Results of Operations

The following table shows consolidated statements of operations data for the periods indicated (in millions):

The results of operations of NBP for the FYE August 28, 2004 and the 24 days ended August 30, 2003 are consolidated in the respective periods and transactions between the USPB and NBP have been eliminated. Accordingly, these operating results are not consistent with prior periods' operating results.

FYE August 28, 2004 compared to August 30, 2003

Net Sales. Net sales were $4,089.5 million for FYE 2004 compared to $871.8 million for  FYE 2003, an increase of $3,217.7 million or 369.1%. The increase was the direct result of consolidating NBP's sales of $4,089.5 million and eliminating the intercompany sales of $614.3 million from the cooperative to NBP. The decline in the cooperative's sales to NBP of $10.9 million, or 1.7%, was driven by a decrease of 15.0% in the number of cattle sold, offset by an increase in the average sales price of 16.2%.

Cost of Sales. Cost of sales was $3,969.7 million for FYE 2004 compared to $853.6 million for FYE 2003, an increase of $3,116.1 million or 365.1%. The increase was the direct result of consolidating NBP's cost of sales of $3,969.7 million and eliminating the intercompany cost of sales of $614.3 million.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $35.9 million for FYE 2004 compared to $5.7 million for FYE 2003, an increase of $30.2 million or 529.8%. The increase was the direct result of consolidating NBP's expenses of $30.7 million that were not consolidated in the 2003 period.

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

Operating Income. Operations resulted in income of $62.7 million for FYE 2004 compared to $10.4 million for FYE 2003, a favorable increase of $52.3 million. The operating income, as a percentage of net sales, was 1.5% for FYE 2004 and 1.2% for FYE 2003. This is the direct result of consolidating NBP's results of operations in 2004 of $68.0 million which was 1.7% of our consolidated sales.

Equity in Earnings. In FYE 2004 the results of NBP were consolidated while earnings in FNB were $22.6 million for FYE 2003. The minority interest in NBP represents the minority owners' equity in NBP's earnings. Kansas City Steak, LLC and aLF Ventures, LLC are subsidiaries of NBP which are also consolidated herein.

Interest Expense. Interest expense was $25.5 million for FYE 2004 compared to $2.4 million for FYE 2003, an increase of $23.1 million. The increase was due primarily to the higher level of borrowings in FYE 2004 as a result of the Acquisition.

Other, Net. Other, net was income of $0.0 million for FYE 2004 compared to an expense of $1.7 million for FYE 2003. In 2004, NBP received $1.1 million through the demutualization of a company which held annuities for NBP employees, and the loss in NBP's equity investment of aLF Ventures, LLC of $0.8 million. This was further offset by tax accruals of $0.5 million in consideration of the potential recharacterization of income from patronage-source to nonpatronage-source, which could be asserted by the IRS. FYE 2003 is primarily due to the consolidation of NBP's net expense of $1.7 million for the 24 day period from August 7 to August 30, 2003. This net expense consisted of $1.7 million of bridge loan commitment fees, $1.6 million in the write-off of unamortized debt issuance costs (both associated with the Acquisition), $0.9 million of expenses associated with an investment in an electronic commerce venture, as offset by receipt of a $2.3 million award in an antitrust vitamin litigation. NBP received approximately $2.3 million to settle its indirect purchaser vitamin antitrust claim through Farmland, which settled its own direct and indirect claims and those of all of its affiliates. The settlement arose from the Department of Justice indictments of several manufacturers of vitamins and feed additives for price fixing, which resulted in confessions, amnesty and fines from 2000 to 2003. During that time, numerous lawsuits were filed by direct and indirect purchasers, including both class-action lawsuits and individual lawsuits, to recover the antitrust overcharge.

FYE August 30, 2003 compared to August 31, 2002

FYE 2003, which ended August 30, 2003, consisted of 52 weeks. FYE 2002, which ended August 31, 2002, consisted of 53 weeks.

Net Sales. Net sales were $871.8 million in FYE 2003 compared to $697.4 million in FYE 2002, an increase of $174.4 million, or 25.0%. The increase resulted primarily from the consolidation of NBP's sales of $282.8 million for the 24 day period from August 7 to August 30, 2003, coupled with an increase of 11.9% in the cooperative's average sales price. This increase was reduced by the elimination of intercompany sales of $36.3 million for the same 24 day period, a decrease of 18.8% in the number of cattle delivered to the cooperative and the additional week in FYE 2002.

Cost of Sales. Cost of sales was $853.6 million in FYE 2003 compared to $697.4 million in FYE 2002, an increase of approximately $156.2 million, or 22.4%. The increase is consistent with the increase in sales and resulted primarily from the consolidation of NBP's cost of sales of $264.8 million for the 24 day period from August 7 to August 30, 2003, reduced by the elimination of intercompany cost of sales of $36.3 million for the same period. This net increase was also supported by an increase of $7.98 per hundred weight (cwt), or 11.9%, in the cooperative's average base purchase prices, partially offset by the additional week in FYE 2002.

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Selling, General and Administrative Expenses. Selling, general and administrative expenses were $5.7 million in FYE 2003 compared to $3.6 million in FYE 2002, an increase of $2.1 million or 58.3%. The increase is attributed to the consolidation of NBP's selling, general and administrative expenses of $2.1 million for the 24 day period from August 7 to August 30, 2003, partially offset by a $0.2 million reduction of USPB's direct general and administrative costs.

Depreciation and Amortization Expense. Depreciation and amortization expense increased by $2.1 million, in FYE 2003 compared to FYE 2002. This increase was directly attributed to the consolidation of NBP's depreciation and amortization expense of $2.1 million for the 24 day period from August 7 to August 30, 2003.

Operating Income. Operations resulted in income of $10.4 million for FYE 2003, compared to a loss of $3.6 million for FYE 2002, an increase of $14.0 million. The increase was primarily due to the consolidation of NBP's operating income of $13.8 million for the 24 day period from August 7 to August 30, 2003 coupled with improved market conditions for beef products, recovering somewhat from reduced demand for beef in travel related industries as a result of the terrorist attacks on September 11, 2001.

Equity in Earnings. FNB's and NBP's combined net income increased 14.8%, while earnings in FNB increased 11.3% to $22.6 million in FYE 2003 from $20.3 million for FYE 2002. The difference is due to the consolidation of NBP's net income of $10.5 million for the 24 day period ended August 30, 2003 subsequent to the Acquisition and due to goodwill amortization of $2.0 million in FYE 2002 related to the excess of our investment in FNB over our share of the underlying net assets of FNB. The minority equity of $4.9 million in 2003 represents the minority owners' equity in NBP for the same 24 day period. Kansas City Steak, LLC and aLF Ventures, LLC are subsidiaries of NBP which are also consolidated herein for the same 24 day period of FYE 2003.

Interest Expense. Interest expense was $2.4 million for FYE 2003 compared to $0.7 million for FYE 2002, an increase of $1.7 million, or 242.9%. The increase resulted primarily from the consolidation of NBP's interest expense of $1.6 million for the 24 day period from August 7 to August 30, 2003.

Interest Rate Exchange Agreement. Expense related to the cooperative's interest rate exchange agreement was $0.0 million in FYE 2003, compared with $1.0 million in FYE 2002. The cooperative's interest rate swap was realigned with the underlying debt at the end of FYE 2002, generating related expenses in 2002 that were not incurred in FYE 2003.

Other, Net. Other decreased to expense of $1.7 million in FYE 2003 from income of $0.5 million in FYE 2002. This decrease is primarily due to the consolidation of NBP's net expense of $1.7 million for the 24 day period from August 7 to August 30, 2003. This net expense consisted of $1.7 million of bridge loan commitment fees, $1.6 million in the write-off of unamortized debt issuance costs (both associated with the Acquisition), $0.9 million of expenses associated with an investment in an electronic commerce venture, as offset by receipt of a $2.3 million award in an antitrust vitamin litigation. NBP received approximately $2.3 million to settle its indirect purchaser vitamin antitrust claim through Farmland, which settled its own direct and indirect claims and those of all of its affiliates. The settlement arose from the Department of Justice indictments of several manufacturers of vitamins and feed additives for price fixing, which resulted in confessions, amnesty and fines from 2000 to 2003. During that time, numerous lawsuits were filed by direct and indirect purchasers, including both class-action lawsuits and individual lawsuits, to recover the antitrust overcharge. Also contributing to the decrease is the recognition of $0.3 million in revenue generated by leasing excess delivery rights in FYE 2002 that were not leased in FYE 2003.