet as of August 28, 2010 and August 29, 2009, respectively.   

The followingtable presents the fair values and other information regarding derivativeinstruments not designated as hedging instruments as of August 28, 2010 and August29, 2009 (thousands of dollars):

**August 28, 2010**

**Derivative Asset**

 

**Derivative Liability**

 

 

**Balance Sheet**

 

 

 

**Balance Sheet**

 

 

 

 

**Location**

 

**Fair Value**

 

**Location**

 

**Fair Value**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other accrued

 

 

 

 

Other current

 

 

 

expenses and

 

 

Commodity contracts

assets

 

$

15,563 

 

liabilities

 

$

14,672 

 

Total

 

 

 

 

$

15,563 

 

 

 

$

14,672 

**August 29, 2009**

**Derivative Asset**

 

**Derivative Liability**

 

 

**Balance Sheet**

 

 

 

**Balance Sheet**

 

 

 

 

**Location**

 

**Fair Value**

 

**Location**

 

**Fair Value**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other accrued

 

 

 

 

Other current

 

 

 

expenses and

 

 

Commodity contracts

assets

 

$

1,442 

 

liabilities

 

$

5,087 

 

Total

 

 

 

 

$

1,442 

 

 

 

$

5,087 

 

 

 

 

 

 

 

 

 

 

 

 

The followingtable presents the impact of derivative instruments on the ConsolidatedStatement of Operations for the fiscal years ended August 28, 2010, August 29,2009, and August 30, 2008 (thousands of dollars):

 

**Derivatives Not**

 

**Location of Gain (Loss)**

 

 

 

 

 

 

 

**Designated as Hedging**

 

**Recognized in Income on**

 

 

 

 

 

 

 

**Instruments**

 

**Derivatives**

 

**Amount of Gain (Loss) Recognized in Income On Derivatives**

 

 

 

 

 

 

 

 

 

**Fiscal year ended**

 

 

 

 

 

 

 

 

 

August 28, 2010

 

August 29, 2009

 

August 30, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Net sales

 

$

14,860 

 

 

$

(37,386)

 

$

(4,652)

Commodity contracts

 

Cost of sales

 

2,397 

 

 

22,224 

 

3,448 

 

Total

 

 

 

$

17,257 

 

 

$

(15,162)

 

$

(1,204)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 (12)    Capital Sharesand Equities

LLC Structure

On August 18, 2004, the shareholders of U.S. Premium Beef, Ltd. approved the conversionof the cooperative into a Delaware LLC (Conversion).  Under the new ownershipstructure, each share of common stock of the cooperative was converted to oneunit of Class A interest and one unit of Class B interest.  Immediatelyfollowing the Conversion, there were 691,845 Class A units and 691,845 Class B units. For a period of time determined by the board of directors, each Class A unit waslinked to its corresponding Class B unit and each pair of linked units wasrequired, if transferred, to be transferred together.  On March 27, 2010, theboard of directors amended the USPB’s LLC Agreement to enable the Class A andClass B units to be transferred separately.  Patronage Refunds for Reinvestmentin the cooperative were carried over at their face amount as PatronageNotices.  

 

 

F-28

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

 

 

** **

**  **

On June 1, 2006, U.S. Premium Beef’s majority owned subsidiary, NBP,completed the acquisition of the assets of Brawley Beef.  As a result of theacquisition, USPB issued 44,160 new Class A units and 44,160 new Class B unitsto Brawley Beef in exchange for 44,160 limited partnership units in NationalBeef California, LP (NBC), a subsidiary of National Beef.  USPB then exchangedthe limited partnership units with National Beef for a higher ownershippercentage in National Beef.  Immediately following the issuance, there were736,005 Class A units and 736,005 Class B units.  

*Class A Units*. When the Conversion occurred, holders of USPB Class A units were entitled to apro rata share of 33% of the profits and losses; to receive distributions ofUSPB’s net cash flow when declared by the board of directors; to participate inthe distribution of USPB’s assets if it dissolves or liquidates after paymentof the Patronage Notices, and to vote on matters submitted to a vote of USPB’sunitholders.  On November, 9, 2009, USPB members approved an amendment toUSPB’s limited liability company agreement that changed the allocation ofprofits and losses to Class A unitholders to 10%.  Holders of USPB Class Aunits, committed under Uniform Cattle Delivery and Marketing Agreements, havethe right and obligation to deliver one head of cattle to USPB annually foreach unit held. 

*Class B Units*. When the Conversion occurred, holders of USPB Class B units were entitled to apro rata share of 67% of the profits and losses; to receive distributions ofUSPB’s net cash flow when declared by the board of directors; to participate inthe distribution of USPB’s assets if it dissolves or liquidates after thepayment of the Patronage Notices, and to vote on matters submitted to a vote ofUSPB’s unitholders.  On November, 9, 2009, USPB members approved an amendmentto USPB’s limited liability company agreement that changed the allocation ofprofits and losses to Class B unitholders to 90%.  Holders of USPB Class Bunits have no cattle delivery commitment.

  *PatronageNotices*.  Patronage Notices do not constitute units or membership interestsin the Company, and holders will not be unitholders or associates of theCompany by virtue of holding Patronage Notices. As was the case in thecooperative, Patronage Notices will be paid by the Company at such time and insuch amounts as may be determined by the board of directors in its sole andabsolute discretion. Upon liquidation, holders of Patronage Notices will bepaid before Holders of Class A and Class B interests.  Patronage Notices carryno other or additional rights.

(13)     Non-controllingInterest

At anytime after certain dates, the earliest being July 31, 2010, the latest beingJuly 31, 2011, certain affiliates of NBP’s Chief Executive officer, Timothy M.Klein (collectively referred to herein as “the Klein Affiliates”), and/or NBPCoHoldings have the right to request that NBP repurchase their interests, thevalue of which is to be determined by a specified formula or a mutually agreedappraisal process.  If NBP is unable to effect the repurchase within a specifiedtime, the requesting member(s) have the right to cause a sale process tocommence. 

On June 2,2010, NBP entered into a Unit Redemption Agreement to redeem at agreed uponredemption prices approximately 5% of the membership interests in NBP that wereowned by the Klein’s Affiliates.  As a result, the Klein Affiliates received$8.0 million for their redeemed units.  

Generallyaccepted accounting principles require USPB to determine the fair value of the non-controllinginterests in USPB at the end of each reporting period.  To the extent thisvalue increases, this change in fair value is accreted over the redemptionperiod.  In determining the fair value of the non-controlling interests in USPBheld by NBPCo Holdings as of August 28, 2010, management has consideredprevious redemption prices, valuations of peer companies and other factors.  Thenon-controlling interests in USPB held by the Klein Affiliates as of August 28,2010 was valued based upon a contractually stipulated valuation formula.  At August29, 2009 management used previous redemption prices and a contractuallystipulated valuation formula in measuring the fair value of the non-controllinginterests in USPB.

 

F-29

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

 

USPBaccounts for changes in the redemption value of these interests by accretingthe change in value from the date of change through the earliest redemptiondate of the respective interests.  At August 28, 2010, the value of the non-controllinginterests in USPB was determined to be $297.2 million, which was in excess ofits carrying value.  The total value of the non-controlling interests in USPBat August 28, 2010, increased by approximately $56.7 million compared to thevalue at August 29, 2009.  Accordingly, the carrying value of the non-controllinginterests in USPB increased by approximately $82.7 million through accretionduring fiscal year 2010, resulting in the $291.7 million carrying value, asreflected in the accompanying consolidated balance sheet as of August 28, 2010. Offsetting the change in the value of the non-controlling interests in USPB isa corresponding change in the members’ capital.   

(14)     Legal Proceedings

National Beef Leathers, LLC, or NBL, a wholly-owned subsidiary ofNBP, is a named defendant in two currently pending purported class actionsinvolving NBL's tannery located in St. Joseph, Missouri, which NBLpurchased in March 2009.  These lawsuits were filed on July 22, 2009 inthe U.S. District Court for the Western District of Missouri. The lawsuitsallege that NBL spread wastewater sludge containing hexavalent chromium in fourcounties in northwest Missouri. The plaintiffs are seeking an unspecifiedamount of damages for economic damages, punitive damages, diminished propertyvalues and medical monitoring. On May 11, 2010, the court issued an order rulingthat NBL is not liable under a successor liability theory for the conduct ofthe tannery’s previous owner and another party prior to NBL’s purchase of thetannery.  As a result of this ruling, the plaintiffs in 15 lawsuits filedbetween April 22, 2009 and April 29, 2010, in the Circuit Courts of BuchannanCounty, Clinton County, and DeKalb County, Missouri seeking damages foreconomic damages, punitive damages, diminished property values and medicalmonitoring voluntarily dismissed their claims against NBL in June 2010.  NBLbelieves it has meritorious defenses to the claims in the remaining twolawsuits and intends to defend them vigorously.

NBP is a party to a number of other lawsuits and claims arising out ofthe operation of its business.  NBP management believes the ultimate resolutionof such matters should not have a material adverse effect on NBP’s financialcondition, results of operations or liquidity.

(15)     BusinessSegments

ASC 820, *Disclosures about Segments of anEnterprise and Related Information*establishes annual and interim reportingstandards for operating segments of a company. It also requires entity widedisclosures about the products and services an entity provides, the materialcountries in which it holds assets and reports revenues, and its majorcustomers. USPB is not organized by multiple operating segments for the purposeof making operating decisions or assessing performance. Accordingly, USPBoperates in one operating segment and reports only certain enterprise‐widedisclosures.

CustomerConcentration

In the fiscalyears 2010, 2009 and 2008 one customer with its consolidated subsidiariesrepresented 9.5%, 9.6% and 7.8%, respectively, of total sales, with no othercustomer representing more than 3.0%, 4.0% and 3.8%, respectively, of totalsales. 

Salesto Foreign Countries

NBP had sales outside the United States of America in the fiscal years 2010,2009 and 2008 of approximately $636.9 million, $608.2 million and $675.1million, respectively.  No single country outside the United States of America accountedfor more than 3% of total sales. The amount of assets maintained outside theUnited States of America is not material.  

 

 

 

 

F-30

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Notes to ConsolidatedFinancial Statements

 

 

(16)     QuarterlyResults (Unaudited)

Selected quarterly financial data for fiscalyears 2010 and 2009 is set forth below (dollars in thousands, except per unitdata):

 

 

 

 

 

 

 

**Net**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Income**

 

 

 

 

 

 

 

 

 

 

 

 

 

**Operating**

 

**Attributable**

 

**Basic Earnings / (Loss) Per**

 

**Diluted Earnings / (Loss) Per**

 

 

**Net Sales**

 

**Income**

 

**to USPB**

 

**Class A Unit**

 

**Class B Unit**

 

**Class A Unit**

 

**Class B Unit**

2010 quarterly results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 28, 2009

 

$

1,342,610 

 

$

43,350 

 

$

25,465 

 

$

9.06 

 

$

24.89 

 

$

8.92 

 

$

24.89 

 

February 27, 2010

 

1,340,926 

 

54,245 

 

31,233 

 

$

4.25 

 

$

37.21 

 

$

4.18 

 

$

37.21 

 

May 29, 2010

 

1,537,879 

 

80,390 

 

51,992 

 

$

7.07 

 

$

61.95 

 

$

6.96 

 

$

61.95 

 

August 28, 2010

 

1,586,514 

 

83,438 

 

52,261 

 

$

7.11 

 

$

62.27 

 

$

6.99 

 

$

62.27 

 

 

 

$

5,807,929 

 

$

261,423 

 

$

160,951 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009 quarterly results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 29, 2008

 

$

1,428,977 

 

$

2,084 

 

$

(3,245)

 

$

(1.46)

 

$

(2.96)

 

$

(1.46)

 

$

(2.96)

 

February 28, 2009

 

1,298,218 

 

40,631 

 

31,430 

 

$

14.10 

 

$

28.64 

 

$

13.90 

 

$

28.22 

 

May 30, 2009

 

1,318,020 

 

51,342 

 

27,692 

 

$

12.43 

 

$

25.23 

 

$

12.24 

 

$

24.84 

 

August 29, 2009

 

1,404,063 

 

73,319 

 

44,106 

 

$

19.79 

 

$

39.12 

 

$

19.51 

 

$

39.12 

 

 

 

$

5,449,278 

 

$

167,376 

 

$

99,983 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17)    Subsequent Event

On October 27, 2010 NBP's Board of Managers approved a $150.0 million cashdistribution to the members.  NBP intends to make the distribution on orbefore December 1, 2010 and utilize the Credit Facility to fund thedistribution.

 

 

 

 

 

 

 

 

 

 

 

 

F-31

 

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