Creditors File Petitions
Forcing FBO Into Chapter 11

DENVER — Turns out the rumors were true regarding the status of Future Beef Operations Inc. Sort of, anyway.

Last week FBO sought bankruptcy protection under Chapter 11 of the Federal Bankruptcy Code. The company did not declare Chapter 11 itself. Rather, the filing, which took place last Monday morning in federal court in Denver, was in response to petitions filed on behalf of several creditors.

In a teleconference this past Thursday, Dr. Ronnie Green, newly appointed vice president of cattle operations, told reporters that it's critical for the industry to understand that FBO did not file themselves.

"We have been asked for the last 60 days whether we had filed or whether we intended to file, and our response to that had always been no, because we were not going to file Chapter 11 nor did we anticipate that we were going to file," Green said.

FBO could not comment on which creditors filed the petition, but Cattle Buyers' Weekly reports that three unsecured creditors filed the involuntary Chapter 11 and that FBO owes them a total of $18,243. FBO reportedly owes tens of millions of dollars to other unsecured creditors. CBW reports that it also owes its secured lender, the Bank of Nova Scotia, more than $160 million.

Essentially a Chapter 11 filing allows FBO a set period of time to go through a reorganization process, both in financing and debt restructuring as well as restructuring of the business itself, Green explained.

The Chapter 11 process occurs in stages. On March 7 the judge in the U.S. Bankruptcy Court District of Colorado put in place the interim order which establishes the debtor in possession financing to allow the company to move forward through this first part of the reorganization period. Then in another two weeks or so, on about the 23^rd, parties will work through the final order. In that final order, Green explained, there has to be a final agreement for the remaining amount of DIP financing and what the bank wants in the way of protection. Once that's completed, FBO will go forward with their restructuring plan. FBO will likely have six months to get their books in order, though that time-frame has not yet been fully determined.

He attributed the Chapter 11 filing to a combination of things. The cattle market over the last six months certainly did not help, he said. There were also start-up problems with the slaughtering facility.

"Some of those things went much better and others went slower than expected, like some of the value-added processes, for example, that we're using in the plant. We've addressed the majority of those issues. We've learned from our mistakes and now we feel comfortable moving forward."

Operations at their slaughtering facility, what they refer to as the "products center," continue uninterrupted. Cattle were harvested at prescheduled levels the week of filing and FBO expects that to continue as such for the remainder of the reorganization period.

"Our ramp-up schedule was faster than we anticipated and there were weeks that we have slaughtered more than anticipated," Green told reporters. "This week we have been slaughtering 1300 to 1400 head. Next week, we expect, we'll be at 1700. It varies with the cattle inventory, but we do not anticipate a slowdown in slaughter at all."

Green admitted that their supply chain management system and the control of inventory and process verification of that inventory have been a bit of a struggle, and part of the struggle involved the market itself.

"I don't believe we've really gotten to the point where we have been able to test our model very well. We’ve gone through one cycle of that in a start-up where the market was not very cooperative, and it was not fair really for us to evaluate the value of that supply chain management yet," he insisted.

Green said the company has an inventory of cattle in place that takes them "through a substantial portion of this year." The VP said it was a little premature to talk about the buy and exactly how the cattle operations division will be structured in the future. He did say that he expects the feedyard partners to have a more direct role in the procurement process.

One immediate change FBO intends to make moving forward is that they will encourage their suppliers to either market their cattle under partnership arrangements or retain full ownership through the entire system. It appears that FBO intends to minimize their risk by letting others own the cattle.

Green addressed the rumors that their individual cattle management system is still not working. He admitted that it's been a challenge, but he assured reporters that the data system is now functioning.

"It has taken a huge amount of effort to get an information system developed that will allow us to build this business model. It was a much greater challenge than we anticipated it would be, even though we knew it would be a big one.

"We are now beginning to pull information and use that information in a way to manage inventory and control and manage the quality of the product that we’re putting through this facility. We’re evaluating ways to make that as attractive as possible.

"We still believe that process verification is highly important," he added. "We still believe that supply chain management is very important. We still believe that sorting cattle to individual end points is highly important, and we still believe in the integration concept so that we can share information," Green stressed.

There has been a significant reduction in the employee payroll, but everyone involved with the products center in Arkansas City, Kansas remains. They were previously under outside management, but FBO has resumed that role and all have been rehired as FBO employees.

Regarding the harvest facility itself, Green told reporters that they are pleased the plant has been brought up to full speed and that the database is largely in place and being finalized in the auditing process.

The hide dehairing system, which reportedly had significant difficulties during the ramp-up period and also suffered a mini-explosion back in December, is now up and running.

"We've reengineered the system, and we've re-engineered the chemical functioning of the system so we won't have that problem again," Green said. "Tweaking continues, but it's working now, and we anticipate that it will be on full line within the coming weeks."

The value-added business units, which include pet treats, hides, cooked products, case-ready ground beef products and variety products, also are now operational and functional and FBO intends to get them brought onto full line during the reorganization phase.

The FBO spokesperson couldn't comment on their relationship with Safeway except to say that they are continuing to send product to the retailer under their contract agreement.

CBW, however, reports that Safeway Stores took a $30.5 million after-tax charge related to FBO's bankruptcy. The charge, CBP says, relates to a first loss deficiency agreement that Safeway has with Future Beef's principal lender, the Bank of Nova Scotia. The agreement provides that under certain circumstances and in the event of FBO's liquidation, Safeway will pay Scotia up to $40 million.

FBO's product, Green did say, is being sold through a variety of outlets, but Safeway remains their primary outlet. FBO also continues to bring labeled product into Safeway's Phoenix division under the Rancher's Reserve label. Not all of FBO's product is brand labeled, however, and Phoenix is the only Safeway division currently offering the branded product.

Consumer reaction, Green said, has been favorable.

"We're just now getting to the point where the noise from 9-11 is diminished enough so that we can get a fair assessment on the product."

Green said FBO's track record in regard to their ability to hit their targeted specs has been pretty good, but as with anything there's room for improvement. Their primary target has been Select Yield Grade 1s and 2s and a 35 to 40 percent Choice mix.

"In terms of our quality grade mix, we've been about where we wanted to be. We have a desire to improve on a lot of our product, as would any of our competitors, and we’re learning from the information that we’re getting back," Green said.

He also mentioned that the company is evaluating its specifications.

"We have a lot of interest in our product, so we're evaluating all of that."

Safeway, Green pointed out, has been particularly pleased with the shelf life of the product, which can be attributed to FBO's required Vitamin E program. Safeway is also reportedly pleased with yield in terms of their boxed product. And all parties, the VP said, are exceptionally pleased with their food safety program and how that system is working in their products center.

"Our relationship with Safeway continues," he reiterated. "As we move forward through the reorganization phase, I think both of us will be looking at ways that we can continue to be partners."

Green concluded on an upbeat note, telling reporters that FBO is just now on the threshold of realizing the value of what they've built and this reorganization phase will give them and the industry time to realize that value.

"We have every intention of moving forward with the business model that we’ve had from the beginning," Green assured reporters. "We’re still embracing a ranch to retail concept."

He said FBO still believes they can attract a price for their product over and above the commodity market that will allow them to pass real dollar incentives back down to their partners.

"I’m not saying we’re not going to get leaner," Green added. "There are some areas that we can improve relative to what our costs are, and we intend to do that. Relative to the difference in value and reaping reward from that value and using the assets that we built in that plant to do that, we are convinced it will work, and I think our creditors are as well or we wouldn’t be where we are today."

Thad York, FBO's acting CEO, heads up the new management team. Working with him are six vice presidents. Besides Green there is Randal Garrett, VP of product center operations; John Francis, VP marketing and sales; Rob Streight, VP quality assurance programs; John Pougnet, VP financial operations; and Darrell Wilkes, VP investor relations.

"We're pleased with the level of support that we continue to receive from the industry," Green concluded. "The desire to have a system like this work is definitely out there."