<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1998
REGISTRATION NOS. 333-49289 AND 333-49289-01
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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SOUTHERN FOODS GROUP, L.P.
SFG CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 2026 75-2571364
DELAWARE 2026 75-2754115
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
PATRICK K. FORD
SOUTHERN FOODS GROUP, L.P.
3114 SOUTH HASKELL 3114 SOUTH HASKELL
DALLAS, TEXAS 75223 DALLAS, TEXAS 75223
(214) 824-8163 (214) 824-8163
(Address, including zip code, and telephone (Name, address, including zip code, and
number, including area code, of telephone
registrant's principal executive offices) number, including area code, of agent for
service)
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Copy to:
CAROL GLENDENNING, ESQ.
STRASBURGER & PRICE, L.L.P.
901 MAIN STREET, SUITE 4300
DALLAS, TEXAS 75202
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 22, 1998
PROSPECTUS
OFFER TO EXCHANGE
ALL OUTSTANDING
9 7/8% SENIOR SUBORDINATED NOTES DUE 2007
($150,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR
9 7/8% SENIOR SUBORDINATED SERIES A NOTES DUE 2007
($150,000,000 PRINCIPAL AMOUNT)
OF
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<S> <C>
SOUTHERN FOODS GROUP, L.P.
SFG CAPITAL CORPORATION [LOGO]
</TABLE>
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THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JULY
, 1998, UNLESS EXTENDED.
---------------------
Southern Foods Group, L.P. (the "Company"), and SFG Capital Corporation
("SFG Capital" and, together with the Company, the "Issuers") hereby offer (the
"Exchange Offer"), upon the terms and subject to the conditions set forth in
this Prospectus and the accompanying Letter of Transmittal (the "Letter of
Transmittal"), to exchange up to an aggregate principal amount of $150,000,000
of their 9 7/8% Senior Subordinated Series A Notes due 2007 (the "Exchange
Notes") for an equal principal amount of their outstanding 9 7/8% Senior
Subordinated Notes due 2007 (the "Outstanding Notes" and, together with the
Exchange Notes, the "Notes"), in integral multiples of $1,000. The Exchange
Notes are substantially identical (including principal amounts, interest rate,
maturity and redemption rights) to the Outstanding Notes for which they may be
exchanged pursuant to this Exchange Offer, except for certain transfer
restrictions, registration rights and liquidated damages provisions relating to
the Outstanding Notes. The Outstanding Notes have been, and the Exchange Notes
will be, issued under an Indenture dated as of September 4, 1997 (the
"Indenture"), among the Company and SFG Capital, as joint and several obligors,
and Chase Bank of Texas, National Association (formerly named Texas Commerce
Bank National Association), as trustee (the "Trustee"). See "Description of the
Notes."
(Cover text continued on next page)
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SEE "RISK FACTORS" ON PAGE 11 FOR A DISCUSSION OF CERTAIN RISKS TO BE
CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND IN EVALUATING AN INVESTMENT
IN THE EXCHANGE NOTES.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS , 1998.
\
<PAGE> 3
(Continued from Cover)
The Company will accept for exchange any and all validly tendered
Outstanding Notes on or prior to 5:00 p.m., New York City time, on July ,
1998, or such later date and time to which it is extended by the Issuers (the
"Expiration Date"). Tenders of Outstanding Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the Expiration Date; otherwise such
tenders are irrevocable. Chase Bank of Texas, National Association is also
acting as the Exchange Agent in connection with the Exchange Offer. The Exchange
Offer is not conditioned upon any minimum principal amount of Outstanding Notes
being tendered for exchange, but is otherwise subject to certain customary
conditions.
The Exchange Notes will mature on September 1, 2007. The Exchange Notes
will bear interest from the date of issuance (or the most recent interest
payment date to which interest on such Exchange Notes has been paid), at a rate
equal to 9 7/8% per annum and on the same terms as the Outstanding Notes.
Interest on the Exchange Notes will be payable semiannually on March 1 and
September 1 of each year commencing September 1, 1998. Holders of the Exchange
Notes will also receive on September 1, 1998 an amount equal to the interest
accrued on the Outstanding Notes from March 1, 1998 to the date of issuance of
the Exchange Notes. The Outstanding Notes that are accepted for exchange will
cease to accrue interest upon issuance of the Exchange Notes.
The Exchange Notes will be unsecured and subordinated in right of payment
to all existing and future senior indebtedness of the Issuers. The Exchange
Notes will rank pari passu with any future senior subordinated indebtedness of
the Issuers and will rank senior to all other subordinated indebtedness of the
Issuers. See "Description of the Notes." As of December 31, 1997, the Issuers
had outstanding approximately $197 million aggregate principal amount of Senior
Indebtedness (exclusive of unused commitments), all of which was indebtedness
secured by a lien, and the Issuers had no senior subordinated indebtedness
outstanding other than the Outstanding Notes and no indebtedness that was
subordinate or junior in right of repayment to the indebtedness represented by
the Notes. See "Description of the Notes -- Ranking."
While the Company and SFG Capital will be jointly and severally liable for
the obligations under the Exchange Notes, SFG Capital, a wholly-owned subsidiary
of the Company, has no assets, does not conduct any operations and was formed
solely in order to facilitate the issuance of debt for the Company.
Except as described below, the Issuers may not redeem the Exchange Notes
prior to September 1, 2002. On or after such date, the Issuers may redeem the
Exchange Notes, in whole or in part, at the redemption prices set forth herein,
together with accrued and unpaid interest, if any, to the date of redemption. In
addition, at any time on or prior to September 1, 2000, the Issuers may, subject
to certain requirements, redeem up to one third of the original aggregate
principal amount of the Exchange Notes with the net cash proceeds of one or more
underwritten public equity offerings by the Company at a price equal to 109.875%
of the principal amount to be redeemed together with accrued and unpaid
interest, if any, provided that at least two thirds of the original aggregate
principal amount of the Exchange Notes remain outstanding immediately after each
such redemption. The Exchange Notes will not be subject to any sinking fund
requirement. Upon the occurrence of a Change of Control as defined in the
Indenture, each holder will have the right to require the Issuers to repurchase
such holder's Exchange Notes at a price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
repurchase. See "Description of the Notes." In the event of a Change of Control
there is no assurance that the Company will have, or will have access to,
sufficient funds to repurchase the Notes.
The Outstanding Notes were sold to the Initial Purchaser in transactions
not registered under the Securities Act of 1933, as amended (the "Securities
Act"), in reliance upon the exemption provided in Section 4(2) of the Securities
Act. The Initial Purchaser subsequently placed the Outstanding Notes with
qualified institutional buyers in reliance upon Rule 144A under the Securities
Act. Accordingly, the Outstanding Notes may not be re-offered, resold or
otherwise transferred in the United States unless so registered or unless an
applicable exemption from the registration requirements of the Securities Act is
available. The Exchange Notes are being offered hereunder in order to satisfy
the obligations of the Company under an Exchange and Registration Rights
Agreement dated September 4, 1997 (the "Registration Rights Agreement") among
the Issuers and Chase Securities Inc. (the "Initial Purchaser"). See "The
Exchange Offer."
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<PAGE> 4
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Issuers believe that Exchange Notes issued pursuant to this
Exchange Offer may be offered for resale, resold and otherwise transferred by a
holder who is not an affiliate of the Issuers without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that the holder is acquiring the Exchange Notes in its ordinary course of
business and is not participating in and has no arrangement or understanding
with any person to participate in the distribution (within the meaning of the
Securities Act) of the Exchange Notes. Persons wishing to exchange Outstanding
Notes in the Exchange Offer must represent to the Issuers that such conditions
have been met.
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer (a "Participating Broker-Dealer") must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal for the Exchange Offer states
that by so acknowledging and delivering a prospectus, a broker-dealer will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of Exchange
Notes received in exchange for Outstanding Notes where such Outstanding Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities. The Issuers have agreed to make this Prospectus
available to any Participating Broker-Dealer for use in connection with any such
resale for a period of 90 days after the Expiration Date. See "Plan of
Distribution."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE ISSUERS ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OUTSTANDING NOTES IN ANY JURISDICTION
IN WHICH THIS EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN
COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
The Company does not intend to list the Exchange Notes on any national
securities exchange or to seek the admission thereof to trading on The Nasdaq
Stock Market. The Initial Purchaser has advised the Company that it intends to
make a market in the Exchange Notes; however, it is not obligated to do so, and
any market-making may be discontinued at any time without notice. Accordingly,
no assurance can be given that an active public or other market will develop for
the Exchange Notes or as to the liquidity of or the trading market for the
Exchange Notes.
The Company expects that the Exchange Notes issued pursuant to this
Exchange Offer will be issued in the form of a global note, which will be
deposited with, or on behalf of, The Depository Trust Company ("DTC") and
registered in its name or in the name of Cede & Co., its nominee. Beneficial
interests in the global Exchange Note representing the Exchange Notes will be
shown on, and transfers thereof to qualified institutional buyers will be
effected through, records maintained by DTC and its participants. After the
initial issuance of the global Exchange Note, Exchange Notes in certificated
form will be issued in exchange for the global Exchange Note on the terms set
forth in the Indenture. See "Book-Entry; Delivery and Form."
The Issuers will not receive any proceeds from this Exchange Offer. No
dealer-manager is being used in connection with this Exchange Offer. See "Use of
Proceeds" and "Plan of Distribution."
Any Outstanding Notes not tendered and accepted in the Exchange Offer will
remain outstanding. To the extent that any Outstanding Notes of other holders
are tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Outstanding Notes could be adversely affected. Following consummation
of the Exchange Offer, the holders of Outstanding Notes will continue to be
subject to the existing restrictions upon transfer thereof. See "Risk
Factors -- Exchange Offer Procedures and Consequences of the Exchange Offer to
Non-Tendering Holders of Outstanding Notes."
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No dealer, salesperson or other person has been authorized to give
information or to make any representations not contained in this Prospectus,
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Issuers. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any security
other than the Exchange Notes offered hereby, nor does it constitute an offer to
sell or the solicitation of an offer to buy any of the Exchange Notes to any
person
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<PAGE> 5
in any jurisdiction in which it is unlawful to make such an offer or
solicitation to such person. Neither the delivery of this Prospectus nor any
sale made hereunder shall under any circumstances create any implication that
the information contained herein is correct as of any date subsequent to the
date hereof.
AVAILABLE INFORMATION
The Issuers have filed with the Commission a registration statement on Form
S-4 (the "Registration Statement") under the Securities Act, with respect to the
Exchange Notes. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in schedules and exhibits to the
Registration Statement as permitted by the rules and regulations of the
Commission. Items of information omitted from this Prospectus but contained in
the Registration Statement may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549 and at the following regional offices of
the Commission: Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material can be obtained by mail from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549 at prescribed rates. Electronic filings filed through the
Commission's Electronic Data Gathering, Analysis and Retrieval System ("EDGAR")
are publicly available through the Commission's home page on the Internet at
http://www.sec.gov.
As a result of this offering, the Company will become subject to the
periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In the event that the
Company ceases to be subject to the informational requirements of the Exchange
Act, the Company has agreed to file with the Commission and provide to the
Trustee and the holders of Notes annual reports and the information, documents
and other reports otherwise required pursuant to Sections 13 and 15(d) of the
Exchange Act. See "Description of the Notes -- Certain Covenants -- SEC
Reports."
No separate financial statements of SFG Capital have been included herein.
The Issuers do not consider that such financial statements would be material to
holders of the Notes because SFG Capital, a wholly-owned subsidiary of the
Company, has no assets and does not conduct any operations. SFG Capital was
formed solely in order to facilitate the Company's issuance of indebtedness,
including the Notes, by making such indebtedness eligible for purchase by
certain institutions which under the legal investment laws of some states are
prohibited from purchasing non-corporate obligations. SFG Capital is not engaged
in and does not propose to engage in any activity other than serving as
co-issuer and co-guarantor of certain debt obligations of the Company, including
the Notes. For the same reasons, the Issuers have applied to the Commission for
relief from the periodic reporting and other informational requirements of the
Exchange Act with respect to SFG Capital.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information, risk factors and historical
and pro forma financial statements, including the related notes, appearing
elsewhere in this Prospectus. The Outstanding Notes were issued by the Issuers
on September 4, 1997, in connection with the transactions described under the
caption "The Transactions" (collectively, the "Transactions"), which included
the acquisition (the "Acquisition") by Dairy Farmers of America, Inc., an
affiliate of the Company, of Borden/Meadow Gold Dairies Holdings, Inc.
("Holdings"), the holding company for certain dairy operations of Borden, Inc.
and an affiliate (collectively, "Borden"). Thereafter, DFA contributed certain
assets and liabilities of Holdings and its subsidiaries consisting of the dairy
operations of Holdings operated under the Meadow Gold tradenames to the Company,
and the Company acquired certain intellectual property rights relating to the
dairy operations of Holdings. As used in this Prospectus, unless the context
otherwise requires, (i) the "Company" or "SFG" refers to Southern Foods Group,
L.P., and its predecessors, and after September 4, 1997 includes Meadow Gold,
(ii) with respect to periods prior to September 4, 1997, "Meadow Gold" refers to
the dairy operations of Holdings operated under the Meadow Gold trademarks, as
constituted prior to the Transactions, and its predecessors, and, with respect
to periods on or after September 4, 1997, refers to the Meadow Gold operations
of the Company, (iii) "SFG Capital" refers to SFG Capital Corporation, (iv) the
Company and SFG Capital are collectively referred to as the "Issuers," and (v)
"DFA" refers to Dairy Farmers of America, Inc. or, with respect to periods
before December 3, 1997, Mid-America Dairymen, Inc. Unless otherwise noted, all
market data presented in this Prospectus is based on the Company's research and
estimates. Schepps(TM), Oak Farms(TM), Meadow Gold(TM), Mountain High(TM), Lite
Line(TM) and Viva(TM) are registered trademarks of the Company and the Company
has applied for federal trademarks for "Barbe's" and "Brown's Velvet Dairy."
Borden(TM), Elsie(TM), Foremost(TM) and Flav-O-Rich(TM) are registered
trademarks licensed to the Company and the Company has arrangements under which
it packages and sells products under the Nestle(TM) and Tampico trademarks. This
Prospectus also includes trademarks of companies other than the Company
including Haagen Dazs(TM), Blue Bell(TM), Dannon(TM), Yoplait(TM), Snickers(TM)
and Tropicana(TM).
THE COMPANY
OVERVIEW
The Company is a leading processor and distributor of fluid milk products
in the United States. The Company markets its products in many of the rapidly
growing Southern and Western states, including Texas, Louisiana, Utah, Montana,
Idaho, Colorado and Hawaii. Major cities served by the Company in these areas
include Dallas/Fort Worth, Houston, San Antonio, Salt Lake City, Denver and
Honolulu. The Company has attained its strong market positions through a series
of strategic acquisitions as well as through internal growth.
The Company's predecessor businesses have produced premium quality, branded
dairy products for over 50 years. The Company processes and distributes fluid
milk products, cultured products (cottage cheese, sour cream and yogurt), ice
cream products and fruit juices and drinks under the Schepps, Oak Farms, Meadow
Gold, Mountain High, Viva, Foremost, Flav-O-Rich, Barbe's and Brown's Velvet
Dairy brand names, as well as various third party labels (including Tropicana
and Tampico) and private labels. These brand names are widely recognized in
their respective markets. The majority of the Company's sales are from fluid
milk products, which include fresh packaged milk and chocolate milk in whole,
reduced fat and fat-free varieties, whipping cream, half-and-half and
buttermilk. The Company also distributes other branded dairy products under
various third party labels, such as Dannon, Yoplait, Haagen Dazs, Blue Bell,
Nestle and Snickers, as well as other dairy related products such as cheese,
eggs, butter, margarine and non-dairy creamers.
The Company's customer base includes retail accounts, such as supermarkets
and convenience stores, and food service accounts, such as restaurants, hotels,
schools, hospitals, airlines and other institutions. The Company processes its
products in 26 dairy processing plants and distributes its products from those
plants and from 34 other major distribution facilities as well as numerous
smaller distribution facilities.
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COMPETITIVE STRENGTHS
The Company believes that the following competitive strengths provide it
with a foundation to enhance the Company's position as an industry leader:
- STRONG MARKET POSITION AND CUSTOMER BASE. The Company believes it is a
leading supplier of fluid milk products in each of the major metropolitan
markets it currently serves.
- LOW COST/HIGH VOLUME PROVIDER. As a result of significant investments in
facilities, equipment and personnel and high production volumes,
management believes that most of the Company's processing plants operate
on a highly efficient basis.
- STRONG BRAND RECOGNITION. The Company enjoys substantial brand awareness
in the markets it serves.
- LEADER IN CUSTOMER SERVICE. The Company's commitment to customer service
includes dependable seven day-a-week delivery coordinated through its 60
processing and major distribution facilities, customized delivery
arrangements, high quality products and assurance of product
availability.
- EXPERIENCED MANAGEMENT TEAM. The Company's two most senior managers, Pete
Schenkel, the Company's President and Chief Executive Officer, and Tony
Ward, the Company's Vice Chairman, each have over 35 years experience
with the Company and its predecessor businesses.
- RELATIONSHIP WITH DAIRY FARMERS OF AMERICA, INC. The Company is 50% owned
by and purchases substantially all of its raw milk requirements from DFA,
the largest dairy cooperative in the United States.
COMPETITIVE CHALLENGES
Notwithstanding these strengths, the Company faces continuing competitive
challenges because of consolidation in the dairy processing industry due to
excess capacity, as well as challenges from competitors, including independent
dairy processors and national food service distributors.
BUSINESS STRATEGY
The Company's strategy is to enhance its position as an industry leader
through the following initiatives:
- SERVE MAJOR METROPOLITAN AREAS. By concentrating on major metropolitan
areas, such as Dallas/Fort Worth, Houston, San Antonio, Salt Lake City,
Denver and Honolulu, and by focusing on large retail and food service
companies in these areas, the Company is able to operate many of its
plants with high production volumes in centralized locations, resulting
in significant processing efficiencies.
- INCREASE MARKET PENETRATION. Management plans to capitalize on its
relationships with large retail and food service customers as these
customers consolidate their suppliers and expand their operations in
existing and new major markets and expects to benefit from opportunities
to cross-sell certain Meadow Gold branded products.
- PURSUE SELECTIVE EXPANSION. Since its inception in 1987, the Company has
actively pursued selective acquisitions of dairy operations. These
acquisitions have enabled the Company to grow in existing markets and to
expand operations into new geographic areas. The Company will continue to
assess viable acquisition opportunities as they arise.
RISK FACTORS
See "Risk Factors" for a discussion of certain risks that should be
considered by holders of Outstanding Notes in connection with the Exchange
Offer, including risk factors relating to (i) the Company's substantial
leverage, (ii) the subordination of the Company's obligations on the Notes,
(iii) certain restrictive debt covenants to which the Company is subject, (iv)
possible increases in the price of raw milk, (v) competition in and the
consolidation of the dairy industry, (vi) the Company's dependence on certain
key employees, (vii) a put right that is held by the Company's Chief Executive
Officer, (viii) the potential for deadlocks and
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<PAGE> 8
conflicts of interest between members of the General Partner of the Company,
(ix) potential environmental liabilities to which the Company may be subject,
(x) the consequences of a Change in Control of the Company, (xi) possible
fraudulent conveyance issues, (xii) the absence of a public market for the
Exchange Notes and (xiii) certain Exchange Offer procedures and the consequences
of the Exchange Offer to Non-Tendering Holders of Outstanding Notes.
COMPANY OWNERSHIP
The Company is owned by DFA (49.5%) and Mr. Schenkel, the Company's
President and Chief Executive Officer (49.5%), as limited partners, and SFG
Management Limited Liability Company, the general partner of the Company ("SFG
Management" or the "General Partner") (1%), as its general partner. Further, the
General Partner, which has no operations or significant assets other than its
investment in the Company, is owned 50% by DFA and 50% by Mr. Schenkel. DFA and
Mid-Am Capital LLC, an affiliate of DFA ("Mid-Am Capital"), also hold non-voting
preferred limited partnership interests (the "Preferred Interests") in the
Company, which at March 31, 1998 aggregated $244.9 million in stated amount of
Preferred Interests. See Note 10 of Notes to the Financial Statements of the
Company, "Business -- Company History and Ownership" and "Description of
Preferred Interests." The Company has entered into discussions with Tony Ward,
the Vice Chairman of the Company, to issue common limited partner interests in
the Company representing two percent of the common partner interests in the
Company for approximately $1 million. No definitive agreements have been
reached, but if this transaction is completed, the common partner interests
would be owned as follows: DFA (48.5%), Mr. Schenkel (48.5%), Mr. Ward (2.0%)
and SFG Management (1.0%). See "Certain Relationships and
Transactions -- Proposed Transaction with Mr. Ward."
The Company's principal corporate offices are located at 3114 South
Haskell, Dallas, Texas 75223, and the Company's telephone number is (214)
824-8163.
SFG CAPITAL
SFG Capital is a wholly owned subsidiary of the Company that was
incorporated in Delaware for the purpose of serving as a corporate co-issuer and
co-obligor of certain debt obligations of the Company, including the Notes. SFG
Capital was formed solely in order to facilitate the Company's issuance of
indebtedness, including the Notes, by making such indebtedness eligible for
purchase by certain institutions which under the legal investment laws of some
states are prohibited from purchasing non-corporate obligations. SFG Capital
does not have any operations or assets and will not earn any revenues. As a
result, holders of the Exchange Notes should not expect SFG Capital to
participate in servicing the interest and principal obligations on the Notes.
SUMMARY OF THE TRANSACTIONS
On September 4, 1997, DFA acquired Holdings, the holding company for
certain dairy operations of Borden, Inc., and the Company obtained the license
(the "Borden License") to use the Borden and Elsie trademarks, subject to
certain limitations, in all 50 states and Mexico (the "Borden Trademarks") for
an aggregate purchase price of approximately $435 million. Holdings owned (i)
the Meadow Gold dairy operations located in the Western United States that
manufacture and sell dairy products primarily under the Meadow Gold and Viva
trademarks (the "Meadow Gold Trademarks") and (ii) other dairies in Texas,
Louisiana and New Mexico (the "Borden Dairies") that manufacture and sell dairy
products primarily under the Borden Trademarks.
Immediately following the Acquisition, DFA contributed (the "Meadow Gold
Contribution") substantially all of the assets and liabilities of Meadow Gold
(excluding the Meadow Gold Trademarks) to the Company in exchange for (a) the
assumption by the Company of DFA's obligations for up to $190.0 million
aggregate principal amount of term loans (the "Term Loans"), of which $175.0
million was borrowed by DFA in connection with the Acquisition, and a $60.0
million revolving credit facility, under which no amounts were drawn at closing
(the "Revolving Credit Facility," and together with the Term Loans, the "Senior
Bank Facilities"), and (b) the issuance by the Company to DFA of $90.0 million
in stated amount of Series B
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Preferred Interests. The contributed assets were comprised primarily of 17 dairy
processing plants and 36 major distribution facilities, which had a fair value
of approximately $265 million. Meadow Gold had revenues of approximately $493
million and $313 million for the year ended December 31, 1996 and for the period
from January 1, 1997 to September 4, 1997, respectively.
On September 4, 1997, the Company also acquired the Meadow Gold Trademarks
from Borden/Meadow Gold Dairies Investments, Inc. ("Investments"), which at the
time was a subsidiary of DFA, for their appraised value of $50.0 million and
obtained the Borden License directly from Borden for the appraised value of the
Borden Trademarks of $55.0 million (the "Trademark Acquisitions"). Concurrently
with the Meadow Gold Contribution, DFA sold the Borden Dairies (the
"Divestiture") to Milk Products, LLC ("Milk Products"), and the Company
sublicensed the Borden Trademarks on a royalty-free basis to Milk Products for
use in several states, including Texas, Louisiana and New Mexico (the "Borden
Sublicense").
The Company issued the Outstanding Notes in connection with the
Transactions, and used the proceeds from the sale of the Outstanding Notes,
together with $45.0 million contributed by Mid-Am Capital for $45.0 million in
stated amount of Preferred Interests (the "Mid-Am Capital Preferred Interests"),
and the remaining $15.0 million borrowed by the Company under the Term Loans, to
repay substantially all of the Company's indebtedness outstanding at the closing
of the Transactions and to fund the Trademark Acquisitions.
4
<PAGE> 10
THE EXCHANGE OFFER
The Exchange Notes......... The forms and terms of the Exchange Notes are
identical in all material respects to the terms of
the Outstanding Notes for which they may be
exchanged pursuant to the Exchange Offer, except
for certain transfer restrictions, registration
rights and liquidated damages provisions relating
to the Outstanding Notes described below under
"Description of the Notes" and "Exchange and
Registration Rights Agreement."
The Exchange Offer......... The Issuers are offering to exchange up to
$150,000,000 aggregate principal amount of the
Exchange Notes for up to $150,000,000 aggregate
principal amount of the Outstanding Notes.
Outstanding Notes may be exchanged only in integral
multiples of $1,000.
Expiration Date;
Withdrawal of Tender..... The Exchange Offer will expire at 5:00 p.m., New
York City time, on the Expiration Date. The tender
of Outstanding Notes pursuant to the Exchange Offer
may be withdrawn at any time prior to the
Expiration Date. Any Outstanding Notes not accepted
for exchange for any reason will be returned
without expense to the tendering holder thereof as
promptly as practicable after the expiration or
termination of the Exchange Offer. See "The
Exchange Offer -- Expiration Date; Extensions;
Amendments."
Certain Conditions to
the Exchange Offer....... The Exchange Offer is subject to customary
conditions, which may be waived by the Issuers.
Such conditions include, (i) to the extent it may
materially impair the ability of the Issuers to
proceed with the Exchange Offer, the initiation or
threat of initiation of any action or proceeding,
(ii) to the extent it may materially impair the
ability of the Issuers to proceed with the Exchange
Offer, the proposal or adoption of any rule,
statute or regulation, or (iii) the inability to
obtain any required governmental approval. In the
event that the Issuers assert or waive a condition
to the Exchange Offer which constitutes a material
change to the terms of the Exchange Offer, the
Issuers will disclose such change in a manner
reasonably calculated to inform prospective
investors of such change and will extend the period
of the Exchange Offer by five business days. See
"The Exchange Offer -- Certain Conditions to the
Exchange Offer."
Procedures for Tendering
Outstanding Notes........ Each Holder of Outstanding Notes wishing to accept
the Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with such Outstanding Notes and any other required
documentation to Chase Bank of Texas, National
Association, as Exchange Agent, at the address set
forth herein. Each holder whose Outstanding Notes
are held through DTC and who wishes to participate
in the Exchange Offer may do so through DTC's
Automated Tender Offer Program ("ATOP"). By
executing the Letter of Transmittal or tendering
through DTC's ATOP, each holder will represent to
the Issuers that, among other things, (i) any
Exchange Notes to be received by it will be
acquired in the ordinary course of business, (ii)
it has no arrangement or understanding with any
person to participate in the distribution of the
Exchange Notes, (iii) it is not engaged in and does
not intend to engage in a distribution of the
Exchange Notes, and (iv) it is not an "affiliate,"
as defined in Rule 405 of the Securities Act, of
the Issuers or, if it is an affiliate, it will
comply with the registration and prospectus
delivery requirements of the Securities Act to the
extent applicable. See "The Exchange
Offer -- Procedures for Tendering."
5
<PAGE> 11
Interest on the Exchange
Notes.................... Interest on the Exchange Notes, at the rate of
9 7/8% per annum, will accrue upon issuance (the
"Exchange Note Issue Date") and will be payable
semi-annually in arrears on each March 1 and
September 1, commencing on September 1, 1998.
Holders of the Exchange Notes will also on
September 1, 1998 receive an amount equal to the
interest accrued from March 1, 1998 on the
Outstanding Notes. Interest on the Outstanding
Notes accepted for the exchange will cease to
accrue upon issuance of the Exchange Notes. See
"The Exchange Offer -- Interest on the Exchange
Notes."
Special Procedures for
Beneficial Owners........ Any beneficial owner whose Outstanding Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender such Outstanding Notes in the
Exchange Offer should contact such registered
holder promptly and instruct such registered holder
to tender on such beneficial owner's behalf. Any
financial institution that is a participant in
DTC's system may utilize DTC's ATOP to tender. See
"The Exchange Offer -- Procedures for Tendering."
Guaranteed Delivery
Procedure................ Holders of the Outstanding Notes who wish to tender
their Outstanding Notes and whose Outstanding Notes
are not immediately available or who cannot deliver
their Outstanding Notes, the Letter of Transmittal
or any other documents required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date, must tender their Outstanding
Notes according to the guaranteed delivery
procedures set forth in "The Exchange
Offer -- Guaranteed Delivery Procedures."
Registration
Requirements............. The Issuers have agreed to use their best efforts
to consummate on or prior to 300 days after
September 4, 1997, the date of original issuance of
the Outstanding Notes (the "Issue Date"), the
registered Exchange Offer pursuant to which holders
of the Outstanding Notes will be offered an
opportunity to exchange their Outstanding Notes for
the Exchange Notes which will be issued without
legends restricting the transfer thereof. In the
event that applicable interpretations of the staff
of the Commission do not permit the Issuers to
effect the Exchange Offer or in certain other
circumstances, the Issuers have agreed to file a
shelf registration statement covering resales of
the Outstanding Notes and to use their best efforts
to cause such Shelf Registration Statement to be
declared effective under the Securities Act and,
subject to certain exceptions, keep such Shelf
Registration Statement effective until two years
after the Issue Date. If the Issuers fail to
consummate the Exchange Offer on or prior to 300
days after the Issue Date or, in the event that the
Issuers are not in compliance with certain
obligations under the Registration Rights
Agreement, the Issuers shall be obligated to pay
liquidated damages to holders of the Outstanding
Notes. See "Exchange and Registration Rights
Agreement."
Federal Income Tax
Considerations........... The exchange of Notes pursuant to the Exchange
Offer will not be a taxable event for federal
income tax purposes. See "Federal Income Tax
Considerations."
Use of Proceeds............ There will be no proceeds to the Issuers from the
exchange of Notes pursuant to the Exchange Offer.
For a discussion of the use of proceeds of the
Outstanding Notes see "Use of Proceeds."
6
<PAGE> 12
Exchange Agent............. Chase Bank of Texas, National Association will act
as exchange agent for the Company in the Exchange
Offer (the "Exchange Agent"). The address and
telephone number of the Exchange Agent are set
forth in "The Exchange Offer -- Exchange Agent."
THE EXCHANGE NOTES
The form and terms of the Exchange Notes are the same as the form and terms
of the Outstanding Notes except that the Exchange Notes will be registered under
the Securities Act and, therefore, will not bear legends restricting the
transfer thereof and will not contain the registration rights and liquidated
damages provisions relating to the Outstanding Notes. See "Description of the
Notes" and "Exchange and Registration Rights Agreement."
Issuers.................... Southern Foods Group, L.P. and SFG Capital
Corporation, as co-obligors.
Securities Offered......... $150,000,000 principal amount of 9 7/8% Senior
Subordinated Series A Notes due 2007. See
"Description of the Notes."
Maturity................... September 1, 2007
Interest Payment Dates..... March 1 and September 1 of each year, commencing on
September 1, 1998. Holders of the Exchange Notes
will also on September 1, 1998 receive an amount
equal to the interest accrued from March 1, 1998 on
the Outstanding Notes. Interest on the Outstanding
Notes accepted for exchange will cease to accrue
upon issuance of the Exchange Notes.
Sinking Fund............... None
Optional Redemption........ Except as described below, the Issuers may not
redeem the Notes prior to September 1, 2002. On or
after such date, the Issuers may redeem the Notes,
in whole or in part, at any time at the redemption
price set forth herein, together with accrued and
unpaid interest, if any, to the date of redemption.
In addition, at any time on or prior to September
1, 2000, the Issuers may, subject to certain
requirements, redeem up to one third of the
original aggregate principal amount of the Notes
with the Net Cash Proceeds of one or more Public
Equity Offerings by the Company at a redemption
price equal to 109.875% of the principal amount to
be redeemed, together with accrued and unpaid
interest, if any, to the date of redemption,
provided that at least two thirds of the original
aggregate principal amount of the Notes remains
outstanding immediately after each such redemption.
See "Description of the Notes -- Optional
Redemption."
Change of Control.......... Upon the occurrence of a Change of Control, each
holder will have the right to require the Issuers
to make an offer to repurchase such holder's Notes
at a price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest,
if any, to the date of repurchase. See "Description
of the Notes -- Change of Control." In the event of
a Change of Control, the Company could be required
to repay the indebtedness under the Senior Bank
Facilities in full and there can be no assurance
that the Company will have sufficient funds to
repay such indebtedness and to make any required
repurchases of the Notes. See "Risk
Factors -- Change of Control."
Ranking.................... The Notes will be unsecured and subordinated in
right of payment to all existing and future Senior
Indebtedness of the Issuers. The Notes will
7
<PAGE> 13
rank pari passu with any future Senior Subordinated
Indebtedness of the Issuers and will rank senior to
all other subordinated indebtedness of the Issuers.
The Company does not currently have any
subsidiaries other than SFG Capital; however, the
Indenture will not restrict the ability of the
Company to create, acquire or capitalize certain
subsidiaries in the future. As of March 31, 1998,
the Issuers had outstanding $181.8 million
aggregate principal amount of Senior Indebtedness
(excluding estimated unused revolving credit
commitments of $57.3 million) (all of which was
Secured Indebtedness), and the Issuers had no
Senior Subordinated Indebtedness outstanding other
than the Notes and no indebtedness that is
subordinate or junior in right of payment to the
indebtedness represented by the Notes. See
"Description of the Notes -- Ranking."
Restrictive Covenants...... The Indenture restricts (i) the incurrence of
additional indebtedness by the Issuers and the
Company's subsidiaries, (ii) the payment of
distributions on, and redemption of, equity
interests in the Issuers and the Company's
subsidiaries and the redemption of certain
subordinated obligations of the Issuers and the
Company's subsidiaries, (iii) certain investments,
(iv) sales of assets, (v) certain transactions with
affiliates, (vi) the sale or issuance of equity
interests of subsidiaries, (vii) the creation of
certain liens, (viii) the lines of business in
which the Issuers and the Company's subsidiaries
may operate, (ix) certain sale and leaseback
transactions and (x) consolidations, mergers and
transfers of all or substantially all the assets of
the Issuers. The Indenture also prohibits certain
restrictions on distributions from subsidiaries.
However, all of these limitations and prohibitions
are subject to a number of important qualifications
and exceptions. See "Description of the
Notes -- Certain Covenants"; and "-- Merger and
Consolidation."
8
<PAGE> 14
SUMMARY PRO FORMA COMBINED CONSOLIDATED STATEMENT OF INCOME DATA
The following table sets forth certain unaudited summary pro forma combined
consolidated statement of income data of the Company for the year ended December
31, 1997. The unaudited summary pro forma combined consolidated statement of
income data gives effect to the Transactions as if they had occurred on January
1, 1997. The unaudited summary pro forma combined consolidated statement of
income data does not purport to represent what the Company's results of
operations or financial condition would have actually been had the Transactions
been consummated as of such date or to project the Company's results of
operations or financial condition for any future period. The unaudited summary
pro forma combined consolidated statement of income data has been derived from
and should be read in conjunction with the Unaudited Pro Forma Combined
Consolidated Statement of Income and the notes thereto. See "Unaudited Pro Forma
Combined Consolidated Statement of Income" and the separate historical financial
statements of the Company and Meadow Gold and the notes thereto appearing
elsewhere in this Prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
STATEMENT OF INCOME DATA:
Net sales................................................. $1,054.3
Gross profit.............................................. 268.1
Selling, distribution and general and administrative
expenses............................................... 202.0
Interest expense.......................................... 32.9
Net income................................................ 18.4
</TABLE>
9
<PAGE> 15
SUMMARY HISTORICAL FINANCIAL DATA
The following table sets forth summary financial data of the Company for
the years ended December 31, 1995, 1996, and 1997 and for the three months ended
March 31, 1997 and 1998. The statement of income and balance sheet data for the
years ended December 31, 1995, 1996, and 1997 are derived from the Company's
audited historical financial statements. The statement of income and balance
sheet data for the three months ended March 31, 1997 and 1998 are derived from
the Company's unaudited financial statements included elsewhere in this
Prospectus, which have been prepared by management on the same basis as the
Company's audited historical financial statements and, in the opinion of
management, include all adjustments consisting of normal recurring adjustments
which the Company considers necessary for a fair presentation of such
information. The results of any interim period are not necessarily indicative of
the results for a full fiscal year. The summary financial data below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Selected Historical Financial Data" and
the historical financial statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------- ----------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales.................................. $475.2 $551.6 $741.0 $145.7 $272.0
Gross profit............................... 115.6 126.6 193.8 38.6 66.3
Selling, distribution and general and
administrative expenses................. 89.7 100.2 140.4 26.7 49.5
Interest expense........................... 9.1 7.6 16.5 2.1 8.1
Net income................................. 10.1 11.5 26.1 7.8 4.9
OTHER DATA:
Ratio of earnings to fixed charges......... 1.9x 2.2x 2.3x 3.9x 1.5x
Pro forma ratio of earnings to fixed
charges................................. 1.7x
BALANCE SHEET DATA (END OF PERIOD):
Total assets............................... $177.7 $182.5 $646.3 $641.4
Total long-term debt....................... 103.2 96.0 346.7 332.6
</TABLE>
10
<PAGE> 16
RISK FACTORS
In evaluating participation in the Exchange Offer, holders of Outstanding
Notes should carefully consider the following risk factors as well as the other
information set forth elsewhere in this Prospectus.
SUBSTANTIAL LEVERAGE
The Company incurred substantial indebtedness in connection with the
Transactions and is highly leveraged. At March 31, 1998, the Company's total
debt was approximately $332.6 million (exclusive of unused commitments), and its
total debt to total capitalization ratio was 63.1%. In the ordinary course of
business, the Company has incurred and, subject to certain restrictions in the
Senior Bank Facilities and the Indenture, will continue to incur additional
indebtedness from time to time to fund working capital requirements and for
other corporate purposes. See "Capitalization," "Description of Senior Bank
Facilities," "Description of the Notes," and the historical financial statements
of the Company, including the notes thereto, and the unaudited pro forma
combined consolidated financial data appearing elsewhere in this Prospectus.
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including the following: (i) the Company's
ability to obtain financing in the future for working capital or other corporate
purposes may be impaired; (ii) a substantial portion of the Company's cash flow
from operations will be required to be dedicated to the payment of principal and
interest on its indebtedness, including the Notes, thereby reducing the funds
available to the Company for other purposes; (iii) the indebtedness outstanding
under the Senior Bank Facilities is secured by substantially all the assets of
the Company and will mature prior to the maturity of the Notes; (iv) certain of
the Company's borrowings will be at variable rates of interest, which could
result in higher interest expense in the event of increases in interest rates;
and (v) the Company's high degree of leverage will make it more vulnerable to
economic downturns and may limit its ability to withstand competitive pressures.
The Company's ability to pay the interest on and retire the principal of
the Notes and the Company's other indebtedness is dependent upon its future
operating performance, which in turn is subject to general economic conditions
and to financial, business and other factors, many of which are beyond the
Company's control. The Company believes that, based upon current levels of
operations and anticipated growth and availability under the Senior Bank
Facilities, it will be able to meet its payment obligations in respect of the
Notes and the Company's other indebtedness. There can be no assurance, however,
that the Company's business will generate sufficient cash flow from operations
or that future working capital borrowings will be available in an amount
sufficient to enable the Company to service its indebtedness, including the
Notes. If the Company cannot generate sufficient cash flow from operations or
borrow under the Senior Bank Facilities to meet such obligations, then the
Company may be required to take certain actions, including reducing or delaying
capital expenditures, attempting to restructure or refinance its debt, selling
material assets or operations, or seeking additional equity. There can be no
assurance that such actions could be effected or would be effective in allowing
the Company to meet such obligations. The failure to generate such sufficient
cash flow or to achieve such alternatives could significantly adversely affect
the market value of the Notes and the Company's ability to pay the principal of,
and interest on, the Notes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
SUBORDINATION OF NOTES
The Notes are unsecured obligations of the Issuers that are subordinated in
right of payment to all existing and future Senior Indebtedness of the Issuers,
including all indebtedness under the Senior Bank Facilities. In addition to
being contractually subordinated, the Notes are unsecured and thus effectively
rank junior to any secured indebtedness of the Issuers or the Company's
subsidiaries, including the indebtedness outstanding under the Senior Bank
Facilities, which is secured by liens on substantially all the assets of the
Company. As of March 31, 1998, approximately $181.8 million of Senior
Indebtedness was outstanding and the Company had borrowing availability of
approximately $57.3 million under the Senior Bank Facilities. The Indenture and
the Senior Bank Facilities permit the Issuers to incur additional Senior
Indebtedness, provided that certain conditions are met, and the Issuers expect
from time to time to incur additional Senior
11
<PAGE> 17
Indebtedness. Furthermore, the Indenture does not limit the Issuers' ability to
secure Senior Indebtedness. In the event of the insolvency, liquidation,
reorganization, dissolution or other winding up of the Company or upon a default
in payment with respect to, or the acceleration of, or if a judicial proceeding
is pending with respect to, any default under any Senior Indebtedness, the
lenders under the Senior Bank Facilities (the "Lenders") and any other creditors
who are holders of Senior Indebtedness must be paid in full before a holder of
the Notes may be paid. Accordingly, there may be insufficient assets remaining
after such payments to pay principal of, or interest on, the Notes. See
"Description of the Notes -- Ranking."
The Company's obligations under the Senior Bank Facilities are secured by
substantially all of the assets of the Company. If a default occurs in respect
of the credit agreement (the "Credit Agreement") under which the Senior Bank
Facilities are provided, and the Company is unable to repay such borrowings, the
Lenders would have the right to exercise the remedies available to secured
creditors under applicable law and pursuant to the Senior Bank Facilities.
Accordingly, the Lenders will be entitled to payment in full from the assets
securing such indebtedness prior to any payment to holders of the Notes. If the
Lenders or the holders of any other secured indebtedness were to foreclose on
the collateral securing the Company's obligations to them, it is possible that
there would be insufficient assets remaining after satisfaction in full of all
such indebtedness to satisfy in full the claims of holders of the Notes.
RESTRICTIVE DEBT COVENANTS
The Credit Agreement and the Indenture contain a number of significant
covenants that, among other things, restrict the ability of the Company and its
subsidiaries to dispose of assets, incur additional indebtedness, pay dividends,
prepay, redeem or repurchase subordinated indebtedness (including, in the case
of the Senior Bank Facilities, the Notes), enter into sale-leaseback
transactions, create liens, engage in mergers or consolidations, make capital
expenditures and make certain investments or acquisitions and otherwise restrict
business activities. In addition, under the Senior Bank Facilities, the Company
is required to comply with specified financial covenants, including, without
limitation, minimum fixed charge coverage ratios, minimum interest coverage
ratios, minimum net worth tests and maximum leverage ratios. The ability of the
Company to comply with such provisions may be affected by events beyond the
Company's control. See the historical financial statements of the Company,
including the notes thereto, appearing elsewhere in this Prospectus. The breach
of any of these covenants could result in a default under the Senior Bank
Facilities. See "Description of Senior Bank Facilities." In the event of any
such default, depending upon the actions taken by the Lenders, the Company could
be prohibited from making any payments of principal of, or interest on, the
Notes. See "Description of the Notes -- Ranking." In addition, the Lenders could
elect to declare all amounts borrowed under the Senior Bank Facilities, together
with accrued interest, to be due and payable or could proceed against the
collateral securing such indebtedness. If the indebtedness under the Senior Bank
Facilities were accelerated, there could be no assurance the Company would have
sufficient funds to repay in full such indebtedness and the other indebtedness
of the Company, including the Notes.
POSSIBLE INCREASES IN PRICES OF RAW MILK
The principal raw material used by the Company is fluid milk. The price of
raw milk is determined by a number of factors, including competitive factors as
well as federal, state and regional regulations and support programs. See
"Business -- The Dairy Industry -- Raw Milk Pricing" and "Business -- Raw
Materials." There have been significant fluctuations in raw milk prices from
time to time. Historically, the Company has generally been able to pass price
increases through to its customers. There can be no assurance, however, that
material increases in milk prices will not occur or that the Company will be
able to pass any such price increases through to its customers.
On November 6, 1997, a federal judge in Minnesota enjoined the United
States Department of Agriculture ("USDA") from collecting Class I differentials
in most federal market orders that establish the federally mandated minimum
price of raw milk, beginning with November raw milk sales. The USDA has obtained
a stay of this ruling pending the outcome of the USDA's appeal to the U.S. Court
of Appeals for the 8th Circuit. Additionally, the USDA has proposed new rules
for the federal milk marketing program which have been published for public
comment. The comment period expires April 30, 1998. The USDA is also
12
<PAGE> 18
considering, as part of formal rulemaking, a proposal to establish a temporary
price floor for raw milk. In addition, certain states have formed or are in the
process of attempting to form regional milk-price compacts designed to ensure
that cheaper milk from other regions does not undercut local producers' prices,
which may result in higher milk prices than the federally mandated minimum
prices. While management does not believe that these matters should have a
material adverse effect on the Company's business, neither the outcome of the
court proceedings, the final form of any new federal regulations or the
existence or location of any additional state compacts nor the effect of such
matters on the Company can be predicted with any certainty.
COMPETITION; CONSOLIDATION OF THE DAIRY INDUSTRY
The Company's dairy and fruit drink processing and distribution businesses
are subject to competition from other regional dairy processors and from large
national food service distributors that also operate in the markets served by
the Company. Competition in these businesses is based primarily upon service,
price, brand recognition, quality and breadth of product line. In addition,
since most customer arrangements are terminable on relatively short notice, the
Company could be vulnerable to price cutting from competitors. The Company
competes with independent processors, large national food service distributors
and the business of Borden Dairies, which is operated by Milk Products. The
business operated by Milk Products remains the Company's most significant
competitor in Texas and Louisiana. See "Business -- Competition."
The dairy processing industry has excess capacity and has been in the
process of consolidation due to limited growth in the demand for fresh milk
products, more efficient processing techniques and the establishment by large
grocery retailers of captive dairy product processing plants. See
"Business -- The Dairy Industry."
DEPENDENCE ON KEY EMPLOYEES
The success of the Company's future business operations is dependent in
part upon the efforts and skills of certain key members of management. These
persons include Mr. Schenkel and Mr. Ward. The loss of either of these persons
could have an adverse effect on the Company. The Company has entered into
employment contracts with each of Messrs. Schenkel and Ward which will have
terms that will extend until 2002 and contain certain compensation arrangements
and non-compete provisions. See "Management -- Executive Compensation." The
Company has not obtained key man life insurance with respect to any of its key
members of management.
PUT BY MR. SCHENKEL
Commencing January 1, 2003, Mr. Schenkel has the right to put his interest
in the Company to the Company or, if the Company does not elect to purchase Mr.
Schenkel's interest, to DFA, and DFA has the right to call 20% of his interest
in the Company. Any exercise of a put or call with respect to the Company
triggers a corresponding put or call with respect to Mr. Schenkel's member
interest in SFG Management. However, DFA may be prohibited from accepting or
purchasing any interest in the Company or SFG Management if, after such
purchase, DFA would own more than 50% of the voting interests in the Company or
SFG Management. In October 1997 DFA and Mr. Schenkel entered into an agreement
that sets forth Mr. Schenkel's remedies if DFA is unable to perform its
obligations. See "Description of the Partnership Agreement and Operating
Agreement -- Put and Call Relating to Mr. Schenkel's Interest in the Company and
SFG Management."
POTENTIAL DEADLOCK AND CONFLICTS OF INTEREST BETWEEN MEMBERS OF THE GENERAL
PARTNER
Except as otherwise provided by the SFG Amendments, major decisions by the
General Partner of the Company require the unanimous consent of representatives
of DFA and Mr. Schenkel who are members of its management committee (the
"Committee"). This creates the potential for deadlocks. In the event of a
deadlock, the Partnership Agreement and the Operating Agreement each provides
for arbitration of any disputes. See "Description of the Partnership Agreement
and Operating Agreement."
13
<PAGE> 19
The Company is 50% owned by DFA, the nation's largest dairy cooperative.
The Company has an agreement with DFA under which all of the Company's raw milk
requirements are supplied by DFA. DFA's stated mission is to provide the highest
possible return to its members for their milk. Although this relationship may
create the potential for conflicts of interest in the Company's milk purchase
and other activities, the Company believes that its relationship with DFA has
not adversely affected the Company to date. The Company has agreed in the
Indenture that its transactions with DFA and other Affiliates (as defined) will
be conducted only in the ordinary course of business on terms not materially
less favorable to the Company than would be obtainable in a comparable
transaction with a person not an Affiliate of the Company. See "Description of
the Notes -- Certain Covenants -- Limitation on Transactions with Affiliates."
ENVIRONMENTAL LIABILITIES
The Company's operations and properties are subject to federal, state and
local laws, regulations and ordinances relating to environmental matters,
particularly those that govern discharges to air, soil and water, as well as the
management of hazardous and toxic substances ("Hazardous Substances") or that
impose liability for the costs of remediating sites affected by, and for damages
resulting from, past disposal or other releases of Hazardous Substances
("Environmental Laws"). Ammonia, a refrigerant used extensively in the Company's
operations, is considered an "extremely" Hazardous Substance pursuant to federal
Environmental Law due to its toxicity. In the past, the Company has experienced
occasional accidental releases of ammonia. The Company has established
procedures and provided for containment systems to prevent or minimize the
impact of any such releases in the future. However, there can be no assurance
that any such future releases will not have a material adverse effect on the
operations of a facility that may be the source of any such release. Many of the
Company's owned and leased facilities, particularly those that provide
maintenance services for truck fleets, store Hazardous Substances (e.g.,
gasoline, diesel fuel and used motor oil) in underground storage tanks. Leaks
and spills associated with these tanks could require remediation of soil and/or
groundwater, perhaps at substantial cost.
Particular environmental regulations affecting the Company include
stringent wastewater discharge standards and governmental requirements for the
safe handling and storage of Hazardous Substances such as laboratory chemicals,
cleaning and maintenance supplies and paints and solvents that are used in the
Company's day-to-day operations. Failure to comply with these requirements may
result in increased expenditures associated with governmental enforcement
actions, cleanup costs, surcharges or capital improvements to correct
non-compliance. See "Business -- Regulatory Environment -- Environmental
Matters."
CHANGE OF CONTROL
A Change of Control could require the Company to refinance substantial
amounts of its indebtedness. Upon the occurrence of a Change of Control, the
Issuers could be required to offer to repurchase the Notes at a purchase price
equal to 101% of the principal amount of such Notes, plus accrued and unpaid
interest, if any, to the date of purchase. The Issuers will comply, to the
extent applicable, with the requirements of Section 14(e) of the Exchange Act,
including Rule 14e-1, and any other applicable securities laws or regulations in
connection with any required repurchase of the Notes. However, the Credit
Agreement prohibits the purchase of the Notes by the Company in the event of a
Change of Control, unless and until such time as the indebtedness under the
Senior Bank Facilities is repaid in full. The Issuers' failure to purchase the
Notes would result in a default under the Indenture and the Senior Bank
Facilities. The Credit Agreement also provides that the indebtedness under the
Senior Bank Facilities could be accelerated in the event of a "Change of
Control" as defined therein. A Change of Control as defined in the Indenture
would constitute a "Change of Control" under the Credit Agreement. The inability
to repay the indebtedness under the Senior Bank Facilities, if accelerated,
could have adverse consequences to the Company and the holders of the Notes. In
the event of a Change of Control, there can be no assurance that the Company
would have sufficient assets to satisfy all of its obligations under the Senior
Bank Facilities and the Notes. See "Description of Senior Bank Facilities" and
"Description of the Notes -- Change of Control."
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<PAGE> 20
FRAUDULENT CONVEYANCE
The incurrence of indebtedness and the use of proceeds thereof are subject
to review under relevant federal and state fraudulent conveyance statutes in a
bankruptcy or reorganization case or a lawsuit by or on behalf of creditors of
the obligor. Under these statutes, if a court were to find that obligations were
incurred with the intent of hindering, delaying or defrauding present or future
creditors or that the obligor received less than a reasonably equivalent value
or fair consideration for those obligations and, at the time of the occurrence
of the obligations, the obligor (i) was insolvent or rendered insolvent by
reason thereof, (ii) was engaged or was about to engage in a business or
transaction for which its remaining unencumbered assets constituted unreasonably
small capital or (iii) intended to or believed that it would incur debts beyond
its ability to pay such debts as they matured or became due, such court could
void or subordinate the obligations in question.
The measure of insolvency for purposes of a fraudulent conveyance claim
will vary depending upon the law of the jurisdiction being applied. Generally,
however, a company will be considered insolvent at a particular time if the sum
of its debts at that time is greater than the then fair value of its assets or
if the fair saleable value of its assets at that time is less than the amount
that would be required to pay its probable liability on its existing debts as
they become absolute and mature. There can be no assurance, however, as to the
standard a court would apply to evaluate the parties' intent or to determine
whether the Company was insolvent at the time of, or rendered insolvent upon
consummation of, the Transactions or that, regardless of the standard, a court
would not determine that the Company was insolvent at the time of, or rendered
insolvent upon consummation of, the Transactions.
ABSENCE OF PUBLIC MARKET
The Exchange Notes are new securities for which there currently is no
market. Although the Initial Purchaser informed the Company that it currently
intends to make a market in the Exchange Notes, it is not obligated to do so and
any such market making may be discontinued at any time without notice. In
addition, such market making activity may be limited during the pendency of the
Exchange Offer or the effectiveness of a shelf registration statement in lieu
thereof. Accordingly, there can be no assurance as to the development or
liquidity of any market for the Exchange Notes. The Outstanding Notes have been
designated for trading in the Private Offerings, Resales and Trading through
Automatic Linkages ("PORTAL") market. The Exchange Notes will not be eligible
for trading in the PORTAL market and the Company does not intend to apply for
listing of the Exchange Notes on any securities exchange or on any automated
dealer quotation system. The liquidity of, and trading market for, the Exchange
Notes also may be adversely affected by general declines in the market for
similar securities. Such a decline may adversely affect such liquidity and
trading markets independent of the financial performance of, and prospects for,
the Company.
EXCHANGE OFFER PROCEDURES AND CONSEQUENCES OF THE EXCHANGE OFFER TO
NON-TENDERING HOLDERS OF OUTSTANDING NOTES
Issuance of the Exchange Notes for Outstanding Notes pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
tendered Outstanding Notes, a properly completed, duly executed Letter of
Transmittal and all other required documents or, in the alternative, after
timely compliance with DTC's ATOP procedures described below. Therefore, holders
desiring to tender their Outstanding Notes in exchange for Exchange Notes should
allow sufficient time to ensure timely delivery.
The Issuers are under no duty to give notification of defects or
irregularities in the tender of Outstanding Notes for exchange. Any Outstanding
Notes that are not tendered or are tendered but not accepted will, following the
consummation of the Exchange Offer, continue to be subject to the existing
restrictions upon transfer thereof and, upon consummation of the Exchange Offer,
the registration rights under the Registration Rights Agreement generally will
terminate. In such event, holders of Outstanding Notes seeking liquidity in
their investment would have to rely on exemptions from the registration
requirements under the securities laws, including the Securities Act. Following
the Exchange Offer, holders of the Notes will not be entitled to receive any
liquidated damages that would otherwise be payable by the Issuers if the Issuers
failed to consummate the Exchange Offer in accordance with the terms of the
Registration Rights Agreement.
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<PAGE> 21
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus and any related amendments or
supplements to this Prospectus under the captions "Prospectus Summary", "Risk
Factors", "Unaudited Pro Forma Combined Consolidated Statement of Income",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Business" and elsewhere herein are "forward-looking statements."
Such statements include, without limitation, any statement that may predict,
forecast, indicate, or imply future results, performance or achievements, and
may contain the words "believe," "anticipate," "expect," "estimate," "project,"
"will be," "will continue," will likely result," or words or phrases of similar
meaning. Such statements involve risks, uncertainties or other factors which may
cause actual results to differ materially from the future results, performance
or achievements expressed or implied by such forward-looking statements. Such
risks, uncertainties and other important factors include, among others, the
following: heightened competition, including specifically the intensification of
price competition; adverse state and federal legislation and regulation; loss of
key executives; general economic and business conditions which are less
favorable than expected; unanticipated changes in industry trends; demographic
changes; changes in consumer preferences; the size, timing and mix of purchases
of the Company's products; customer service; adverse publicity; fluctuations and
difficulty in forecasting operating results; the ability of the Company to
sustain, manage or forecast its growth; new product development and
introduction; the ability to secure and protect trademarks, patents, and other
intellectual property; the entry of new competitors and the development of new
products or services by new and existing competitors; failure to obtain new
customers or failure to retain existing customers; inability to carry out
marketing and sales plans; the loss of significant suppliers; business
disruptions including conditions affecting the public health and the production
process; product recalls; changes in business strategy or development plans;
liability and other claims asserted against the Company; the ability to attract
and retain qualified personnel; and other factors referenced in this Prospectus.
Moreover, the Company operates in a very competitive and rapidly changing
environment. New risk factors emerge from time to time and it is not possible
for management to predict all such risk factors, nor can it assess the impact of
all such risk factors on the Company's business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements. These forward-looking
statements represent the estimates and assumptions of management only as of the
date of this Prospectus. Given these risks and uncertainties, investors should
not place undue reliance on forward-looking statements as a prediction of actual
results.
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<PAGE> 22
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
Pursuant to the Registration Rights Agreement, the Issuers have agreed (i)
to file a registration statement with respect to an offer to exchange the
Outstanding Notes for senior debt securities of the Issuers with terms
substantially identical to the Outstanding Notes (except that the Exchange Notes
will not contain terms with respect to transfer restrictions, registration
rights and liquidated damages) on or prior to 210 days after the Issue Date and
(ii) to use best efforts to cause such registration statement to become
effective under the Securities Act within 270 days after the Issue Date. In the
event that any change in law or applicable interpretations thereof by the staff
of the Commission do not permit the Issuers to effect the Exchange Offer as
contemplated thereby, or if certain holders of the Outstanding Notes notify the
Issuers that they are not eligible to participate in, or would not receive
freely tradeable Exchange Notes in exchange for tendered Outstanding Notes
pursuant to the Exchange Offer, the Issuers will use their best efforts to cause
to become effective a shelf registration statement (the "Shelf Registration
Statement") with respect to the resale of the Outstanding Notes and, with
certain exceptions, to keep the Shelf Registration Statement effective until two
years after the Issue Date. In the event that the Issuers are not in compliance
with certain obligations under the Registration Rights Agreement, the Issuers
shall be obligated to pay liquidated damages to holders of the Outstanding
Notes. See "Exchange and Registration Rights Agreement."
Each holder of the Outstanding Notes that wishes to exchange such
Outstanding Notes for Exchange Notes in the Exchange Offer will be required to
make certain representations, including representations that (i) any Exchange
Notes to be received by it will be acquired in the ordinary course of its
business, (ii) it has no arrangement or understanding with any persons to
participate in the distribution of the Exchange Notes, and (iii) it is not an
"affiliate," as defined in Rule 405 of the Securities Act, of the Issuers or if
it is an affiliate, it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
RESALE OF EXCHANGE NOTES
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third-parties, except as described below, the
Issuers believe that the Exchange Notes issued pursuant to the Exchange Offer in
exchange for Outstanding Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than a holder which is an "affiliate"
of the Issuers within the meaning of Rule 405 under the Securities Act or
broker-dealers, as set forth below) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business and
such holder (i) is not engaged in and does not intend to engage in a
distribution of such Exchange Notes and (ii) has no arrangement or understanding
with any person to participate in the distribution of such Exchange Notes. Any
holder who tenders in the Exchange Offer with the intention or for the purpose
of participating in a distribution of the Exchange Notes cannot rely on such
interpretation by the staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. Unless an exemption from
registration is otherwise available, any such resale transaction should be
covered by an effective registration statement containing the selling security
holder's information required by Item 507 of Regulation S-K under the Securities
Act. This Prospectus may be used for an offer to resell, resale or other
retransfer of Exchange Notes only as specifically set forth herein. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Outstanding Notes, must acknowledge that it (i) acquired the Outstanding Notes
for its own account as a result of market making activities or other trading
activities, (ii) has not entered into any arrangement or understanding with the
Issuers or any "affiliate" of the Issuers (within the meaning under Rule 405 of
the Securities Act) to distribute the Exchange Notes to be received in the
Exchange Offer and (iii) will deliver a prospectus in connection with any resale
of such Exchange Notes. The Letter of Transmittal states that by so
acknowledging and delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act. The
Issuers have agreed that, for a period of 90 days, if required, after the
Expiration Date, it will make the Prospectus available
17
<PAGE> 23
to any broker-dealer for use in connection with any such resale. See "Plan of
Distribution." In that regard, each participating broker-dealer who surrenders
Outstanding Notes pursuant to the Exchange Offer will be deemed to have agreed,
by execution of the Letter of Transmittal or delivery of an Agent's Message in
lieu thereof that, upon receipt of notice from the Issuers of the occurrence of
any event or the discovery of any fact which makes any statement contained or
incorporated by reference in this Prospectus untrue in any material respect or
which causes this Prospectus to omit to state a material fact necessary in order
to make the statements contained or incorporated by reference herein, in light
of the circumstances under which they were made, not misleading or of the
occurrence of certain other events specified in the Registration Rights
Agreement, such participating broker-dealer will suspend the sale of the
Exchange Notes pursuant to this Prospectus until the Issuers have amended or
supplemented this Prospectus to correct such misstatement or omission and have
furnished copies of the amended or supplemented Prospectus to such participating
broker-dealer or the Issuers have given notice that the sale of the Exchange
Notes may be resumed, as the case may be.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Issuers will accept for exchange any and
all Outstanding Notes properly tendered and not withdrawn prior to 5:00 p.m.,
New York City time, on the Expiration Date. The Issuers will issue $1,000
principal amount of Exchange Notes in exchange for each $1,000 principal amount
of Outstanding Notes surrendered pursuant to the Exchange Offer. Outstanding
Notes may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes will be the same in all material
respects as the form and terms of the Outstanding Notes, except the Exchange
Notes will be registered under the Securities Act and hence will not bear
legends restricting the transfer thereof. The Exchange Notes will evidence the
same debt as the Outstanding Notes. The Exchange Notes will be issued under and
entitled to the benefits of the Indenture, which also authorized the issuance of
the Outstanding Notes, such that both series will be treated as a single class
of debt securities under the Indenture.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Outstanding Notes being tendered for exchange.
As of the date of this Prospectus, $150.0 million aggregate principal
amount of the Outstanding Notes are outstanding. This Prospectus, together with
the Letter of Transmittal, is being sent to all registered holders of
Outstanding Notes. There will be no fixed record date for determining registered
holders of Outstanding Notes entitled to participate in the Exchange Offer.
The Exchange Offer is not being made to, nor will the Issuers accept
surrenders for exchange from, holders of Outstanding Notes in any jurisdiction
in which this Exchange Offer or the acceptance thereof would not be in
compliance with the securities or blue sky laws of such jurisdiction.
The Issuers intend to conduct the Exchange Offer in accordance with the
provisions of the Registration Rights Agreement and the applicable requirements
of the Exchange Act, and the rules and regulations of the Commission thereunder.
Outstanding Notes which are not tendered for exchange in the Exchange Offer will
remain outstanding and continue to accrue interest, will be entitled to the
rights and benefits such holders have under the Indenture but, subject to
certain limited exceptions, will not be entitled to the rights and benefits such
holders previously had under the Registration Rights Agreement.
The Issuers shall be deemed to have accepted for exchange properly tendered
Outstanding Notes when, as and if the Issuers shall have given oral or written
notice thereof to the Exchange Agent and complied with the provisions of Section
1 of the Registration Rights Agreement. The Exchange Agent will act as agent for
the tendering holders for the purposes of receiving the Exchange Notes from the
Issuers. The Issuers expressly reserve the right to amend or terminate the
Exchange Offer, and not to accept for exchange any Outstanding Notes not
theretofore accepted for exchange, upon the occurrence of any of the conditions
specified below under "-- Certain Conditions to the Exchange Offer."
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<PAGE> 24
Holders who tender Outstanding Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of
Outstanding Notes pursuant to the Exchange Offer. The Issuers will pay all
charges and expenses, other than certain applicable taxes described below, in
connection with the Exchange Offer. See "-- Fees and Expenses."
NEITHER THE GENERAL PARTNER OF THE COMPANY NOR THE BOARD OF DIRECTORS OF
SFG CAPITAL IS MAKING ANY RECOMMENDATION TO HOLDERS OF OUTSTANDING NOTES AS TO
WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY PORTION OF THEIR
OUTSTANDING NOTES PURSUANT TO THE EXCHANGE OFFER. IN ADDITION, NO ONE HAS BEEN
AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS OF OUTSTANDING NOTES MUST
MAKE THEIR OWN DECISION WHETHER TO TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF
SO, THE AGGREGATE AMOUNT OF OUTSTANDING NOTES TO TENDER AFTER READING THIS
PROSPECTUS AND THE LETTER OF TRANSMITTAL AND CONSULTING WITH THEIR ADVISERS, IF
ANY, BASED ON THEIR OWN FINANCIAL POSITION AND REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on July
, 1998, unless the Issuers extend the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date and time to which the Exchange
Offer is extended.
The Issuers expressly reserve the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Outstanding Notes. During any such
extensions, all Outstanding Notes previously tendered will remain subject to the
Exchange Offer and may be accepted for exchange by the Issuers.
In order to extend the Exchange Offer, the Issuers will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders of Outstanding Notes an announcement thereof, each prior to 9:00 a.m.,
New York City time, on the next business day after the Expiration Date as in
effect prior to such extension. Without limiting the manner by which the Issuers
may choose to make public announcements of any delay in acceptance, extension,
termination or amendment of the Exchange Offer, the Issuers shall have no
obligation to publish, advertise, or otherwise communicate any such public
announcement, other than by making a timely release to the Dow Jones News
Service.
The Issuers reserve the right (i) to delay accepting for exchange any
Outstanding Notes, to extend the Exchange Offer or to terminate the Exchange
Offer if any of the conditions set forth below under "-- Certain Conditions to
the Exchange Offer" shall not have been satisfied, by giving oral or written
notice of such delay, extension or termination to the Exchange Agent or (ii) to
amend the terms of the Exchange Offer. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof to the registered holders of Outstanding Notes. If the
Exchange Offer is amended in a manner determined by the Issuers to constitute a
material change, the Issuers will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered holders, and
the Issuers will extend the period of the Exchange Offer, depending upon the
significance of the amendment and the manner of disclosure to the registered
holders, if the Exchange Offer would otherwise expire during such period.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate of 9 7/8% per annum,
payable semi-annually, on March 1 and September 1 of each year, commencing on
September 1, 1998. Holders of Exchange Notes will receive interest on September
1, 1998 from the date of initial issuance of the Exchange Notes, plus an amount
equal to the accrued interest on the Outstanding Notes. Interest on the
Outstanding Notes accepted for the exchange will cease to accrue upon issuance
of the Exchange Notes.
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<PAGE> 25
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Issuers will not
be required to accept for exchange, or exchange any Exchange Notes for, any
Outstanding Notes, and may terminate the Exchange Offer as provided herein
before the acceptance of any Outstanding Notes for exchange, if:
(a) any action or proceeding is instituted or threatened in any court
of competent jurisdiction by or before any governmental agency with respect
to the Exchange Offer which, in the Issuers' reasonable judgment, might
materially impair the ability of the Issuers to proceed with the Exchange
Offer;
(b) Any rule, statute, or regulation is proposed, adopted or enacted,
or any existing law, statute, rule or regulation is interpreted by the
staff of the Commission, which, in the Issuers' reasonable judgment, might
materially impair the ability of the Issuers to proceed with the Exchange
Offer; or
(c) any governmental approval has not been obtained, which approval
the Issuers shall, in their reasonable discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
The foregoing conditions are for the sole benefit of the Issuers and may be
asserted by the Issuers regardless of the circumstances giving rise to any such
condition or may be waived by the Issuers in whole or in part at any time and
from time to time in their sole discretion. The failure by the Issuers at any
time to exercise any of the foregoing rights shall not be deemed a waiver of any
such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time. In the event the Issuers assert or
waive a condition to the Exchange Offer which constitutes a material change to
the terms of the Exchange Offer, the Issuers will follow the procedures for an
extension or amendment of the Exchange Offer.
In addition, the Issuers will not accept for exchange any Outstanding Notes
tendered, and no Exchange Notes will be issued in exchange for any such
Outstanding Notes, if at such time any stop order shall be threatened or in
effect with respect to the Registration Statement of which this Prospectus
constitutes a part or the qualification of the Indenture under the Trust
Indenture Act of 1939.
PROCEDURES FOR TENDERING
Only a holder of Outstanding Notes may tender such Outstanding Notes in the
Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign
and date the Letter of Transmittal, or facsimile thereof, have the signature
therein guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile to the Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date or, in the
alternative, comply with DTC's ATOP procedures described below. In addition,
prior to the Expiration Date (i) Outstanding Notes must be received by the
Exchange Agent along with the Letter of Transmittal, (ii) a properly transmitted
Agent's Message and timely confirmation of book-entry transfer (a "Book-Entry
Confirmation") of such Outstanding Notes, if such procedure is available, into
the Exchange Agent's account at DTC (sometimes hereafter referred to as the
"Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below must be received by the Exchange Agent, or (iii) the
holder must comply with the guaranteed delivery procedures described below. See
"Book-Entry; Delivery and Form."
PHYSICAL DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH ITS PROCEDURES
DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a holder which is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Issuers in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES, THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. IF THE HOLDER IS NOT USING DTC'S ATOP, IT IS RECOMMENDED THAT
HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE,
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<PAGE> 26
INSTEAD OF DELIVERY BY MAIL. IN ALL CASES SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF
TRANSMITTAL OR OUTSTANDING NOTES SHOULD BE SENT TO THE ISSUERS. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
OTHER NOMINEES TO EFFECT THE ABOVE DESCRIBED TRANSACTION FOR SUCH HOLDERS.
Any beneficial owner whose Outstanding Notes are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder of Outstanding Notes to tender on such beneficial owner's
behalf.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below, as the case may be, must be guaranteed by an Eligible Institution (as
defined below) unless the Outstanding Notes tendered pursuant thereto are
tendered (i) by a registered holder who has not completed the box entitled
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are required to be
guaranteed, such guarantor must be a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act which is a member of one of the recognized
signature guarantor programs identified in the Letter of Transmittal (an
"Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Outstanding Notes listed therein, such Outstanding
Notes must be endorsed or accompanied by a properly completed bond power, signed
by such registered holder as such registered holder's name appears on such
Outstanding Notes with the signature thereon guaranteed by an Eligible
Institution.
If the Letter of Transmittal or any Outstanding Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such person should so indicate when signing, and unless waived by the
Issuers, should submit evidence satisfactory to the Issuers of their authority
to so act with the Letter of Transmittal.
The Exchange Agent will make a request to establish an account with respect
to the Outstanding Notes at DTC for purposes of the Exchange Offer promptly
after the date of this Prospectus. The Exchange Agent and DTC have confirmed
that any financial institution that is a participant in DTC's system may utilize
DTC's ATOP to tender. Accordingly, participants in DTC's ATOP may, in lieu of
physically completing and signing the Letter of Transmittal and delivering it to
the Exchange Agent, electronically transmit their acceptance of the Exchange
Offer by causing DTC to transfer the Outstanding Notes to the Exchange Agent in
accordance with DTC's ATOP procedures for transfer. DTC will then send an
Agent's Message to the Exchange Agent.
The term "Agent's Message" means a message transmitted by DTC received by
the Exchange Agent and forming part of the Book-Entry Confirmation, which states
that DTC has received an express acknowledgment from a participant in DTC's ATOP
that is tendering Outstanding Notes which are the subject of such book entry
confirmation, that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal (or, in the case of an Agent's Message
relating to guaranteed delivery, that such participant has received and agrees
to be bound by the applicable Notice of Guaranteed Delivery), and that the
agreement may be enforced against such participant.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Outstanding Notes and withdrawal of tendered
Outstanding Notes will be determined by the Issuers in their sole discretion,
which determination will be final and binding. The Issuers reserve the absolute
right to reject any and all Outstanding Notes not properly tendered or any
Outstanding Notes, the Issuers' acceptance of which would, in the opinion of
counsel for the Issuers, be unlawful. The Issuers also reserve the right to
waive any defects, irregularities or conditions of tender as to particular
Outstanding Notes. The Issuers' interpreta-
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<PAGE> 27
tion of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Outstanding Notes must be cured within such time as the Issuers shall
determine. Although the Issuers intend to notify holders of defects or
irregularities with respect to tenders of Outstanding Notes, neither the
Issuers, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Outstanding Notes will not be
deemed to have been made until such defects or irregularities have been cured or
waived. Any Outstanding Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering holder,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In all cases, issuance of Exchange Notes for Outstanding Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of Outstanding Notes, a properly completed
and duly executed Letter of Transmittal and all other required documents or a
timely Book-Entry Confirmation (with Agent's Message) of such Outstanding Notes
into the Exchange Agent's account at the Book-Entry Transfer Facility. If any
tendered Outstanding Notes are not accepted for exchange for any reason set
forth in the terms and conditions of the Exchange Offer or if Outstanding Notes
are submitted for a greater principal amount than the holder desires to
exchange, such unaccepted or non-exchanged Outstanding Notes will be returned
without expense to the tendering holder thereof (or, in the case of Outstanding
Notes tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described above, such non-exchanged Outstanding Notes will be credited to an
account maintained with such Book-Entry Transfer Facility) as promptly as
practicable after the expiration or termination of the Exchange Offer.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Outstanding Notes and (i) whose
Outstanding Notes are not immediately available or (ii) who cannot deliver their
Outstanding Notes, the Letter of Transmittal or any other required documents to
the Exchange Agent prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the registered number(s)
of such Outstanding Notes and the principal amount of Outstanding Notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within three Nasdaq Stock Market trading days after the Expiration
Date, the Letter of Transmittal (or facsimile thereof), and any other
documents required by the Letter of Transmittal, together with the
Outstanding Notes, or a Book-Entry Confirmation and properly transmitted
Agent's Message, as the case may be, will be delivered by the Eligible
Institution to the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), and any other documents required by the Letter of
Transmittal, as well as all tendered Notes in proper form for transfer or a
Book-Entry Confirmation and properly transmitted Agent's Message, as the
case may be, are received by the Exchange Agent within three Nasdaq Stock
Market trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Outstanding Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
22
<PAGE> 28
For a withdrawal to be effective, (i) a written notice of withdrawal must
be received by the Exchange Agent at the Dallas, Texas address set forth below
under "-- Exchange Agent" or (ii) holders must comply with the appropriate
procedures of DTC's ATOP system. Any such notice of withdrawal must specify the
name of the person having tendered the Outstanding Notes to be withdrawn,
identify the Outstanding Notes to be withdrawn (including the principal amount
of such Outstanding Notes), and (where certificates for Outstanding Notes have
been transmitted) specify the name in which such Outstanding Notes were
registered, if different from that of the withdrawing holder. If certificates
for Outstanding Notes have been delivered or otherwise identified to the
Exchange Agent, then, prior to the release of such certificates the withdrawing
holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such holder is an Eligible Institution. If
Outstanding Notes have been tendered pursuant to the procedure for book-entry
transfer described above, any notice of withdrawal must specify the name and
number of the account at the Book-Entry Transfer Facility to be credited with
the withdrawn Outstanding Notes and otherwise comply with the procedures of such
facility. All questions as to the validity, form and eligibility (including time
of receipt) of such notices will be determined by the Issuers, whose
determination shall be final and binding on all parties. Any Outstanding Notes
so withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the Exchange Offer. Any Outstanding Notes which have been tendered
for exchange but which have been withdrawn will be returned to the holder
thereof, and subsequently may be retendered by such holder, each in accordance
with the procedures described under "-- Procedures for Tendering."
EXCHANGE AGENT
Chase Bank of Texas, National Association has been appointed as Exchange
Agent of the Exchange Offer.
Unless the holder is complying with the appropriate procedures of DTC's
ATOP system, Outstanding Notes, the Letter of Transmittal and other required
documents must be received by the Exchange Agent prior to 5:00 p.m., New York
City time, on the Expiration Date addressed as follows:
Chase Bank of Texas, National Association
c/o Texas Commerce Trust Company of New York
Attention: Steve Horowitz, Corporate Trust Securities Window
North Building, Room 234, Window 20
55 Water Street
New York, New York 10041
Questions, requests for assistance and notices of withdrawal should be
directed to the Exchange Agent addressed as follows:
Chase Bank of Texas, National Association
Attention: Gary Jones
2200 Ross Avenue, 5th Floor
Dallas, Texas 75201
Telephone: (214) 965-3510
Facsimile: (214) 965-3577
Requests for additional copies of this Prospectus or of the Letter of
Transmittal and requests for Notice of Guaranteed Delivery should be directed to
the Exchange Agent as follows:
Chase Bank of Texas, National Association
Attention: Steve Kohansion
Telephone: (214) 672-5751
Facsimile: (214) 672-5963
23
<PAGE> 29
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Issuers. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, facsimile, telephone or in person by officers and
regular employees of the Issuers and their affiliates.
The Issuers have not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to broker dealers or others
soliciting acceptances of the Exchange Offer. The Issuers, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The expenses to be incurred in connection with the Exchange Offer,
including registration fees, fees and expenses of the Exchange Agent and
Trustee, accounting and legal fees and printing costs, and related fees and
expenses, will be paid by the Issuers.
The Issuers will pay all transfer taxes, if any, applicable to the exchange
of Notes pursuant to the Exchange Offer. If, however, certificates representing
Outstanding Notes for principal amounts not tendered or accepted for exchange
are to be delivered to, or are to be issued in the name of, any person other
than the registered holder of Outstanding Notes tendered, or if tendered
Outstanding Notes are registered in the name of any person other than the person
signing the Letter of Transmittal, or if a transfer tax is imposed for any
reason other than the exchange of Notes pursuant to the Exchange Offer, then the
amount of any such transfer taxes (whether imposed on the registered holder or
any other persons) will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering holder.
TRANSFER TAXES
Holders who tender their Outstanding Notes for exchange will not be
obligated to pay any transfer taxes in connection therewith, except that holders
who instruct the Issuers to register Exchange Notes in the name of, or request
that Outstanding Notes not tendered or not accepted in the Exchange Offer be
returned to, a person other than the registered tendering holder will be
responsible for the payment of any applicable transfer tax thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Outstanding Notes who do not exchange their Outstanding Notes
for Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of such Outstanding Notes, as set forth (i) in the
legend thereon as a consequence of the issuance of the Outstanding Notes
pursuant to the exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state securities
laws and (ii) otherwise set forth in the Offering Memorandum dated August 27,
1997 distributed in connection with the offering of the Outstanding Notes. In
general, the Outstanding Notes may not be offered or sold, unless registered
under the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. The Issuers do not currently anticipate that they will register the
Outstanding Notes under the Securities Act. Based on interpretations by the
staff of the Commission, Exchange Notes issued pursuant to the Exchange Offer
may be offered for resale, resold or otherwise transferred by holders thereof
(other than any such holder which is an "affiliate" of the Issuers within the
meaning of Rule 405 under the Securities Act or broker-dealers) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are acquired in ordinary
course of such holders' business and such holders have no arrangement or
understanding with respect to the distribution of the Exchange Notes to be
acquired pursuant to the Exchange Offer. Any holder who tenders in the Exchange
Offer for the purpose of participating in a distribution of the Exchange Notes
(i) could not rely on the applicable interpretations of the staff of the
Commission and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. In addition, to comply with the securities laws of certain
jurisdictions, if applicable, the Exchange Notes may not be offered or sold
unless they have been registered or such securities laws have been complied
with. The Issuers have agreed, pursuant to the Registration Rights Agreement and
subject to certain specified limitations therein, to register or qualify the
24
<PAGE> 30
Exchange Notes for offer or sale under the securities or blue sky laws of such
jurisdictions as any holder of the Exchange Notes may request in writing.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Outstanding Notes, as reflected in the Issuers' accounting records on the date
of the exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Issuers. The cost of the Exchange Offer and the unamortized
expenses related to the issuance of the Outstanding Notes will be amortized over
the term of the Exchange Notes.
25
<PAGE> 31
THE TRANSACTIONS
OVERVIEW
On September 4, 1997, DFA acquired all of the issued and outstanding
capital stock of Holdings and the Company acquired the Borden License for an
aggregate purchase price of approximately $435 million. Holdings was the owner
of Meadow Gold and the Borden Dairies.
Immediately following the Acquisition, DFA made the Meadow Gold
Contribution to the Company in exchange for (a) the assumption by the Company of
DFA's obligations with respect to the Senior Bank Facilities, which included
$175.0 million of Term Loans that were outstanding under the facilities at the
time of the contribution and (b) the issuance by the Company to DFA of $90.0
million in stated amount of Preferred Interests.
The Company acquired the Meadow Gold Trademarks from Investments for their
appraised value of $50.0 million. In addition, the Company obtained the Borden
License directly from Borden for the appraised value of the Borden Trademarks of
$55.0 million. The Borden License grants to the Company rights to use the Borden
Trademarks in all 50 states and Mexico.
Concurrently with the Meadow Gold Contribution, DFA sold Borden Dairies to
Milk Products for $65.0 million. Immediately prior to the Acquisition, Mr. Allen
Meyer divested his interest in the Company by selling it to Mr. Schenkel for
$3.4 million. The Company sublicensed its rights to use the Borden Trademarks
and related trademarks on a royalty-free basis to Milk Products for use in
certain states, including Texas, Louisiana and New Mexico.
In connection with the Meadow Gold Contribution, the Company issued the
Outstanding Notes, and used the proceeds from the sale of the Outstanding Notes,
together with $45.0 million contributed by Mid-Am Capital for Preferred
Interests and an additional $15.0 million borrowed under the Term Loans, to
repay substantially all of its existing indebtedness on the date of the closing,
and to fund the Trademark Acquisitions.
THE ACQUISITION
Pursuant to a Stock Purchase and Merger Agreement among DFA, Borden and
Holdings (the "Acquisition Agreement"), a wholly-owned subsidiary of DFA
("Acquisition Subsidiary") acquired all the outstanding capital stock of
Holdings owned by Borden. Immediately thereafter, Acquisition Subsidiary merged
with and into Holdings, and cash payments were made to the remaining
shareholders of Holdings, who were members of Holdings' management team. As a
result of such merger, Holdings became a wholly-owned subsidiary of DFA. The
aggregate purchase price paid by DFA for all of the capital stock of Holdings
and by the Company for the Borden License was $435 million. In addition, Borden
received $14.9 million from Holdings, the aggregate amount of earnings before
income taxes of Holdings and its subsidiaries for the period from January 1,
1997 to September 4, 1997, after deducting certain distributions and payments
for taxes made by Holdings to Borden and other agreed-upon adjustments.
THE MEADOW GOLD CONTRIBUTION
After the Acquisition, Holdings and its subsidiaries (other than
Investments and the subsidiary that owned the Borden Dairies) were merged into
DFA. Immediately thereafter, DFA contributed the assets and liabilities that
relate to Meadow Gold (other than the Meadow Gold Trademarks) to the Company.
Upon receipt of the Meadow Gold Contribution, the Company issued to DFA
$90.0 million in stated amount of Series B Preferred Interests and the Company
assumed all of DFA's obligations under the Senior Bank Facilities, which
consisted of $175.0 million of borrowings that were outstanding under the Term
Loans at the time of the contribution.
Pursuant to the terms of the Acquisition Agreement, until September 4, 1998
the Company is obligated to offer employee benefits to the employees of Meadow
Gold that are comparable in the aggregate to the
26
<PAGE> 32
employee benefits that are currently in effect for such employees. The Company
has adopted employee benefit plans for the employees of Meadow Gold that are
substantially similar to their existing employee benefit plans. In consideration
of the transfer of assets relating to the employees of Meadow Gold from the
Borden, Inc. pension plans, the Company assumed the obligation to provide
benefits to such employees with respect to such plans.
THE TRADEMARK ACQUISITIONS
In connection with the Acquisition, the Company paid Borden the appraised
value of the Borden License, which was $55.0 million. The Borden License
authorizes the Company to process, sell and distribute certain products being
processed, sold and distributed by Holdings and its subsidiaries on September 4,
1997, using the Borden Trademarks in the United States and to sell dairy
products using the Borden Trademarks in Mexico. The license agreement is for an
initial term of five years and will be automatically renewed, subject to the
Company remaining in compliance with the terms of the License, for continuous
five-year periods unless it is terminated by the Company. In addition, the
Company received an assignment from Borden of certain of the state trademarks
used by Meadow Gold. Other licenses enabling the licensees to use the Borden
Trademarks in certain additional states are outstanding and the Borden License
will be subject to these existing third party licenses. However, the Company
will be entitled to any fees paid under the licenses.
Immediately after the Acquisition, the Company purchased from Investments
(which at the time of purchase was a wholly-owned subsidiary of DFA) all of the
intellectual property rights relating to Meadow Gold owned by Investments,
including the Meadow Gold Trademarks. The Company paid Investments the appraised
value of the Meadow Gold Trademarks, which was $50.0 million.
Upon consummation of the Trademark Acquisitions, the Company executed a
trademark license agreement with Borden Foods Corporation ("Borden Foods")
pursuant to which the Company granted Borden Foods an exclusive, royalty-free
license (the "Borden Foods License") throughout the United States to use the
Meadow Gold Trademarks in connection with the manufacture and distribution of
sweetened condensed milk. In addition, Borden Foods executed a trademark license
agreement with the Company to allow the Company to use the Eagle Brand
trademarks (the "Eagle Brands License") in connection with the manufacture and
distribution of ice cream until September 4, 1998, to permit the Company to
fulfill Meadow Gold's existing contractual obligations and to convert its
production to its other ice cream brands.
ISSUANCE OF MID-AM CAPITAL PREFERRED INTERESTS AND AMENDMENT OF SERIES A
PREFERRED INTERESTS
Mid-Am Capital made a $45.0 million cash investment in the Company through
the purchase of the Mid-Am Capital Preferred Interests, which consisted of $15.0
million in stated amount of the 10% Series C Preferred Interests and $30.0
million in stated amount of the 9.5% Series D Preferred Interests. In addition,
the 10% Series A Preferred Interests held by DFA at the time of the Acquisition
(the "Series A Preferred Interests") were amended to provide for payment-in-kind
distributions on the Series A Preferred Interests, and to provide that the
Series A Preferred Interests rank pari passu with the Preferred Interests.
MEYER DIVESTITURE
Immediately prior to the Acquisition, Mr. Meyer sold his 24.5% limited
partner interest in the Company and his 25% member interest in SFG Management to
Mr. Schenkel for $3.4 million (the "Meyer Divestiture"). This sale terminated
Mr. Meyer's interest in the Company and in SFG Management.
THE DIVESTITURE; THE BORDEN SUBLICENSE
Borden/Meadow Gold Dairies, Inc., the subsidiary of Holdings that owned the
Borden Dairies, sold Borden Dairies to Milk Products for $65.0 million. In
connection therewith, DFA agreed with the Department of Justice ("DOJ") to amend
the agreements relating to certain of its joint ventures (the "Joint Venture
Agreement Amendments") and entered into a consent decree (the "DOJ Consent
Decree") with regard to the Divestiture, a loan to be provided by Mid-Am Capital
to Milk Products and certain other matters (collectively, "HSR Conditions").
DFA, the Company and Milk Products also entered into a consent decree
27
<PAGE> 33
with the Texas Attorney General relating to the loan provided by Mid-Am Capital
to Milk Products and certain other matters (the "Texas Consent Decree"). See
"Description of the Partnership Agreement and Operating Agreement" and
"Business -- Legal Proceedings."
In addition, the Company granted to Milk Products the Borden Sublicense and
pursuant to another license agreement granted to Milk Products the right to use
certain other marks currently used by the Borden Dairies, such as the Poinsettia
and Lite Line trademarks. The Borden Sublicense is subject to other existing
licenses of these marks, but is an exclusive license for Texas, Louisiana and
New Mexico. Pursuant to these licenses, Milk Products also received a
non-exclusive license of these marks for use in Arkansas, Mississippi, Florida,
Alabama and Tennessee and the parts of Mexico currently served by the operations
of the Borden Dairies, but only for the types of products sold by the Borden
Dairies in those areas on September 4, 1997. The Borden Sublicense is for an
initial term of five years and will be automatically renewed, subject to Milk
Products remaining in compliance with the terms of the Borden Sublicense, for
continuous five-year periods unless it is terminated by Milk Products.
SFG DEBT REFINANCING
Immediately prior to the Transactions, the Company had outstanding (i)
$70.9 million in secured debt owed to its existing bank lenders, (ii) $21.1
million in subordinated debt owed to Mid-Am Capital, (iii) $0.5 million in
subordinated debt owed to SFG Management, and (iv) $1.5 million to various
creditors. As part of the Transactions, all of the Company's existing
indebtedness as of the Closing, other than the $1.5 million referenced in clause
(iv), was repaid in full.
SFG FINANCING
In connection with the Transactions, DFA entered into the Senior Bank
Facilities in an aggregate principal amount of up to $250.0 million, consisting
of $190.0 million principal amount of the Term Loans and the Revolving Credit
Facility in an aggregate principal amount of up to $60.0 million provided by a
group of lending banks. The Company assumed the obligations of DFA with respect
to the Senior Bank Facilities in connection with the Meadow Gold Contribution,
including $175.0 million initially borrowed by DFA under the Term Loans. See
"Description of Senior Bank Facilities."
The aggregate amounts paid by the Company to meet its obligations in
connection with the Transactions consisted of approximately (i) $92.5 million to
repay the Existing Indebtedness, (ii) $50.0 million to purchase the Meadow Gold
Trademarks from Investments, (iii) $55.0 million to acquire the Borden License,
and (iv) $16.1 million to pay costs and expenses incurred by the Company in
connection with the Transactions (of which approximately $11.4 million was paid
at Closing). The funds required by the Company to consummate the Transactions
were provided by the proceeds from the offering of the Outstanding Notes, the
issuance of the Mid-Am Capital Preferred Interests and the remaining $15.0
million of term loan borrowings under the Senior Bank Facilities.
DFA FINANCING OF ACQUISITION PURCHASE PRICE
After deducting the amount paid by the Company for the Borden License, DFA
was required to pay $380.0 million in connection with the Acquisition. These
required funds were provided by (i) borrowings by DFA of $175.0 million under
the Senior Bank Facilities (which were assumed by the Company in connection with
the Meadow Gold Contribution), (ii) $65.0 million from the sale of Borden
Dairies to Milk Products, (iii) $50.0 million from the sale by Investments of
the Meadow Gold Trademarks to the Company, and (iv) $90.0 million of borrowings
under DFA's credit facilities.
28
<PAGE> 34
AMENDMENTS TO PARTNERSHIP AGREEMENT AND OPERATING AGREEMENT
In connection with the Transactions, DFA and Mr. Schenkel also amended the
partnership agreement of the Company (the "Partnership Agreement") and the
limited liability company agreement of the General Partner (the "Operating
Agreement"). These amendments (collectively, the "SFG Amendments") authorized
the issuance of the Preferred Interests issued in the Transactions. They also
implemented certain amendments agreed upon by DFA and the DOJ that restrict
DFA's ability to participate in certain decisions about the operation of the
Company, particularly decisions to expand its business. See "Description of the
Partnership Agreement and Operating Agreement" and "Business -- Legal
Proceedings." The SFG Amendments also amended the put and call agreements
relating to Mr. Schenkel's interest in the Company and SFG Management, so that
at any time on or after January 1, 2003, Mr. Schenkel may require the Company or
DFA to purchase all of his partnership interests in the Company, and DFA has the
option to purchase up to 20% of Mr. Schenkel's interest in the Company. See
"Description of the Partnership Agreement and Operating Agreement -- Put and
Call Relating to Mr. Schenkel's Interest in the Company and SFG Management."
29
<PAGE> 35
USE OF PROCEEDS
There will be no proceeds to the Issuers from the exchange of Notes
pursuant to the Exchange Offer. The Company used the $150.0 million gross
proceeds from the sale of the Outstanding Notes, together with the $45.0 million
investment in the Company by Mid-Am Capital and $15.0 million of borrowings
under the Senior Bank Facilities, as follows: (i) $92.5 million to repay the
Existing Indebtedness, (ii) $105.0 million to make the Trademark Acquisitions,
and (iii) approximately $11.4 million to pay costs and expenses due at the
closing in connection with the Transactions. See "Capitalization" and "The
Transactions -- SFG Financing."
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
as of March 31, 1998, as derived from the Company's unaudited historical
financial statements. This table should be read in conjunction with the
historical financial statements of the Company and related notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1998
---------------------
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C>
Long-term debt:
Term Loans................................................ $181.0
Revolving Credit Facility................................. .8
Notes..................................................... 150.0
Existing Indebtedness..................................... .8
------
Total long-term debt.............................. 332.6
Less current maturities................................ .7
------
Long-term debt, net of current maturities................. $331.9
Partners' equity:
Preferred Interests....................................... $181.5
General partner -- common interest........................ .4
Limited partners -- common interest....................... 13.2
------
Partners' equity....................................... 195.0
------
Total capitalization.............................. $526.9
======
</TABLE>
30
<PAGE> 36
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF INCOME
The following Unaudited Pro Forma Combined Consolidated Statement of Income
for the year ended December 31, 1997 gives effect to the Transactions as if they
had occurred January 1, 1997. The Unaudited Pro Forma Combined Consolidated
Statement of Income is based on the historical financial statements of the
Company and Meadow Gold and the assumptions and adjustments described in the
accompanying notes. The Unaudited Pro Forma Combined Consolidated Statement of
Income does not purport to represent what the Company's results of operations
actually would have been if the Transactions had occurred as of the date
indicated or what such results will be for any future periods.
The Unaudited Pro Forma Combined Consolidated Statement of Income is based
upon assumptions that the Company believes are reasonable and should be read in
connection with the historical financial statements of the Company and Meadow
Gold and the accompanying notes thereto included elsewhere in this Prospectus.
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
MEADOW PRO FORMA PRO FORMA
SFG(A) GOLD(B) ADJUSTMENTS COMBINED
------- ------- ----------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales........................................... $741.0 $313.3 $ $1,054.3
Cost of sales....................................... 547.2 238.6 .4(c) 786.2
------ ------ ------ --------
193.8 74.7 (.4) 268.1
Selling, distribution and general and administrative
expenses......................................... 140.4 61.6 202.0
Amortization of goodwill and other intangible
assets........................................... 12.0 1.2 (1.2)(d) 16.5
2.7(e)
1.8(f)
------ ------ ------ --------
Income from operations.............................. 41.4 11.9 (3.7) 49.6
Interest expense.................................... 16.5 -- 16.4(g) 32.9
Other income, net................................... (1.2) (0.5) (1.7)
------ ------ ------ --------
Net income.......................................... $ 26.1 $ 12.4 $(20.1) $ 18.4
====== ====== ====== ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Consolidated Statement of Income.
31
<PAGE> 37
NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED
STATEMENT OF INCOME
The Unaudited Pro Forma Combined Consolidated Statement of Income gives
effect to the following unaudited pro forma adjustments:
(a) The results for SFG for the year ended December 31, 1997 include
the operations of Meadow Gold from September 4, 1997, the date of
contribution. Pro forma adjustments have been made to recognize only the
additional expenses that would have been incurred had the Transactions
taken place on January 1, 1997.
(b) Represents the revenues, expenses and division income of Meadow
Gold for the period from January 1, 1997 through September 4, 1997.
(c) Represents the additional depreciation expense resulting from the
revaluation to fair value of property, plant and equipment contributed to
the Company by DFA.
(d) Represents the elimination of Meadow Gold's historical
amortization of goodwill.
(e) Represents the additional amortization of goodwill associated with
the assets and liabilities of Meadow Gold contributed to the Company by
DFA, which resulted in goodwill of $169.1 million to be amortized over a 40
year period.
(f) Represents the additional amortization of the Trademark
Acquisitions. The intellectual property acquired in the Trademark
Acquisitions has a value of $105.0 million and will be amortized over 40
years.
(g) Pro forma adjustments to interest expense are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
(DOLLARS IN MILLIONS)
<S> <C>
Elimination of interest on Existing Indebtedness........... $(5.8)
Additional interest on the Notes........................... 10.0
Additional interest on Term Loans (assumed average variable
rate of 8.5%)............................................ 10.9
Additional interest on the Revolving Credit Facility and
bank fees (assumed variable rate of 9.75%)............... .4
Additional amortization of deferred financing costs
incurred in connection with the Notes and the Senior Bank
Facilities............................................... .9
-----
Net increase............................................... $16.4
=====
</TABLE>
An increase of 1/8% in the variable interest rate associated with the
Term Loans and Revolving Credit Facility would result in incremental annual
pro forma interest expense of $0.2 million.
32
<PAGE> 38
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected financial data of the Company for
the period from February 17, 1994 through December 31, 1994, for the years ended
December 31, 1995, 1996, and 1997 and for the three months ended March 31, 1997
and 1998. The statement of income and balance sheet data for the periods from
February 17, 1994 through December 31, 1994 and for the years ended December 31,
1995, 1996, and 1997 are derived from the Company's audited historical financial
statements. The table also sets forth selected financial data for the year ended
December 31, 1993 and for the period from January 1, 1994 to February 16, 1994,
which has been derived from the unaudited historical financial statements of SFG
Inc., the predecessor of the Company. The statement of income and balance sheet
data for the three months ended March 31, 1997 and 1998 are derived from the
Company's unaudited financial statements included elsewhere in this Prospectus.
In the opinion of management, the unaudited data include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the data for such periods. The selected financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Historical Results of Operations," "Summary
Historical Financial Data" and the historical financial statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR(A) SFG
-------------------------------------- --------------------
PERIOD FROM PERIOD FROM
YEAR ENDED JANUARY 1, 1994 TO FEBRUARY 17, 1994 TO
DECEMBER 31, 1993 FEBRUARY 16, 1994 DECEMBER 31, 1994
----------------- ------------------ --------------------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales................ $393.3 $55.6 $387.5
Gross profit............. 98.7 12.4 91.4
Selling, distribution and
general and
administrative
expenses............... 84.7 15.6 72.3
Interest expense......... 4.1 0.6 8.3
Net income (loss)........ 6.0 (2.4) 4.3
OTHER DATA:
Ratio of earnings to
fixed charges(b)....... 2.8x (d) 1.4x
Pro forma ratio of
earnings to fixed
charges(e).............
BALANCE SHEET DATA (END OF
PERIOD):
Total assets............. $ 92.5 $96.4 $181.7
Total indebtedness....... 35.5 43.1 120.8
<CAPTION>
SFG THREE MONTHS
------------------------- ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- --------------
1995 1996 1997(C) 1997 1998
------ ------ ------- ----- ------
(DOLLARS IN MILLIONS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales................ $475.2 $551.6 $741.0 145.7 272.0
Gross profit............. 115.6 126.6 193.8 38.6 66.3
Selling, distribution and
general and
administrative
expenses............... 89.7 100.2 140.4 26.7 49.5
Interest expense......... 9.1 7.6 16.5 2.1 8.1
Net income (loss)........ 10.1 11.5 26.1 7.8 4.9
OTHER DATA:
Ratio of earnings to
fixed charges(b)....... 1.9x 2.2x 2.3x 3.9x 1.5x
Pro forma ratio of
earnings to fixed
charges(e)............. 1.7x
BALANCE SHEET DATA (END OF
PERIOD):
Total assets............. $177.7 $182.5 $646.3 $641.4
Total indebtedness....... 103.2 96.0 346.7 332.6
</TABLE>
- ---------------
(a) Due to a change in the basis of accounting for net assets of SFG at
February 17, 1994 and to related financing activity associated with the
purchase of an interest in SFG Inc. by DFA and certain affiliates, the
financial results for the year ended December 31, 1993 and for the period
from January 1, 1994 through February 16, 1994 and for the period from
February 17, 1994 through December 31, 1994 include components, such as
interest expense, amortization of goodwill and income taxes, which are not
comparable between periods. The Predecessor was subject to income taxes,
but SFG, as a partnership, is not subject to income taxes. Additionally,
the total of the operations for the year ended December 31, 1993 and for
the period from January 1, 1994 through February 16, 1994 for SFG Inc. and
for the period from February 17, 1994 through December 31, 1994 for the
Company are not necessarily comparable to financial information of the
Company for the years ended December 31, 1995, 1996, and 1997.
(b) For purposes of computing this ratio, earnings consist of net income and
fixed charges. Fixed charges consist of interest expense, amortization of
debt discount and one third of rental expenses which is that portion of
rentals considered to be representative of interest.
(c) Results for the year ended December 31, 1997 are not necessarily comparable
to prior periods as Meadow Gold's operations are included in the
consolidated results from September 4, 1997, the date of the Meadow Gold
Contribution.
(d) Earnings were inadequate to cover fixed charges during the period from
January 1, 1994 to February 16, 1994. The deficiency was $3.9 million.
(e) The calculation of the pro forma ratio of earnings to fixed charges differs
from the historical ratio calculation for 1997 only as a result of the
inclusion of additional pro forma interest expense.
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<PAGE> 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On September 4, 1997, DFA contributed the operations, assets and
liabilities of Meadow Gold to SFG. As a result of this transaction, the
accompanying financial statements include the results of Meadow Gold from
September 4, 1997, the date of the contribution, which is essentially four
months of activity. During that period, Meadow Gold contributed $149.8 million
to sales, $33.9 million to gross profit, $29.3 million to selling, distribution
and general and administrative expenses and $2.5 million to income from
operations, which includes $2.2 million of amortization of goodwill and
trademarks. SFG also acquired a small dairy, Land-of-Pines Dairy, in March 1997,
and the operations of Barbe's Dairy were contributed to SFG by an affiliate of
DFA in February 1997. Additionally, the 1997 period includes a full year of
results for the operations of Pure Milk and Ice Cream Company, Inc. ("Pure
Milk"), which was acquired in February 1996, while 1996 only includes a partial
period of results for Pure Milk. Barbe's Dairy and Pure Milk (now operating as
Oak Farms-Waco) have continued as operating dairy plants, while production and
routes from Land-of-Pines Dairy have been consolidated into other processing and
distribution facilities.
The following discussion and analysis of the historical results of
operations and financial condition of the Company covers periods before
completion of the Transactions. Accordingly, the discussion and analysis of such
historical periods does not fully reflect the significant impact that the
Transactions will have on the Company. See "Unaudited Pro Forma Combined
Consolidated Statement of Income." This discussion and analysis should be read
in conjunction with the historical financial statements of SFG and Meadow Gold
and the notes thereto included elsewhere in this Prospectus. SFG Capital, a
wholly-owned subsidiary of the Company, was formed solely for the purpose of
serving as co-issuer and co-obligor with respect to certain debt obligations of
the Company, including the Notes, and has no operations.
HISTORICAL RESULTS OF OPERATIONS
General
SFG operates 26 facilities which process and package fluid milk products,
cultured products, ice cream products, fruit juices and drinks and other dairy
related products. The majority of SFG's sales are from fluid milk products,
which include fresh packaged milk and chocolate milk in whole, reduced fat and
fat-free varieties, whipping cream, half-and-half and buttermilk. These products
are produced and marketed primarily under the Schepps, Oak Farms, Meadow Gold,
Viva, Foremost, Brown's Velvet, Barbe's and Flav-O-Rich brand names, as well as
various private labels. SFG produces cultured products, such as sour cream,
cottage cheese and yogurt, as well as ice cream and fruit juices and drinks
under its brand names, various private labels and third-party labels. SFG also
distributes cultured products, fruit juices and drinks, ice cream products and
other dairy related products such as cheese, eggs, butter and non-dairy creamers
purchased from third parties.
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Net sales increased 87% to $272.0 million for the three months ended March
31, 1998 compared to $145.7 million for the three months ended March 31, 1997.
The increase is due primarily to the addition of the operations of Meadow Gold,
which contributed $118.8 million of revenues in the 1998 period. Sales also
increased due to growth in SFG's existing and new customer base. Additionally,
raw milk costs, and thus prices charged to customers, were higher during the
three months ended March 31, 1998 as compared to the three months ended March
31, 1997.
Gross profits increased 72% to $66.3 million for the three months ended
March 31, 1998 compared to $38.6 million for the three months ended March 31,
1997. This increase is due primarily to the increased sales resulting from the
addition of the operations of Meadow Gold, which contributed $26.3 million of
gross profit in the 1998 period. Gross profit margins decreased from 26.5% for
the three months ended March 31, 1997 to 24.4% for the three months ended March
31, 1998. The decrease is primarily due to the inclusion in the 1998 period of
Meadow Gold's operations, which generate lower margins than SFG's stand-alone
operations.
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<PAGE> 40
Selling, distribution and general and administrative expenses increased 86%
to $49.5 million for the three months ended March 31, 1998 compared to $26.7
million for the three months ended March 31, 1997. This increase is due
primarily to the addition of the Meadow Gold operations, which incurred $21.6
million of expense in the 1998 period.
Amortization of goodwill and other intangible assets increased 85% to $3.7
million for the three months ended March 31, 1998 as compared to $2.0 million
for the three months ended March 31, 1997. This increase is due primarily to the
amortization of goodwill, trademarks and other intangible assets related to the
Meadow Gold transaction of $1.7 million in the first quarter of 1998.
Interest expense increased significantly to $8.1 million for the three
months ended March 31, 1998 compared to $2.1 million for the three months ended
March 31, 1998. This increase is due to higher average outstanding debt balances
as a result of the Transactions as well as higher weighted average interest
rates under the Notes and Senior Bank Facilities.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales increased 34% to $741.0 million for the year ended December 31,
1997 compared to $551.6 million for the year ended December 31, 1996. The
increase is due to increased volumes, offset partially by lower prices. The
increase in volumes is primarily attributable to the addition of the operations
of Meadow Gold, Barbe's Dairy and Land-of-Pines Dairy, as well as growth in
SFG's existing customer base as large customers continued to expand operations
and open new stores. These increases were partially offset by a decline in raw
milk costs and therefore the prices charged to customers.
Gross profits increased 53% to $193.8 million for the year ended December
31, 1997 compared to $126.6 million for the year ended December 31, 1996. This
increase is attributable to the addition of the operations of Meadow Gold,
Barbe's Dairy and Land-of-Pines Dairy. The increase also results from the
expansion of SFG's existing customer base, combined with an increase in gross
margin percentage to 26.2% in 1997 compared to 22.9% in 1996. The gross margin
percentage increase is a result of the Company's ability to recover raw milk
cost changes combined with processing efficiencies from higher production
volumes, as well as improved results at two of SFG's smaller plants resulting
from management changes and capital improvements.
Selling, distribution and general and administrative expenses increased 40%
to $140.4 million for the year ended December 31, 1997 compared to $100.2
million for the prior period. This increase is attributable to the operations of
Meadow Gold and Barbe's Dairy, as well as an increase in distribution costs to
support the higher level of sales. Selling, distribution and general and
administrative expenses as a percentage of revenues increased to 19.0% for the
1997 period as compared to 18.2% for the 1996 period, primarily as a result of
the decrease in prices received from customers. This occurred as decreased sales
prices resulted in lower revenues per gallon sold, causing selling, distribution
and general and administrative expenses to increase as a percentage of dollar
sales.
Amortization of goodwill and other intangible assets increased 56% to $12.0
million for the year ended December 31, 1997 as compared to $7.7 million for the
prior period. This increase is due to higher amortization of goodwill,
trademarks and other intangible assets resulting from the Meadow Gold, Barbe's
Dairy and Land-of-Pines Dairy transactions.
Interest expense increased 116.0% to $16.5 million for the year ended
December 31, 1997 as compared to $7.6 million for the prior year due to higher
average outstanding debt balances as a result of the Transactions, as well as
higher weighted average interest rates under the Notes and Senior Bank
Facilities.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales increased 16.1% to $551.6 million in 1996 as compared to $475.2
million in 1995. The increase is attributable to the purchase of a new dairy in
early 1996, higher milk prices and increased volume. In February 1996, SFG
purchased certain assets of Pure Milk in Waco, Texas, which contributed $17.5
million to net sales in 1996. Additionally, the average cost of raw milk
increased approximately 16% in 1996 as
35
<PAGE> 41
compared to 1995, which resulted in higher prices to customers. Excluding the
volumes sold by Pure Milk, the total volume of milk products sold in 1996
increased approximately 5.2% over 1995 due primarily to new customers in 1996.
Gross profit increased 9.5% to $126.6 million in 1996 compared to $115.6
million in 1995. This increase is due primarily to the higher level of sales in
1996. Although the increase in raw milk costs were generally passed through to
customers, the increased costs, combined with an increase in costs of certain
packaging materials and items purchased for resale, caused the gross margin
percentage to decline to 22.9% in 1996 from 24.3% in 1995.
Selling, distribution and general and administrative expenses increased
11.7% to $100.2 million in 1996 as compared to $89.7 million in 1995. This
increase is due primarily to the addition of the operations of Pure Milk which
was acquired in February 1996 and costs related to the integration of the Pure
Milk operations into SFG.
Although income from operations increased in 1996 over 1995, income from
operations as a percentage of net sales declined slightly to 3.4% in 1996 from
3.8% in 1995. This decrease is due to the additional costs incurred in 1996 to
integrate the Pure Milk operations with those of SFG.
Interest expense decreased 16.1% to $7.6 million in 1996 as compared to
$9.1 million in 1995. The decrease is attributable primarily to a reduction in
the average balance outstanding under the existing term loan and a reduction of
the average interest rate on both the existing term loan and revolving loan
facilities.
Net income increased 14.3% in 1996 over 1995 as a result of the factors
noted above. Net income as a percentage of net sales was consistent from 1995 to
1996 as the increases in selling, distribution and general and administrative
expenses were offset by the decrease in interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities of $43.8 million for the year ended
December 31, 1997 was $10.5 million higher than the prior year, due primarily to
increased cash provided by working capital changes combined with higher net
income. Cash and cash equivalents on hand at December 31, 1997 were $4.7 million
compared to $2.0 million at December 31, 1996.
Cash used in investing activities for the year ended December 31, 1997 of
$125.1 million is primarily the result of the Trademark Acquisitions in
September 1997 for $105.0 million. Cash used for acquisitions during the year
ended December 31, 1997 also includes amounts paid for Land-of-Pines Dairy along
with transaction fees related to the Meadow Gold Contribution. Cash used for
additions to property, plant and equipment increased to $12.1 million in 1997
compared to $7.2 million in 1996, primarily as a result of the Meadow Gold
Contribution. Cash used for acquisitions during the year ended December 31, 1996
relates to the February 1996 acquisition of Pure Milk.
Cash provided by financing activities was $84.1 million for the year ended
December 31, 1997. This increase is a result of the proceeds from the $150.0
million of Notes, $15.0 million in proceeds under the Senior Bank Facilities,
and $45.0 million of Mid-Am Capital Preferred Interests issued in connection
with the Transactions, net of repayments of existing bank debt and related party
notes. Additionally, SFG had refinanced outstanding debt in February 1997.
Noncash investing and financing activities include $175.0 million of term loans
under the Senior Bank Facilities which were assumed by SFG and $90.0 million of
Series B DFA Preferred Interests in conjunction with the Meadow Gold
Contribution to SFG in September 1997. Additionally, in February 1997 SFG issued
$8.0 million in Series A Preferred Interests to an affiliate of DFA in
conjunction with the affiliate's contribution of Barbe's Dairy to SFG.
SFG's total debt at December 31, 1997 was $346.7 million. The $150.0
million of Notes bear interest at a rate of 9 7/8%, payable semi-annually
beginning March 1, 1998, and mature September 1, 2007. The Term Loans consist of
borrowings under two tranches, Tranche A for $90.0 million and Tranche B for
$100.0 million. Both tranches bear interest at variable rates, which weighted
average rates were 8.39% and 8.87% for Tranche A and Tranche B, respectively, at
December 31, 1997. SFG had $14.3 million of borrowings and
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<PAGE> 42
$1.8 million of letters-of-credit outstanding against its $60.0 million
Revolving Credit Facility, leaving available borrowings of $43.9 million at
December 31, 1997.
Cash on hand at March 31, 1998 was $2.0 million, a decrease of $2.7 million
from December 31, 1997. Cash provided by operating activities of $13.5 million
during the quarter ended March 31, 1998 was $0.8 million higher than in the
corresponding period of the prior year. An increase in cash provided by
operating activities during the quarter ended March 31, 1998 due to the addition
of the Meadow Gold operations is offset by increased cash interest costs as a
result of the higher average debt balances and weighted average interest rates,
along with the fact that the semi-annual interest payment on the Notes was made
in March 1998. Cash used in financing activities of $1.9 million during the
quarter ended March 31, 1998 was $4.7 million lower than the quarter ended March
31, 1997 due primarily to the acquisition of Land-of-Pines Dairy in March 1997.
Cash used in financing activities of $14.3 million during the quarter ended
March 31, 1998 was $10.8 million higher than the corresponding period of the
prior year due primarily to the net repayment of revolving loans of $13.5
million and other debt of $0.6 million during the quarter ended March 31, 1998.
As a result of these debt repayments, SFG's total debt has decreased to $332.6
million at March 31, 1998 compared to $346.7 million at December 31, 1997. The
Company has $57.3 million available under its revolving credit facility at March
31, 1998.
In 1997 and 1998, the Company began to utilize interest rate collars and
swaps to manage interest rate exposures. The principal objective of such
contracts is to reduce the impact of changes in interest rates on its variable
rate debt. The Company does not utilize financial instruments for trading or
other speculative purposes. Swap agreements are contracts to exchange variable
rates for fixed rate payments periodically over the life of the agreements
without the exchange of the underlying notional amounts. The notional amounts of
interest rate agreements are used to measure interest to be paid or received.
The Company makes interest payments on the Senior Bank Facilities based on the
floating rate plus the applicable margin, and then either makes a payment to or
receives a payment from the counterparty to the swap agreement based on the
related notional amount and the difference between the fixed swap rate and the
applicable floating rate.
In January 1998, in order to fix the interest rates on the majority of the
Company's bank debt, the Company entered into various interest rate swap
agreements. The fixed LIBOR rate under these agreements ranges between 5.565%
and 5.63%. These agreements have an aggregate initial notional amount of $127
million, which declines annually over a five-year period to a final aggregate
notional amount of $23 million, and are cancellable at the counterparty's option
at the end of three or four years, based on the individual agreement. The
Company also has an interest rate collar with a notional amount of $28.0 million
and a LIBOR rate cap of 7% and a floor of 5.65%. This agreement expires in
October 2000.
Interest payments on the Notes and on the Senior Bank Facilities represent
significant liquidity requirements for SFG. SFG anticipates that the Notes will
require annual interest payments of approximately $15 million and the Senior
Bank Facilities will require substantial interest payments based on the
unamortized loan balance and variable interest rates in effect (approximately
$16 million annually based on December 31, 1997 balances and applicable interest
rates). In addition to its debt service obligations, SFG will require liquidity
for capital expenditures and working capital needs. Management believes that the
cash flow generated from its operations, together with amounts available under
the Revolving Credit Facility, should be sufficient to fund its debt service
requirements, working capital needs, anticipated capital expenditures and other
operating expenses. SFG's future operating performance and ability to service or
refinance the Notes and to extend or refinance the Senior Bank Facilities will
be subject to future economic conditions and to financial, business and other
factors, many of which are beyond SFG's control.
The Senior Bank Facilities and the Notes impose restrictions on SFG's
ability to make capital expenditures and limit SFG's ability to incur additional
indebtedness. Such restrictions, together with the highly leveraged nature of
SFG, could limit SFG's ability to respond to market conditions, to provide for
unanticipated capital investments or to take advantage of business or
acquisition opportunities. The covenants contained in the Senior Bank Facilities
and the Notes also, among other things, limit the ability of SFG to dispose of
assets, repay indebtedness or amend other debt instruments, pay distributions,
create liens on assets, enter into sale and leaseback transactions, make
investments, loans or advances and make acquisitions.
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<PAGE> 43
On November 6, 1997, a federal judge in Minnesota enjoined the USDA from
collecting Class I differentials in most federal market orders that establish
the federally mandated minimum price of raw milk, beginning with November raw
milk sales. The USDA has obtained a stay of this ruling pending the outcome of
the USDA's appeal to the U.S. Court of Appeals for the 8th Circuit.
Additionally, the USDA has proposed new rules for the federal milk marketing
program which have been published for public comment. The comment period expired
April 30, 1998. The USDA is also considering, as part of formal rulemaking, a
proposal to establish a temporary price floor for raw milk. In addition, certain
states have formed or are in the process of attempting to form regional
milk-price compacts designed to ensure that cheaper milk from other regions does
not undercut local producers' prices, which may result in higher milk prices
than the federally mandated minimum prices. While management does not believe
that these matters should have a material adverse effect on the Company's
business, neither the outcome of the court proceedings, the final form of any
new federal regulations or the existence or location of any additional state
compacts nor the effect of such matters on the Company can be predicted with any
certainty.
SFG is involved in certain threatened and pending governmental
investigations and legal proceedings in the ordinary course of business.
Although neither the outcome of these investigations and proceedings nor the
effect of such outcome can be predicted with certainty, in the opinion of
management, the outcome of these matters should not have a material adverse
effect on the financial condition or results of operations of SFG.
The Company has conducted an internal review of its computer systems to
identify systems that could be affected by the "Year 2000" issue. The Year 2000
issue is the result of computer programs being written using two digits rather
than four to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. Based upon its internal review, the Company presently believes
that the Year 2000 issue will not pose significant operational problems for the
Company's computer systems. However, the Company intends to utilize outside
consultants during the first half of 1998, at an estimated cost of $100,000, to
test its computer systems for Year 2000 compliance. The Company also intends to
use reasonable efforts to assess whether any Year 2000 noncompliance of the
computer systems of entities with which the Company's computer systems interact,
including suppliers, customers and financial services organizations, could have
an adverse impact on the Company. The Company expects its Year 2000 compliance
program to be completed on a timely basis. However, there can be no assurance
that the computer systems of other entities on which the Company's computer
systems rely also will be Year 2000 compliant on a timely basis or that any such
failure to be Year 2000 compliant would not have an adverse impact on the
Company.
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<PAGE> 44
BUSINESS
OVERVIEW
The Company is a leading processor and distributor of fluid milk products
in the United States. The Company markets its products in many of the rapidly
growing Southern and Western states, including Texas, Louisiana, Utah, Montana,
Idaho, Colorado and Hawaii. Major cities served by the Company in these areas
include Dallas/Fort Worth, Houston, San Antonio, Salt Lake City, Denver and
Honolulu. The Company has attained its strong market positions through a series
of strategic acquisitions as well as through internal growth.
The Company's predecessor businesses have produced premium quality, branded
dairy products for over 50 years. The Company processes and distributes fluid
milk products, cultured products (cottage cheese, sour cream and yogurt), ice
cream products and fruit juices and drinks under the Schepps, Oak Farms, Meadow
Gold, Mountain High, Viva, Foremost, Flav-O-Rich, Barbe's and Brown's Velvet
Dairy brand names, as well as various third party labels (including Tropicana
and Tampico) and private labels. These brand names are widely recognized in
their respective markets. The majority of the Company's sales are from fluid
milk products, which include fresh packaged milk and chocolate milk in whole,
reduced fat and fat-free varieties, whipping cream, half-and-half and
buttermilk. The Company also distributes other branded dairy products under
various third party labels, such as Dannon, Yoplait, Haagen Dazs, Blue Bell,
Nestle and Snickers, as well as other dairy related products such as cheese,
eggs, butter, margarine and non-dairy creamers.
The Company's customer base includes retail accounts, such as supermarkets
and convenience stores, and food service accounts, such as restaurants, hotels,
schools, hospitals, airlines and other institutions. The Company processes its
products in 26 dairy processing plants and distributes its products from those
plants and from 34 other major distribution facilities as well as numerous
smaller distribution facilities.
COMPETITIVE STRENGTHS
The Company believes that the following competitive strengths provide it
with a foundation to enhance the Company's position as an industry leader.
- STRONG MARKET POSITION AND CUSTOMER BASE. The Company believes it is a
leading supplier of fluid milk products in each of the major metropolitan
markets it currently serves. The Company's markets are concentrated in
states which are experiencing rapid population growth and are projected
by the U.S. Bureau of the Census to continue to grow rapidly. In
addition, in the markets it serves, management believes the Company is
the largest provider of fluid milk to many well-known companies that
require significant amounts of fluid milk in their day-to-day operations,
including retail accounts and food service accounts.
- LOW COST/HIGH VOLUME PROVIDER. As a result of significant investments in
facilities, equipment and personnel and high production volumes,
management believes that most of the Company's processing plants operate
on a highly efficient basis. In addition, the Company has acquired
dairies in attractive markets and improved the efficiency of its
operations by integrating dairy processing plants and distribution
routes, increasing utilization of the Company's plants and implementing
operating improvements while maintaining high product quality and
customer service standards. These investments and acquisitions have
resulted in a relatively low cost structure and provide a platform for
the Company to further increase operating efficiencies and enhance
economies of scale as production volumes increase.
- STRONG BRAND RECOGNITION. The Company enjoys substantial brand awareness
in the markets it serves. Additionally, the Company processes many fluid
milk products sold under major supermarket private labels that are
well-known and highly regarded in their markets. Although the Company
currently does not widely use the Borden and Elsie trademarks, the rights
the Company obtained as a result of the Transactions should provide an
opportunity to increase revenues by introducing these trademarks into new
markets or sublicensing them to other dairies. The Company's high level
of brand recognition
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<PAGE> 45
provides a broad market for its products and enables customers to easily
identify its products at the dairy case.
- LEADER IN CUSTOMER SERVICE. Due to the short shelf life of fresh fluid
milk and the necessity of providing customers with a continuous supply of
milk, customer service is a critical element of the competitive
environment. The Company's commitment to customer service includes
dependable seven day-a-week delivery coordinated through its 60
processing and major distribution facilities, customized delivery
arrangements, high quality products and assurance of product
availability. The Company also serves its customers by providing a full
line of dairy products, from fluid milk and related products processed by
the Company to third-party products such as branded ice cream and yogurt
that the Company distributes.
- EXPERIENCED MANAGEMENT TEAM. The Company's two most senior managers each
have over 35 years experience with the Company and its predecessor
businesses. Pete Schenkel, the Company's President and Chief Executive
Officer, has been in the dairy business since 1958 and owns 50% of the
common equity interests in the Company. Tony Ward, formerly Meadow Gold's
Chief Executive Officer, has been in the dairy industry since 1961 and is
the Vice Chairman of the Company.
- RELATIONSHIP WITH DAIRY FARMERS OF AMERICA, INC. DFA, the largest dairy
cooperative in the United States, is a 50% owner of the Company.
Effective January 1, 1998, the Company entered into an agreement under
which all of the Company's raw milk requirements are supplied by DFA.
COMPETITIVE CHALLENGES
Notwithstanding these strengths, the Company faces continuing competitive
challenges due to consolidation in the dairy processing industry due to excess
capacity, as well as challenges from competitors, including independent dairy
processors and national food service distributors.
BUSINESS STRATEGY
The Company's strategy is to enhance net sales and profitability and
strengthen its position as an industry leader through the following key
initiatives:
- SERVE MAJOR METROPOLITAN AREAS. By concentrating on major metropolitan
areas such as Dallas/Fort Worth, Houston, San Antonio, Salt Lake City,
Denver and Honolulu, the Company is able to operate many of its plants
with high production volumes in centralized locations, resulting in
significant processing efficiencies. Additionally, the Company has
established and maintained strong relationships with major retail and
food service customers located in these areas. Serving these large
customers allows the Company to make high volume deliveries to individual
customers, which minimizes distribution costs and product returns. The
principal metropolitan areas currently served by the Company have been
growing rapidly in recent years, contributing to increased sales and
improved operating results.
- INCREASE MARKET PENETRATION. Management plans to capitalize on its
relationships with large retail and food service customers as these
customers consolidate their suppliers and expand their operations in
existing and new major markets. Also, as a result of the Meadow Gold
Contribution, the Company expects to benefit from opportunities to
cross-sell certain Meadow Gold branded products, including ice cream,
extended shelf life products and yogurt.
- ENHANCE OPERATING EFFICIENCIES. Management constantly reviews the
Company's operations for opportunities to further reduce costs and
increase manufacturing efficiencies through improved utilization of
processing facilities and distribution routes and more efficient human
resource allocation. For example, the Company's Norand data management
system enables it to effectively interface between its processing
facilities and route salesmen, as well as certain customers, in order to
optimize scheduled delivery routes and efficiently manage inventory
levels.
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- PURSUE SELECTIVE EXPANSION. Since its inception in 1987, the Company has
actively pursued growth opportunities through selective acquisitions of
dairy operations in attractive markets. These acquisitions have enabled
the Company to grow in the markets it historically served and to expand
operations into new geographic areas. These acquisitions have also
enabled the Company to improve the efficiency of its operations through
the consolidation of processing and distribution facilities and
personnel. Management's acquisition strategy is to focus primarily on
dairies that are located near large markets and have high volume
customers. The Company will continue to assess viable acquisition
opportunities as they arise.
COMPANY HISTORY AND OWNERSHIP
Southern Foods Group, Inc. ("SFG Inc."), the predecessor business to the
Company, was founded in 1987 by Pete Schenkel and Allen Meyer for the purpose of
acquiring dairy companies in the Southern United States. In February 1994, DFA
and certain affiliates acquired a significant interest in SFG Inc. In December
1994, SFG, a limited partnership organized under the laws of the State of
Delaware, was formed to be the successor to the business of SFG Inc. Immediately
prior to the Acquisition, Mr. Allen Meyer divested his interest in the Company
and the General Partner to Mr. Schenkel in the Meyer Divestiture. Currently, the
Company is owned by DFA (49.5%) and Mr. Schenkel (49.5%), as limited partners,
and SFG Management (1%), as its general partner. Further, the General Partner,
which has no operations or significant assets other than its investment in the
Company, is owned 50% by DFA and 50% by Mr. Schenkel. DFA and Mid-Am Capital
also hold Preferred Interests in the Company, which at December 31, 1997
aggregated $238.7 million in stated amount of Preferred Interests. See Note 10
of Notes to the Financial Statements of the Company and "Description of
Preferred Interests." The Company has entered into discussions with Tony Ward,
the Vice Chairman of the Company, to issue common limited partner interests in
the Company representing two percent of the common partner interests in the
Company for approximately $1 million. No definitive agreements have been
reached, but if this transaction is completed, the common partner interests
would be owned as follows: DFA (48.5%), Mr. Schenkel (48.5%), Mr. Ward (2.0%)
and SFG Management (1.0%). See "Certain Relationships and
Transactions -- Proposed Transaction with Mr. Ward."
SFG CAPITAL
SFG Capital is a wholly owned subsidiary of the Company that was
incorporated in Delaware for the purpose of serving as a corporate co-issuer and
co-obligor of certain debt obligations of the Company, including the Notes. SFG
Capital was formed solely in order to facilitate the Company's issuance of
indebtedness, including the Notes, by making such indebtedness eligible for
purchase by certain institutions which under the legal investment laws of some
states are prohibited from purchasing non-corporate obligations. SFG Capital
does not have any operations or assets and will not earn any revenues. As a
result, holders of the Exchange Notes should not expect SFG Capital to
participate in servicing the interest and principal obligations on the Notes.
AFFILIATION WITH DAIRY FARMERS OF AMERICA, INC.
The Company is an affiliate of DFA, the nation's largest dairy cooperative.
At January 31, 1998, DFA had over 18,600 member farms operating in 42 states.
DFA receives milk from its farmer members which it processes in its own plants
or markets to its affiliates, including the Company, and others. In 1997, on a
pro forma combined basis DFA marketed for its members 28.3 billion pounds of
milk, representing approximately 18% of total U.S. milk production. DFA's dairy
products, which include milk, cheese, butter, nonfat dry milk and formulated
dairy food products, are processed in DFA's plants and sold to wholesale and
retail customers. DFA's pro forma combined revenues for the year ended December
31, 1997 were approximately $6.2 billion.
In addition to its 50% interest in the Company, DFA has equity interests in
a number of other dairy affiliates and joint ventures (the "Joint Ventures"),
including Hiland Dairy Foods Company, Roberts Dairy Company, Adohr Farms LLC,
Tuscan/Lehigh Dairies L.P., Sinton Dairy Foods Company, L.L.C., Valley Rich
Dairy, Ideal American Dairy, Land-O-Sun Dairies, L.L.C., Melody Farms, L.L.C.,
Western Quality Foods, L.C. and Lea County Cheese Factory, Ltd. Co. DFA also has
a 50% equity interest in Mid-Am
41
<PAGE> 47
Capital. In connection with the Transactions, DFA entered into the Joint Venture
Agreement Amendments, including the SFG Amendments. See "The Transactions" and
"Business -- Legal Proceedings."
THE DAIRY INDUSTRY
Overview
The dairy processing industry is characterized as mature. Generally flat
demand for fluid milk has resulted in an emphasis on the development of more
efficient manufacturing processes. In order for processors to achieve economies
of scale, high volume production has become increasingly important in dairy
operations. As a result, the industry has undergone consolidation in recent
years and larger, regional dairy processors have emerged. The Milk Industry
Foundation estimates that the number of plants producing fluid milk products,
has declined by 17% over the past five years from an estimated 749 plants in
1992 to an estimated 622 plants in 1996.
The demand for fluid milk has been generally flat over the past ten years
with declines in per capita consumption largely offset by population growth.
Overall milk demand can be broken down into fluid milk and its derivative
products, with fluid milk accounting for an estimated 37% of current demand,
cheese accounting for 35% and other products including butter, nonfat dry milk,
evaporated milk, ice cream and yogurt accounting for the remaining 28%. Although
milk demand as a whole has remained stable, changes in the mix of fluid milk
products have occurred as demand has increased for products with lower fat
content, while demand has decreased for products with higher fat content.
Raw Milk Supply
The USDA estimates that in 1996 approximately 85% of the nation's milk
supply was produced and marketed by approximately 237 dairy cooperatives and the
other 15% was produced and marketed by independent producers. Total milk
production increased by 9.5% from 143 billion pounds in 1985 to 156.6 billion
pounds in 1997. The increase in production is due primarily to the increase in
the output of milk per cow. According to the USDA, while the number of cows has
declined an average of 0.8% per year over approximately the past 20 years, milk
production has increased an average of 1.4% per year over the same period due to
improved dairy farming practices and innovative techniques.
In addition, the production of milk has been increasing in the West and
Southwest and decreasing in the Midwest, which has traditionally been the
largest supplier of milk. Currently, California, Wisconsin, New York,
Pennsylvania and Minnesota are the five leading suppliers of milk. However,
Idaho, Arizona, New Mexico and Florida are expected to realize sizeable
production increases over the next several years due to population growth and
the increase in milk output per cow. Several factors are contributing to the
geographic shift, including rapid population growth in, and migration to, the
West and Southwest, climate and costs. Population growth in the West and
Southwest has resulted in an increased demand for milk in those areas. As a
result of this increased demand and the perishability of fluid milk products
which requires that production facilities be located in reasonably close
proximity to the consumer, the production of milk will continue to move closer
to the population centers in the West and Southwest. In addition, because of the
milder climate in the West and Southwest, dairy farms in those regions have
ample supplies of quality forage, abundant labor and lower land and facilities
costs, resulting in lower costs.
Raw Milk Pricing
The price of raw milk purchased by dairy processors is determined based on
a combination of factors including supply and demand and federal and state
regulations. The federal government regulates raw milk pricing through the
federal market orders and price support programs, and state governments can
regulate raw milk pricing by establishing their own market order programs or by
forming compacts that establish minimum prices for raw milk.
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<PAGE> 48
On a monthly basis federal and state market orders determine the minimum
price processors are required to pay for raw milk. Raw milk which is used to
produce fluid milk is categorized as Class I, cultured products and ice cream as
Class II, and butter, powdered milk and hard cheese as Class III. The market
orders set the "basic formula price" per one hundred pounds of Class III milk,
and establish incremental increases in the price for Class I and Class II milk.
Class I differentials are based on the location of the plant while Class II
differentials are the same in all market orders. Additionally, processors pay a
"butterfat differential" based on whether the milk contains more or less than
3.5% butterfat.
The price actually paid by processors is based on the market order price
discussed above plus administrative and handling fees and premiums that may be
charged by the cooperative or independent producer. Cooperatives also generally
provide a receiving credit to processors which is based on processing plants
receiving deliveries evenly seven days a week. Payments for the market order
price and for the Class I and butterfat differentials are coordinated through
the market order administrator, but payments for premiums and other fees charged
by the producer are made directly to the cooperative or independent producer. As
a result of this pricing mechanism, processors in the same market order areas
pay essentially the same price for raw milk, and there is rarely any shortage in
the amount of raw milk available for Class I or Class II products.
Federal price support programs set the price the federal government will
pay for certain products such as hard cheese and dry milk. As utilization of
these programs by dairy farmers has declined in recent years, the federal
government is phasing out price supports through 1999, at which time price
supports will be replaced with a loan program under which loans for specified
products will be available at the 1999 support price.
On November 6, 1997, a federal judge in Minnesota enjoined the USDA from
collecting Class I differentials in most federal market orders that establish
the federally mandated minimum price of raw milk, beginning with November raw
milk sales. The USDA has obtained a stay of this ruling pending the outcome of
the USDA's appeal to the U.S. Court of Appeals for the 8th Circuit.
Additionally, the USDA has proposed new rules for the federal milk marketing
program which have been published for public comment. The comment period expired
April 30, 1998. The USDA is also considering, as part of formal rulemaking, a
proposal to establish a temporary price floor for raw milk. In addition, certain
states have formed or are in the process of attempting to form regional
milk-price compacts designed to ensure that cheaper milk from other regions does
not undercut local producers' prices, which may result in higher milk prices
than the federally mandated minimum prices. While management does not believe
that these matters should have a material adverse effect on the Company's
business, neither the outcome of the court proceedings, the final form of any
new federal regulations or existence or location of any additional state
compacts nor the effect of such matters on the Company can be predicted with any
certainty.
PRODUCTS
The Company produces a variety of dairy products, fruit juices and drinks.
The Company's product mix is heavily weighted towards fluid milk. In addition,
the Company produces cultured products, ice cream products, and other dairy
related products.
The table below illustrates management's estimate of the contribution of
each product line to total sales:
<TABLE>
<CAPTION>
PRODUCT LINE SALES CONTRIBUTION(A)
------------ ---------------------
<S> <C>
Fluid milk products....................................... 79.8%
Cultured products......................................... 7.6
Fruit juices and drinks................................... 5.0
Ice cream products........................................ 4.6
Other..................................................... 3.0
-----
Total........................................... 100.0%
</TABLE>
-----------------------
(a) Based on total sales for the month ended December 31, 1997
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<PAGE> 49
Fluid Milk Products. The Company produces fluid milk products such as fresh
packaged milk and chocolate milk in whole, reduced fat and fat-free varieties,
as well as buttermilk, half-and-half and whipping cream. Fluid milk products are
sold under proprietary brand names as well as certain private labels. The
Company produces milk under the Schepps, Oak Farms, Foremost, Flav-O-Rich,
Barbe's, Brown's Velvet Dairy, Meadow Gold and Viva brand names. The Company
also sells and distributes branded fluid milk products such as lactose-reduced
and fortified products manufactured by third parties.
Cultured Products. Cultured products include cottage cheese, sour cream and
yogurt. The Company produces these products under the Schepps, Oak Farms,
Foremost, Barbe's, Brown's Velvet Dairy, Meadow Gold, Viva and Mountain High
brand names. The Company also produces these products under various private
labels, and distributes Dannon and Yoplait brands of yogurt.
Fruit Juices and Drinks. The Company produces orange juice and fruit drinks
under the Schepps, Oak Farms, Meadow Gold, Brown's Velvet Dairy, Flav-O-Rich and
Foremost brand names as well as under certain private labels.
Ice Cream Products. The Company provides ice cream mix to fast food
restaurant chains and produces ice cream, frozen yogurt and certain ice cream
novelties, such as ice cream sandwiches, which are sold under the Meadow Gold,
Olde Fashioned Recipe and Viva brand names. The Company also distributes ice
cream and frozen novelties purchased from outside sources.
RAW MATERIALS
Raw Milk. The most significant raw material used in the Company's
operations is raw milk. Effective January 1, 1998 the Company entered into an
agreement with DFA pursuant to which the Company has agreed to source all of its
milk from DFA. Prices charged to the Company by DFA under the supply arrangement
are at competitive market prices. The agreement is initially for a term of one
year and thereafter may be canceled on 12 months' notice. See "-- The Dairy
Industry -- Raw Milk Pricing." See "Certain Relationships and
Transactions -- Affiliation with DFA."
Distributed Products. The Company purchases ice cream, yogurt and other
dairy related products for distribution to its customers from numerous third
party manufacturers. The Company selects these manufacturers, which include both
large multi-line suppliers such as Nestle, and smaller specialty suppliers such
as Haagen Dazs, primarily on the basis of their brand names and product lines.
The Company has no significant long-term purchase obligations for the products
it distributes, and management believes that the Company has adequate
alternative sources of supply for the branded refrigerated and frozen food
products it distributes.
Crates, Packaging and Other Materials. Other production materials such as
juice concentrates, sweeteners, flavorings and various packaging supplies,
including milk crates, are purchased from numerous sources. The Company also
purchases resins for blowmolding into plastic containers. The Company is not
dependent upon any single supplier for such commodities.
PRODUCTION PROCESS
The fluid milk production process includes the steps described below.
Raw Milk Purchase and Processing. Milk producers transport their raw milk
to the Company's processing facilities on an "as needed" basis. The weight of
the milk is checked with either tank or truck scales. If raw milk passes the
Company's quality control testing, the Company takes ownership of the milk and
the raw milk is pumped into refrigerated silos. The milk is then transferred
from the silos either to the separator or directly into the blending process.
The separator is used to separate the butterfat from the skim milk. At this
point, the milk is standardized (reduced fat milks are standardized to 1/2%, 1%
or 2% milkfat) before being blended with vitamins and, in some cases (such as
chocolate milk), flavorings. The milk is then pasteurized by flash-heating to
approximately 168 degrees Fahrenheit to destroy harmful bacteria. Following the
pasteurization process, the milk is homogenized, which breaks up the butterfat
molecules so that the fat will not separate and rise to the top.
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<PAGE> 50
Packaging. After pasteurization and homogenization, the Company packages
milk into many different varieties of paper and plastic packages, including
half-gallon, quart, pint and half-pint sizes. The Company blowmolds some of its
own plastic containers in both gallon and half-gallon sizes. These containers
are made in the processing facility through a blowmold process and then moved
across conveyors to allow for cooling prior to being filled. For food service
accounts, the Company often packages its products in bulk plastic bags. The
Company stamps each product with an expiration date ranging from 12 to 17 days
from the date of shipment, depending on certain state regulatory requirements.
In addition, the Company provides certain nutritional information on the label
of each container in accordance with regulations promulgated by the Food and
Drug Administration ("FDA"). See "-- Regulatory Environment."
Short-Term Storage. Each processing facility has its own temporary cold box
storage space proportionate to its production capacity. Fluid milk products are
generally stored in these facilities for no more than 24 hours. Products other
than fluid milk may be kept in cold box storage longer. The products are then
loaded into the Company's extensive distribution fleet for delivery to its
customers.
Quality Control. The Company has strenuous quality control procedures to
ensure that its milk meets grade "A" standards. Upon receiving raw milk from its
suppliers, the Company implements a series of checks on the milk's level of
water, butterfat and non-fat solids and the presence of antibiotics and other
residues. This ensures that raw milk purchased by the Company is of appropriate
quality. Each processing facility has its own laboratory personnel who
continually oversee the production process, checking products in each stage of
production from raw materials to finished product. The Company keeps a sample of
every batch of product on hand for a reasonable period in order to monitor
product quality after it goes to market and to respond promptly in the case of a
problem. The Company has set a general requirement that at least 90% of its
products stay fresh for two days after the stamped expiration date. The
manufacturing equipment is cleaned, washed, scrubbed and sanitized on a daily
basis. The Company has invested in equipment in its major facilities that can be
cleaned in place. This allows the Company to properly cleanse its equipment on a
daily basis without disassembly. The Company also emphasizes the importance of
keeping the manufacturing and storage areas clean and sanitary. The Company's
products and processing facilities are subject to frequent inspections by
federal and state government officials.
PROCESSING FACILITIES
The Company operates a total of 26 processing facilities in 11 states. All
of the Company's plants produce fluid milk except for the facilities in Des
Moines, Orem and Perry, which only produce ice cream. Each of the Company's
processing facilities currently runs multiple shifts per day. In addition, each
processing facility also serves as a distribution facility.
The following table provides detailed information regarding the Company's
processing facilities:
PROCESSING FACILITIES
<TABLE>
<CAPTION>
GALLONS PROCESSED SQUARE
IN 1997 OWNED OR FOOTAGE
(IN MILLIONS) LEASED (THOUSANDS)
------------------ -------- -----------
<S> <C> <C> <C>
Dallas, TX (Schepps Dairy)................. 54.5 Owned 59.6
Houston, TX................................ 52.1 Owned 68.2
Dallas, TX (Oak Farms Dairy)............... 34.5 Owned 85.0
Salt Lake City, UT......................... 33.8 Leased 74.9
San Antonio, TX............................ 27.8 Owned 63.5
Boise, ID.................................. 23.2 Owned 34.6
Shreveport, LA............................. 22.3 Owned 58.5
Englewood, CO.............................. 19.6(a) Owned 88.7
Tulsa, OK.................................. 18.3 Leased 63.7
Lincoln, NE................................ 14.9 Leased 103.7
New Orleans, LA............................ 13.0 Owned 100.0
Greeley, CO................................ 12.9 Owned 74.9
Waco, TX................................... 12.7 Owned 51.3
Delta, CO.................................. 11.5 Owned 15.2
Canton, MS................................. 11.5 Leased 36.3
Great Falls, MT............................ 8.3(a) Owned 39.0
</TABLE>
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<PAGE> 51
<TABLE>
<CAPTION>
GALLONS PROCESSED SQUARE
IN 1997 OWNED OR FOOTAGE
(IN MILLIONS) LEASED (THOUSANDS)
------------------ -------- -----------
<S> <C> <C> <C>
Pocatello, ID.............................. 8.1 Leased 21.0
Westwego, LA............................... 7.0 Owned 24.6
Des Moines, IA............................. 6.4(b) Owned 41.1
Honolulu, HI............................... 6.4(a) Leased 80.1
Billings, MT............................... 5.8 Owned 34.4
Kalispell, MT.............................. 5.1 Owned 25.3
Perry, IA.................................. 4.7(b) Owned 28.8
Orem, UT................................... 4.5(b) Owned 36.7
Hilo, HI................................... 1.6 Leased 17.6
Puhi, HI................................... 0.8 Leased 13.8
</TABLE>
- ---------------
(a) Amount includes some ice cream production.
(b) Amounts represent ice cream production.
MARKETS
The Company's markets are concentrated in several states which are
experiencing and are projected by the U.S. Bureau of the Census to continue to
experience rapid population growth. Because per capita fluid milk consumption
has been declining, one of the most important factors in determining growth in
the consumption of dairy products is the rate of population growth in that
market. Population growth in the states in which the Company markets its
products is currently projected by the U.S. Bureau of the Census to increase at
a faster rate than for the U.S. as a whole.
The following table presents the contribution to the Company's pro forma
combined sales in 1997 by marketing area:
<TABLE>
<CAPTION>
MARKETING AREA SALES CONTRIBUTION
-------------- ------------------
<S> <C>
Dallas/Ft. Worth, TX........................................ 25.9
Houston, TX................................................. 8.3
San Antonio, TX............................................. 7.5
Salt Lake City, UT.......................................... 7.4
Denver, CO.................................................. 6.3
Honolulu, HI................................................ 5.9
Shreveport, LA.............................................. 5.5
Boise, ID................................................... 4.4
Tulsa, OK................................................... 4.1
Lincoln, NE................................................. 3.1
Grand Junction, CO.......................................... 3.1
Other....................................................... 18.5
----
Total............................................. 100%
====
</TABLE>
CUSTOMERS
The Company's customer base consists primarily of retailers and food
service accounts. Most supply arrangements are terminable on short notice or at
will, including those with Albertson's Inc. as described below. Albertson's
Inc., which the Company estimates accounted for approximately 12% of the
Company's pro forma combined net sales for 1997, was the only customer which
accounted for more than 10% of the Company's pro forma combined net sales in
that year.
Retailers. Retail accounts consist primarily of supermarkets and
convenience stores. Supermarkets (local supermarket chains in particular) and
convenience stores typically purchase dairy products from local dairies such as
those operated by the Company.
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<PAGE> 52
Food Service Accounts. Food service accounts include schools, restaurants,
hotels, hospitals, airlines and other institutions. Food service customers are
highly service oriented and less sensitive to price changes than retail
customers. In particular, more service is required for ordering, stocking and
rotating stock. Additionally, food service customers require more delivery
frequency, yet have more limited delivery times. Numerous specialty products and
various bulk products are also delivered to these customers. As a result of
these factors, strong relationships are important to maintain food service
customers, and dependable service can lead to customer loyalty.
MARKETING AND DISTRIBUTION
The Company sells products primarily through its own sales force. In
addition, independent distributors are utilized primarily in rural areas and for
the sale of certain product lines such as ice cream novelties, including ice
cream sandwiches, creamsicles, popsicles, and brokers are utilized for
distribution of Mountain High yogurt.
The Company distributes products from 60 major facilities, 26 of which also
serve as processing facilities. The Company owns 25 of its major distribution
branches. The following table provides additional information with respect to
the Company's major distribution facilities with 1,000 square feet or more
(excluding the processing facilities):
DISTRIBUTION FACILITIES
<TABLE>
<CAPTION>
SQUARE FOOTAGE
(THOUSANDS) OWNED OR LEASED
-------------- ---------------
<S> <C> <C>
Houston, TX............................................ 43.7 Owned
Austin, TX............................................. 27.0 Owned
Missoula, MT........................................... 25.0 Owned
Grand Junction, CO..................................... 20.0 Owned
Thibodaux, LA.......................................... 15.6 Owned
Riverton, WY........................................... 13.9 Owned
Colorado Springs, CO................................... 13.8 Owned
Ogden, UT.............................................. 10.3 Owned
Butte, MT.............................................. 10.0 Owned
Las Vegas, NV.......................................... 9.7 Owned
Longview, TX........................................... 9.2 Owned
Humble, TX............................................. 8.6 Owned
Wichita, KS............................................ 7.5 Owned
San Antonio, TX........................................ 7.3 Owned
Oklahoma City, OK...................................... 6.0 Owned
Pueblo, CO............................................. 5.5 Leased
Helena, MT............................................. 5.0 Owned
St. George, UT......................................... 4.5 Leased
Idaho Falls, ID........................................ 4.0 Owned
Jackson, WY............................................ 4.0 Owned
Evansville, WY......................................... 4.0 Owned
Paris, TX.............................................. 3.0 Owned
Twin Falls, ID......................................... 2.5 Owned
Wichita Falls, TX...................................... 2.5 Leased
Cheyenne, WY........................................... 2.3 Owned
Austin, TX............................................. 2.0 Owned
Beaumont, TX........................................... 2.0 Owned
Baton Rouge, LA........................................ 2.0 Leased
Wichita Falls, TX...................................... 2.0 Leased
Vernal, UT............................................. 2.0 Owned
</TABLE>
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<PAGE> 53
<TABLE>
<CAPTION>
SQUARE FOOTAGE
(THOUSANDS) OWNED OR LEASED
-------------- ---------------
<S> <C> <C>
Denison, TX............................................ 2.0 Leased
Gulfport, MS........................................... 1.8 Leased
Price, UT.............................................. 1.8 Leased
Lufkin, TX............................................. 1.0 Leased
</TABLE>
Products are distributed to customers primarily through the Company's own
distribution fleets directly to customers' stores. Centralized deliveries to
customer warehouses are generally performed by common carrier. The Company's
distribution fleet includes approximately 1,600 tractors and route trucks and
approximately 900 trailers that are used to service its customer network. The
Company's distribution fleet is approximately 62% owned and 38% leased.
COMPETITION
The Company's processing and distribution businesses are subject to
competition from other regional dairy processors and from large national food
service distributors that also operate in the markets served by the Company.
Competition in these businesses is based primarily upon service, price, brand
recognition, quality and breadth of product line. Increased competition has
resulted from the fact that the dairy processing industry has excess capacity
and has been in the process of consolidation due to limited growth in the demand
for fresh milk products, more efficient processing techniques and the
establishment by large grocery retailers of captive dairy product processing
plants.
In Texas and Louisiana markets, the Company, Borden Dairies, other regional
dairies and captive processing plants operated by supermarket chains are
currently the only significant dairy processors. In addition, there are a few
small scale independent processors in Texas and Louisiana against whom the
Company competes within specific markets, but each of these small processors
competes only in its specific geographic market. The Company's competitors
outside of Texas and Louisiana consist primarily of smaller, regional dairy
processors and captive supermarket processing plants. The Company will also
continue to compete with large national food service distributors which also
provide dairy products from other dairy processors to their customers.
EMPLOYEES
As of February 28, 1998, the Company employed approximately 4,600 people,
of whom approximately 10% are supervisory level employees. Approximately 27% of
employees are members of collective bargaining units, including units of the
International Brotherhood of Teamsters. The Company's management considers its
relations with employees to be good and believes that its employees are a key
element to the continuing success of the Company. The Company has never
experienced a work stoppage.
Following the consummation of the Acquisition, the Company kept in place
the corporate offices of Meadow Gold in Ogden, Utah. The Company anticipates
that it will be able to consolidate the administrative operations of Meadow Gold
in Dallas, so that the Ogden corporate offices will likely be closed by early
1999.
REGULATORY ENVIRONMENT
Federal Regulation of Milk Prices and Related Matters
The federal government has two programs, price supports and market orders
that can affect the prices paid by the Company for raw milk and thus can affect
the net sales and net margins of the Company. The price support program will be
phased out in 1999 and replaced with a loan program in 2000, and the number of
market orders will be reduced from 32 to between 10 and 14 by April 1999. While
the modification of these programs under the existing regulations is not
expected to adversely affect the Company's net sales and net margin, portions of
the federal milk order regulations have been successfully challenged, and new
rules have been proposed by the USDA. See "-- The Dairy Industry -- Raw Milk
Pricing" and "-- Raw Materials -- Raw Milk."
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<PAGE> 54
As a purchaser and processor of milk, the Company is required to pay
certain assessments to the National Dairy Promotion and Research Board and the
National Processor Advertising and Promotion Board and its pro rata share of
administrative expenses of administering the market order program.
State Regulation of Milk Prices and State Compacts
Various state governments also have programs which affect the price of
milk. For instance, Hawaii, Montana and California have their own milk market
order programs that set basic formula prices for raw milk produced by dairy
farmers in these states. Recently, Congress authorized the formation of a state
compact that has authority to regulate the price received by dairy farmers for
raw milk in the states of Vermont, New Hampshire, New York, Connecticut and
Massachusetts and certain other states are in the process of attempting to form
additional regional milk-price compacts. To date, the basic formula prices
established in Hawaii, Montana and California and by the compact generally have
exceeded the basic formula price established under the federal milk market order
program. While management does not believe that these developments should have
an adverse effect on the Company's business, neither the existence of or
location of any additional state compacts nor their effect on the Company can be
predicted with any certainty.
Tariffs
The Federal government imposes quota restrictions on certain imported dairy
products, which limit the quantity that may be imported at a given tariff rate
during a specified period. These tariff quotas are designed to protect the
integrity of the dairy price support program and the domestic dairy industry. If
these tariff quotas are removed and there is dumping of dairy products in this
country, the Company and the industry could be adversely affected. The NAFTA and
GATT accords provide for tariffs on certain imported dairy products to decrease
or be eliminated over time, but only if certain conditions are met. For
instance, a number of different dairy products may currently be imported
duty-free from Mexico, subject to quantitative limitations. Reduction of tariffs
on imported dairy products may adversely affect domestic producers or processors
of competitive products, such as the Company.
Public Health
As a processor and distributor of food products, the Company is subject to
the Federal Food, Drug and Cosmetic Act and regulations promulgated thereunder
by the FDA. This comprehensive regulatory scheme governs the manufacture
(including composition and ingredients), labeling, packaging and safety of food.
The FDA regulates manufacturing practices for food through its good
manufacturing practices regulations, specifies the standards of identity for
certain foods, including many of the products sold by the Company, and
prescribes the format and content of certain information required to appear on
food product labels.
In addition, the FDA enforces the Public Health Service Act and related
regulations, which are designed to prevent the introduction, transmission or
spread of communicable diseases. These regulations require, for example,
pasteurization of milk and milk products. The Company's products and facilities
are subject to both scheduled and unannounced inspections by the FDA and the
USDA and by various state agencies. The Company and its products are also
subject to state and local regulation such as the licensing of dairy processing
facilities, enforcement by state and local health agencies of state standards
for the Company's products, inspection of the Company's facilities and
regulation of the Company's trade practices in connection with the sale of dairy
products. As is the case with other dairy processors, the Company may recall
products either voluntarily or as a result of regulatory action. The Company has
not been required by a regulatory agency to recall any products in recent years.
Environmental Matters
The Company's operations and properties are subject to extensive regulation
pursuant to Environmental Laws, particularly those governing the management,
release and disposal of Hazardous Substances. Ammonia, a refrigerant used
extensively in the Company's operations, is considered an "extremely" Hazardous
Substance pursuant to federal Environmental Law due to its toxicity. In the
past, the Company has
49
<PAGE> 55
experienced occasional accidental releases of ammonia. The Company has
established procedures and provided for containment systems to prevent or
minimize the impact of any such releases in the future. However, there can be no
assurance that any such future releases will not have a material adverse affect
on the operations of a facility that may be the source of any such release.
Wastewater discharges from the Company's processing plants are typically
subject to sewer use ordinances, pretreatment regulations and permit
requirements imposed by the municipalities that receive and treat and the
plants' wastewater. From time-to-time, a plant's discharge may exceed
established municipal wastewater limits for biochemical oxygen demanding
materials, total suspended solids and pH. Generally, excess discharges result in
the payment of wastewater surcharges to the affected municipalities. In the case
of severe or persistent violations, however, the affected municipalities may
impose fines, require the construction and operation of pretreatment facilities
or require the processor to take other action to abate such violations.
Many of the Company's owned and leased facilities, particularly those that
provide maintenance services for truck fleets, store Hazardous Substances (e.g.,
gasoline, diesel fuel and used motor oil) in underground storage tanks. Leaks
and spills associated with these tanks could require remediation of soil and/or
groundwater, perhaps at substantial cost. Moreover, underground storage tanks
are subject to extensive regulations covering operation and maintenance, leak
detection and reporting, financial responsibility, corrective action and
closure. The Company may need to make expenditures from time-to-time to remain
in compliance with these regulations and to upgrade existing facilities.
In addition to ammonia, the Company's facilities utilize a variety of other
Hazardous Substances in the ordinary course of business. These substances
include laboratory chemicals, cleaning and maintenance supplies and paints and
solvents. The Company is required to report inventories of certain Hazardous
Substances, including ammonia, to state and local emergency response agencies
and to maintain and, if necessary, implement emergency plans at affected
facilities. Some of the Company's facilities were constructed with
asbestos-containing materials ("ACM"). The presence of ACM may impose additional
operating costs on the Company in connection with building maintenance,
protection of affected employees and renovation or demolition of structures that
contain ACM.
The Company believes that it is in compliance in all material respects with
all applicable Environmental Laws. To date, compliance with such requirements
has not had a material adverse impact on the Company's capital expenditures,
earnings or competitive position.
TRADEMARKS
The Company owns a number of registered United States trademarks, including
Schepps, Oak Farms, Meadow Gold, Mountain High, Lite Line, Profile, Big Dip,
So-Lo, None, Midwest Farms, Golden Royal, Cabell's, The Dairy Best, Knowlton's,
Jersey Gold, Dairy Land, Holland Dutch, Skim-Line, Econo-Way, Olde Fashioned
Recipe, Farmstead, Go Lightly, Viva-Yo, Blue Valley, Grand Old Vanilla,
Starflake, Poinsettia, Svelte and Frostick. In addition, the Company has filed
federal trademark applications for its Barbe's and Brown's Velvet Dairy
tradenames. The Company is also licensed to use the Borden, Elsie, Flav-O-Rich
and Foremost trademarks to process and sell dairy products. The Company also has
arrangements with the owners of the Nestle and Tampico trademarks to package and
sell products under those registered trademarks. In addition, the Company
distributes a number of products that are manufactured by third parties and sold
by the Company under registered trademarks of the third parties. Management is
not aware of any facts that would materially adversely impact continuing use of
the trademarks and tradenames currently used by the Company.
LEGAL PROCEEDINGS
In connection with the Transactions, DFA, the Company, and Milk Products
entered into the DOJ Consent Decree. The DOJ Consent Decree required DFA to
divest the Borden Dairies, but provided that the sale to Milk Products as part
of the Transactions satisfied this requirement. The DOJ Consent Decree also
required Mid-Am Capital to divest the Milk Products loan over approximately a
two-year period. The DOJ Consent Decree prohibits, among other things, DFA,
Mid-Am Capital and the Company from purchasing
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membership interests in or assets of, or from making additional loans to, Milk
Products. The Company does not expect that the terms of the DOJ Consent Decree
will have a material adverse effect on its operations.
As a further part of the HSR Conditions, DFA implemented the Joint Venture
Agreement Amendments relating to the Company and two other Joint Ventures
(Hiland and Roberts) that operate in part of the territory previously served by
Meadow Gold. The Joint Venture Agreement Amendments, including the SFG
Amendments, restrict DFA's access to non-public, competitively sensitive
information relating to packaged fluid milk products. In addition, the Joint
Venture Agreement Amendments restrict DFA's ability to initiate unilaterally the
termination of the Joint Ventures (including the removal of the General Partner
of the Company) or to increase its ownership in the Joint Ventures to greater
than 50%. The Joint Venture Agreement Amendments also restrict DFA's ability to
vote on matters involving budgets and capital expenditures, the incurrence of
new debt relating to capital expenditures, and the selection and compensation of
officers. With respect to Sinton, another Joint Venture that operates in part of
the territory currently served by Meadow Gold, DFA representatives have resigned
from Sinton's representative committee and DFA has no further rights to
participate in Sinton's management.
The Company, Mr. Schenkel, DFA, Borden, Inc., Mr. Meyer, and Milk Products
received civil investigative demands ("CIDs") from the State of Texas relating
to the Transactions. DFA, Milk Products and the Company entered into the Texas
Consent Decree, which also requires Mid-Am Capital to divest its interest in the
loan to Milk Products on terms similar to those contained in the DOJ Consent
Decree. The Texas Consent Decree prohibits, among other things, DFA, Mid-Am
Capital and the Company from purchasing membership interests in or assets of, or
from making additional loans to Milk Products.
In July 1991, Schepps-Foremost, Inc., a predecessor of SFG Inc.
("Schepps-Foremost"), entered into a consent judgment and agreed permanent
injunction to settle certain civil antitrust claims made by the State of Texas
against it for the sale of dairy products to the State of Texas, its agencies
and Texas public schools during the period from 1975 to 1989. Schepps-Foremost
agreed to pay a civil fine of $575,000 to the State of Texas, to pay damages of
$5.2 million to the Texas public schools and to be restrained from violating the
Texas Antitrust Act. Also in the late 1980's DOJ initiated federal grand jury
investigations in a number of states into suspected bid-rigging and market
allocation in the dairy industry. In May 1994, SFG Inc. entered into a
Settlement Agreement pursuant to which it paid the United States an aggregate of
approximately $3 million in damages and fines and pled guilty to conspiring to
rig bids to supply fluid milk products to Texas and Louisiana public schools.
SFG Inc. entered into compliance agreements with certain federal agencies,
including the USDA (except for certain ongoing reporting requirements, most of
the substantive provisions of which expired January 13, 1998) and the Defense
Logistics Agency (except for certain ongoing reporting requirements, most of the
substantive provisions of which expired October 24, 1997), to implement
antitrust compliance and other programs to demonstrate that SFG, Inc. remains an
eligible government contractor. If the Company does not comply with these
agreements, cause for suspension and/or debarment from participating in federal
nonprocurement programs may exist. Management of the Company believes it is in
substantial compliance with these agreements and that compliance does not have a
material adverse effect on the Company.
On August 6, 1997, a lawsuit entitled David Curry, et.al. vs Borden, Inc.,
Southern Foods Group, LP., et.al. was filed against the Company and other dairy
processors in Texas in the District Court of Harris County, Texas. The plaintiff
alleges that containers of processed milk sold by the Company and the other
dairy processing defendants to grocery stores and schools were under-filled and
did not contain the volume of milk stated on the carton based upon certain tests
allegedly performed by the USDA. The plaintiff alleges violation of the Texas
Deceptive Trade Practices-Consumer Protection Act, breach of express warranty,
breach of the warranty of merchantability and common law fraud. The plaintiff is
asserting a claim for an unspecified amount of damages. The plaintiff seeks to
maintain the case as a class action on behalf of all persons who purchased
retail milk from the defendants in gallon, quart, pint or half-pint containers
in the State of Texas from August 5, 1993 to August 5, 1997. A hearing on
whether the case will be maintained as a class is set for August 17, 1998. The
case is not set for trial. This matter is in the early stages of discovery. The
Company believes it has meritorious defenses and intends to vigorously defend
the lawsuit. Although the outcome of this
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matter is uncertain, management does not believe that the lawsuit will have a
material adverse effect on the Company.
The Texas Attorney General's office is investigating possible violations of
state antitrust laws in the milk and milk products industry in the State of
Texas. In April 1998 the Company received a civil investigative demand which
requested certain information from the Company in connection with its
investigation. The Company has produced documents in response to the CID.
Management is unable to predict the outcome of this investigation.
The Company is party to certain litigation in the normal course of
business. Management does not believe the outcome of any of these proceedings
will materially affect the Company's financial position or results of
operations.
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MANAGEMENT
The following table sets forth the executive officers of the Company and
the executive officers and Representatives on the Committee of SFG Management.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Pete Schenkel.............. 61 President, Chief Executive Officer and Representative
Anthony R. Ward............ 57 Vice Chairman
Patrick K. Ford............ 31 Chief Financial Officer
Gary E. Hanman............. 64 Representative
Gerald L. Bos.............. 59 Representative
Jerry W. Frie.............. 59 Representative
</TABLE>
Pete Schenkel has served as President of the Company since 1987, became
Chief Executive Officer in 1994 and has served on the Committee since the
formation of SFG Management in December 1994. Mr. Schenkel became President of
Schepps in January 1985, where he previously served as President of the Northern
Division and General Manager. Mr. Schenkel joined Schepps in 1958 when a local
dairy company owned by his father was purchased by Schepps. Mr. Schenkel is a
past Chairman of the Dallas/Fort Worth International Airport Board of Directors
and was former Texas Governor Clement's appointee to the Board of Directors of
Texas Tourism and Development Agency. He is also a member of the Board of
Goodwill Industries and the Dallas Citizen Council. He is a member of the Board
of Directors at First Bank and for the Milk Industry Foundation. Mr. Schenkel is
also the President and Chief Executive Officer of SFG Capital.
Anthony R. Ward serves as Vice Chairman of the Company. Mr. Ward was
appointed Chairman of the Board of Directors, President and Chief Executive
Officer of Borden/Meadow Gold in May 1995. Prior to assuming this position, Mr.
Ward served as Western Region Manager of the Dairy Division of Borden since 1993
and Western Region Sales Manager since 1992. Mr. Ward has over 36 years of
experience in the dairy industry, all of which have been with Borden and the
Company.
Patrick K. Ford joined SFG in June 1997 and assumed the position of Chief
Financial Officer upon Mr. Frie's resignation from that position in December
1997. Mr. Ford served as Assistant Controller-Corporate with Weatherford
Enterra, Inc. from September 1996 through May 1997. Prior to assuming that
position, Mr. Ford was employed by Price Waterhouse LLP since 1990, most
recently serving as Senior Manager. During his tenure with Price Waterhouse LLP,
Mr. Ford served as an auditor of SFG from 1990 through 1995. Mr. Ford is the
Chief Financial Officer, Secretary and Treasurer of SFG Capital.
Jerry W. Frie has served as a Representative on the Committee of SFG
Management since September 4, 1997. Mr. Frie served as Chief Financial Officer
of SFG from 1987 to December 1997, and has 30 years of experience in the dairy
industry in both accounting and operations management functions. Mr. Frie began
his career with Foremost where he progressed from a junior accountant, to
Controller, to General Manager of Foremost's Shreveport production facility. In
1985, Mr. Frie became the Controller and Treasurer for Schepps. Mr. Frie is
Chairman of the Master Dairies Financial Group, and a member of M.I.F. Federal
Milk Order Committee. Mr. Frie continues to serve as a part time employee of the
Company for various matters such as raw milk pricing policies.
Gary E. Hanman has served as a Representative on the Committee of SFG
Management since the formation of SFG Management in December 1994. Mr. Hanman
who is the President and Chief Executive Officer of DFA, became its Chief
Executive Officer in July 1988. Prior to that time, Mr. Hanman was Executive
Vice President and General Manager of DFA from 1975, and before that was Vice
President of Fluid Marketing for DFA. Mr. Hanman previously was employed by the
Federal Milk Market Administrator at St. Louis, Missouri from 1956 until 1964.
In 1994, Mr. Hanman was appointed to a three year term on the National Fluid
Milk Promotion Board by the Secretary of Agriculture. This 20 member board,
composed of fluid milk processors, administers the $55 million, handler-funded
advertising and promotion program aimed at increasing Class I fluid milk sales
throughout the U.S. In January 1995 he was elected President of the National
Council of Farmer Cooperatives, a national organization that represents 100 of
the nation's
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agricultural cooperatives in Washington, D.C. for a two year term. Mr. Hanman
also chaired the NCFC's Political Action Committee.
Gerald L. Bos has served as a Representative to the Committee of SFG
Management since the formation of SFG Management in December 1994. Mr. Bos is
the Chief Financial Officer of DFA. Mr. Bos joined DFA as Vice
President -- Finance and Accounting in April 1979, and became the Chief
Financial Officer of DFA on January 1, 1998. Mr. Bos worked with the accounting
firm of Touche Ross & Co. from 1963 to 1979, and was a partner in that firm.
EXECUTIVE EMPLOYMENT AGREEMENTS
In connection with the Transactions, the Company entered into executive
employment agreements with Pete Schenkel and Anthony R. Ward. The employment
agreements are for a term of five years and the term automatically extends for
one or more one year terms unless either the Company or the employee, not less
than 90 days prior to the commencement of any term, notifies the other party
that the agreement will expire at the end of the term. The employment agreements
provide for the payment of an annual salary, which cannot be less than the base
salary of $359,000 for Mr. Schenkel and $336,000 for Mr. Ward, an annual bonus
as determined from time to time by the Company, which in the case of Mr. Ward
will be an amount equal to .66% of the earnings before interest, income taxes,
depreciation and amortization of Meadow Gold not to exceed his base salary for
the year, and certain other employee benefits. If the Company terminates the
executive without cause or if the Company materially breaches the agreement and
such breach is not cured within 30 days, the Company is obligated to pay the
employee a severance benefit. The severance benefit is equal to the base salary
for the then remaining term of the agreement payable in monthly installments,
plus the annual bonus, if any, which would have otherwise been paid to the
employee during each year of the remaining term. The employment agreements
define "cause" as death of the employee; total disability of the employee; the
dissolution and liquidation of the Company other than as a part of a
reorganization or sale of all or substantially all of the assets of the Company
where the Company's business is continued; a conviction or plea of guilty or no
contest by the employee to a felony involving fraud, embezzlement, theft or
dishonesty or other criminal act; habitual neglect of the employee's duties or
failure to perform obligations that is not remedied within 30 days after written
notice from the Company; or any material breach by the employee of the agreement
which is not cured within 30 days after written notice from the Company.
In addition, Mr. Ward's employment agreement provides that for a period of
two years after termination of his employment he may not compete with the
business of the Company in any of the states of the United States located west
of the Mississippi River as long as the Company continues to conduct business in
that area. In addition, he may not solicit customers or employees of the Company
during that period. Mr. Schenkel's employment agreement also contains a two year
non-compete provision after termination of his employment and a non-solicitation
provision. Mr. Schenkel's non-compete provision is limited to Texas, Louisiana,
Oklahoma, and Arkansas. Mr. Schenkel's employment agreement provides that in the
event of his death during the term of the agreement, his base salary will
continue to be paid to his estate for a year and one-half of his base salary
will be paid for an additional year.
RETIREMENT PLANS
The Company maintains the Southern Foods Group, L.P. Employees Savings and
Profit Sharing Plan ("Profit Sharing Plan"). All employees of the Company are
eligible to participate in the Profit Sharing Plan upon completion of six months
of service, as defined. The Company matches employee contributions equal to 50%
of the participant's contribution up to 3% of the participant's compensation.
The Company may also make discretionary contributions based on profits.
Employees vest in the Company's contribution after two to five years of service.
Selected management personnel are eligible to participate in the Management
Security Plan, an unqualified plan. The Company matches 100% of contributions up
to 3% of each participant's compensation. Employees vest in the Company's
contribution after two years of service.
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Effective October 1, 1996, the Company adopted the Supplemental Executive
Retirement Plan ("SERP"). The SERP is available to certain specified executives
of the Company ("SERP Participants") and provides benefits based on a percentage
of the executives' salaries. Benefits are payable monthly for the SERP
Participant's life upon retirement, disability or involuntary termination. Such
monthly amount will be equal to 70% of the greatest annual earnings received by
the SERP Participant from the Company during any consecutive twelve calendar
month period on or prior to the SERP Participant's retirement date, less the sum
of the maximum monthly amount that could be payable to the SERP Participant
under the Profit Sharing Plan and the monthly retirement benefit payable to the
SERP Participant by the Social Security Administration, whether or not actually
paid. The SERP is non-qualified and unfunded and there is no calculation of
market value or fair value of the assets in the SERP. The estimated annual
benefits payable under the SERP upon retirement for Pete Schenkel and Jerry Frie
are $174,000 and $54,000, respectively.
Meadow Gold employees are eligible to participate in a 401(k) plan upon
date of hire. The Company matches contributions equal to 50% of the
participant's contribution up to 5% of each participant's compensation.
Employees vest in the Company's contribution over five years. Most Meadow Gold
employees also participate in a retirement cash contribution plan where benefits
are based generally on compensation and credited service. For most hourly
employees, benefits under this plan are based on specified amounts per year of
credited service.
See Note 8 of Notes to the Financial Statements of the Company.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
to the Company's Chief Executive Officer and the other executive officers of the
Company for the fiscal years shown.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(A)
---------------------------------------------------
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(B) COMPENSATION($)(C)
------------------ ---- --------- -------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Pete Schenkel 1997 $358,651 $455,888 $2,000,000 $ 740,260(d)
Chief Executive 1996 361,800 319,507 746,563 20,354
Officer.................. 1995 334,039 285,747 21,341
Jerry W. Frie 1997 117,832 124,146 -- 77,070
Chief Financial 1996 114,869 72,876 7,454
Officer(e)............... 1995 111,142 71,481 6,668
Allen Meyer 1997 259,076 614,286 2,000,000 1,137,272(d)
Former Vice 1996 348,400 272,542 751,754 18,229
President(f)............. 1995 73,442 253,642 4,406
Tony Ward
Vice Chairman(g)......... 1997 110,200 6,612
</TABLE>
- ---------------
(a) Excludes the aggregate, incremental cost to the Company of perquisites and
other personal benefits, securities or property, the aggregate amount of
which, with respect to the named individual, does not exceed the lesser of
$50,000 or 10% of reported annual salary and bonus for such person.
(b) Represents amounts distributed to the partners of the Company as
Partnership Tax Amounts to pay federal and state income tax due on
partnership income. See "Description of the Partnership Agreement and
Operating Agreement."
(c) Represents amounts contributed by the Company under retirement plans, less
the amounts set forth in footnote (d) below, where applicable.
(d) Includes special distributions made to Mr. Schenkel ($700,000) and Mr.
Meyer ($1,100,000), as partners in the Company, in connection with the
Transactions. See "Certain Relationships and Transactions -- Certain
Distributions and Related Party Payments."
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(e) Jerry W. Frie resigned as Chief Financial Officer of the Company effective
December 31, 1997.
(f) Allen Meyer resigned as Vice President of the Company effective May 22,
1997, and has had no affiliation with the Company since September 4, 1997.
Mr. Meyer owns Milk Products, an independent company which acquired and
operates the assets of the Borden Dairies.
(g) Tony Ward became an employee of the Company on September 4, 1997. Amounts
shown represent the salary paid to Mr. Ward for the period September 4,
1997 to December 31, 1997, but exclude $119,301 of bonus earned in such
period but paid in 1998.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
AFFILIATION WITH DFA
The Company is an affiliate of DFA. DFA owns a 49.5% limited partnership
interest, Mr. Schenkel owns a 49.5% limited partnership interest and SFG
Management owns a 1% general partnership interest in the Company. SFG Management
is owned 50% by DFA and 50% by Mr. Schenkel. In addition, as of December 31,
1997, DFA owns $192.3 million in net stated amount of Preferred Interests,
including unpaid preferred returns, and Mid-Am Capital owns an additional $46.4
million in stated amount of Preferred Interests, including unpaid preferred
returns, of the Company. Mid-Am Capital is owned 50% by DFA and 50% by seven
other companies, including the Company, which has a seven percent equity
interest in Mid-Am Capital. For a description of the Transactions, see "The
Transactions" and for a description of the governance of the Company see
"Description of the Partnership Agreement and Operating Agreement."
Effective January 1, 1998, DFA and the Company entered into a written milk
supply agreement pursuant to which the Company agreed to source all of its raw
milk requirements from DFA or from other dairy cooperatives with which DFA has
cooperative marketing agency agreements as long as DFA's prices are competitive
with those which could be obtained from independent sources.
On January 1, 1998, DFA merged with three other large dairy cooperatives.
The other cooperatives were Milk Marketing Inc. of Strongsville, Ohio, Western
Dairymen Cooperative Inc., and the southern region of Associated Milk Producers,
Inc. Together, these cooperatives represented over 18,600 member farms in 1997.
Total sales of the combining cooperatives were approximately $6.2 billion in
1997. The consolidation did not constitute a "Change of Control" within the
meaning of the restrictive covenant described under "Description of the
Notes -- Change of Control."
In connection with the Acquisition, DFA assumed Borden's rights and
obligations with respect to certain equipment and vehicles used by Holdings in
its dairy operations by entering into new master lease agreements with the
lessors. DFA subleased the leased equipment used by Meadow Gold to the Company
on the basis of passing through DFA's rights and obligations under the new
master lease agreements. In addition, DFA has agreed to pay to Borden any
contributions in excess of $5 million that the Pension Benefit Guaranty
Corporation may require to be made by Borden to benefit plans that the Company
will sponsor for employees of Meadow Gold. Since such contributions are for the
benefit of the Company, the Company will issue Additional Preferred Interests to
DFA in a stated amount equal to any such DFA contribution. See "Description of
Preferred Interests."
In July 1994, DFA entered into a lease agreement with Unionbanc Leasing
Corporation pursuant to which Unionbanc leased to DFA certain equipment used by
the Company. DFA has subleased the equipment to the Company on a pass through
basis.
The Company employs Mr. Jerry Bos, the CFO of DFA and a Representative on
the Committee, as a consultant on financial services. The Company paid Mr. Bos
consulting fees of $100,000 and $125,000 for 1997 and 1998, respectively.
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OWNERSHIP REORGANIZATION AND CONTRIBUTION BY DFA OF THE BARBE'S DAIRY ASSETS
In October 1996, Messrs. Meyer and Schenkel each purchased for $100,000 a
10% membership interest in SFG Management from Mid-Am Finance, Inc., the
predecessor of Mid-Am Capital and an affiliate of DFA. In February 1997, Messrs.
Schenkel and Meyer each increased their ownership in the Company by contributing
$3.1 million each for a 24.75% common limited partnership interest in the
Company. DFA retained the remaining 49.5% Common Limited Partnership Interest
and received Series A Preferred Interests in a stated amount of $76.9 million.
At that time, an affiliate of DFA also contributed to the Company the assets and
liabilities of Barbe's Dairy, Inc. and received Series A Preferred Interests in
a stated amount of $8.0 million. See "Description of the Partnership Agreement
and Operating Agreement."
LEASE OF AND OPTION TO PURCHASE PROCESSING PLANT AND LICENSE OF TRADEMARKS FROM
FLAV-O-RICH, INC.
Flav-O-Rich, Inc. ("Flav-O-Rich"), a wholly owned subsidiary of DFA, has
leased a dairy processing plant owned by it in Canton, Mississippi to the
Company, pursuant to a Lease Agreement between the Company and Flav-O-Rich dated
February 28, 1995. The lease initially was for a one year term and, so long as
the Company is in compliance with its terms, extends automatically for one year
terms unless terminated by either party upon at least 90 days' notice. The lease
is a net lease and the annual base rent is $180,000. The Company has a right of
first refusal to purchase the plant in the event that Flav-O-Rich receives an
offer or desires to sell the plant. In addition, the Company has an option to
purchase the Canton plant at any time during the term of the lease, at an option
price that varies depending on the month in which the option is exercised
ranging from an option price of $1,066,250 if the option is exercised in May
1998 to $820,000 if the option is exercised in February 2000. In addition, the
Company obtained a royalty-free license to use the Flav-O-Rich trademarks in the
states of Louisiana, Mississippi and Arkansas and a portion of Tennessee for
specified dairy products. The license continues so long as the lease agreement
is in effect and for three years after any exercise of the option to purchase
the plant.
CERTAIN DISTRIBUTIONS AND RELATED PARTY PAYMENTS INVOLVING PARTNERS
Immediately prior to the closing of the Acquisition, the Company
distributed to Mr. Meyer approximately $1.1 million in cash as a special
distribution. In addition, the Company made a special distribution to Mr.
Schenkel of approximately $700,000 in cash and approximately $400,000 in stated
amount of Series E Preferred Interests, all of which interests were immediately
contributed to the Company. The Company also issued to DFA approximately $2.2
million in stated amount of Series E Preferred Interests, of which $400,000 was
immediately contributed to the Company. Such distributions were made in
connection with the Meyer Divestiture and to maintain equality with respect to
the Common Partner Interests of DFA and Mr. Schenkel. In addition, on September
10, 1997 the Company made additional distributions to Messrs. Schenkel and Meyer
of $2.0 million each as a distribution of Partnership Tax Amounts (as defined)
in respect of certain tax liabilities and to DFA of $4.0 million of Series E
Preferred Interests. See "Description of the Partnership Agreement and Operating
Agreement -- Allocations and Distributions -- Distributions" and "Description of
Preferred Interests."
Mr. Schenkel's son is employed by the Company as the Company's sales
manager and Mr. Schenkel's son-in-law is employed as the general manager of the
Dallas Oak Farms plant. In 1997, they received compensation from the Company in
the amounts of $68,984 and $95,936, respectively.
PUT AND CALL RELATING TO MR. SCHENKEL'S INTEREST IN THE COMPANY AND SFG
MANAGEMENT
At any time on or after January 1, 2003, Mr. Schenkel may require the
Company or DFA to purchase all of his partnership interests in the Company and
his member interest in SFG Management, and DFA has the option to purchase up to
20% of Mr. Schenkel's interest in the Company. See "Description of the
Partnership Agreement and Operating Agreement -- Put and Call Relating to Mr.
Schenkel's Interest in the Company and SFG Management."
PROPOSED TRANSACTION WITH MR. WARD
The Company has entered into discussions with Tony Ward, the Vice Chairman
of the Company, to issue common limited partner interests in the Company
representing two percent of the common partner interests in
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<PAGE> 63
the Company for approximately $1 million. If this transaction is completed, of
the common partner interests in the Company, DFA and Mr. Schenkel would each own
48.5%, Mr. Ward would own two percent and SFG Management would own one percent.
Current discussions also contemplate that Mr. Ward would have the right to put
his interest, and the Company would have the right to call Mr. Ward's interest,
on terms substantially similar to those between the Company and Mr. Schenkel,
except the put and call purchase price formula does not change over time and the
Company has the right to call Mr. Ward's interest if Mr. Ward is no longer an
employee of the Company. See "Description of the Partnership Agreement and
Operating Agreement -- Put and Call Relating to Mr. Schenkel's Interest in the
Company and SFG Management."
The Company believes that all of the transactions set forth above under the
caption "Certain Relationships and Transactions" are on terms that are not
materially less favorable than would be the case if they were done on an
arms-length basis.
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DESCRIPTION OF THE PARTNERSHIP AGREEMENT
AND OPERATING AGREEMENT
The following discussion summarizes provisions of the Partnership Agreement
and the Operating Agreement, as amended through May 22, 1998.
The Partnership Agreement authorizes both common partnership interests
("Common Interests") that participate in the Company's profits and losses and
have voting rights and preferred limited partnership interests ("Preferred
Interests") that are only entitled to the return of the stated amount of the
Preferred Interests, but are entitled to a preferred return from the Company's
profits (the "Preferred Return") and do not have voting rights other than as
required by law or as specified in the Partnership Agreement. Currently the
Company has one general partner, SFG Management, which has a common general
partnership interest in the Company, and two limited partners, Pete Schenkel and
DFA, which have common limited partnership interests in the Company
(collectively, the "Common Limited Partners", and together with the General
Partner, the "Common Partners"). The Company also has outstanding five series of
Preferred Interests, four of which were issued in connection with the
Transactions. The holders of Preferred Interests are hereinafter referred to as
"Preferred Limited Partners", and together with the Common Partners, the
"Partners" (each a "Partner"). At December 31, 1997 the Company had an aggregate
of $238.7 million stated amount of Preferred Interests outstanding.
The Company is managed by its General Partner, SFG Management, except that
without the prior written consent of the Common Limited Partners, the General
Partner does not have authority to take certain actions, including taking any
action which would cause a limited partner to be personally liable to a creditor
of the Company or which would possess or assign partnership property for other
than a Company purpose.
The membership interests of SFG Management are owned 50% each by DFA and
Mr. Schenkel. SFG Management is governed by its members (collectively, the
"Members", and each a "Member") which act through the Committee, consisting of
two members appointed by DFA and two members appointed by Pete Schenkel
(collectively, the "Representatives" and each a "Representative"). DFA appointed
Messrs. Hanman and Bos as members of the Committee and Mr. Schenkel appointed
himself and Mr. Jerry Frie, the former Chief Financial Officer of the Company,
as members of the Committee. Actions by the Committee require a written consent
signed by all Representatives or that a quorum, consisting of one Representative
of each member, be present and that all Representatives present approve the
action. The Company has entered into discussions with Tony Ward, the Vice
Chairman of the Company, to issue common limited partner interests in the
Company representing two percent of the common partner interests in the Company
for approximately $1 million. No definitive agreements have been reached, but if
this transaction is completed, the common partner interests would be owned as
follows: DFA (48.5%), Mr. Schenkel (48.5%), Mr. Ward (2.0%) and SFG Management
(1.0%). See "Certain Relationships and Transactions -- Proposed Transaction with
Mr. Ward."
The Committee may delegate its powers to officers of SFG Management except
that it may not delegate the powers in respect of certain matters, including any
actions or approvals to be taken by SFG Management on behalf of the Company, the
appointment or removal of any officer of SFG Management or the Company, and the
acquisition, expansion or disposal of facilities of SFG Management or the
Company.
Pursuant to the SFG Amendments, DFA agreed to certain revisions to the
Partnership Agreement and the Operating Agreement that restrict or modify its
rights to have its Representatives participate and vote with respect to certain
matters affecting the Company. For instance, with respect to matters relating to
the acquisition, expansion or disposal of facilities, DFA has agreed to certain
restrictions regarding its ability to participate in the capital budget and
capital expenditure process, particularly when the Company contemplates an
expansion of its business. With respect to budgeting and capital expenditures
relating to the processing and sale of fluid milk products, DFA has agreed that
it will not participate in a vote on expenditures unless the total project cost
exceeds $3 million. In that case, DFA is obligated to vote in favor of an
expenditure unless it has persuaded an independent decisionmaker (an individual
experienced in accounting and financial matters who is not affiliated with DFA)
that the expenditure would not be a rational business decision and would
threaten the ongoing financial viability of the Company. With respect to
budgeting and capital expenditures
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relating to products other than fluid milk products, DFA may not disapprove
projects of under $3 million and may only disapprove capital expenditures on
projects with a total project cost of more than $3 million if it persuades an
independent decisionmaker that the expenditure would not be a rational business
decision for a company whose primary business purpose is to process and sell
products with milk as their primary ingredient. In addition, DFA has agreed to
not participate in a vote regarding the incurrence by the Company of any new
borrowings relating to the capital expenditures described above unless such
approval is necessary to satisfy requirements imposed by a creditor of the
Company. With respect to the appointment or removal of any officer of the
Company or the General Partner, the Representatives appointed by Mr. Schenkel
will nominate all officers and DFA will be obligated to vote for such officers
unless the nominee lacks appropriate management experience or other
qualifications. No officer, director or employee of DFA or its Joint Ventures
(other than the Company) may serve as an officer of the Company or the General
Partner. In addition, compensation decisions with respect to the officers will
be restricted to Representatives appointed by Mr. Schenkel. The SFG Amendments
will restrict the rights of the Representatives of DFA to vote on certain other
matters with respect to the Company.
CERTAIN ACTIONS THAT REQUIRE MEMBER APPROVAL
The Committee may not undertake certain actions unless it first receives
the consent of all of the Members, which actions include the sale, lease,
transfer or other disposition of all or substantially all of SFG Management's
assets or business; any increase or decrease in the capitalization of or the
admission of any new Member to SFG Management; the making of loans by or from
SFG Management with, any guarantee of debt on behalf of or contract or amendment
to any contract with, any Member or any affiliate of any Member; the making of a
material tax election under the Code affecting SFG Management or its Members
unless specifically allowed pursuant to the terms of the Operating Agreement;
the confession of a judgment or bankruptcy filing by or the liquidation or
dissolution of SFG Management; the conversion of SFG Management into another
form of entity; the offering of any securities or membership interests to third
parties by SFG Management; and any amendment or modification of the Operating
Agreement or the Certificate of Formation of SFG Management.
ARBITRATION OF DISPUTES
The Partnership Agreement provides that all controversies, claims and
matters of difference between the Partners will be submitted to arbitration in
Dallas, Texas, and that the Partners agree to abide by all awards rendered in
the proceedings. During the pendency of arbitration proceedings relating to a
default, no party is considered in default until the final award has been
rendered. The Operating Agreement also provides for arbitration of disputes.
INDEMNIFICATION AND FIDUCIARY STANDARDS
Each Partner has agreed to indemnify and hold harmless the Company and its
other Partners from all losses, liabilities, claims and expenses arising out of
any breach of the Partnership Agreement by such Partner or actions or omissions
of the Partner that are outside of the scope of its authority as a Partner.
The Company has agreed to indemnify the General Partner and its officers,
managers, employees, members and agents to the fullest extent permitted by law
from all costs and expenses incurred by such parties as a result of acting on
behalf of or having been associated with the Company so long as the indemnified
party is not ultimately adjudged to have engaged in gross negligence, willful
misconduct or a breach of a material provision of the Partnership Agreement.
The Operating Agreement provides that SFG Management must indemnify to the
fullest extent permitted by law each representative, member and officer of SFG
Management or the Company against all costs, expenses and liabilities incurred
in connection with any action, suit or proceeding with which such person may be
involved by reason of having been a representative, member or officer of SFG
Management or the Company.
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ALLOCATIONS AND DISTRIBUTIONS
Allocations. Subject to certain special allocations, net profits of the
Company for any fiscal year will be allocated first to the Preferred Interests
to bring their capital accounts to an amount equal to the cumulative Preferred
Returns on such interests for all prior and current periods. Next, net profits
will be allocated ratably to eliminate any deficit balance in any Partner's
capital account balance. Next, to the extent net losses have been allocated in
prior periods in amounts that were not pro rata among the Common Interests, net
profits will be allocated to cause the balances of the capital accounts related
to the Common Interests to be in proportion to such Common Interests and the
remainder will be allocated pro rata to the Common Interests. Subject to certain
special allocations, losses will be allocated to the Common Interests pro rata
except that no Common Limited Partner may receive an allocation which would
cause such Common Limited Partner to have a deficit in its capital account at
the end of any fiscal year of the Company.
Distributions. The Company intends to distribute to its Partners its gross
cash receipts from operations (as well as any net cash proceeds received from
the sale or financing of its assets unless it is a sale of all or substantially
all of the assets of the Company) less the portion required to pay the Company's
expenses and less any reserves established by the General Partner for operating
expenses, taxes, maintenance, insurance, capital expenditures, repairs and other
items deemed reasonable and necessary for the Company's business or operations
(collectively, "Net Operating Cash Flow"). Net Operating Cash Flow may be
distributed to the Partners so long as (i) after the distribution is made, the
liabilities of the Company, excluding the Company's liability to its Partners
for their capital contributions, do not exceed the fair market value of the
assets of the Company and (ii) no distribution would reduce a Partner's capital
account below zero unless it is a distribution of Partnership Tax Amounts.
Net Operating Cash Flow is distributed first to certain Partners (the
"Eligible Partners") until each of the Eligible Partners has received a
distribution in an amount equal to the combined federal, state and local income
tax on the amount of such Partner's net amount of taxable income of the Company
allocated to it for the taxable period using the highest combined tax rates (or
alternative minimum tax rates) under federal, state and local law after taking
into account any deductibility of such taxes on any other tax return (the
"Partnership Tax Amount"). The Eligible Partners are (i) Mr. Schenkel and (ii)
prior to the Meyer Divestiture, Mr. Meyer. In the event Net Operating Cash Flow
is insufficient to make any distribution of Partnership Tax Amounts for a
period, the deficiency must be satisfied as soon as Net Operating Cash Flow is
available. Next, within 45 days after the end of each fiscal semi-annual period
Net Operating Cash Flow is distributed to the Preferred Limited Partners who are
entitled to cash payments of Preferred Returns until each Preferred Limited
Partner has received a distribution equal to the excess of the cumulative
Preferred Return due to such Preferred Limited Partner for the period from the
issuance of the Preferred Interest to the end of the semi-annual period over the
sum of all Preferred Returns previously paid to such Partner (the "Unpaid
Preferred Return"). Finally, in the discretion of the General Partner, the
balance of any Net Operating Cash Flow may be distributed to the Common Partners
or to the Preferred Partners, subject, however, to any limitations on such
distributions contained in any agreement to which the Company is a party. In
connection with the Transactions, the Partnership Agreement was amended to
provide that all Preferred Returns with respect to the Series A Preferred
Interests must be paid in kind and to make corresponding changes to the
distributions to Partner provisions.
Distributions on liquidation of the Company will initially be made in
accordance with capital account balances, and will be made first to pay any net
profits allocated with respect to Preferred Returns that have not previously
been distributed in cash, then to pay all Unreturned Preferred Capital Balances
and then to pay the capital accounts of the Common Partners. Once each Partner
has been paid the amount of its capital account, any remaining assets will be
distributed pro rata to the holders of Common Interests.
ISSUANCE OF ADDITIONAL PARTNERSHIP INTERESTS
Additional Common Interests may not be offered by the Company except with
the approval of the Committee.
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The General Partner has the authority to create the terms of additional
series of additional Preferred Interests ("Additional Preferred Interests") in
the Company, such as the Preferred Interests issued as part of the Transactions.
In creating any such series the General Partner is to establish the designation
of the series; the number of interests included in such series, which number may
be increased or decreased from time to time unless otherwise provided when the
series is created; the rate of return payable on the Additional Preferred
Interests and whether such return is intended to be a guaranteed payment or is
based upon the Company's profits and losses; the annual distribution rate or
allocation of profits and losses and the date on which such amounts are to be
payable; whether the distributions are cumulative and, if cumulative, the date
on which such rate of return becomes cumulative; the amount to be paid upon
dissolution or termination of the Company; the prices at which the Additional
Preferred Interests may be redeemed or purchased by the Company; the obligation,
if any, of the Company to purchase or redeem the Additional Preferred Interests
and the prices and other terms on which they may be redeemed; and all other
rights, powers and preferences of the Additional Preferred Interests that are
not inconsistent with the Partnership Agreement.
The General Partner may create series of Additional Preferred Interests
without approval of any Partner, except approval of the Common Limited Partners
is required when the Additional Preferred Interests grant any right to vote as a
partner or to participate in the management of the Company. If any series of
Additional Preferred Interests is ranked above, has priority over or affects the
rights of any existing holders of Preferred Interests or Common Interests, the
prior written approval of all Partners so affected must be obtained.
LIMITATIONS ON TRANSFER OF PARTNERSHIP INTERESTS
No Transfers Permitted. Under the Partnership Agreement, any transfer or
pledge of a partnership interest by a Partner is subject to the consent of the
Partners, except the individual limited partners may freely transfer their
partnership interests into an entity in which a Partner and members of his
family own more than a 50% interest. In addition, DFA and Mid-Am Capital may
transfer their partnership interests to any successor by merger or consolidation
without obtaining consent of the other Partners. Neither SFG Management nor any
Partner of the Company is permitted to transfer any or all of their respective
partnership interests in the Company if such transfer will adversely affect the
Company's tax status. In addition, DFA is prohibited from purchasing or
accepting a transfer of any additional interests in the Company or in the
General Partner if the purchase or transfer would cause DFA to own more than 50%
of the voting interests of the Company or the General Partner in existence at
the time of the transfer or purchase.
Right of First Refusal. Transfers of partnership interests by a Partner are
subject to a right of first offer to the other Partners of the Company and to
the Company itself.
PUT AND CALL RELATING TO MR. SCHENKEL'S INTEREST IN THE COMPANY AND SFG
MANAGEMENT
At any time on or after January 1, 2003, Mr. Schenkel may require the
Company or DFA to purchase all of his partnership interests in the Company, and
DFA has the option to purchase up to 20% of Mr. Schenkel's interest in the
Company. In the event of Mr. Schenkel's death, his successors-in-interest have
the right to require the Company or DFA to purchase all of his interests in the
Company. In addition, the Company and DFA have a right to require Mr. Schenkel's
successors-in-interest to sell to the Company or DFA, as the case may be, all of
his interests in the Company in the event of his death. Any exercise of a put or
call with respect to the Company triggers a corresponding put or call with
respect to Mr. Schenkel's member interest in SFG Management. The purchase price
for Mr. Schenkel's interests in the Company and SFG Management will be the
greater of (i) $6.8 million if the put or call notice date is on or before
January 1, 2003, and $10 million thereafter or (ii) six times the average of the
Company's last three fiscal years' earnings before interest, income taxes and
depreciation and amortization less the aggregate amount of all the Company's
outstanding interest bearing debt and the amount of outstanding Preferred
Interests along with any Preferred Return on the Preferred Interests that has
been accumulated but not paid multiplied by the quotient of the Common Partner
Interests owned by Mr. Schenkel divided by the total outstanding Common Partner
Interests. If the Company does not elect to purchase Mr. Schenkel's interests
when a put is exercised, DFA is required, subject to certain limitations under
DFA's current debt agreements, to purchase such interests. However, under the
SFG Amendments, DFA will be prohibited from accepting or purchasing any interest
in the
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Company or SFG Management if, after such purchase, DFA would own more than 50%
of the voting interests in the Company or SFG Management. As a result, DFA may
not be able to purchase Mr. Schenkel's interests in the Company or SFG
Management unless (a) it gives prior written notice to DOJ of its intention to
modify the SFG Amendments and DOJ does not challenge any proposed purchase or
transfer of Mr. Schenkel's interests or (b) DFA first reduces its ownership
interest in the Company and SFG Management so that the purchase of Mr.
Schenkel's interests would not cause DFA to own more than 50% of the voting
interests in the Company or SFG Management. In October 1997 DFA and Mr. Schenkel
entered into an agreement that sets forth Mr. Schenkel's remedies if DFA is
unable to perform its obligations to purchase Mr. Schenkel's interests within
180 days after exercise of the put. In such case, DFA will deliver a note to Mr.
Schenkel in principal amount equal to the put price, payable in 120 equal
monthly installments. If the put is exercised on or before January 1, 2003, the
note bears interest at the prime rate, but if such put is exercised after
January 1, 2003, the note will not bear interest. If any subsequent purchase of
Mr. Schenkel's interests by DFA or an alternative buyer is subsequently
permitted, the aggregate amount of all principal payments made under the note
will be credited against the purchase price for Mr. Schenkel's interests.
DISSOLUTION OF THE COMPANY
The Company will continue until December 31, 2050, unless sooner dissolved
upon a sale of all or substantially all of the assets of the Company, the
written consent of the Partners or the withdrawal or bankruptcy of the General
Partner or the occurrence of any other event that results in the General Partner
ceasing to be a general partner unless the Common Partners agree to continue the
business and appoint a new general partner. Under the SFG Amendments, DFA may
seek a dissolution of the Company or the General Partner only if the General
Partner has been declared bankrupt, insolvent or placed in receivership,
indicted for or convicted of a felony, or held by a court or arbitrator to have
committed fraud against DFA or the Company, except that DFA may seek to dissolve
the Company or the General Partner where it has persuaded an independent
decisionmaker that termination is necessary to minimize long-term financial
losses to the Company.
MODIFICATION AND TERMINATION OF THE SFG AMENDMENTS
The SFG Amendments may not be modified without sixty days' prior notice to
DOJ; however, they will terminate if DFA or its affiliates no longer have a
financial interest in the Company or the General Partner. In addition, if any
non-affiliate of DFA purchases any of DFA's interests in the Company or the
General Partner, such purchaser will not be bound by the SFG Amendments.
DESCRIPTION OF PREFERRED INTERESTS
At December 31, 1997, the Company had outstanding $93.4 million stated
amount of Series A Preferred Interests with a book value at December 31, 1997 of
$30.9 million. See Note 10 of Notes to the Financial Statements of the Company.
In connection with the Transactions, the Company issued Preferred Interests in a
net aggregate stated amount of $136.8 million. These Preferred Interests were
issued in four series, one of which was received by DFA in exchange for the
Meadow Gold Contribution, two of which were issued to Mid-Am Capital in exchange
for a $45.0 million contribution to the Company, and one of which was issued for
certain Company purposes, including in connection with certain distributions of
Partnership Tax Amounts. See "The Transactions" and "Certain Relationships and
Transactions -- Certain Distributions and Related Party Payments."
In connection with the Meadow Gold Contribution, the Company issued to DFA
a series of Preferred Interests consisting of its "Series B 10% Payment-in-Kind
Preferred Limited Partner Interests" in a stated amount of $90.0 million. Each
holder of such Series B DFA Preferred Interests is entitled to receive an
allocation of net profits in the Company equal to a Preferred Return of up to
ten percent per annum.
As part of the Transactions, the Company also issued to Mid-Am Capital in
two series the Mid-Am Capital Preferred Interests. One series was the Company's
"Series C 10% Payment-in-Kind Preferred Limited Partner Interests" in a stated
amount of $15.0 million. Each holder of such 10% Mid-Am Capital Preferred
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Interests is entitled to receive an allocation of net profits in the Company
equal to a Preferred Return of up to ten percent per annum. The second series
issued to Mid-Am Capital by the Company was its "Series D 9 1/2% Preferred
Limited Partner Interests" in a stated amount of $30.0 million. Each holder of
such 9 1/2% Mid-Am Capital Preferred Interests is entitled to receive an
allocation of net profits in the Company equal to a Preferred Return of up to
nine and one half percent per annum.
In connection with the Transactions, the Company authorized a series of
Additional Preferred Interests, consisting of its "Series E 10% Payment-in-Kind
Preferred Limited Partner Interests" ("Series E Preferred Interests"). Each
holder of the Series E Preferred Interests is entitled to receive an allocation
of net profits in the Company equal to a Preferred Return of up to ten percent
per annum. Initially, Series E Preferred Interests were issued in an aggregate
stated amount of $2.6 million to DFA and Mr. Schenkel, each of whom immediately
recontributed $400,000 of such interests to the Company. In addition, in
mid-September 1997 the Company made distributions of Partnership Tax Amounts in
respect of certain tax liabilities in cash to Messrs. Schenkel and Meyer of $2
million each. At that time, the Company issued an additional $4 million in
stated amount of Series E Preferred Interests to DFA. The Company is also
authorized to issue additional amounts of Series E Preferred Interests under
certain circumstances. For instance, DFA will receive additional Series E
Preferred Interests if and when other distributions of Partnership Tax Amounts
are made to other Partners or if DFA is required to make a payment to Borden
with respect to the benefit plans that the Company sponsors for employees of
Meadow Gold. See "Certain Relationships and Transactions -- Affiliation with
DFA."
In connection with the Transactions, certain other amendments were made to
the Partnership Agreement that affected the Preferred Interests. The
distribution provisions were amended to provide that the General Partner may
elect, after the payment of all Partnership Tax Amounts and all Preferred
Returns payable in cash from Net Operating Cash Flow, to use any remaining Net
Operating Cash Flow to return all or a portion of the Unreturned Preferred
Capital Balances to Preferred Interests. The General Partner retains the right
to determine whether to make such a distribution to the Preferred Interests or
to the Common Partners. The Indenture and the Credit Agreement restrict any such
distributions so long as the Notes are outstanding or the Senior Bank Facilities
remain in place. See "Description of the Partnership Agreement and Operating
Agreement -- Allocations and Distributions -- Distributions."
Each holder of the Preferred Interests is entitled to receive an allocation
of net profits equal to the net profits allocated as Preferred Return (the
"Allocated Preferred Return"), which is cumulative and semi-annually compounded,
in an amount equal to the Preferred Return for the series for the actual number
of days occurring in the period for which the Preferred Return is being
determined. The Allocated Preferred Return is required to be distributed
semi-annually in kind to the extent Net Operating Cash Flow is available. If in
any semi-annual period the Preferred Return is not distributed because Net
Operating Cash Flow is not available, but Net Operating Cash Flow later becomes
available for distribution, each Preferred Limited Partner is entitled to
receive distributions until it has received all cumulated Preferred Returns due
from the issuance of the Preferred Interests to the end of the semi-annual
period. The Preferred Return is based on the average daily balance of the sum of
the unreturned Preferred Interest balances outstanding during the period to
which the Preferred Return relates plus the Preferred Return outstanding from
the date of issuance of the Preferred Interests.
None of the series of Preferred Interests has any voting rights unless
Delaware limited partnership law so provides. If the General Partner establishes
a series of Additional Preferred Interests that is ranked above, has priority
over, or affects the right of existing holders of Preferred Interests the
holders of the Preferred Interests must consent to the issuance of the
Additional Preferred Interests. In addition, none of the series of Preferred
Interests has any mandatory redemption requirements, but the Company has the
option to redeem the Preferred Interests subject to the terms of any restriction
contained in any agreement to which the Company is a party, such as the
Indenture or the Credit Agreement.
Upon dissolution of the Company, the holders of Preferred Interests will be
entitled to preferred distributions equal to the aggregate amount of net profits
allocated with respect to Preferred Returns that has not previously been
distributed in cash and to the aggregate Unreturned Preferred Capital Balances
of all of
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the Preferred Limited Partners before any distributions may be made to the
Common Partners with respect to their Common Partner Interests in the Company.
All series of the Preferred Interests will rank pari passu with respect to
distributions and upon dissolution.
With the exception of the 9 1/2% Mid-Am Capital Preferred Interests, the
other series of Preferred Interests will receive payment of the Preferred
Return, if any, in payments of additional Preferred Interests in the stated
amount of the Allocated Preferred Return due. In the case of the 9 1/2% Mid-Am
Capital Preferred Interests, so long as the Company is in compliance with
certain covenants contained in the Senior Bank Facilities and the Indenture, the
Company is entitled to pay Allocated Preferred Returns to the holders of the
9 1/2% Mid-Am Capital Preferred Interests in cash. See "Description of the
Notes -- Certain Covenants -- Limitation on Restricted Payments."
DESCRIPTION OF SENIOR BANK FACILITIES
The Senior Bank Facilities were provided by a syndicate of banks and other
financial institutions led by The Chase Manhattan Bank, as administrative agent
and collateral agent (the "Agent"), that provided the Term Loans in an aggregate
principal amount of $190.0 million and the Revolving Credit Facility in an
aggregate principal amount of up to $60.0 million. At March 31, 1998, $181.8
million was outstanding under the Senior Bank Facilities. The Company assumed
all of DFA's obligations under the Credit Agreement immediately upon completion
of the Meadow Gold Contribution and DFA was released from all obligations
thereunder. Chase Securities Inc. acted as advisor and arranger in connection
with the Senior Bank Facilities (the "Arranger"). The following is a summary
description of the principal terms of the Credit Agreement and is subject to,
and qualified in its entirety by reference to, the definitive Credit Agreement,
a copy of which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
Structure. Loans under the Credit Agreement consist of (i) a term loan (the
"Tranche A Term Loan") in an aggregate principal amount of $90.0 million; (ii) a
second term loan (the "Tranche B Term Loan," which together with the Tranche A
Term Loan, comprises the "Term Loans") in an aggregate principal amount of
$100.0 million; and (iii) the Revolving Credit Facility in an aggregate
principal amount of up to $60.0 million (of which up to $5.0 million is
available in the form of letters of credit and up to $10.0 million may be
extended in the form of swingline loans). DFA used $175.0 million of the Term
Loans to provide a portion of the funding necessary to consummate the
Acquisition. The Company assumed DFA's obligations under the Senior Bank
Facilities immediately upon consummation of the Meadow Gold Contribution and
borrowed $15.0 million of the amount available as Term Loans in connection with
the Transactions.
Security, Guarantees. The Notes are subordinated in right of payment to
indebtedness under the Senior Bank Facilities. The obligations of the Company
under the Senior Bank Facilities are unconditionally and irrevocably guaranteed,
jointly and severally, by each subsequently acquired or organized domestic (and,
to the extent no adverse tax consequences would result, foreign) subsidiary of
the Company (collectively, the "Guarantors"). In addition, the obligations of
the Company under the Senior Bank Facilities and the guarantees thereunder are
secured by substantially all the assets of the Company and the Guarantors
(collectively, the "Collateral"), including but not limited to (a) a
first-priority pledge of (i) all the partnership interests of the Company (other
than those that are held by DFA or Mid-Am Capital), including the partnership
interests of the Company held by SFG Management, and (ii) all the capital stock
or other equity interests held by the Company or any domestic subsidiary of the
Company of each subsequently acquired or organized domestic subsidiary of the
Company and (b) perfected first-priority security interests in, and mortgages
on, substantially all tangible and intangible assets of the Company and the
Guarantors (including but not limited to accounts receivable, contract rights,
inventory, equipment, intellectual property, general intangibles, real property,
cash and cash accounts and proceeds of the foregoing), in each case subject to
certain limited exceptions. The Collateral also includes the capital stock and
other equity interests and the assets of any subsequently acquired foreign
subsidiaries of the Company, to the extent no adverse tax consequences to the
Company would result from such inclusion. In addition, each holder of any
partnership interests in the Company agreed not to enter into or permit to exist
any agreement prohibiting or restricting in any way the creation or assumption
of any lien or security interest on, or the pledge of, partnership interests in
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the Company at any time held by such holder, including any such lien, security
interest or pledge to secure the obligations of the Company under the Senior
Bank Facilities.
Availability. The full amount of the Term Loans was drawn in two drawings
at the closing of the Transactions, and amounts repaid or prepaid under the Term
Loans may not be reborrowed. As of December 31, 1997, $14.3 million was drawn
under the Revolving Credit Facility and $1.8 million was outstanding under
letters of credit. The remaining portion of the Revolving Credit Facility is
available in varying minimum principal amounts, depending on the type of
interest rate chosen by the Company, the lowest of which permits a minimum draw
of $1.0 million, and amounts repaid under the Revolving Credit Facility may be
reborrowed. For at least three periods (each of which shall be at least 14
consecutive days) in each fiscal year, the aggregate amount of loans and letters
of credit outstanding under the Revolving Credit Facility shall not exceed $20
million.
Amortization, Interest. The Tranche A Term Loan is repayable in quarterly
principal payments through September 4, 2004 and bears interest at a rate per
annum equal (at the Company's option) to: (a) an adjusted London inter-bank
offered rate ("Adjusted LIBOR") plus the applicable margin (the "Applicable
LIBOR Margin") or (b) an Alternate Base Rate (equal to the highest of the
Agent's prime rate, a certificate of deposit rate plus 1% and the Federal Funds
effective rate plus 1/2 of 1%) plus the applicable margin (the "Applicable ABR
Margin" and, together with the Applicable LIBOR Margin, the "Applicable
Margins") where the Applicable Margins are determined by reference to the levels
specified for the Company's ratio of (i) consolidated total debt as of the date
of determination to (ii) consolidated EBITDA (as defined in the Credit
Agreement) for the period of four consecutive fiscal quarters most recently
ended as of such date of determination. The Tranche B Term Loans are repayable
in quarterly principal payments through March 4, 2006 and bear interest at a
rate per annum equal (at the Company's option) to: (i) Adjusted LIBOR plus 3.0%
or (ii) the Alternate Base Rate plus 1.75%. The Revolving Credit Facility has a
final maturity on September 4, 2004, and bears interest at a rate per annum
equal (at the Company's option) to: (i) Adjusted LIBOR plus the Applicable LIBOR
Margin or (ii) the Alternate Base Rate plus the Applicable ABR Margin. The
Applicable LIBOR Margin and the Applicable ABR Margin for the Term Loans and
loans under the Revolving Credit Facility will be increased by 0.25% if the
ratio of consolidated total debt to consolidated EBITDA exceeds the prescribed
level at any time. Principal amounts under the Senior Bank Facilities not paid
when due shall bear interest at a default rate equal to 2.00% per annum above
the otherwise applicable rate. Other amounts not paid when due under the Senior
Bank Facilities shall bear interest at the interest rate then applicable to
Alternate Base Rate loans under the Term Loans and Revolving Credit Facility
plus 2.00% per annum.
Prepayments. Voluntary prepayments of borrowings under the Term Loans and
the Revolving Credit Facility and voluntary reductions of the unutilized
portions of the Revolving Credit Facility are permitted at any time. The Company
is required to make mandatory prepayments of Term Loans, subject to certain
exceptions, in amounts equal to (i) 75% of excess cash flow of the Company and
its subsidiaries, (ii) 100% of the net cash proceeds of dispositions of all
non-ordinary-course asset sales or other property by the Company or any of its
subsidiaries, (iii) 100% of the net proceeds of issuances of debt obligations of
the Company or any of its subsidiaries (other than the Notes) and (iv) 50% of
the net proceeds of issuances of equity of the Company and its subsidiaries.
Fees. The Company is required to pay the lenders, on a quarterly basis, a
commitment fee ranging from 0.35% to 0.50% per annum on the undrawn portion of
the commitments, based upon the Company's ratio of (i) consolidated total debt
as of the date of determination and (ii) consolidated EBITDA for the period of
four consecutive fiscal quarters most recently ended as of such date of
determination. The Company is also required to pay (a) a per annum letter of
credit fee, on a quarterly basis, equal to the Applicable LIBOR Margin on the
aggregate face amount of outstanding letters of credit under the Revolving
Credit Facility, (b) a fronting bank fee, on a quarterly basis, equal to 1/4 of
1% per annum of the aggregate face amount of outstanding letters of credit under
the Revolving Credit Facility and customary issuance and administrative fees for
the letter of credit issuing bank, and (c) agent, arrangement and other similar
fees.
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Covenants. The Senior Bank Facilities contain a number of covenants that,
among other things, restrict the ability of the Company and its subsidiaries,
subject to certain exceptions, to dispose of assets, incur additional
indebtedness, incur guarantee obligations, prepay other indebtedness or amend
other debt instruments, make distributions or pay dividends on partnership
interests or capital stock, redeem and repurchase partnership interests or
capital stock, create liens on assets, enter into sale and leaseback
transactions, make investments, loans or advances, make acquisitions, engage in
mergers or consolidations, change the business conducted by the Company or its
subsidiaries, make capital expenditures or engage in certain transactions with
affiliates and otherwise restrict certain business activities. In addition, the
Company is required to comply with specified financial ratios and tests under
the Senior Bank Facilities, including the following: (i) a maximum leverage
ratio (total debt to consolidated EBITDA) which is currently 5.80 to 1.00, but
will incrementally decrease to 3.50 to 1.00 by September 30, 2003, (ii) a
minimum interest coverage ratio (consolidated EBITDA to interest expense) which
is currently 1.70 to 1.00, but will incrementally increase to 3.00 to 1.00 by
March 31, 2005, (iii) a minimum current ratio of 0.85 to 1.00, (iv) a minimum
fixed charge coverage ratio for any period of four consecutive fiscal quarters
of 1.00 to 1.00, and (v) a minimum net worth, calculated pursuant to a specified
formula as of the end of each fiscal year, which was $132.0 million for the
fiscal year ended December 31, 1997. As of March 31, 1998, the Company was in
compliance with each of such financial ratios and tests. The Company believes
that, as of the date of this Prospectus, it is in compliance with each of such
financial ratios and tests.
The Senior Bank Facilities also contain provisions that prohibit any
modification of the Indenture in any manner adverse to the Lenders and that
limit the Company's ability to refinance or otherwise prepay the Notes without
the consent of such Lenders.
Events of Default. The Senior Bank Facilities contain customary events of
default, including payment defaults, breach of representations and warranties,
covenant defaults, cross-defaults and cross-acceleration to certain other
indebtedness, certain events of bankruptcy and insolvency, ERISA events,
judgment defaults, actual or asserted invalidity of any security documents or
guarantees, change of control, the voluntary creation of security interests
relating to partnership interests in the Company or the voluntary creation of
any prohibition on the creation of such security interests. Upon the occurrence
of an event of default, the Lenders could elect to declare all amounts borrowed
under the Senior Bank Facilities, together with accrued interest, to be due and
payable or could proceed against the collateral securing such indebtedness. In
addition, the Company could be prohibited from making any payments on the Notes.
DESCRIPTION OF THE NOTES
GENERAL
The Outstanding Notes were, and the Exchange Notes will be, issued under an
indenture, dated as of September 4, 1997 (the "Indenture"), among the Company
and SFG Capital, as joint and several obligors, and Chase Bank of Texas,
National Association (formerly Texas Commerce Bank National Association), as
trustee (the "Trustee"). The following summary of certain provisions of the
Indenture and the Notes does not purport to be complete and is subject to, and
is qualified in its entirety by reference to, all the provisions of the
Indenture, including the definitions of certain terms therein and those terms
made a part thereof by the TIA. Capitalized terms used herein and not otherwise
defined have the meanings set forth in the section "-- Certain Definitions"
below. A copy of the Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. References to the Notes includes
the Exchange Notes unless the context otherwise requires.
Principal of, premium (if any) and interest on the Notes are payable, and
the Notes may be exchanged or transferred, at the office or agency of the
Issuers in the Borough of Manhattan, The City of New York (which initially shall
be the corporate trust office of the Trustee, at 55 Water Street, New York, New
York 10041, Attention: Corporate Trust Securities Window, North Building, Room
234, Window 20), except that, at the option of the Issuers, payment of interest
may be made by check mailed to the registered holders of the Notes at their
registered addresses.
The Notes are issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of
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Notes, but the Issuers may require payment of a sum sufficient to cover any
transfer tax or other similar governmental charge payable in connection
therewith.
TERMS OF THE NOTES
The Notes are unsecured senior subordinated obligations of the Issuers,
limited to $150.0 million aggregate principal amount, and will mature on
September 1, 2007. Each Note bears interest at a rate per annum shown on the
front cover of this Prospectus from the Issue Date, or from the most recent date
to which interest has been paid or provided for, payable semiannually to Holders
of record at the close of business on the February 15 or August 15 immediately
preceding the interest payment date on March 1 and September 1 of each year,
commencing September 1, 1998.
OPTIONAL REDEMPTION
Except as set forth below, the Notes will not be redeemable at the option
of the Issuers prior to September 1, 2002. On and after such date, the Notes
will be redeemable, at the Issuers' option, in whole or in part, at any time
upon not less than 30 nor more than 60 days' prior notice mailed by first-class
mail to each Holder's registered address, at the following redemption prices
(expressed as a percentage of principal amount), plus accrued and unpaid
interest (if any) to the redemption date (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date that is on or prior to the date of redemption), if
redeemed during the 12-month period commencing on September 1 of the years set
forth below:
<TABLE>
<CAPTION>
PERIOD REDEMPTION PRICE
------ ----------------
<S> <C>
2002........................................................ 104.938%
2003........................................................ 103.292%
2004........................................................ 101.646%
2005 and thereafter......................................... 100.000%
</TABLE>
In addition, at any time and from time to time prior to September 1, 2000,
the Issuers may redeem in the aggregate up to one-third of the original
aggregate principal amount of the Notes with the proceeds of one or more Public
Equity Offerings by the Company following which there is a Public Market, at a
redemption price (expressed as a percentage of principal amount thereof) of
109.875% plus accrued and unpaid interest (if any) to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date that is on or prior
to the date of redemption); provided, however, that at least two-thirds of the
original aggregate principal amount of the Notes must remain outstanding after
each such redemption.
SELECTION
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
will be redeemed in part. If any Note is to be redeemed in part only, the notice
of redemption relating to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note.
RANKING
The Indebtedness evidenced by the Notes is unsecured Senior Subordinated
Indebtedness of the Issuers. The payment of the principal of, premium (if any)
and interest on the Notes is subordinated in right of payment, as set forth in
the Indenture, to all existing and future Senior Indebtedness of each of the
Issuers, ranks pari passu in right of payment with all future Senior
Subordinated Indebtedness of each of the Issuers and is senior in right of
payment to all existing and future Subordinated Obligations of each of the
Issuers. The Notes are also effectively subordinated to any Secured Indebtedness
of the Company, SFG Capital and all
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future subsidiaries of the Company to the extent of the value of the assets
securing such Indebtedness. However, payment from the money or the proceeds of
U.S. Government Obligations held in any defeasance trust described under
"-- Defeasance" below is not subordinated to any Senior Indebtedness or subject
to the restrictions described herein.
On the date of issuance of the Exchange Notes, the Company will not have
any subsidiaries other than SFG Capital; however, the Indenture does not
restrict the ability of the Company to create, acquire or capitalize
subsidiaries in the future. Claims of creditors of any such future subsidiary,
including trade creditors, and claims of preferred equityholders (if any) of any
such future subsidiary generally will have priority with respect to the assets
and earnings of any such future subsidiary over the claims of creditors of the
Company, including Holders of the Notes. The Notes, therefore, are effectively
subordinated to creditors (including trade creditors) and preferred
equityholders (if any) of any future subsidiary of the Company. Although the
Indenture limits the incurrence of Indebtedness and Preferred Equity Interests
of certain future subsidiaries of the Company, such limitation is subject to a
number of significant qualifications. See, however, "-- Certain
Covenants -- Future Note Guarantors" below.
As of December 31, 1997, the Company had outstanding an estimated $197
million aggregate principal amount of Senior Indebtedness (exclusive of unused
commitments), all of which was Secured Indebtedness, no Senior Subordinated
Indebtedness other than the Indebtedness represented by the Notes and no
Indebtedness that is subordinate and junior in right of repayment to the
Indebtedness represented by the Notes, and SFG Capital had no Indebtedness other
than the Indebtedness represented by the Notes and the Bank Indebtedness.
Although the Indenture contains limitations on the amount of additional
Indebtedness which the Issuers may Incur, under certain circumstances the amount
of such Indebtedness could be substantial and, in any case, such Indebtedness
may be Senior Indebtedness. See "-- Certain Covenants -- Limitation on
Indebtedness" below.
Only Indebtedness of the Company or SFG Capital that is Senior Indebtedness
will rank senior to the Notes in accordance with the provisions of the
Indenture. The Notes in all respects rank pari passu with all other Senior
Subordinated Indebtedness of the Company or SFG Capital. The Issuers have agreed
in the Indenture that each of them will not Incur, directly or indirectly, any
Indebtedness which is subordinate or junior in ranking in any respect to Senior
Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness or is
expressly subordinated in right of payment to Senior Subordinated Indebtedness.
Unsecured Indebtedness is not deemed to be subordinate or junior to Secured
Indebtedness merely because it is unsecured.
The Issuers may not pay principal of, premium (if any) or interest on, the
Notes or make any deposit pursuant to the provisions described under
"-- Defeasance" below and may not otherwise purchase, redeem or otherwise retire
any Notes (collectively, "pay the Notes") if (i) any Senior Indebtedness is not
paid when due or (ii) any other default on Senior Indebtedness occurs and the
maturity of such Senior Indebtedness is accelerated in accordance with its terms
unless, in either case, the default has been cured or waived and any such
acceleration has been rescinded or such Senior Indebtedness has been paid in
full. However, the Issuers may pay the Notes without regard to the foregoing if
the Issuers and the Trustee receive written notice approving such payment from
the Representative of the Designated Senior Indebtedness with respect to which
either of the events set forth in clause (i) or (ii) of the immediately
preceding sentence has occurred and is continuing. During the continuance of any
default (other than a default described in clause (i) or (ii) of the second
preceding sentence) with respect to any Designated Senior Indebtedness pursuant
to which the maturity thereof may be accelerated immediately without further
notice (except such notice as may be required to effect such acceleration) or
the expiration of any applicable grace periods, the Issuers may not pay the
Notes for a period (a "Payment Blockage Period") commencing upon the receipt by
the Trustee (with a copy to the Issuers) of written notice (a "Blockage Notice")
of such default from the Representative of the Designated Senior Indebtedness
specifying an election to effect a Payment Blockage Period and ending 179 days
thereafter (or earlier if such Payment Blockage Period is terminated (i) by
written notice to the Trustee and the Issuers from the Person or Persons who
gave such Blockage Notice, (ii) by repayment in full of such Designated Senior
Indebtedness or (iii) because the default giving rise to such Blockage Notice is
no longer continuing). Notwithstanding the provisions described in the
immediately preceding sentence (but
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subject to the provisions contained in the first sentence of this paragraph),
unless the holders of such Designated Senior Indebtedness or the Representative
of such holders have accelerated the maturity of such Designated Senior
Indebtedness, the Issuers may resume payments on the Notes after the end of such
Payment Blockage Period. Not more than one Blockage Notice may be given in any
consecutive 360-day period, irrespective of the number of defaults with respect
to Designated Senior Indebtedness during such period. However, if any Blockage
Notice within such 360-day period is given by or on behalf of any holders of
Designated Senior Indebtedness other than the Bank Indebtedness, the
Representative of the Bank Indebtedness may give another Blockage Notice within
such period. In no event, however, may the total number of days during which any
Payment Blockage Period or Periods is in effect exceed 179 days in the aggregate
during any 360 consecutive day period. For purposes of these provisions, no
Default or Event of Default that existed or was continuing on the date of the
commencement of any Payment Blockage Period with respect to the Designated
Senior Indebtedness initiating such Payment Blockage Period shall be, or be
made, the basis of the commencement of a subsequent Payment Blockage Period by
the Representative of such Designated Senior Indebtedness, whether or not within
a period of 360 consecutive days, unless such default or Event of Default shall
have been cured or waived for a period of not less than 90 consecutive days.
Upon any payment or distribution of the assets of either of the Issuers to
creditors of the Company or SFG Capital upon a total or partial liquidation or
dissolution or reorganization of or similar proceeding relating to the Company
or SFG Capital or their respective property, the holders of Senior Indebtedness
of the Company or SFG Capital will be entitled to receive payment in full of
such Senior Indebtedness before the Noteholders are entitled to receive any
payment and until such Senior Indebtedness is paid in full, any payment or
distribution to which Noteholders would be entitled but for the subordination
provisions of the Indenture will be made to holders of such Senior Indebtedness
as their interest may appear. If a distribution is made to Noteholders that due
to the subordination provisions of the Indenture should not have been made to
them, such Noteholders are required to hold it in trust for the holders of such
Senior Indebtedness and pay it over to them as their interests may appear.
If payment of the Notes is accelerated because of an Event of Default, the
Issuers or the Trustee shall promptly notify the holders of the Designated
Senior Indebtedness (or their Representative) of the acceleration. If any
Designated Senior Indebtedness is outstanding, the Issuers may not pay the Notes
until five Business Days after such holders or the Representative of the
Designated Senior Indebtedness receives notice of such acceleration and,
thereafter, may pay the Notes only if the subordination provisions of the
Indenture otherwise permit payment at that time.
By reason of such subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Issuers who are holders of Senior
Indebtedness may recover more, ratably, than the Noteholders, and creditors of
the Issuers who are not holders of Senior Indebtedness or of Senior Subordinated
Indebtedness (including the Notes) may recover less, ratably, than holders of
Senior Indebtedness and may recover more, ratably, than the holders of Senior
Subordinated Indebtedness.
NOTE GUARANTEES
If at any time following the issuance of the Notes, a Restricted Subsidiary
(other than SFG Capital) Incurs Indebtedness in excess of $100,000, the Company
will cause such Restricted Subsidiary to execute and deliver to the Trustee a
Note Guarantee pursuant to which such Restricted Subsidiary will Guarantee
payment of the Notes. All such Restricted Subsidiaries (the "Note Guarantors"),
as primary obligors and not merely as sureties, will irrevocably and
unconditionally Guarantee on an unsecured senior subordinated basis the
performance and punctual payment when due, whether at Stated Maturity, by
acceleration or otherwise, of all obligations of the Issuers under the Indenture
and the Notes, whether for payment of principal of or interest on the Notes,
expenses, indemnification or otherwise (all such obligations guaranteed by such
Note Guarantors being herein called the "Guaranteed Obligations") by executing
Note Guarantees. Such Note Guarantors will agree to pay, in addition to the
amount stated above, any and all expenses (including reasonable counsel fees and
expenses) incurred by the Trustee or the Holders in enforcing any rights under
the Note Guarantees. Each Note Guarantee will be limited in amount to an amount
which the Company reasonably believes will not exceed the maximum amount that
can be Guaranteed by the applicable
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Note Guarantor without rendering the Note Guarantee, as it relates to such Note
Guarantor, voidable under applicable law relating to fraudulent conveyance or
fraudulent transfer or similar laws affecting the rights of creditors generally.
See "-- Certain Covenants -- Future Note Guarantors" below.
Each Note Guarantee will be a continuing guarantee and shall (a) remain in
full force and effect until payment in full of all the Guaranteed Obligations,
(b) be binding upon each Note Guarantor and (c) inure to the benefit of and be
enforceable by the Trustee, the Holders and their successors, transferees and
assigns.
Each Note Guarantee will be released upon the sale of the Equity Interests
or all or substantially all of the assets, of the applicable Note Guarantor if
such sale is made in compliance with the Indenture. SFG Capital and each future
Subsidiary of the Company will also Guarantee the Indebtedness of the Company
Incurred under the terms of the Credit Agreement. Each Note Guarantee will be
released to the extent the applicable Note Guarantor is released from its
obligation to Guarantee Indebtedness under the Credit Agreement.
CHANGE OF CONTROL
Upon the occurrence of any of the events listed below, each Holder will
have the right to require the Issuers to repurchase all or any part of such
Holder's Notes at a purchase price in cash equal to 101% of the principal amount
thereof, plus accrued and unpaid interest (if any) to the date of repurchase
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date that is on or prior
to the date of repurchase).
Each of the following constitutes a "Change of Control":
(i) the sale, lease, exchange or transfer, in one transaction or a
series of transactions, of all or substantially all the assets of the
Company and its Restricted Subsidiaries, to any Person other than a
Permitted Holder;
(ii) the adoption of a plan relating to the liquidation or dissolution
of the Company or SFG Capital;
(iii) the Permitted Holders fail to own in the aggregate, directly or
indirectly, at least 50% of each class of Voting Equity Interests in the
Company or, for as long as the Company remains a limited partnership, the
General Partner; or
(iv) the Company fails to own, of record and beneficially, 100% of the
Equity Interests of SFG Capital.
Within 30 days following any Change of Control, the Issuers shall mail a
notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to require the Issuers
to purchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof, plus accrued and unpaid interest (if any) to the date
of repurchase (subject to the right of Holders of record on a record date to
receive interest due on the relevant interest payment date that is on or prior
to the date of repurchase); (2) the circumstances and relevant facts and
financial information regarding such Change of Control; (3) the repurchase date
(which shall be no earlier than 30 days nor later than 60 days from the date
such notice is mailed); and (4) the instructions determined by the Issuers,
consistent with this covenant, that a Holder must follow in order to have its
Notes purchased.
The Issuers will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act, including Rule 14e-1, and any other
securities laws or regulations in connection with the repurchase of Notes
pursuant to this covenant. To the extent that the provisions of any securities
laws or regulations conflict with provisions of this covenant, the Issuers will
comply with the applicable securities laws and regulations and will not be
deemed to have breached their obligations under this paragraph by virtue
thereof.
The Change of Control purchase feature is a result of negotiations among
the Issuers and the Initial Purchaser. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Issuers would decide to do so in the future. Subject to the limitations
discussed
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below, the Issuers could, in the future, enter into certain transactions,
including acquisitions, refinancings or other recapitalizations, that would not
constitute a Change of Control under the Indenture, but that could increase the
amount of Indebtedness outstanding at such time or otherwise affect the Issuers'
capital structure or credit ratings.
The occurrence of certain of the events which would constitute a Change of
Control would constitute a default under the Credit Agreement. Future Senior
Indebtedness of the Company or SFG Capital may contain prohibitions of certain
events which would constitute a Change of Control or require such Senior
Indebtedness to be repurchased upon a Change of Control. Moreover, the exercise
by the Holders of their right to require the Issuers to repurchase the Notes
could cause a default under such Senior Indebtedness, even if the Change of
Control itself does not, due to the financial effect of such repurchase on the
Issuers. Finally, the Issuers' ability to pay cash to the Holders upon a
repurchase may be limited by the Issuers' then existing financial resources and
by agreements with holders of Senior Indebtedness. There can be no assurance
that sufficient funds will be available when necessary to make any required
repurchases.
MATERIAL COVENANTS
The Indenture contains the following material covenants:
Limitation on Indebtedness. (a) The Company will not, and will not permit
any of its Restricted Subsidiaries to, Incur any Indebtedness; provided,
however, that the Company or any Restricted Subsidiary may Incur Indebtedness if
on the date thereof the Consolidated Coverage Ratio would be greater than
2.00:1.00, if such Indebtedness is Incurred on or prior to September 1, 1999,
and 2.25:1.00 if such Indebtedness is Incurred thereafter. Notwithstanding the
foregoing, the Company will not permit SFG Capital or any other future
Restricted Subsidiary to issue, to any party other than the Company or any
Wholly Owned Subsidiary, any Preferred Equity Interest.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness:
(i) Indebtedness under the Credit Agreement (as the same may be
amended from time to time without increasing the committed amount
outstanding, except as otherwise permitted by this covenant) in an
aggregate principal amount on the date of Incurrence which, when added to
all other Indebtedness Incurred pursuant to this clause (i) and then
outstanding, shall not exceed $190.0 million less the aggregate amount of
all prepayments of principal applied to reduce the then outstanding
Indebtedness under the Term Loans actually made since the Issue Date;
(ii) Indebtedness in an aggregate principal amount at any time
outstanding not in excess of $60.0 million in respect of revolving credit,
working capital and letter of credit facilities;
(iii) Indebtedness of the Company owing to and held by any Wholly
Owned Subsidiary or Indebtedness of a Restricted Subsidiary owing to and
held by the Company or any Wholly Owned Subsidiary; provided, however, that
any subsequent issuance or transfer of any Equity Interest or any other
event that results in any such Wholly Owned Subsidiary ceasing to be a
Wholly Owned Subsidiary or any subsequent transfer of any such Indebtedness
(except to the Company or a Wholly Owned Subsidiary) will be deemed, in
each case, to constitute the Incurrence of such Indebtedness by the issuer
thereof;
(iv) (A) Indebtedness represented by the Notes and (B) any
Indebtedness (other than the Indebtedness described in clauses (i) through
(iii) above) outstanding on the Issue Date;
(v) Indebtedness of a Restricted Subsidiary Incurred and outstanding
on or prior to the date on which such Restricted Subsidiary was acquired by
the Company (other than Indebtedness Incurred as consideration in
connection with, in contemplation of, or to provide all or any portion of
the funds or credit support utilized to consummate, the transaction or
series of related transactions pursuant to which such Restricted Subsidiary
became a Restricted Subsidiary or was otherwise acquired by the Company);
provided, however, that at the time such Restricted Subsidiary is acquired
by the Company, the Company
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would have been able to Incur $1.00 of additional Indebtedness pursuant to
paragraph (a) after giving effect to the Incurrence of such Indebtedness
pursuant to this clause (v);
(vi) Indebtedness (A) in respect of performance bonds, bankers'
acceptances, letters of credit and surety or appeal bonds provided by the
Company or any of its Restricted Subsidiaries to customers in the ordinary
course of business, (B) in respect of performance bonds or similar
obligations of the Company or any of its Restricted Subsidiaries in
connection with pledges, deposits or payments made or given in the ordinary
course of business in connection with or to secure statutory, regulatory or
similar obligations, including obligations under milk market orders and (C)
under Currency Agreements and Interest Rate Agreements, in each case
entered into for bona fide hedging purposes of the Company in the ordinary
course of business; provided, however, that, in the case of Currency
Agreements and Interest Rate Agreements, such Currency Agreements and
Interest Rate Agreements do not increase the Indebtedness of the Company
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or by reason of fees, indemnities
and compensation payable thereunder;
(vii) Indebtedness (other than Indebtedness permitted to be Incurred
pursuant to paragraph (a) or any other clause of this paragraph (b)) in an
aggregate principal amount on the date of Incurrence which, when added to
all other Indebtedness Incurred pursuant to this clause (vii) and then
outstanding, will not exceed $30.0 million; provided, however, that the
Indebtedness permitted by this clause (vii) may only be Indebtedness of the
Company and may not be Indebtedness of any Subsidiary of the Company (other
than SFG Capital acting as co-issuer or co-obligor of Indebtedness of the
Company);
(viii) Indebtedness represented by the Note Guarantees and Guarantees
of Indebtedness Incurred pursuant to clause (i), (ii) or (iii) above;
(ix) Purchase Money Mortgages and Capitalized Lease Obligations in an
aggregate principal amount not in excess of $10 million at any time
outstanding;
(x) Acquisition Indebtedness not in excess of $15.0 million at any
time outstanding;
(xi) Indebtedness arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or
from Guarantees or letters of credit, surety bonds or performance bonds
securing any obligation of the Company or any of its Restricted
Subsidiaries pursuant to such agreements, in each case Incurred in
connection with the disposition of any business assets or Restricted
Subsidiary (other than Guarantees of Indebtedness or any other obligations
Incurred by any Person acquiring all or any portion of such business assets
or Restricted Subsidiary for the purpose of financing such acquisition) in
a principal amount not to exceed the gross proceeds actually received by
the Company or any of its Restricted Subsidiaries in connection with such
disposition; provided, however, that the principal amount of any
Indebtedness Incurred pursuant to this clause (xi), when taken together
with all Indebtedness Incurred pursuant to this clause (xi) and then
outstanding, shall not exceed $5.0 million; or
(xii) Any Refinancing Indebtedness incurred in respect of any
Indebtedness incurred pursuant to paragraph (a) or this paragraph (b),
other than clauses (iii), (iv) (A), (vi) and (viii) hereof.
(c) Notwithstanding the foregoing, the Company may not Incur any
Indebtedness pursuant to paragraph (b) above if the proceeds thereof are used,
directly or indirectly, to repay, prepay, redeem, defease, retire, refund or
refinance any Subordinated Obligations unless such Indebtedness will be
subordinated to the Notes to at least the same extent as such Subordinated
Obligations. The Company may not Incur any Indebtedness if such Indebtedness is
subordinate or junior in ranking in any respect of any Senior Indebtedness
unless such Indebtedness is Senior Subordinated Indebtedness or is expressly
subordinated in right of payment to Senior Subordinated Indebtedness. In
addition, the Company may not Incur any Secured Indebtedness which is not Senior
Indebtedness unless contemporaneously therewith effective provision is made to
secure the Notes equally and ratably with such Secured Indebtedness for so long
as such Secured Indebtedness is secured by a Lien.
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(d) Notwithstanding any other provision of this covenant, the maximum
amount of Indebtedness that the Company or any Restricted Subsidiary may Incur
pursuant to this covenant shall not be deemed to be exceeded solely as a result
of fluctuations in the exchange rates of currencies. For purposes of determining
the outstanding principal amount of any particular Indebtedness Incurred
pursuant to this covenant, (i) Indebtedness permitted by this covenant need not
be permitted solely by reference to one provision permitting such Indebtedness
but may be permitted in part by one such provision and in part by one or more
other provisions of this covenant permitting such Indebtedness and (ii) in the
event that Indebtedness or any portion thereof meets the criteria of more than
one of the types of Indebtedness described in this covenant, the Company, in its
sole discretion, shall classify such Indebtedness and only be required to
include the amount of such Indebtedness in one of such clauses.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any of its Restricted Subsidiaries, directly or indirectly, to make any
Restricted Payment if at the time the Company or such Restricted Subsidiary
makes such Restricted Payment:
(i) a Default will have occurred and be continuing (or would result
therefrom);
(ii) the Company could not Incur at least $1.00 of additional
Indebtedness under paragraph (a) of the covenant described under
"-- Limitation on Indebtedness" above; or
(iii) the aggregate amount of such Restricted Payment and all other
Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the Governing Board, whose determination will
be conclusive and evidenced by a resolution of the Governing Board)
declared or made subsequent to the Issue Date would exceed the sum of: (A)
50% of the Consolidated Net Income accrued during the periods (such periods
to be treated as one accounting period) (x) from the Issue Date to the end
of the most recent fiscal quarter for which financial statements are
available at the time of such Restricted Payment and (y) with respect to
Consolidated Net Income attributable to SFG and not attributable to Meadow
Gold Dairies, from July 1, 1997 to the Issue Date (or, in case such
Consolidated Net Income for such periods will be a deficit, minus 100% of
such deficit); (B) the aggregate Net Cash Proceeds received by the Company
from the issue or sale of its Equity Interests (other than Disqualified
Interests) subsequent to the Issue Date (other than an issuance or sale to
a Subsidiary of the Company or, except as provided for in clause (D), an
employee participation plan or other trust established by the Company or
any of its Subsidiaries); (C) the amount by which Indebtedness of the
Company or its Restricted Subsidiaries is reduced on the Company's balance
sheet upon the conversion or exchange (other than by a Subsidiary)
subsequent to the Issue Date of any Indebtedness of the Company or its
Restricted Subsidiaries issued after the Issue Date and convertible or
exchangeable for Equity Interests (other than Disqualified Interests) of
the Company (less the amount of any cash or other property distributed by
the Company or any Subsidiary of the Company upon such conversion or
exchange); and (D) the aggregate Net Cash Proceeds received by the Company
from the issue or sale of its Equity Interests (other than Disqualified
Interests) to an employee participation plan or similar trust subsequent to
the Issue Date; provided, however, that if such plan or trust Incurs any
Indebtedness to, or Guaranteed by, the Company or any of its Restricted
Subsidiaries to finance the acquisition of such Equity Interests, such
aggregate amount shall be limited to such Net Cash Proceeds less such
Indebtedness Incurred to or Guaranteed by the Company or any of its
Restricted Subsidiaries and any increase in the Consolidated Net Worth of
the Company resulting from principal repayments made by such plan or trust
with respect to Indebtedness Incurred by it to finance the purchase of such
Equity Interests.
(b) The provisions of the foregoing paragraph (a) will not prohibit:
(i) any purchase or redemption of Equity Interests of the Company or
Subordinated Obligations made by exchange for, or out of the proceeds of
the substantially concurrent sale of, Equity Interests of the Company
(other than Disqualified Interests and other than Equity Interests issued
or sold to a Subsidiary of the Company or an employee participation plan or
other trust established by the Company or any of its Subsidiaries);
provided, however, that (A) such purchase or redemption will be excluded
from the calculation of the amount of Restricted Payments and (B) the Net
Cash Proceeds from such
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sale applied in the manner set forth in this clause (i) will be excluded
from clause (iii)(B) of paragraph (a) above;
(ii) any purchase or redemption of Subordinated Obligations from Net
Available Cash to the extent permitted by the covenant described under "--
Limitation on Sales of Assets and Subsidiary Equity Interests" below;
provided, however, that such purchase or redemption will be excluded from
the calculation of the amount of Restricted Payments;
(iii) distributions to the holders of Equity Interests paid within 60
days after the date of declaration thereof if at such date of declaration
such distribution would have complied with this covenant; provided,
however, that such distributions will be included in the calculation of the
amount of Restricted Payments;
(iv) as long as the Company remains a limited partnership, payments to
the General Partner in the amount equal to the sum of the following: (A)
franchise taxes and other fees required by the General Partner to maintain
its existence as a limited liability company or corporation, as the case
may be, and (B) the operating costs of the General Partner that are
attributable to the governance of the Company in an amount up to $100,000
per fiscal year; provided, however, that such payments will be excluded
from the calculation of the amount of Restricted Payments;
(v) as long as the Company remains a limited partnership, periodic
payments to an Eligible Partner in an aggregate amount not to exceed the
Partnership Tax Amount; provided, however, that such payments will be
excluded from the calculation of the amount of Restricted Payments;
(vi)(A) issuances of Series E 10% Preferred Interests, (B) scheduled
distributions in kind to holders of Preferred Equity Interests, (C)
scheduled cash distributions to the holders of up to $15 million in stated
amount of the Mid-Am Capital 9.5% Preferred Interests; provided that at the
time such distributions are made, and after giving pro forma effect to such
distributions, the Consolidated Coverage Ratio exceeds 2.25 to 1.00, and
(D) scheduled cash distributions to the holders of the remainder of the
stated amount of the Mid-Am Capital 9.5% Preferred Interests; provided that
at the time such distributions are made, and after giving pro forma effect
to such distributions and any distributions to be made pursuant to (C) of
this clause (vi), the Consolidated Coverage Ratio exceeds 2.40 to 1.00;
provided further, that such cash distributions will be included in the
calculation of the amount of Restricted Payments;
(vii) the repurchase of Equity Interests in the Company or its
Subsidiaries from employees, former employees, directors or former
directors of the Company or any of its Subsidiaries (or permitted
transferees of such employees, former employees, directors or former
directors), pursuant to the terms of the agreements (including employment
agreements) or plans (or amendments thereto) approved by the Governing
Board under which such individuals purchase or sell or are granted the
option to purchase or sell, Equity Interests in the Company or its
Subsidiaries; provided, however, that the aggregate amount of such
repurchases shall not exceed $1.0 million in any calendar year; provided
further, however, that such repurchases will be excluded from the
calculation of the amount of Restricted Payments;
(viii) any payment up to $1.2 million in the aggregate to purchase the
Flav-O-Rich Facility; provided, however, that such payment will be excluded
from the calculation of the amount of Restricted Payments; or
(ix) any purchase or redemption of Subordinated Obligations of the
Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Subordinated Obligations of the Company; provided,
however, that such purchase or redemption will be excluded from the
calculation of the amount of Restricted Payments.
Limitation on Restrictions on Distributions from Restricted Subsidiaries.
The Company will not, and will not permit any of its Restricted Subsidiaries to,
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any such Restricted Subsidiary to
(i) pay dividends or make any other distributions on its Equity Interests or pay
any Indebtedness owed to the Company, (ii) make any loans or advances to the
Company or (iii) transfer any of its property or assets to the
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Company, except: (1) any encumbrance or restriction pursuant to an agreement in
effect at or entered into on the Issue Date, including the Credit Agreement; (2)
any encumbrance or restriction with respect to a Restricted Subsidiary pursuant
to an agreement relating to any Indebtedness Incurred by such Restricted
Subsidiary prior to the date on which such Restricted Subsidiary was acquired by
the Company (other than Indebtedness Incurred as consideration in connection
with, in contemplation of, or to provide all or any portion of the funds or
credit support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Subsidiary of
the Company or was otherwise acquired by the Company) and outstanding on such
date; (3) any encumbrance or restriction with respect to such Restricted
Subsidiary pursuant to an agreement constituting Refinancing Indebtedness of
Indebtedness Incurred pursuant to an agreement referred to in clause (1) of this
covenant or this clause (3) or contained in any amendment to an agreement
referred to in clause (1) of this covenant or this clause (3); provided,
however, that the encumbrances and restrictions contained in any such
refinancing agreement or amendment taken as a whole are no less favorable in any
material respect to the Noteholders than encumbrances and restrictions contained
in such agreements; (4) in the case of clause (iii), any encumbrance or
restriction (A) that restricts in a customary manner the subletting, assignment
or transfer of any property or asset that is subject to a lease, license or
similar contract, (B) by virtue of any transfer of, agreement to transfer,
option or right with respect to, or Lien on, any property or assets of the
Company or any Restricted Subsidiary not otherwise prohibited by the Indenture
or (C) contained in security agreements or mortgages securing Indebtedness of a
Restricted Subsidiary to the extent such encumbrance or restrictions restrict
the transfer of the property subject to such security agreements or mortgages;
(5) any restriction with respect to a Restricted Subsidiary imposed pursuant to
an agreement entered into for the sale or disposition of all or substantially
all of the Equity Interests or assets of such Restricted Subsidiary pending the
closing of such sale or disposition; and (6) encumbrances or restrictions
arising or existing by reason of applicable law.
Limitation on Sales of Assets and Subsidiary Equity Interests. (a) The
Company will not, and will not permit any Restricted Subsidiary to, make any
Asset Disposition unless (i) the Company or such Restricted Subsidiary receives
consideration (including by way of relief from, or by any other Person assuming
sole responsibility for, any liabilities, contingent or otherwise) at the time
of such Asset Disposition at least equal to the fair market value of the Equity
Interests and assets subject to such Asset Disposition, (ii) at least 75% of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash or cash equivalents and (iii) an amount equal to 100% of the
Net Available Cash from such Asset Disposition is applied by the Company (or
such Restricted Subsidiary, as the case may be) (A) first, to the extent the
Company elects (or is required by the terms of any Senior Indebtedness or
Indebtedness (other than Preferred Equity Interests) of a Wholly Owned
Subsidiary), to prepay, repay or purchase Senior Indebtedness or such
Indebtedness (in each case other than Indebtedness owed to the Company or an
Affiliate of the Company) within 180 days after the later of the date of such
Asset Disposition or the receipt of such Net Available Cash; (B) second, to the
extent of the balance of Net Available Cash after application in accordance with
clause (A), to the extent the Company or such Restricted Subsidiary elects, to
reinvest in Additional Assets (including by means of an Investment in Additional
Assets by a Restricted Subsidiary with Net Available Cash received by the
Company or another Restricted Subsidiary) within 180 days from the later of such
Asset Disposition or the receipt of such Net Available Cash; (C) third, within
45 days after the later of the application of Net Available Cash in accordance
with clauses (A) and (B) and the date that is 180 days from the date of the
Asset Disposition to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A) and (B), to make an Offer (as defined
below) to purchase Notes pursuant to and subject to the conditions set forth in
section (b) of this covenant, (D) fourth, to the extent of the balance of such
Net Available Cash after application in accordance with clauses (A), (B) and
(C), to (x) acquire Additional Assets (other than Indebtedness and Equity
Interests) or (y) prepay, repay or purchase Indebtedness of the Company (other
than Indebtedness owed to an Affiliate of the Company and other than
Disqualified Interests of the Company) or Indebtedness of any Restricted
Subsidiary (other than Indebtedness owed to the Company or an Affiliate of the
Company), in each case described in this clause (D) within one year from the
receipt of such Net Available Cash or, if the Company has made an Offer pursuant
to clause (C), six months from the date such Offer is consummated; and (E)
fifth, to the extent of the balance of such Net Available Cash after application
in accordance with clauses (A), (B), (C), and (D), for any
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legitimate business purpose; provided, however, that in connection with any
prepayment, repayment or purchase of Indebtedness pursuant to clause (A), (C) or
(D) above, the Company or such Restricted Subsidiary will retire such
Indebtedness and will cause the related loan commitment (if any) to be
permanently reduced in an amount equal to the principal amount so prepaid,
repaid or purchased. Notwithstanding the foregoing provisions of this covenant,
the Company and its Restricted Subsidiaries will not be required to apply any
Net Available Cash in accordance with this covenant except to the extent that
the aggregate Net Available Cash from all Asset Dispositions that is not applied
in accordance with this covenant exceeds $5.0 million.
For purposes of this covenant the following are deemed to be cash
equivalents: (x) the assumption of Indebtedness of the Company (other than
Disqualified Interests of the Company) or any Restricted Subsidiary and the
release of the Company or such Restricted Subsidiary from all liability on such
Indebtedness in connection with such Asset Disposition (in which case the
Company will, without further action, be deemed to have applied such assumed
Indebtedness in accordance with clause (A) of the preceding paragraph) and (y)
securities received by the Company or any Restricted Subsidiary from the
transferee that are promptly converted by the Company or such Restricted
Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of
Notes pursuant to clause (a)(iii)(C) of this covenant, the Issuers will be
required to purchase Notes tendered pursuant to an offer by the Issuers for the
Notes (the "Offer") at a purchase price of 100% of their principal amount plus
accrued and unpaid interest (if any) to the date of purchase in accordance with
the procedures (including prorationing in the event of oversubscription) set
forth in the Indenture. If the aggregate purchase price of Notes tendered
pursuant to the Offer is less than the Net Available Cash allotted to the
purchase of the Notes, the Company will apply the remaining Net Available Cash
in accordance with clauses (a)(iii)(D) and (a)(iii)(E) of this covenant. The
Issuers will not be required to make an Offer for Notes pursuant to this
covenant if the Net Available Cash available therefor (after application of the
proceeds as provided in clauses (A) and (B) of this covenant clause (a)(iii)) is
less than $15.0 million for any particular Asset Disposition (which lesser
amount will be carried forward for purposes of determining whether an Offer is
required with respect to the Net Available Cash from any subsequent Asset
Disposition).
(c) The Issuers will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Issuers will comply
with the applicable securities laws and regulations and will not be deemed to
have breached their obligations under this covenant by virtue thereof.
Limitation on Transactions with Affiliates. (a) The Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter into
or conduct any transaction (including, the purchase, sale, lease or exchange of
any property or the rendering of any service) with any Affiliate of the Company
(an "Affiliate Transaction") on terms (i) that are materially less favorable to
the Company or such Restricted Subsidiary, as the case may be, than those that
could be obtained in a comparable transaction with a Person who is not such an
Affiliate and (ii) that, in the event such Affiliate Transaction involves an
aggregate amount in excess of $1.0 million, has not been approved by a majority
of the members or directors, as the case may be, of the Governing Board that
have no personal stake in such Affiliate Transaction and are not employed by or
otherwise associated with such Affiliate; provided that if such Affiliate
Transaction involves an amount in excess of $20.0 million, a fairness opinion
must be provided by a nationally recognized appraisal or investment banking
firm; provided further that in the case of arrangements for the purchase or sale
of milk or other dairy products from an Affiliate in the ordinary course of
business such arrangements, purchases and sales will be considered in the
aggregate and no fairness opinion will be required.
(b) The provisions of the foregoing paragraph (a) will not prohibit (i) any
Restricted Payment permitted to be paid pursuant to the covenant described under
"-- Limitation on Restricted Payments" above, (ii) any issuance of securities
(including Equity Interests), or other payments, awards or grants in cash,
securities (including Equity Interests) or otherwise pursuant to, or the funding
of, employment arrangements and participation plans approved by the Governing
Board, (iii) loans or advances to employees in the ordinary
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course of business in accordance with past practices of the Company not to
exceed $2.0 million in the aggregate outstanding at any one time, (iv) the
payment of reasonable fees to directors of the Governing Board or directors of
the Company's Subsidiaries who, in either case, are not employees of the Company
or its Subsidiaries, (v) any transaction effected pursuant to an Existing
Agreement between the Company and any Affiliate, (vi) any Permitted Investment,
(vii) any transaction between the Company and a Wholly Owned Subsidiary or
between Wholly Owned Subsidiaries or any transaction contemplated by the
Transactions, (viii) indemnification agreements with, and the payment of fees
and indemnities to, directors, officers and employees of the Company and its
Restricted Subsidiaries, in each case in the ordinary course of business, and
(ix) any employment, noncompetition or confidentiality agreements entered into
by the Company or any Restricted Subsidiary with its employees in the ordinary
course of business.
Limitation on the Sale or Issuance of Equity Interests of Restricted
Subsidiaries. The Company will not sell any Equity Interest in a Restricted
Subsidiary, and will not permit any Restricted Subsidiary, directly or
indirectly, to issue or sell any of its Equity Interests except to the Company
or a Wholly Owned Subsidiary unless the proceeds of any sale of such Equity
Interests will be treated as Net Available Cash from an Asset Disposition and
are applied in accordance with the terms of the covenant described under
"-- Limitation on Sales of Assets and Subsidiary Equity Interests."
Limitation on Liens. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, Incur any Lien on any of its
property or assets (including Equity Interests), whether owned on the original
Issue Date or thereafter acquired, securing any Indebtedness other than Senior
Indebtedness of the Company or a Restricted Subsidiary, unless contemporaneously
therewith (or prior thereto) effective provision is made to secure the Notes or
the Note Guarantee, as the case may be, equally and ratably with (or on a senior
basis to, in the case of Indebtedness expressly subordinated in right of payment
to the Notes or the Note Guarantee, as the case may be) such obligation for so
long as such obligation is so secured. The preceding sentence will not require
the Company or any Subsidiary of the Company to equally and ratably secure the
Notes if such Lien consists of Permitted Liens.
SEC Reports. Prior to the filing of the Registration Statement, of which
this Prospectus forms a part (the "Exchange Offer Registration Statement"), the
Issuers shall provide within a reasonable time (not to exceed 45 days following
the end of the first three quarters of any fiscal year and 90 days following the
end of such year) to the Trustee, Noteholders and prospective Noteholders (upon
request) quarterly and annual financial statements prepared in accordance with
GAAP (provided that, in the case of such quarterly financial statements, such
financial statements may be prepared in substantial compliance with Part I of
Form 10-Q), together with management's discussion and analysis of financial
condition and results of operations and, in the case of annual financial
statements, a description of any changes in, or disagreements with, accountants
on accounting and financial disclosure, a brief description of the Company's
business, a discussion of any material legal proceedings in which the Issuers
are involved (other than routine legal proceedings incidental to the conduct of
the business) and a discussion of the compensation paid to, and any material
arrangements with, executive officers. Following the filing of the Exchange
Offer Registration Statement, notwithstanding that the Issuers may not be
required to be or remain subject to the reporting requirements of Section 13 or
15(d) of the Exchange Act, the Issuers will file with the SEC and provide the
Trustee and Noteholders within 15 days after they file them with the SEC, copies
of the Company's annual report and the information, documents and other reports
that are specified in Sections 13 and 15(d) of the Exchange Act (commencing with
the quarterly report on Form 10-Q for the quarter ended March 31, 1998). In
addition, following a Public Equity Offering, the Issuers shall furnish to the
Trustee and the Noteholders and prospective Noteholders (upon request), promptly
upon their becoming available, copies of the Company's annual report to partners
or equityholders and any other information provided by the Company to its
equityholders generally. The Issuers also will comply with the other provisions
of Section 314(a) of the TIA.
Future Note Guarantors. The Company will cause each Restricted Subsidiary
(other than SFG Capital) that Incurs Indebtedness in excess of $100,000 to
execute and deliver to the Trustee a Note Guarantee pursuant to which such
Restricted Subsidiary will Guarantee payment of the Notes. Each Note Guarantee
will be limited to an amount which the Company reasonably believes will not
exceed the maximum amount that can be Guaranteed by that Restricted Subsidiary
without rendering the Note Guarantee, as it relates to
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such Restricted Subsidiary, voidable under applicable law relating to fraudulent
conveyance or fraudulent transfer or similar laws affecting the rights of
creditors generally.
Limitation on Lines of Business. The Company will not, and will not permit
any Restricted Subsidiary to, engage in any business, other than a Related
Business.
Limitation on Sale/Leaseback Transactions. The Company will not, and will
not permit any Restricted Subsidiary to, enter into any Sale/Leaseback
Transaction with respect to any property unless (a) the Company or such
Restricted Subsidiary would be entitled to (i) Incur Indebtedness in an amount
equal to the Attributable Debt with respect to such Sale/Leaseback Transaction
pursuant to the covenant described under "-- Limitation on Indebtedness" above
and (ii) create a Lien on such property securing such Attributable Debt without
equally and ratably securing the Notes pursuant to the covenant described under
"-- Limitation on Liens" above, (b) the net cash proceeds received by the
Company or any Restricted Subsidiary in connection with such Sale/Leaseback
Transaction are at least equal to the fair value (as determined in good faith by
the Governing Board) of such property and (c) the transfer of such property is
permitted by, and the Company applies the proceeds of such transaction in
compliance with, the covenant described under "-- Limitation on Sale of Assets
and Subsidiary Equity Interests" above.
Limitation on Business Activities of SFG Capital. SFG Capital will not
engage in any trade or business, and will conduct no business activity, other
than the Incurrence of Indebtedness permitted under "-- Limitation on
Indebtedness" and the issuance of Equity Interests to the Company and activities
incidental thereto. Furthermore, SFG Capital will not create, capitalize or
otherwise own or acquire any Subsidiary.
MERGER AND CONSOLIDATION
Neither the Company nor SFG Capital will consolidate with or merge with or
into, or convey, transfer or lease all or substantially all its assets to, any
Person; provided, however, that the Company may consolidate with or merge with
or into, or convey, transfer or lease all or substantially all its assets to,
any Person if (i) the resulting, surviving or transferee Person (the "Successor
Company") will be a corporation, limited liability company or limited
partnership organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia, and the Successor
Company (if not the Company) will expressly assume, by an indenture supplemental
hereto, executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of the Company under the Notes and the Indenture;
(ii) immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Restricted Subsidiary as a result of such transaction as having been Incurred by
the Successor Company or such Restricted Subsidiary at the time of such
transaction), no Default will have occurred and be continuing; (iii) immediately
after giving effect to such transaction, the Successor Company would be able to
Incur an additional $1.00 of Indebtedness under paragraph (a) of the covenant
described under "-- Certain Covenants -- Limitation on Indebtedness" above; (iv)
immediately after giving effect to such transaction, the Successor Company will
have Consolidated Net Worth in an amount which is not less than the Consolidated
Net Worth of the Company immediately prior to such transaction; and (v) the
Company will have delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that such consolidation, merger or transfer and
such supplemental indenture (if any) comply with the Indenture.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but the
predecessor Company in the case of a conveyance, transfer or lease of all or
substantially all its assets will not be released from the obligation to pay the
principal of, and interest on, the Notes.
Notwithstanding the foregoing clauses (ii), (iii) and (iv), (a) any
Restricted Subsidiary, other than SFG Capital, may consolidate with, merge into
or transfer all or part of its properties and assets to the Company, and (b) the
Company may merge with an Affiliate of the Company incorporated or organized for
the purpose of incorporating or organizing the Company in another jurisdiction
or to realize tax or other benefits or changing organizational form from a
limited partnership to a corporation or limited liability company.
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DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in any
payment of interest on any Note when due, (whether or not prohibited by the
provisions described under "-- Ranking" above), continued for 30 days, (ii) a
default in the payment of principal of any Note when due at its Stated Maturity,
upon optional redemption, upon required repurchase, upon declaration or
otherwise, (whether or not such payment is prohibited by the provisions
described under "-- Ranking" above), (iii) the failure by the Issuers to comply
with its obligations under the covenant described under "-- Merger and
Consolidation" above, (iv) the failure by the Issuers to comply for 30 days
after notice with any of its obligations under the covenants described under
"-- Change of Control" or "-- Certain Covenants" above (in each case, other than
a failure to purchase Notes), (v) the failure by the Issuers to comply for 60
days after notice with their other agreements contained in the Securities or the
Indenture, (vi) the failure by the Issuers or any Significant Subsidiary to pay
any Indebtedness within any applicable grace period after final maturity or the
acceleration of any such Indebtedness by the holders thereof because of a
default if the total amount of such Indebtedness unpaid or accelerated exceeds
$10.0 million or its foreign currency equivalent and such default shall not have
been cured or such acceleration rescinded within a 10 day period (the "cross
acceleration provision"), (vii) certain events of bankruptcy, insolvency or
reorganization of the Company, SFG Capital or a Significant Subsidiary (the
"bankruptcy provisions"), (viii) the rendering of any judgment or decree for the
payment of money in excess of $10.0 million or its foreign currency equivalent
(to the extent not covered by insurance) against the Company, SFG Capital or a
Significant Subsidiary if (A) an enforcement proceeding thereon is commenced or
(B) such judgment or decree remains outstanding for a period of 60 days after
such judgment becomes final and non-appealable (the "judgment default
provision") or (ix) any Note Guarantee ceases to be in full force and effect
(except as contemplated by the terms thereof) or any Note Guarantor denies or
disaffirms its obligations under the Indenture or any Note Guarantee and such
Default continues for 30 days.
The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body.
However, a Default under clauses (iv) or (v) will not constitute an Event
of Default until the Trustee or the Holders of 25% in principal amount of the
outstanding Notes notify the Issuers of the default and the Issuers do not cure
such default within the time specified in clauses (iv) and (v) hereof after
receipt of such notice.
If an Event of Default (other than a Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company or SFG Capital) occurs
and is continuing, the Trustee or the Holders of at least 25% in principal
amount of the outstanding Notes by notice to the Issuers may declare the
principal of, and accrued and unpaid interest (if any) on, all the Notes to be
due and payable. Upon such a declaration, such principal and interest will be
due and payable immediately. If an Event of Default relating to certain events
of bankruptcy, insolvency or reorganization of the Company or SFG Capital
occurs, the principal of, and interest on, all the Notes will become immediately
due and payable without any declaration or other act on the part of the Trustee
or any Holders. Under certain circumstances, the Holders of a majority in
principal amount of the outstanding Notes may rescind any such acceleration with
respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
have offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such Holder has
previously given the Trustee notice that an Event of Default is continuing, (ii)
Holders of at least 25% in principal amount of the outstanding Notes have
requested the Trustee to pursue the remedy, (iii) such Holders have offered the
Trustee reasonable security or indemnity against any loss, liability or expense,
(iv) the Trustee has not complied with such request within 60 days after the
receipt of the request and the offer of security or indemnity and (v) the
Holders of a majority
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in principal amount of the outstanding Notes have not given the Trustee a
direction inconsistent with such request within such 60-day period. Subject to
certain restrictions, the Holders of a majority in principal amount of the
outstanding Notes are given the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
Holder or that would involve the Trustee in personal liability. Prior to taking
any action under the Indenture, the Trustee will be entitled to indemnification
satisfactory to it in its sole discretion against all losses and expenses caused
by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the Default
within the earlier of 90 days after it occurs or 30 days after it is known to a
Trust Officer or written notice of it is received by the Trustee. Except in the
case of a Default in the payment of principal of, premium (if any) or interest
on, any Note, the Trustee may withhold notice if and so long as a committee of
its Trust Officers in good faith determines that withholding notice is in the
interests of the Noteholders. In addition, the Issuers are required to deliver
to the Trustee, within 120 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that occurred during
the previous year. The Issuers also are required to deliver to the Trustee,
within 30 days after the occurrence thereof, written notice of any event which
would constitute certain Defaults, their status and what action the Issuers are
taking or propose to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture and the Notes may be amended
with the consent of the Holders of a majority in principal amount of the Notes
then outstanding and any past default or compliance with any provisions of the
Indenture may be waived with the consent of the Holders of a majority in
principal amount of the Notes then outstanding. However, without the consent of
each Holder of an outstanding Note affected, no amendment may, among other
things, (i) reduce the amount of Notes whose Holders must consent to an
amendment, (ii) reduce the rate of or extend the time for payment of interest on
any Note, (iii) reduce the principal of or extend the Stated Maturity of any
Note, (iv) reduce the premium payable upon the redemption of any Note or change
the time at which any Note may be redeemed as described under "-- Optional
Redemption" above, (v) make any Note payable in money other than that stated in
the Note, (vi) make any change to the subordination provisions of the Indenture
that adversely affects the rights of any Holder, (vii) impair the right of any
Holder to receive payment of principal of, and interest on, such Holder's Notes
on or after the due dates therefor or to institute suit for the enforcement of
any payment on or with respect to such Holder's Notes, (viii) make any change in
the amendment provisions which require each Holder's consent or in the waiver
provisions or (ix) modify the Note Guarantees in any manner adverse to the
Holders.
Without the consent of any Holder, the Issuers and Trustee may amend the
Indenture or the Notes to cure any ambiguity, omission, defect or inconsistency,
to provide for the assumption by a successor corporation of the obligations of
the Issuers under the Indenture, to provide for uncertificated Notes in addition
to or in place of certificated Notes (provided that the uncertificated Notes are
issued in registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated Notes are described in Section 163(f)(2)(B)
of the Code), to add Guarantees with respect to the Notes, to secure the Notes,
to add to the covenants of the Issuers for the benefit of the Noteholders or to
surrender any right or power conferred upon the Issuers, to make any change that
does not adversely affect the rights of any Holder in any material respect or to
comply with any requirement of the SEC in connection with the qualification of
the Indenture under the TIA. However, no amendment may be made to the
subordination provisions of the Indenture that adversely affects the rights of
any holder of Senior Indebtedness then outstanding unless the holders of such
Senior Indebtedness (or any group or Representative thereof authorized to give a
consent) consent to such change.
The consent of the Noteholders is not necessary under the Indenture to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
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After an amendment under the Indenture becomes effective, the Issuers are
required to mail to Noteholders a notice briefly describing such amendment.
However, the failure to give such notice to all Noteholders, or any defect
therein, will not impair or affect the validity of the amendment.
TRANSFER AND EXCHANGE
A Noteholder may transfer or exchange Notes in accordance with the
Indenture. Upon any transfer or exchange, the registrar and the Trustee may
require a Noteholder, among other things, to furnish appropriate endorsements
and transfer documents, and the Issuers may require a Noteholder to pay any
taxes required by law or permitted by the Indenture. The Issuers are not
required to transfer or exchange any Note selected for redemption or to transfer
or exchange any Note for a period of 15 days prior to a selection of Notes to be
redeemed. The Notes will be issued in registered form and the registered holder
of a Note will be treated as the owner of such Note for all purposes.
DEFEASANCE
The Issuers at any time may terminate all their obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Issuers at any time may terminate their obligations under the
covenants described under "-- Certain Covenants" above, the operation of the
cross acceleration provision, the bankruptcy provisions with respect to
Subsidiaries of the Company and the judgment default provision described under
"-- Defaults" above and the limitations contained in clauses (iii) and (iv)
under "-- Merger and Consolidation" above ("covenant defeasance"). If the
Issuers exercise their legal defeasance option or their covenant defeasance
option, each Note Guarantor will be released from all of its obligations with
respect to its Note Guarantee.
The Issuers may exercise their legal defeasance option notwithstanding
their prior exercise of their covenant defeasance option. If the Issuers
exercise their legal defeasance option, payment of the Notes may not be
accelerated because of an Event of Default with respect thereto. If the Issuers
exercise their covenant defeasance option, payment of the Notes may not be
accelerated because of an Event of Default specified in clause (iv), (vi), (vii)
with respect only to Significant Subsidiaries, (viii) or (ix) under
"-- Defaults" above or because of the failure of the Company to comply with
clause (iii) or (iv) under "-- Merger and Consolidation" above.
In order to exercise either defeasance option, the Issuers must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal of premium (if any) and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel to the effect that holders of the Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such deposit
and defeasance and will be subject to federal income tax on the same amount and
in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable federal income tax law).
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, PARTNERS, EMPLOYEES, INCORPORATORS
AND EQUITYHOLDERS
No director, officer, partner (including any general partner), employee,
incorporator or equityholder of either of the Issuers, as such, shall have any
liability for any obligations of the Issuers under the Notes or the Indenture or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder of Notes, by accepting a Note, waives and releases
all such liability. The waiver and release are part of the consideration for
issuance of the Notes. Such waiver may not be effective to waive liabilities
under the federal securities laws, and it is the view of the Commission that
such a waiver is against public policy.
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CONCERNING THE TRUSTEE
Chase Bank of Texas, National Association is the Trustee under the
Indenture and has been appointed by the Issuers as Registrar and Paying Agent
with regard to the Notes.
GOVERNING LAW
The Indenture provides that it and the Notes are governed by, and construed
in accordance with, the laws of the State of New York without giving effect to
applicable principles of conflicts of law to the extent that the application of
the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Acquisition Indebtedness" means Indebtedness of the Company or a
Restricted Subsidiary incurred in connection with the acquisition of (i) all or
substantially all of the assets or operations of a dairy processing facility or
all or substantially all of the assets or operations of a Person primarily
engaged in the distribution of milk or other dairy related products, (ii) all or
substantially all of the outstanding Equity Interests of a Person engaged
primarily in the distribution or processing of milk or other dairy related
products and (iii) trademarks of milk or other dairy related products.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Equity Interests) to be used by the Company or a Restricted
Subsidiary in a Related Business; (ii) the Equity Interests of a Person that
becomes a Restricted Subsidiary as a result of the acquisition of such Equity
Interests by the Company or another Restricted Subsidiary; or (iii) Equity
Interests constituting a minority interest in any Person that at such time is a
Restricted Subsidiary; provided, however, that any such Restricted Subsidiary
described in clauses (ii) or (iii) above is primarily engaged in a Related
Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the provisions described under "-- Certain Covenants -- Limitation
on Transactions with Affiliates" and "-- Certain Covenants -- Limitation on
Sales of Assets and Subsidiary Equity Interests" only, "Affiliate" of the
Company shall also mean any owner of shares representing 10% or more of the
total voting power of the Voting Equity Interests of the General Partner (as
long as the Company remains a limited partnership) or the Company or of rights
or warrants to purchase such Voting Equity Interests (whether or not currently
exercisable) and any Person who would be an Affiliate of any such owner pursuant
to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition of
Equity Interests of a Restricted Subsidiary (other than directors' qualifying
Equity Interests), property or other assets (each referred to for the purposes
of this definition as a "disposition") by the Company or any of its Restricted
Subsidiaries (including any disposition by means of a merger, consolidation or
similar transaction) other than (i) a disposition by a Restricted Subsidiary to
the Company or by the Company or a Restricted Subsidiary to a Wholly Owned
Subsidiary, (ii) a disposition of inventory in the ordinary course of business,
(iii) any disposition in the ordinary course of business of obsolete and worn
out equipment or equipment that is no longer used or useful in the conduct of
the business of the Company or any Restricted Subsidiary, (iv) any dispositions
or series of related dispositions for a consideration valued in the good faith
judgment of the Company at less than $1.0 million, (v) transactions permitted
under "-- Merger and Consolidation" above, (vi) for purposes of the provisions
described under "-- Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Equity Interests" only, a disposition subject to the covenant
described under "-- Certain Covenants -- Limitation on Restricted Payments", and
(vii) any asset swap or other exchange of a dairy processing facility for
another dairy processing facility with any Person who is not an Affiliate of the
Company, provided that third party appraisals of all material properties to be
exchanged are received by the Company in connection with such
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exchange and the terms of such exchange are no less favorable to the Company
than those indicated by such appraisals.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the Notes, compounded annually) of the total obligations of the lessee
for rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has been
extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Equity Interest, the quotient obtained by dividing (i)
the sum of the products of the numbers of years from the date of determination
to the dates of each successive scheduled principal payment of such Indebtedness
or redemption or similar payment with respect to such Preferred Equity Interest
multiplied by the amount of such payment by (ii) the sum of all such payments.
"Bank Indebtedness" means any and all amounts payable under or in respect
of the Credit Agreement, the other Senior Credit Documents and any Refinancing
Indebtedness with respect thereto, as amended from time to time, including
principal, premium (if any), interest (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to
either of the Issuers whether or not a claim for post-filing interest is allowed
in such proceedings), fees, charges, expenses, reimbursement obligations,
guarantees and all other amounts payable thereunder or in respect thereof.
"Business Day" means a day other than a Saturday, Sunday or other day on
which banking institutions in the states of New York or Texas are authorized or
required by law to close.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending prior to the date of such determination
and as to which financial statements are available to (ii) Consolidated Interest
Expense for such four fiscal quarters; provided, however, that (A) if the
Company or any Restricted Subsidiary has Incurred any Indebtedness since the
beginning of such period that remains outstanding on such date of determination
or if the transaction giving rise to the need to calculate the Consolidated
Coverage Ratio is an Incurrence of Indebtedness, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving effect on a
pro forma basis to such Indebtedness as if such Indebtedness had been Incurred
on the first day of such period and the discharge of any other Indebtedness
repaid, repurchased, defeased or otherwise discharged with the proceeds of such
new Indebtedness as if such discharge had occurred on the first day of such
period, (B) if since the beginning of such period any Indebtedness of the
Company or any of its Restricted Subsidiaries has been repaid, repurchased,
defeased or otherwise discharged (other than Indebtedness under a revolving
credit or similar arrangement unless such revolving credit Indebtedness has been
permanently repaid and has not been replaced) Consolidated Interest Expense for
such period shall be calculated after giving pro forma effect thereto as if such
Indebtedness had been repaid, repurchased, defeased or otherwise discharged on
the first day of such period, (C) if since the beginning of such period the
Company or any Restricted Subsidiary shall have made any Asset Disposition, the
EBITDA for such period shall be reduced by an amount equal to the EBITDA (if
positive) directly attributable to the assets that are the subject of such Asset
Disposition for such period or increased by an amount equal to the EBITDA (if
negative) directly attributable thereto for such period, and Consolidated
Interest Expense for such period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Indebtedness of the
Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise
discharged with respect to the Company and its continuing Restricted
Subsidiaries in connection with such Asset Disposition for such period (or, if
the Equity Interests of any Restricted Subsidiary are sold, the Consolidated
Interest
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Expense for such period directly attributable to the Indebtedness of such
Restricted Subsidiary to the extent the Company and its continuing Restricted
Subsidiaries are no longer liable for such Indebtedness after such sale), and
increased by the interest income attributable to the assets which are the
subject of such Asset Disposition for such period, (D) if since the beginning of
such period the Company or any Restricted Subsidiary (by merger or otherwise)
shall have made an Investment in any Restricted Subsidiary (or any Person that
becomes a Restricted Subsidiary) or an acquisition of assets, including any
investment in a Restricted Subsidiary or any acquisition of assets occurring in
connection with a transaction causing a calculation to be made hereunder, which
constitutes all or substantially all of an operating unit of a business, EBITDA
and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the Incurrence of any Indebtedness)
as if such Investment or acquisition occurred on the first day of such period
and (E) if since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into the Company or any
Restricted Subsidiary since the beginning of such period) shall have made any
Asset Disposition or any Investment or acquisition of assets that would have
required an adjustment pursuant to clause (C) or (D) above if made by the
Company or a Restricted Subsidiary during such period, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto as if such Asset Disposition, Investment or acquisition of assets
occurred on the first day of such period. For purposes of this definition,
whenever pro forma effect is to be given to an acquisition of assets, the amount
of income or earnings relating thereto and the amount of Consolidated Interest
Expense associated with any Indebtedness Incurred in connection therewith, the
pro forma calculations shall be determined in good faith by a responsible
financial or accounting Officer of the Company. If any Indebtedness bears a
floating rate of interest and is being given pro forma effect, the interest
expense on such Indebtedness shall be calculated as if the rate in effect on the
date of determination had been the applicable rate for the entire period (taking
into account any Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term as at the date of determination in
excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its Restricted Subsidiaries, plus, to the extent
Incurred by the Company and its Restricted Subsidiaries in such period but not
included in such interest expense, (i) interest expense attributable to
Capitalized Lease Obligations, (ii) amortization of debt discount and debt
issuance cost, (iii) capitalized interest, (iv) noncash interest expense, (v)
commissions, discounts and other fees and charges with respect to letters of
credit and bankers' acceptance financing, (vi) interest accruing on any
Indebtedness of any other Person to the extent such Indebtedness is Guaranteed
by the Company or any Restricted Subsidiary, provided that payment of such
amounts by the Company or any Restricted Subsidiary is being made to, or is
sought by, the holders of such Indebtedness pursuant to such Guarantee, (vii)
net costs associated with Hedging Obligations (including amortization of fees),
(viii) Preferred Equity Interest distributions or dividends, other than
payment-in-kind distributions, in respect of all Preferred Equity Interests of
the Company and its Subsidiaries and Disqualified Interests of the Company held
by Persons other than the Company or a Wholly Owned Subsidiary, and (ix) the
cash contributions to any employee participation plan or similar trust to the
extent such contributions are used by such plan or trust to pay interest or fees
to any Person (other than the Company) in connection with Indebtedness Incurred
by such plan or trust and less (a) to the extent included in such interest
expense, the amortization of capitalized debt issuance costs related to the
Transactions and (b) interest income.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its Restricted Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income: (i) any net income (loss) of
any Person if such Person is not a Subsidiary of the Company, except that (A)
subject to the limitations contained in clause (iv) below, the Company's equity
in the net income of any such Person for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually distributed
by such Person during such period to the Company or a Subsidiary of the Company
as a dividend or other distribution (subject, in the case of a dividend or other
distribution to a Subsidiary of the Company, to the limitations contained in
clause (iii) below) and (B) the Company's equity in a net loss of any such
Person for such period but only to the extent of the aggregate Investment of the
Company and any Restricted Subsidiary in such Person shall be included in
determining such Consolidated Net Income; (ii) any net income (loss) of any
person acquired by the Company or a Restricted Subsidiary in a pooling of
interests
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transaction for any period prior to the date of such acquisition; (iii) any net
income (loss) of any Restricted Subsidiary if such Restricted Subsidiary is
subject to restrictions, directly or indirectly, on the payment of dividends or
the making of distributions by such Restricted Subsidiary, directly or
indirectly, to the Company, except that (A) subject to the limitations contained
in clause (iv) below, the Company's equity in the net income of any such
Restricted Subsidiary for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash that could have been distributed by
such Restricted Subsidiary during such period to the Company or another
Restricted Subsidiary as a dividend (subject, in the case of a dividend that
could have been made to another Restricted Subsidiary, to the limitation
contained in this clause) and (B) the Company's equity in a net loss of any such
Restricted Subsidiary for such period, but only to the extent of the Investment
of the Company and its Restricted Subsidiaries in such Person, shall be included
in determining such Consolidated Net Income; (iv) any gain or loss realized upon
the sale or other disposition of any asset of the Company or its Restricted
Subsidiaries (including pursuant to any Sale/Leaseback Transaction) that is not
sold or otherwise disposed of in the ordinary course of business and any gain or
loss realized upon the sale or other disposition of any Equity Interests of any
Person; (v) any extraordinary gain or loss; (vi) exchange or translation gains
or losses on foreign currencies; and (vii) the cumulative effect of a change in
accounting principles.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its Restricted Subsidiaries, determined on a
Consolidated basis, as of the end of the most recent fiscal quarter of the
Company ending prior to the taking of any action for the purpose of which the
determination is being made and for which financial statements are available, as
(i) the par or stated amount of all outstanding Equity Interests of the Company
plus (ii) paid-in capital or capital surplus relating to such Equity Interests
plus (iii) any retained earnings or earned surplus less (A) any accumulated
deficit and less (B) any amounts attributable to Disqualified Interests.
"Consolidation" means the consolidation of the amounts of each of the
Restricted Subsidiaries with those of the Company in accordance with GAAP
consistently applied. The term "Consolidated" has a correlative meaning.
"Credit Agreement" means the credit agreement dated as of September 4,
1997, among the Company, Mid-Am, The Chase Manhattan Bank, as administrative
agent, and the lenders party thereto from time to time, as amended, waived or
otherwise modified from time to time (except to the extent that any such
amendment, waiver or other modification thereto would, on the date of such
amendment, waiver or modification, be prohibited by the terms of the Indenture,
unless otherwise agreed to by the Holders of at least a majority in aggregate
principal amount of Notes at the time outstanding), including any such
amendments or modifications (or any other credit agreement or credit agreements)
that replace, refund or refinance, in whole or in part, any of the commitments
or loans thereunder.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) the Bank Indebtedness and (ii)
any other Senior Indebtedness which, at the date of determination, has an
aggregate principal amount outstanding of, or under which, at the date of
determination, the holders thereof, are committed to lend up to, at least $50.0
million and is specifically designated by the Company in the instrument
evidencing or governing such Senior Indebtedness as "Designated Senior
Indebtedness" for purposes of the Indenture.
"Disqualified Interest" means, with respect to any Person, any Equity
Interest which by its terms (or by the terms of any security or other interest
into which it is convertible or for which it is exchangeable or exercisable) or
upon the happening of any event (i) matures or is mandatorily redeemable
pursuant to a sinking fund obligation or otherwise; (ii) is convertible or
exchangeable for Indebtedness or Disqualified Interests (excluding Equity
Interests which are convertible or exchangeable solely at the option of the
Company or a Restricted Subsidiary); or (iii) is redeemable at the option of the
holder thereof, in whole or in
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part, in each case on or prior to 91 days after the Stated Maturity of the
Notes; provided, that only the portion of Equity Interests which so matures or
is mandatorily redeemable, is so convertible or exchangeable or is so redeemable
at the option of the holder thereof prior to such Stated Maturity shall be
deemed to be Disqualified Interests.
"EBITDA" for any period means the Consolidated Net Income for such period
plus, to the extent deducted in calculating such Consolidated Net Income, (i)
income tax expense or Partnership Tax Amount, (ii) Consolidated Interest
Expense; provided that distributions or dividends referred to in clause (viii)
of the definition of Consolidated Interest Expense shall be included only to the
extent, if any, that such distributions or dividends are deducted in calculating
Consolidated Net Income, (iii) depreciation expense, (iv) amortization expense,
and (v) all other non-cash charges (excluding all such charges to the extent
they represent future cash disbursements or cash receipts reasonably expected to
materialize prior to the Stated Maturity of the Notes), in each case for such
period. Notwithstanding the foregoing, the provision for taxes based on the
income or profits of, and the depreciation and amortization of, a Subsidiary of
the Company shall be added to Consolidated Net Income to compute EBITDA only to
the extent (and in the same proportion) that the net income of such Subsidiary
was included in calculating Consolidated Net Income and only if a corresponding
amount would be permitted at the date of determination to be paid as a dividend
to the Company by such Subsidiary without prior approval (that has not been
obtained), pursuant to the terms of its charter and all agreements, instruments,
judgments, decrees, orders, statutes, rules and governmental regulations
applicable to such Subsidiary or its equityholders.
"Eligible Partner" means Mr. Pete Schenkel as a holder of direct or
indirect partnership interests in the Company or any taxable successor(s) to all
or a part of his direct or indirect partnership interests in the Company.
"Equity Interest" in any partnership, limited liability company or
corporation means any general, limited, preferred or other interest or evidence
of equity participation in such partnership, any interest in such limited
liability company and any and all shares, interests, rights to purchase,
warrants, options, participations or other equivalents of or interests in
(however designated) equity of such corporation, including any Preferred Equity
Interests, but excluding any debt securities convertible into such equity.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Agreement" means any written agreement to which either of the
Issuers was a party on the Issue Date as in effect on the Issue Date.
"Flav-O-Rich Facility" means the dairy plant located in Canton, Mississippi
which on the Issue Date was subject to a lease by the Company from Flav-O-Rich,
Inc., a Kentucky cooperative association.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession.
All ratios and computations based on GAAP contained in the Indenture shall be
computed in conformity with GAAP.
"General Partner" means the Partner of the Company that has the power to
direct the management and set the policies of the Company.
"Governing Board" of the Company means (i) the Representative Committee of
the members or other controlling authority of the General Partner, as long as
the Company remains a limited partnership, (ii) the board of directors of the
Company, if the Company has reorganized as, or otherwise changed form into, a
corporation or (iii) the manager or managing members or any controlling
committee of members, if the Company has reorganized as a limited liability
company.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or
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payment of) such Indebtedness or other obligation of such other Person (whether
arising by virtue of partnership arrangements, or by agreement to keep-well, to
purchase assets, goods, securities or services, to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness or other
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Equity Interest of a Person
existing at the time such person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred
by such person at the time it becomes a Restricted Subsidiary.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium or
discount (if any) in respect of indebtedness of such Person for borrowed money;
(ii) the principal of and premium or discount (if any) in respect of obligations
of such Person evidenced by bonds, debentures, notes or other similar
instruments; (iii) all obligations of such Person in respect of letters of
credit or other similar instruments (including reimbursement obligations with
respect thereto) (other than obligations with respect to letters of credit
securing obligations (other than obligations described in clauses (i), (ii) and
(iii)) entered into in the ordinary course of business of such Person to the
extent that such letters of credit are not drawn upon); (iv) all obligations of
such Person to pay the deferred and unpaid purchase price of property or
services (except Trade Payables, accrued expenses Incurred in the ordinary
course of business and contingent obligations to pay purchase price or
earnouts), which purchase price is due more than six months after the date of
placing such property in service or taking delivery and title thereto or the
completion of such services; (v) all Capitalized Lease Obligations and all
Attributable Debt of such Person; (vi) the amount of all obligations of such
Person with respect to the redemption, repayment or other repurchase of
Disqualified Interests or, with respect to any Restricted Subsidiary, any
Preferred Equity Interests to the extent such obligation arises on or before 91
days following the Stated Maturity of the Notes (but excluding, in each case,
any accrued dividends); (vii) all Indebtedness of other Persons secured by a
Lien on any asset of such Person, whether or not such Indebtedness is assumed by
such Person; provided, however, that the amount of Indebtedness of such Person
shall be the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness of such other Persons;
(viii) all Indebtedness of other Persons to the extent Guaranteed by such
Person; and (ix) to the extent not otherwise included in this definition,
Hedging Obligations of such Person. The amount of Indebtedness of any Person at
any date shall be the outstanding balance at such date of all unconditional
obligations as described above as such amount would be reflected on a balance
sheet prepared in accordance with GAAP and the maximum liability, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations at such date.
"Initial Purchaser" means Chase Securities Inc.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of such Person) or other
extension of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or
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services for the account or use of others), or any purchase or acquisition of
Equity Interests, Indebtedness or other similar instruments issued by such
Person.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Limited Partner" means any Partner of the Company that generally has
limited liability with respect to the obligations of the Company and does not
have the right to control, through its ownership of limited partnership
interests, the day-to-day operations of the Company.
"Mid-Am" means Mid-America Dairymen, Inc., a Kansas cooperative marketing
association (now DFA), and its successors following any merger or consolidation
involving Mid-Am.
"Mid-Am Capital 9.5% Preferred Interests" means the $30,000,000 stated
amount of Series D 9.5% preferred limited partner interests in the Company
originally issued by the Company to Mid-Am Capital, L.L.C., a Delaware limited
liability company, on the Issue Date, as amended (except to the extent that any
such amendment thereto would be prohibited by the terms of the Indenture, unless
otherwise agreed to by the Holders of at least a majority in aggregate principal
amount of Notes at the time outstanding).
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring person of Indebtedness or other obligations relating
to the properties or assets that are the subject of such Asset Disposition or
received in any other noncash form) therefrom, in each case net of (i) all
legal, title and recording tax expenses, commissions and other fees and expenses
incurred, and all federal, state, provincial, foreign and local taxes required
to be paid or accrued as a liability under GAAP, as a consequence of such Asset
Disposition, (ii) all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of any
Lien upon such assets, or which must by its terms, or in order to obtain a
necessary consent to such Asset Disposition, or by applicable law be repaid out
of the proceeds from such Asset Disposition, (iii) all distributions and other
payments required to be made to any person owning a beneficial interest in
assets subject to sale or minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Disposition, (iv) appropriate amounts to be
provided by the seller as a reserve, in accordance with GAAP, against any
liabilities associated with the assets disposed of in such Asset Disposition and
retained by the Company or any Restricted Subsidiary after such Asset
Disposition and (v) any portion of the purchase price from an Asset Disposition
placed in escrow (whether as a reserve for adjustment of the purchase price, for
satisfaction of indemnities in respect of such Asset Disposition or otherwise in
connection with such Asset Disposition); provided, however, that upon
termination of any such escrow, Net Available Cash shall be increased by any
portion of funds therein released to the Company or any Restricted Subsidiary.
"Net Cash Proceeds" with respect to any issuance or sale of Equity
Interests, means the cash proceeds of such issuance or sale net of attorneys'
fees, accountants' fees, underwriters', initial purchasers' or placement agents'
fees, discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Note Guarantee" means any Guarantee of the Notes that may from time to
time be executed and delivered by a Restricted Subsidiary pursuant to the terms
of the Indenture. Each such Note Guarantee will have subordination provisions
equivalent to those contained in the Indenture and will be substantially in the
form prescribed in the Indenture.
"Note Guarantor" means any Restricted Subsidiary that has issued a Note
Guarantee.
"Officer" of either Issuer, as the case may be, means the Chief Executive
Officer, the Chief Financial Officer, the Chief Accounting Officer, the
President, any Vice President, the Treasurer or any Assistant Treasurer or the
Secretary or any Assistant Secretary of such Issuer, and in the case of the
Company, the General Partner acting on behalf of the Company.
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"Officers' Certificate" of either Issuer, as the case may be, means a
certificate signed by two Officers of such Issuer.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of, or counsel to, the
Issuers or the Trustee.
"Partner" means any Person owning an Equity Interest in a partnership.
"Partnership Tax Amount" means the amount of money directly or indirectly
payable as a distribution with respect to the Eligible Partner's direct or
indirect partnership interests in the Company (including such Eligible Partner's
direct or indirect interests in the General Partner) to enable such Eligible
Partner to pay Federal, state and local Income Taxes (including quarterly
estimated Income Taxes) with respect to the Company's net income or any division
or segment thereof allocable to such Eligible Partner. For the purposes of this
definition:
(a) "Income Taxes" means all Federal, state and local taxes, fees,
assessments or charges of any kind, imposed on, or determined with
reference to, net income of the Company or any division or segment thereof,
or any allocable portion thereof, including, without limitation, any
self-employment or similar tax imposed with respect to an Eligible
Partner's allocable share of net income or any division or segment thereof,
and "Income Tax" means any one of such Income Taxes.
(b) The Partnership Tax Amount in any applicable fiscal year shall
equal the greater of (1) the product of (i) the sum of (A) the highest
marginal Federal tax rate (taking into account deductions or credits for
state and local taxes) applicable to the Eligible Partner (at either
individual or corporate rates, as applicable) with respect to the Company's
taxable income directly or indirectly allocable to such Eligible Partner
with respect to such applicable fiscal year, (B) the highest state tax rate
(taking into account deductions or credits for local taxes) applicable to
the Eligible Partner (at either individual or corporate rates, as
applicable) with respect to the Company's taxable income directly or
indirectly allocable to such Eligible Partner with respect to such
applicable fiscal year and (C) the highest local tax rate applicable to the
Eligible Partner (at either individual or corporate rates, as applicable)
with respect to the Company's taxable income directly or indirectly
allocable to such Eligible Partner with respect to such applicable fiscal
year, multiplied by (ii) the Company's taxable income directly or
indirectly allocable to such Eligible Partner with respect to such fiscal
year or (2) the product of (i) the sum of (A) the highest Federal
alternative minimum tax rate (taking into account deductions or credits for
state and local taxes) applicable to the Eligible Partner (at either
individual or corporate rates, as applicable) with respect to the Company's
alternative minimum taxable income directly or indirectly allocable to such
Eligible Partner with respect to such applicable fiscal year, (B) the
highest state tax rate (taking into account deductions or credits for local
taxes) applicable to the Eligible Partner (at either individual or
corporate rates, as applicable) with respect to the Company's taxable
income or alternative minimum taxable income, as applicable, directly or
indirectly allocable to such Eligible Partner with respect to such
applicable fiscal year and (C) the highest local tax rate applicable to the
Eligible Partner (at either individual or corporate rates, as applicable)
with respect to the Company's taxable income or alternative minimum taxable
income, as applicable, directly or indirectly allocable to such Eligible
Partner with respect to such applicable fiscal year, multiplied by (ii) the
Company's taxable income or alternative minimum taxable income, as
applicable, directly or indirectly allocable to such Eligible Partner with
respect to such fiscal year. The Partnership Tax Amount for each applicable
fiscal year shall be appropriately adjusted to reflect (i) any tax losses
of the Company arising in any prior fiscal year (assuming that any such
losses are carried forward and used to offset the Company's taxable income
in the applicable fiscal year) and (ii) the Company's payment of any
withholding taxes that would give rise to a credit or other tax benefit to
the Company (or the Eligible Partner).
(c) Payments or distributions in connection with the Partnership Tax
Amount related to payments of estimated Federal Income Tax shall be payable
in quarterly installments with respect to the applicable fiscal year, in
each case no more than five days prior to the Federal estimated tax due
dates applicable to the Eligible Partner. Such quarterly installments shall
be based upon the Company's then good faith estimate of its taxable income
(or alternative minimum taxable income, as applicable) directly or
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indirectly allocable to the Eligible Partner (as calculated in the manner
described in paragraph (b) above), subject to appropriate adjustment to
reflect over and under payment of any prior quarterly periods during the
applicable fiscal year, and in each quarter shall be no greater than the
applicable estimated tax payment to be paid by such Eligible Partner to the
applicable Governmental Authority.
(d) Payments or distributions in connection with the Partnership Tax
Amount relating to the filing of extensions of time for filing Income Tax
returns for a fiscal year shall be payable in each case no more than five
days prior to the applicable date on which such payment of Income Tax is
due, shall be based on the Company's then good faith estimate of its
taxable income (or alternative minimum taxable income, as applicable)
directly or indirectly allocable to the Eligible Partner for such fiscal
year, and shall be no greater than the applicable tax payment to be paid by
such Eligible Partner to the applicable Governmental Authority.
(e) The aggregate amount of all payments made in connection with the
Partnership Tax Amount during the applicable fiscal year shall be based
upon the Company's taxable income (or alternative minimum taxable income,
as applicable) directly or indirectly allocable to the Eligible Partner
during such applicable fiscal year as shown on the Company's filed Federal
Income Tax return for such fiscal year, or if such return is not filed when
the financial statements referred to in Section 5.01(a) of the Credit
Agreement for such fiscal year are delivered, the Company's then good faith
estimate of the amount of its taxable income (or alternative minimum
taxable income, as applicable), taking into account any separately stated
items, for such fiscal year. In the event that the Company files an amended
Income Tax return (or upon the Company's filing of its original return for
the applicable fiscal year if the Partnership Tax Amount was based upon the
Company's good faith estimate of its taxable income or alternative minimum
taxable income, as applicable, that is inconsistent with its calculation of
its taxable income (or alternative minimum taxable income, as applicable)
for any such fiscal year(s), or in the event that a Governmental Authority
determines that information reflected in any of the Company's Income Tax
returns for such fiscal year is inaccurate or incomplete, then the Company
shall make a proper adjustment (including any penalties, interest or other
charges related to the adjustment or correction of information reflected in
such return(s) or the filing of such return(s)) to the amount payable in
connection with the Partnership Tax Amount for such fiscal year(s).
According to whether such adjustments to the amounts payable in connection
with the Partnership Tax Amount for the applicable year are positive or
negative with respect to the Eligible Partner, the Company shall, as
applicable, either promptly pay to the Eligible Partner as a distribution
as needed to fund payment to a Governmental Authority by such Eligible
Partner, or shall require the Eligible Partner to promptly pay to it, the
amount of any such adjustment (and no further payments in connection with
the Partnership Tax Amount shall be paid until the Eligible Partner has
repaid any such excess to the Company). Payments or distributions to the
Eligible Partner upon the Eligible Partner's filing original Income Tax
returns for a fiscal year shall be payable in each case no more than five
days prior to the applicable date on which the Income Tax payment is due in
connection with such return filing, and shall be no greater than the
applicable tax payment to be paid by such Eligible Partner to the
applicable Governmental Authority.
(f) In the event that the aggregate amount of payments in connection
with the Partnership Tax Amount actually distributed in respect of any
fiscal year exceeds the amounts determined as indicated in paragraph (e)
above for such fiscal year, the Eligible Partner shall promptly repay any
such excess to the Company (and no further payments in connection with the
Partnership Tax Amount shall be paid until the Eligible Partner has repaid
any such excess to the Company).
(g) For all periods from and after the inception of the Company as a
partnership, the amount of the aggregate payments in connection with the
Partnership Tax Amount made with respect to the direct or indirect
partnership interests held by an Eligible Partner for each fiscal year
shall be appropriately adjusted in the current fiscal year or in future
fiscal years, regardless of whether such Eligible Partner has held, or now
or in the future holds, a direct or indirect partnership interest in the
Company (to allow additional payments in connection with the Partnership
Tax Amount for the benefit of such Eligible Partner in the case of tax
increases or in the case of tax decreases by the Eligible Partner paying
any tax
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decrease to the Company) to reflect any adjustments in Income Tax
liabilities as a result of adjustments made for any reason to items of
income, gain, loss, deduction or credit of the Company, or adjustments made
in the Eligible Partner's allocable shares of such items (regardless of
whether occurring as a result of the Company's filing of an amended return
or as a result of an examination or audit by a Governmental Authority). For
the period up to and including Mr. Schenkel's purchase of Mr. Meyer's
direct or indirect partnership interests in the Company, "Eligible Partner"
shall also include Mr. Meyer as a former holder of a partnership interest
in the Company.
(h) In the event that, for any reason, all or any portion of the
Partnership Tax Amount cannot be distributed to an Eligible Partner, such
deficiency in payments in connection with the Partnership Tax Amount shall
be distributed to such Eligible Partner in any subsequent fiscal year.
"Permitted Holders" means Mid-Am or any of its Subsidiaries, Schenkel and
any Person acting in the capacity of an underwriter or initial purchaser in
connection with a public or private offering of Equity Interests in the Company.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) a Restricted Subsidiary or a Person which will, upon the
making of such Investment, become a Restricted Subsidiary; provided, however,
that the primary business of such Restricted Subsidiary is a Related Business;
(ii) another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary (other
than SFG Capital); provided, however, that such Person's primary business is a
Related Business; (iii) Temporary Cash Investments; (iv) receivables owing to
the Company or any Restricted Subsidiary, if created or acquired in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms; provided, however, that such trade terms may include such
concessionary trade terms as the Company or any such Restricted Subsidiary deems
reasonable under the circumstances; (v) payroll, travel and similar advances to
cover matters that are expected at the time of such advances ultimately to be
treated as expenses for accounting purposes and that are made in the ordinary
course of business; (vi) loans or advances to employees made in the ordinary
course of business consistent with past practices of the Company or such
Restricted Subsidiary and not exceeding $2.0 million in the aggregate
outstanding at any one time and (vii) Equity Interests, obligations or
securities received in settlement of debts created in the ordinary course of
business and owing to the Company or any Restricted Subsidiary or in
satisfaction of judgments.
"Permitted Liens" means with respect to the Company and its Subsidiaries:
(a) Liens to secure Indebtedness permitted under the provisions
described under clause (b)(i) or (ii) under "Certain
Covenants -- Limitation on Indebtedness";
(b) pledges or deposits made or other Liens granted by the Company and
its Restricted Subsidiaries (1) under workmen's compensation laws,
unemployment insurance laws or similar legislation, (2) in connection with
bids, tenders, contracts (other than for the payment of Indebtedness) or
leases to which the Company or a Restricted Subsidiary is a party, or (3)
to secure public or statutory obligations of the Company or a Restricted
Subsidiary or deposits of cash or United States government bonds to secure
surety or appeal bonds to which the Company or a Restricted Subsidiary is a
party, or deposits as security for contested taxes or import duties or for
the payment of rent, in each case Incurred in the ordinary course of
business;
(c) Liens imposed by law, such as carriers', warehousemen's,
mechanics', employees' and other like Liens, in each case for sums not yet
due or being contested in good faith by appropriate proceedings or other
Liens arising out of judgments, awards, decrees or orders of any court or
other governmental authority against the Company or a Restricted Subsidiary
with respect to which the Company or a Restricted Subsidiary shall then be
proceeding with an appeal or other proceedings for review;
(d) Liens for property taxes not yet due or payable or subject to
penalties for non-payment or which are being contested in good faith and by
appropriate proceedings;
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(e) Liens in favor of issuers of surety, performance, judgment, appeal
and other like bonds or letters of credit issued pursuant to the request of
and for the account of the Company or a Restricted Subsidiary in the
ordinary course of its business;
(f) minor survey exceptions, minor encumbrances, easements, or
reservations of, or rights of others for, licenses, rights of way, sewers,
electric lines, telegraph and telephone lines and other similar purposes,
or zoning provisions, carveouts, conditional waivers or other restrictions
as to the use of real properties or minor irregularities of title (and with
respect to leasehold interests, mortgages, obligations, Liens and other
encumbrances Incurred, created, assumed or permitted to exist and arising
by, through or under a landlord or owner of the leased property, with or
without consent of the lessee) or Liens incidental to the conduct of the
business of the Company and its Restricted Subsidiaries or to the ownership
of its properties which were not Incurred in connection with Indebtedness
and which do not in the aggregate materially impair the use of such
properties in the operation of the business of the Company and its
Restricted Subsidiaries;
(g) Liens existing or provided for under written arrangements existing
on the Issue Date;
(h) Liens securing Indebtedness or other obligations of a Restricted
Subsidiary owing to the Company or a Wholly Owned Subsidiary;
(i) Liens securing Hedging Obligations so long as the related
Indebtedness is, and is permitted to be under the Indenture, secured by a
Lien on the same property securing such Hedging Obligations;
(j) Liens to secure any refinancing, refunding, replacement, renewal,
repayment or extension (or successive refinancings, refundings,
replacements, renewals, repayments or extensions) as a whole, or in part,
of any Indebtedness secured by any Lien referred to in clause (g), (i),
(l), (m) or (n); provided, however, that (x) such new Lien shall be limited
to all or part of the same property that secured the original Lien (plus
improvements on such property) and (y) the Indebtedness secured by such
Lien at such time is not increased to any amount greater than the sum of
(A) the outstanding principal amount or, if greater, committed amount of
the Indebtedness described under clauses (g), (i), (l), (m) and (n) at the
time the original Lien became a Permitted Lien and (B) an amount necessary
to pay any fees and expenses, including premiums, related to such
refinancing, refunding, replacement, renewal, repayment or extension;
(k)(i) Liens or restrictions that have been placed by any developer,
landlord or other third party on property over which the Company or any
Restricted Subsidiary has easement rights or on any real property leased by
the Company and subordination or similar agreements relating thereto and
(ii) any condemnation or eminent domain proceedings affecting any real
property;
(l) Liens on property, assets or Equity Interests of a Person at the
time such Person becomes a Subsidiary of the Company; provided, however,
such Liens are not created, Incurred or assumed by such Person in
connection with, or in contemplation of, such other Person becoming such a
Subsidiary of the Company; provided further, however, that such Liens may
not extend to any other property owned by the Company or any Restricted
Subsidiary;
(m) Liens on property or assets at the time the Company or a
Restricted Subsidiary acquired the property or assets, including any
acquisition by means of a merger or consolidation with or into the Company
or a Restricted Subsidiary; provided, however, that such Liens are not
created in connection with, or in contemplation of, such acquisition;
provided further, however, that the Liens may not extend to any other
property owned by the Company or any Restricted Subsidiary; and
(n) any Lien on Equity Interests or other securities of an
Unrestricted Subsidiary that secures Indebtedness of such Unrestricted
Subsidiary.
"Person" means any individual, corporation, partnership, limited
partnership, limited liability company, joint venture, association, joint-stock
company, trust, unincorporated organization, government or any agency or
political subdivision thereof or any other entity.
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"Preferred Equity Interests", as applied to the Equity Interests of any
partnership, limited liability company or corporation, means Equity Interests of
any class or classes (however designated) which are preferred as to the payment
of dividends or as to the distribution of assets upon any voluntary or
involuntary liquidation or dissolution of such partnership, limited liability
company or corporation, over Equity Interests of any other class of such
partnership, limited liability company or corporation.
"principal" of a Note means the principal of the Note plus the premium (if
any) payable on the Note which is due or overdue or is to become due at the
relevant time.
"Public Equity Offering" means an underwritten primary public offering of
Equity Interests of the Company pursuant to an effective registration statement
under the Securities Act.
"Public Market" means any time after (i) a Public Equity Offering has been
consummated and (ii) at least 15% of the total issued and outstanding Equity
Interests of the Company have been distributed by means of an effective
registration statement under the Securities Act.
"Purchase Money Mortgages" means Indebtedness consisting of the deferred
purchase price of an asset or assets including any conditional sale obligation,
any obligation under any title retention agreement or other purchase money
obligation; provided that (i) such Indebtedness is Incurred within 180 days of
the acquisition of such asset or assets by the Company or its Restricted
Subsidiaries, (ii) the Average Life of such Indebtedness is less than the
anticipated useful life of such asset or assets and (iii) such Indebtedness is
secured by a first priority Lien on such asset or assets.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any defeasance
or discharge mechanism) (collectively, "refinances," and "refinanced" shall have
a correlative meaning), in whole or in part, any Indebtedness existing on the
date of the Indenture or Incurred in compliance with the Indenture (including
Indebtedness of the Company or SFG Capital that refinances Indebtedness of any
Restricted Subsidiary (to the extent permitted in the Indenture) and
Indebtedness of any Restricted Subsidiary that refinances Indebtedness of
another Restricted Subsidiary) including Indebtedness that refinances
Refinancing Indebtedness; provided, however, that, with respect to any
Refinancing Indebtedness (other than Bank Indebtedness), (i) the Refinancing
Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the
Indebtedness being refinanced or 91 days following the Stated Maturity of the
Notes, if shorter; (ii) the Refinancing Indebtedness has an Average Life at the
time such Refinancing Indebtedness is Incurred that is equal to or greater than
the Average Life of the Indebtedness being refinanced and (iii) such Refinancing
Indebtedness is Incurred in an aggregate principal amount (or if issued with
original issue discount, an aggregate issue price) that is equal to or less than
the aggregate principal amount (or if issued with original issue discount, the
aggregate accreted value) then outstanding of the Indebtedness being refinanced;
provided further, however, that Refinancing Indebtedness shall not include
Indebtedness of a Restricted Subsidiary (other than SFG Capital) that refinances
Indebtedness of the Company or SFG Capital.
"Related Business" means any business which is the same as or related,
ancillary or complementary to the businesses of the Company on the Issue Date.
"Representative" means the trustee, agent or representative (if any) for an
issue of Senior Indebtedness.
"Restricted Payment" with respect to any Person means (i) the distribution
of any sort in respect of its Equity Interests, including any payment in
connection with any merger or consolidation involving such Person (other than
dividends or distributions payable solely in its Equity Interests (other than
Disqualified Interests) or in options, warrants or other rights to purchase its
Equity Interests, as the case may be, or dividends or distributions payable
solely to such Person and its wholly owned Subsidiaries), (ii) the purchase,
redemption or other acquisition or retirement for value of any Equity Interest
of such Person or any direct or indirect parent of such Person, (iii) the
purchase, repurchase, redemption or other acquisition or retirement for value,
prior to scheduled maturity, scheduled repayment or scheduled sinking fund
payment, of any Subordinated Obligation of such Person (other than the purchase,
repurchase, or other acquisition of a Subordinated Obligation acquired in
anticipation of satisfying a sinking fund obligation, principal installment or
final maturity due within one year of the date of the acquisition of such
Subordinated Obligation) or (iv) the
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making of any Investment (other than a Permitted Investment) in any Unrestricted
Subsidiary or in any Affiliate of such Person other than a wholly owned
Subsidiary of such Person or a Person which will become a wholly owned
Subsidiary of such Person as a result of such Investment.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or such Restricted
Subsidiary leases it from such Person, other than leases between the Company and
a Wholly Owned Subsidiary or between Wholly Owned Subsidiaries.
"Schenkel" means Pete Schenkel and any entity in which Schenkel and the
members of his family (consisting of the persons described in Section 318(a)(1)
of the Code) own more than a 50% interest.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of either of the Issuers
secured by a Lien.
"Senior Credit Documents" means the collective reference to the Credit
Agreement, the notes issued pursuant thereto and the Guarantees thereof, and the
Security Agreements, the Mortgages and the Pledge Agreements (each as defined in
the Credit Agreement).
"Senior Indebtedness" of the Company or SFG Capital means all principal of,
premium (if any), accrued and unpaid interest (if any) (including interest
accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Company or SFG Capital whether or not a claim for
post-filing interest is allowed in such proceedings), fees, charges, expenses,
reimbursement obligations, Guarantees and other amounts owing with respect to
all Indebtedness of the Company or SFG Capital, and including all Bank
Indebtedness, and all Refinancing Indebtedness with respect thereto, whether
outstanding on the Issue Date or thereafter Incurred, unless in the instrument
creating or evidencing the same or pursuant to which the same is outstanding it
is expressly provided that such obligations are not superior in right of payment
to the Notes; provided, however, that Senior Indebtedness shall not include (i)
any obligation of the Company to any Subsidiary of the Company, (ii) any
accounts payable or other liability to trade creditors arising in the ordinary
course of business (including Guarantees thereof or instruments evidencing such
liabilities), (iii) any Indebtedness or obligation of the Company or SFG Capital
which is subordinate or junior in any respect to any other Indebtedness or
obligation of the Company or SFG Capital, as the case may be, including any
Senior Subordinated Indebtedness and any Subordinated Obligations, (iv) any
obligations with respect to any Equity Interest, (v) any Indebtedness Incurred
in violation of the Indenture, or (vi) any liability for federal, foreign,
state, local or other taxes owed or owing by the Company or SFG Capital.
"Senior Subordinated Indebtedness" means the Notes and any other
Indebtedness of the Company or SFG Capital that specifically provides that such
Indebtedness is to rank pari passu with the Notes and is not subordinated by its
terms to any Indebtedness or other obligation of the Company or SFG Capital, as
the case may be, which is not Senior Indebtedness.
"Series E 10% Preferred Interests" means the Series E 10% Payment-in-Kind
Preferred Limited Partner Interests of the Company.
"Significant Subsidiary" means any Subsidiary of the Company, other than
SFG Capital, that would be a "Significant Subsidiary" of the Company within the
meaning of Rule 1-02 under Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer thereof unless such contingency has
occurred).
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"Subordinated Obligation" means any Indebtedness of the Company or SFG
Capital (whether outstanding on the Issue Date or thereafter Incurred) that is
subordinate or junior in right of payment to the Notes pursuant to a written
agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of the
Equity Interests entitled (without regard to the occurrence of any contingency)
to vote in the election of directors, representatives, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by (i) such
Person or (ii) one or more Subsidiaries of such Person or both; provided,
however, that the Company shall not be deemed to be a Subsidiary of Mid-Am.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America having capital, surplus and undivided profits
aggregating in excess of $250,000,000 (or the foreign currency equivalent
thereof) and whose long-term debt is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organized (as defined in Rule 436 under the Securities Act), (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above, (iv) investments in commercial
paper, maturing not more than 90 days after the date of acquisition, issued by a
corporation (other than an Affiliate of the Company) organized and in existence
under the laws of the United States of America or any foreign country recognized
by the United States of America with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings
Service, a division of The McGraw-Hill Companies, Inc. ("S&P"), (v) investments
in securities with maturities of six months or less from the date of acquisition
issued or fully guaranteed by any state, commonwealth or territory of the United
States of America, or by any political subdivision or taxing authority thereof,
and rated at least "A" by S&P or "A" by Moody's Investors Service, Inc., and
(vi) investments in mutual funds and bank collective investments or trust funds
whose investment guidelines restrict such funds' investments to those satisfying
the provisions of clauses (i) through (v) above.
"Term Loans" means the Tranche A Term Loans and the Tranche B Term Loans
outstanding under the Credit Agreement.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. sec.sec.
77aaa-77bbbb) as in effect on the date of the Indenture, or such other date as
may be established by the TIA.
"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Trustee" means the party named as such in the Indenture until a successor
replaces it in accordance with the terms of the Indenture and, thereafter, means
the successor.
"Trust Officer" means the Chairman of the Board, the President or any other
officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters with responsibility for the
administration of the Indenture, and, in the case of any certification required
to be signed by a Trust Officer, such officer who is authorized by the Trustee
from time to time to execute such certificates.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Governing Board in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Governing Board may designate any Subsidiary of the
Company (including any newly acquired or newly formed Subsidiary of the
Company), other than SFG Capital, to be an Unrestricted Subsidiary unless such
Subsidiary or any of its Subsidiaries owns any Equity Interest in, or
Indebtedness of, or owns or holds any Lien on any property of, the Company or
any Restricted
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Subsidiary that is not a Subsidiary to be so designated; provided, however, that
either (A) the Subsidiary to be so designated has total consolidated assets of
$10,000 or less or (B) if such Subsidiary has consolidated assets greater than
$10,000, then such designation would be permitted under "-- Certain
Covenants -- Limitation on Restricted Payments." The Governing Board may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided,
however, that immediately after giving effect to such designation (x) the
Company could Incur $1.00 of additional Indebtedness under clause (a) of
"-- Certain Covenants -- Limitation of Indebtedness" and (y) no Default shall
have occurred and be continuing. Any such designation by the Governing Board
shall be evidenced to the Trustee by promptly filing with the Trustee a copy of
the authorization of the Governing Board giving effect to such designation and
an Officers' Certificate of the Company certifying that such designation
complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the option of the issuer thereof.
"Voting Equity Interests" of a partnership, limited liability company or
corporation means all classes of Equity Interests of such partnership, limited
liability company or corporation then outstanding that normally entitle the
holders of such interests to participate in the management or to elect those
participating in the management of such partnership, limited liability company
or corporation.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Equity
Interests of which (other than directors' qualifying Equity Interests) are owned
by the Company or another Wholly Owned Subsidiary.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences
under the Internal Revenue Code of 1986, as amended (the "Code"), of the
ownership and disposition of Notes. The summary is based upon the laws,
regulations, rulings and judicial decisions now in effect, all of which are
subject to change (possibly on a retroactive basis). This summary does not
discuss all aspects of federal income taxation that may be relevant to investors
in light of their particular investment circumstances or the consequences to
certain types of holders subject to special treatment under the federal income
tax laws (for example, tax-exempt organizations, dealers in securities,
financial institutions, life insurance companies, foreign taxpayers, persons
holding shares as part of a hedging or conversion transaction or a straddle, or
persons whose functional currency is not the United States dollar). This summary
also does not discuss the consequences to a holder under state, local or foreign
tax laws, which may differ from the corresponding federal income tax laws. The
Issuers have not sought a formal legal opinion from their tax counsel regarding
the material federal income tax consequences under the Code of holding and
disposing of the Notes.
BEFORE DETERMINING WHETHER TO PARTICIPATE IN THE EXCHANGE OFFER,
PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING
THEIR PARTICULAR CIRCUMSTANCES WITH RESPECT TO THE FEDERAL, STATE, LOCAL AND
OTHER TAX CONSIDERATIONS PERTAINING TO THE OWNERSHIP AND DISPOSITION OF THE
NOTES.
PAYMENTS OF INTEREST
A holder of a Note generally will be required to report as ordinary income
for federal income tax purposes interest received or accrued on the Note in
accordance with the holder's method of tax accounting.
THE EXCHANGE OFFER
The exchange of Notes for Exchange Notes pursuant to the Exchange Offer
should not constitute a taxable exchange. Consequently, (i) a holder should not
recognize taxable gain or loss as a result of exchanging Outstanding Notes for
Exchange Notes pursuant to the Exchange Offer; (ii) the holding period of the
Exchange Notes should include the holding period of the Outstanding Notes
exchanged therefor; and
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(iii) the adjusted tax basis of the Exchange Notes immediately after the
exchange should be the same as the adjusted tax basis immediately prior to the
exchange of the Outstanding Notes that are exchanged for such Exchange Notes.
The Company intends, to the extent required, to treat the Exchange Offer for
federal income tax purposes in accordance with the position described in this
paragraph.
The Issuers will be required to pay additional cash interest on the
Outstanding Notes if they fail to comply with certain of their obligations under
the Registration Rights Agreement. Although the matter is not free from doubt,
such additional interest should be taxable to a holder as ordinary income at the
time it accrues or is received by such holder in accordance with such holder's
regular method of tax accounting. Holders bear the risk that the Internal
Revenue Service may assert an alternative position that would require each
holder to include such additional interest in income as such additional interest
accrues or becomes a fixed obligation of the Issuers (irrespective of such
holder's regular method of tax accounting).
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to certain
payments of principal, interest and premium paid on Notes and to the proceeds of
sale of a Note made to holders other than certain exempt recipients (such as
corporations). A 31% backup withholding tax will apply to such payments if the
holder fails to provide a taxpayer identification number or certification of
foreign or other exempt status or fails to report in full interest income. The
amount of any backup withholding from a payment to a holder will be allowed as a
credit against the holder's federal income tax liability.
EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
The following description sets forth the material provisions of the
Registration Rights Agreement, but is intended as a summary only. This
description does not purport to be complete and is qualified in its entirety by
reference to all provisions of the Registration Rights Agreement, a copy of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
The Issuers and the Initial Purchaser entered into the Registration Rights
Agreement concurrently with the issuance of the Outstanding Notes. Pursuant to
the Registration Rights Agreement, the Issuers agreed to (i) file with the
Commission on or prior to 210 days after the Issue Date a registration statement
on an appropriate form under the Securities Act (the "Exchange Offer
Registration Statement") relating to a registered exchange offer for the
Outstanding Notes under the Securities Act, and (ii) use their reasonable best
efforts to cause the Exchange Offer Registration Statement to be declared
effective under the Securities Act within 270 days after the Issue Date. As soon
as practicable after the effectiveness of the Exchange Offer Registration
Statement, the Issuers agreed to offer to the holders of Transfer Restricted
Securities (as defined) who are not prohibited by any law or policy of the
Commission from participating in the Exchange Offer the opportunity to exchange
their Transfer Restricted Securities for Exchange Notes, identical in all
material respects to the Outstanding Notes (except that the Exchange Notes do
not contain terms with respect to transfer restrictions), that would be
registered under the Securities Act. This Prospectus constitutes a part of the
Exchange Offer Registration Statement and was filed with the Commission for the
purpose of making the Exchange Offer for the Outstanding Notes. The Issuers
agreed to keep the Exchange Offer open for not less than 30 days (or longer, if
required by law) after the date notice of the Exchange Offer is mailed to the
holders of the Outstanding Notes. In the event that a change in law or
applicable interpretations of the staff of the Commission does not permit the
Issuers to effect the Exchange Offer, any applicable law or interpretations of
the staff of the Commission does not permit any holder of Outstanding Notes
(including the Initial Purchaser) to participate in the Exchange Offer, or any
holder of Outstanding Notes (including the Initial Purchaser) participates in
the Exchange Offer and does not receive freely transferable Exchange Notes in
exchange for tendered Outstanding Notes after complying with the terms of the
Exchange Offer, the Issuers will use their reasonable best efforts to file with
the Commission the Shelf Registration Statement to cover resales of Transfer
Restricted Securities by such holders who satisfy certain conditions relating
to, among other things, the provision of information in connection with the
Shelf Registration Statement. For purposes of the foregoing, "Transfer
Restricted Securities" means each Outstanding Note until (i) the date on which
such
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Outstanding Note has been exchanged for a freely transferable Exchange Note in
the Exchange Offer, (ii) the date on which such Outstanding Note has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement or (iii) the date on which such
Outstanding Note is distributed to the public pursuant to Rule 144 under the
Securities Act or may be sold pursuant to Rule 144(k) under the Securities Act.
The Issuers agreed to use their reasonable best efforts to have the
Exchange Offer Registration Statement and, if applicable, a Shelf Registration
Statement declared effective by the Commission as promptly as practicable after
the filing thereof. Under the Registration Rights Agreement, unless the Exchange
Offer would not be permitted by a policy of the Commission, the Issuers will
commence the Exchange Offer and will use their reasonable best efforts to
consummate the Exchange Offer as promptly as practicable, but in any event prior
to 300 days after the Issue Date. If applicable, the Issuers will use their best
efforts to keep the Shelf Registration Statement effective for a period of two
years after the Issue Date, subject to certain exceptions, including suspending
the effectiveness thereof for certain valid business reasons. If (i) the
applicable registration statement is not filed with the Commission on or prior
to 210 days after the Issue Date, (ii) the Exchange Offer Registration Statement
or the Shelf Registration Statement, as the case may be, is not declared
effective within 270 days after the Issue Date (or in the case of a Shelf
Registration Statement required to be filed in response to a change in law or
the applicable interpretations of the Commission's staff, if later, within 45
days after publication of the change in law or interpretation), (iii) the
Exchange Offer is not consummated on or prior to 300 days after the Issue Date
or (iv) the Shelf Registration Statement is filed and declared effective within
270 days after the Issue Date (or in the case of a Shelf Registration Statement
required to be filed in response to a change in law or the applicable
interpretations of Commission's staff, if later, within 45 days after
publication of the change in law or interpretation), but shall thereafter cease
to be effective (at any time that the Issuers are obligated to maintain the
effectiveness thereof) without being succeeded within 60 days by an additional
registration statement filed and declared effective (each such event referred to
in clauses (i) through (iv), a "Registration Default"), the Issuers are
obligated to pay liquidated damages to each holder of Transfer Restricted
Securities, during the period of one or more such Registration Defaults, in an
amount equal to $0.192 per week per $1,000 principal amount of Transfer
Restricted Securities held by such holder until the applicable registration
statement is filed or declared effective, the Exchange Offer is consummated or
the Shelf Registration Statement again becomes effective, as the case may be.
All accrued liquidated damages shall be paid to holders in the same manner as
interest payments on the Outstanding Notes on semi-annual payment dates which
correspond to interest payment dates for the Outstanding Notes. Following the
cure of all Registration Defaults, the accrual of liquidated damages will cease.
The Registration Rights Agreement also provides that the Issuers (i) shall
make available for a period of 90 days after the consummation of the Exchange
Offer a prospectus meeting the requirements of the Securities Act to any
broker-dealer for use in connection with any resale of any such Exchange Notes
and (ii) shall pay all expenses incident to the Exchange Offer (including the
expenses of one counsel to the holders of the Outstanding Notes) and will
indemnify certain holders of the Outstanding Notes (including any broker-dealer)
against certain liabilities, including liabilities under the Securities Act. A
broker-dealer that delivers such a prospectus to purchasers in connection with
such resales will be subject to certain of the civil liability provisions under
the Securities Act and will be bound by the provisions of the Registration
Rights Agreement (including certain indemnification rights and obligations).
Each holder of the Outstanding Notes that wishes to exchange such
Outstanding Notes for Exchange Notes in the Exchange Offer will be required to
make certain representations, including representations that (i) any Exchange
Notes to be received by it will be acquired in the ordinary course of its
business, (ii) it has no arrangement with any person to participate in the
distribution of the Exchange Notes and (iii) it is not an "affiliate" (as
defined in Rule 405 of the Securities Act), of the Issuers or, if it is an
affiliate, it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
If a holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
Exchange Notes. If a holder is a broker-dealer that will receive Exchange Notes
for its own account in exchange for Outstanding Notes that were acquired as a
result of
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market making activities or other trading activities, it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes.
Holders of the Outstanding Notes will be required to make certain
representations to the Issuers (as described above) in order to participate in
the Exchange Offer and will be required to deliver information to be used in
connection with the Shelf Registration Statement in order to have their
Outstanding Notes included in the Shelf Registration Statement and benefit from
the provisions regarding liquidated damages set forth in the preceding
paragraphs. A holder who sells Outstanding Notes pursuant to the Shelf
Registration Statement generally will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such a
holder (including certain indemnification obligations).
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth below, the Outstanding Notes were issued, and the
Exchange Notes initially will be issued, in the form of one or more registered
notes in global form without coupons (each a "Global Note"). Each Global Note
representing the Outstanding Notes was deposited on the Issue Date, and each
Global Note representing the Exchange Notes will be deposited on the closing
date of the Exchange Offer, with, or on behalf of, DTC, and registered in the
name of Cede & Co., as nominee of DTC, or will remain in the custody of the
Trustee pursuant to the FAST Balance Certificate Agreement between DTC and the
Trustee.
DTC has advised the Issuers that it is (i) a limited purpose trust company
organized under the laws of the State of New York, (ii) a member of the Federal
Reserve system, (iii) a "clearing corporation" within the meaning of the Uniform
Commercial Code, as amended, and (iv) a "Clearing Agency" registered pursuant to
Section 17A of the Exchange Act. DTC was created to hold securities for its
participants (collectively, the "Participants") and facilitates the clearance
and settlement of securities transactions between Participants through
electronic book-entry changes to the accounts of its Participants, thereby
eliminating the need for physical transfer and delivery of certificates.
Participants include securities brokers and dealers (including the Initial
Purchaser), banks and trust companies, clearing corporations and certain other
organizations. Access to DTC's system is also available to other entities such
as banks, brokers, dealers and trust companies (collectively, the "Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. Holders who are not Participants may
beneficially own securities held by or on behalf of DTC only through
Participants or Indirect Participants.
The Issuers expect that pursuant to procedures established by DTC (i) upon
deposit of the Global Notes, DTC has or will credit the accounts of Participants
designated by the Exchange Agent with an interest in the Global Notes and (ii)
ownership of beneficial interests in the Global Notes has or will be shown on,
and the transfer of beneficial ownership therein will be effected only through,
records maintained by DTC (with respect to the interest of Participants), the
Participants and the Indirect Participants. The laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own and that security interests in negotiable instruments can only be
perfected by delivery of certificates representing the instruments.
Consequently, the ability to transfer Notes or to pledge the Notes as collateral
will be limited to such extent.
So long as DTC or its nominee is the registered owner of a Global Note, DTC
or such nominee, as the case may be, will be considered the sole owner or holder
of the Notes represented by the Global Note for all purposes under the
Indenture. Except as provided below, owners of beneficial interests in a Global
Note will not be entitled to have Notes represented by such Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of certificated securities (the "Certificated Securities"), and will
not be considered the owners or holders thereof under the Indenture for any
purpose, including with respect to the giving of any direction, instruction or
approval to the Trustee thereunder or with respect to any decision about
accepting the Exchange Offer. As a result, the ability of a person having a
beneficial interest in Notes represented by a Global Note to pledge or transfer
such interest to persons or entities that do not participate in
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DTC's system or to otherwise take action with respect to such interest, may be
affected by the lack of a physical certificate evidencing such interest.
Accordingly, each holder owning a beneficial interest in a Global Note must
rely on the procedures of DTC and, if such holder is not a Participant or an
Indirect Participant, on the procedures of the Participant through which such
holder owns its interest, to exercise any rights of a holder of Notes under the
Indenture or such Global Note including exercise of the rights of the holder
with respect to the Exchange Offer. The Issuers understand that under existing
industry practice, in the event the Issuers request any action of holders of
Notes or a holder that is an owner of a beneficial interest in a Global Note
desires to take any action that DTC, as the holder of such Global Note, is
entitled to take, DTC would authorize the Participants to take such action and
the Participant would authorize holders owning through such Participant to take
such action or would otherwise act upon the instruction of such holders. None of
the Issuers or the Trustee will have any responsibility or liability for any
aspect of the records relating to or payments made on account of Notes by DTC,
or for maintaining, supervising or reviewing any records of DTC relating to such
Notes.
Payments with respect to the principal of, premium, if any, and interest
on, any Notes represented by a Global Note registered in the name of DTC or its
nominee on the applicable record date will be payable by the Trustee to or at
the direction of DTC or its nominee in its capacity as the registered holder of
the Global Note representing such notes under the Indenture. Under the terms of
the Indenture, the Issuers and the Trustee may treat the persons in whose names
the Notes, including the Global Notes, are registered as the owners thereof for
the purpose of receiving such payment and for any and all other purposes
whatsoever. Consequently, none of the Issuers or the Trustee has or will have
any responsibility or liability for the payment of such amounts to beneficial
owners of interests in the Global Notes (including principal, premium, if any,
and interest), or to immediately credit the accounts of the relevant
Participants with such payment, in amounts proportionate to their respective
holdings in principal amount of beneficial interest in the Global Note as shown
on the records of DTC. Payments by the Participants and the Indirect
Participants to the beneficial owners of interests in the Global Note will be
governed by standing instructions and customary practice and will be the
responsibility of the Participants or the Indirect Participants and DTC.
CERTIFICATED SECURITIES
If (i) the Issuers notify the Trustee in writing that DTC is no longer
willing or able to act as a depositary or DTC ceases to be registered as a
clearing agency under the Exchange Act and the Issuers are unable to locate a
qualified successor within 90 days, (ii) the Issuers, at their option, notify
the Trustee in writing that they elect to cause the issuance of Notes in
definitive form under the Indenture or (iii) upon the occurrence of certain
other events, then, upon surrender by DTC of its Global Notes, Certificated
Securities will be issued to each person that DTC identifies as the beneficial
owner of the Notes represented by the Global Notes. Upon any such issuance, the
Trustee is required to register such Certificated Securities in the name of such
person or persons (or the nominee of any thereof) and cause the same to be
delivered thereto.
None of the Issuers or the Trustee shall be liable for any delay by DTC or
any Participant or Indirect Participant in identifying the beneficial owners of
the related Notes and each such person may conclusively rely on, and shall be
protected in relying on, instructions from DTC for all purposes (including with
respect to the registration and delivery, and the respective principal amounts,
of the Notes to be issued).
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
copy of this Prospectus in connection with any resale of such Exchange Notes.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in connection with resales of Exchange
Notes received in exchange for Outstanding Notes where such Outstanding Notes
were acquired as a result of market-making activities or other trading
activities. The Issuers have agreed that, for a period of 90 days after the
Expiration Date, they will make this Prospectus, as amended or supplemented,
available to any Participating Broker-Dealer for use
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in connection with any such resale. In addition, until October , 1998, all
dealers effecting transactions in the Exchange Notes may be required to deliver
a prospectus.
The Issuers will not receive any proceeds from any sales of the Exchange
Notes by Participating Broker-Dealers. Exchange Notes received by Participating
Broker-Dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchasers of any such Exchange
Notes. Any broker-dealer that resells Exchange Notes that were received by it
for its own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that, by acknowledging that it will
deliver and by delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Expiration Date the Issuers will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. The Issuers have agreed to pay all expenses incident to the
Exchange Offer (including the expenses of one counsel for the Holders of the
Outstanding Notes) other than commissions or concession of any brokers-dealers
and will indemnify the Holders of the Outstanding Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
By acceptance of this Exchange Offer, each broker-dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer agrees that,
upon receipt of notice from the Issuers of the happening of any event which
makes any statement in the Prospectus untrue in any material respect or which
requests the making of any changes in the Prospectus in order to make the
statements therein not misleading (which notice the Issuers agree to deliver
promptly to such broker-dealer), such broker-dealer will suspend use of the
Prospectus until the Issuers have amended or supplemented the Prospectus to
correct such misstatement or omission and have furnished copies of the amended
or supplemental Prospectus to such broker-dealer. If the Issuers shall give any
such notice to suspend the use of the Prospectus, it shall extend the 90-day
period referred to above by the number of days during the period from and
including the date of the giving of such notice to and including when
broker-dealers shall have received copies of the amended or supplemented
Prospectus necessary to permit resales of the Exchange Notes.
LEGAL MATTERS
Certain legal matters will be passed upon for the Issuers by Strasburger &
Price, L.L.P., Dallas, Texas, counsel to the Company.
102
<PAGE> 108
EXPERTS
The consolidated financial statements of SFG as of December 31, 1996, and
1997 and for each of the three years in the period ended December 31, 1997
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements of Meadow Gold Dairies for the period from January
1, 1997 through September 4, 1997 included in this Prospectus have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of Meadow Gold Dairies for each of the years ended
December 31, 1995 and 1996 included in this Prospectus have been so included in
reliance on the report of Deloitte & Touche LLP, independent auditors, as stated
in their report appearing herein and are included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
Upon completion of the Transactions, Price Waterhouse LLP was appointed,
and replaced Deloitte & Touche LLP, as independent accountants for Meadow Gold
Dairies for the period from January 1, 1997 through September 4, 1997.
103
<PAGE> 109
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SOUTHERN FOODS GROUP, L.P.
Report of Independent Accountants......................... F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997 and March 31, 1998 (unaudited).................... F-3
Consolidated Statements of Income for the years ended
December 31, 1995, 1996 and 1997 and for the three
months ended March 31, 1997 and 1998 (unaudited)....... F-4
Consolidated Statements of Partners' Equity for the years
ended December 31, 1995, 1996, and 1997 and for the
three months ended March 31, 1998 (unaudited).......... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 and for the three
months ended March 31, 1997 and 1998 (unaudited)....... F-6
Notes to the Consolidated Financial Statements............ F-7
MEADOW GOLD DAIRY OPERATIONS (A DIVISION OF BORDEN/MEADOW
GOLD DAIRIES HOLDINGS, INC.)
Report of Independent Accountants......................... F-18
Independent Auditors' Report.............................. F-19
Statements of Revenues and Expenses for the years ended
December 31, 1995 and 1996 and for the period from
January 1, 1997 to September 4, 1997................... F-20
Statements of Cash Flows for the years ended December 31,
1995 and 1996 and for the period from January 1, 1997
to September 4, 1997................................... F-21
Notes to Financial Statements............................. F-22
</TABLE>
F-1
<PAGE> 110
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Southern Foods Group, L.P.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of partners' equity and of cash flows
present fairly, in all material respects, the financial position of Southern
Foods Group, L.P. and its subsidiary at December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas
March 31, 1998
F-2
<PAGE> 111
SOUTHERN FOODS GROUP, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash.................................................... $ 1,995 $ 4,747 $ 2,002
Accounts receivable, net................................ 41,508 77,987 79,486
Inventories............................................. 9,702 30,548 32,851
Prepaid expenses and other assets....................... 1,621 2,947 3,627
-------- -------- --------
Total current assets............................ 54,826 116,229 117,966
-------- -------- --------
Property, plant and equipment, at cost:
Land.................................................... 7,971 30,678 30,743
Buildings and improvements.............................. 14,783 39,931 40,809
Machinery and equipment................................. 39,630 114,424 115,646
Vehicles................................................ 2,589 9,351 9,425
-------- -------- --------
64,973 194,384 196,623
Less: Accumulated depreciation and amortization......... (12,150) (20,321) (24,582)
-------- -------- --------
52,823 174,063 172,041
-------- -------- --------
Goodwill, net............................................. 70,753 238,323 234,400
Trademarks and licenses, net.............................. -- 104,154 103,498
Deferred financing costs, net............................. 1,701 11,714 11,426
Other assets.............................................. 2,357 1,830 2,109
-------- -------- --------
Total assets.................................... $182,460 $646,313 $641,440
======== ======== ========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 11,184 $ 27,396 $ 30,196
Raw milk accrual........................................ 15,406 25,511 28,790
Accrued expenses........................................ 15,071 45,668 44,200
Current portion of long-term debt....................... 5,570 777 740
-------- -------- --------
Total current liabilities....................... 47,231 99,352 103,926
-------- -------- --------
Long-term debt............................................ 55,972 345,914 331,854
Related party notes payable............................... 34,424 -- --
Other long-term liabilities............................... -- 10,668 10,621
Commitments and contingencies (Note 9)
Partners' equity:
Limited partner preferred, stated amount of zero,
$238,671, $244,926................................... -- 176,199 181,464
Limited partner common.................................. 44,367 13,771 13,166
General partner common.................................. 466 409 409
-------- -------- --------
44,833 190,379 195,039
-------- -------- --------
Total liabilities and partners' equity.......... $182,460 $646,313 $641,440
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 112
SOUTHERN FOODS GROUP, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE
FOR EACH OF THE YEARS ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------------------- --------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales........................... $475,170 $551,636 $740,983 $145,654 $272,025
Cost of sales....................... 359,595 425,079 547,182 107,082 205,751
-------- -------- -------- -------- --------
115,575 126,557 193,801 38,572 66,274
-------- -------- -------- -------- --------
Selling, distribution and general
and administrative expenses....... 89,714 100,192 140,429 26,668 49,532
Amortization of goodwill and other
intangible assets................. 7,635 7,658 11,950 1,988 3,685
-------- -------- -------- -------- --------
Income from operations.............. 18,226 18,707 41,422 9,916 13,057
Interest expense.................. 9,108 7,640 16,500 2,064 8,124
Other (income) expense, net....... (981) (480) (1,174) 51 30
-------- -------- -------- -------- --------
Net income.......................... $ 10,099 $ 11,547 $ 26,096 $ 7,801 $ 4,903
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 113
SOUTHERN FOODS GROUP, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED COMMON
--------- ------------------
LIMITED GENERAL LIMITED
PARTNER PARTNER PARTNER TOTAL
--------- ------- -------- --------
<S> <C> <C> <C> <C>
Partners' equity, January 1, 1995.................... $ -- $ 250 $ 29,661 $ 29,911
Partner contributions.............................. 2,707 2,707
Partner distributions.............................. (377) (377)
Net income................................. 101 9,998 10,099
-------- ----- -------- --------
Partners' equity, December 31, 1995.................. -- 351 41,989 42,340
Partner contributions.............................. 15 15
Partner distributions.............................. (9,069) (9,069)
Net income................................. 115 11,432 11,547
-------- ----- -------- --------
Partners' equity, December 31, 1996.................. -- 466 44,367 44,833
Conversion of common equity to preferred........... 20,275 (20,275) --
Partner contributions.............................. 143,000 62 6,341 149,403
Partner distributions.............................. (251) (29,702) (29,953)
Net income................................. 12,924 132 13,040 26,096
-------- ----- -------- --------
Partners' equity, December 31, 1997.................. 176,199 409 13,771 190,379
Conversion of common equity to preferred
(unaudited)........................................ 362 (362) --
Partner contributions (unaudited).................. 119 119
Partner distributions (unaudited).................. (362) (362)
Net income (unaudited)..................... 4,903 4,903
-------- ----- -------- --------
Partners' equity, March 31, 1998 (unaudited)......... $181,464 $ 409 $ 13,166 $195,039
======== ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 114
SOUTHERN FOODS GROUP, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR EACH OF THE YEARS ENDED FOR THE THREE
DECEMBER 31, MONTHS ENDED
------------------------------ MARCH 31,
1995 1996 1997 1997 1998
-------- -------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income..................................... $ 10,099 $ 11,547 $ 26,096 $ 7,801 $ 4,903
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................... 4,666 5,652 9,769 1,601 4,451
Amortization................................... 8,140 8,165 12,829 1,988 4,016
Interest added to long-term debt............... 2,902 3,208 -- -- --
Change in assets and liabilities, net of
effects of business acquisitions:
(Increase) decrease in accounts receivable... (1,971) (3,700) (3,682) 1,875 (1,499)
(Increase) decrease in inventories........... (876) (658) (869) 81 (2,302)
(Increase) decrease in prepaid expenses and
other assets............................... (189) 96 313 91 (680)
Increase (decrease) in accounts payable and
accrued expenses........................... 1,136 8,933 (708) (793) 4,563
-------- -------- -------- -------- ---------
Net cash provided by operating
activities.............................. 23,907 33,243 43,748 12,644 13,452
-------- -------- -------- -------- ---------
Cash flows from investing activities:
Purchase of trademarks......................... (105,000)
Business acquisitions, net of cash acquired.... (5,998) (8,851) (4,954)
Additions to property, plant and equipment..... (5,381) (7,167) (12,123) (1,576) (2,239)
(Increase) decrease in other assets............ (284) 74 894 381
-------- -------- -------- -------- ---------
Net cash used in investing activities...... (5,665) (13,091) (125,080) (6,530) (1,858)
-------- -------- -------- -------- ---------
Cash flows from financing activities:
Borrowings on long-term debt................... 6,000 255,000 90,000
Repayments on long-term debt................... (14,619) (16,820) (149,706) (51,771) (596)
Borrowings on related party notes payable...... 20,490 20,490
Repayments on related party notes payable...... (54,914) (34,424)
Net borrowings (repayments) -- revolving credit
facility..................................... (5,900) 400 4,100 10,200 (13,500)
Payment of deferred financing costs............ (12,141)
Partner contributions -- preferred equity...... 45,000
Partner contributions -- common equity......... 2,707 15 6,208 6,195 119
Partner distributions -- common equity......... (377) (9,069) (29,953) (23,804) (362)
-------- -------- -------- -------- ---------
Net cash provided by (used in) financing
activities.............................. (18,189) (19,474) 84,084 (3,514) (14,339)
-------- -------- -------- -------- ---------
Net increase (decrease) in cash.................. 53 678 2,752 2,600 (2,745)
Cash at beginning of period...................... 1,264 1,317 1,995 1,995 4,747
-------- -------- -------- -------- ---------
Cash at end of period............................ $ 1,317 $ 1,995 $ 4,747 $ 4,595 $ 2,002
======== ======== ======== ======== =========
Supplemental information:
Interest paid.................................... $ 6,437 $ 4,901 $ 10,248 $ 1,268 $ 11,145
======== ======== ======== ======== =========
Noncash investing and financing activities:
Meadow Gold contribution:
Net assets contributed.................. $265,000
Term debt assumed....................... (175,000)
Preferred equity interests issued....... (90,000)
--------
$ --
========
Barbe's Dairy contribution:
Net assets contributed.................. $ 8,000 $ 8,000
Preferred equity interests issued....... (8,000) (8,000)
-------- --------
$ -- $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 115
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Southern Foods Group, L.P. ("SFG" or the "Partnership") owns 26 facilities
which process and package fluid milk products, cultured products, ice cream
products, fruit juices and drinks and other dairy related products. The majority
of SFG's sales are from fluid milk products, which include fresh packaged milk
and chocolate milk in whole, reduced fat and fat-free varieties, whipping cream,
half-and-half and buttermilk. These products are produced and marketed primarily
under the Schepps, Oak Farms, Meadow Gold, Viva, Foremost, Brown's Velvet,
Barbe's and Flav-O-Rich brand names, as well as various private labels. SFG
produces cultured products, such as sour cream, cottage cheese and yogurt, as
well as ice cream and fruit juices and drinks under its brand names, various
private labels and third-party labels. SFG also distributes cultured products,
fruit juices and drinks, ice cream products and other dairy related products
such as cheese, eggs, butter and non-dairy creamers purchased from
third-parties.
On May 22, 1997, Dairy Farmers of America, Inc., formerly Mid-America
Dairymen, Inc. ("DFA"), entered into a stock purchase and merger agreement with
Borden, Inc. and an affiliate ("Borden") to acquire the dairy operations of
Borden, including Meadow Gold Dairies ("Meadow Gold"), and certain related
trademarks (the "Borden Transaction"). This and other related transactions were
completed on September 4, 1997. Immediately following the acquisition, DFA, a
50% common equity partner in the Partnership, contributed the dairy operations
of Meadow Gold to the Partnership. Details of these and other related
transactions are further described in Note 2.
ACCOUNTING POLICIES
Basis of Accounting
The accompanying consolidated financial statements include the accounts of
the Partnership and its wholly-owned subsidiary, SFG Capital Corporation. SFG
Capital Corporation has no assets, no liabilities, does not conduct any
operations and was formed solely to facilitate the issuance of indebtedness for
the Partnership.
The accompanying consolidated financial statements include certain
reclassifications to previously reported amounts to conform to current year
presentation.
Unaudited Interim Financial Information
The financial statements for the three months ended March 31, 1997 and 1998
are unaudited but include all adjustments (consisting of normal recurring
adjustments) that the Partnership considers necessary for a fair presentation.
Operating results for the three months ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. All information contained in these financial statements related to the
three month periods ended March 31, 1997 and 1998 is unaudited.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues on product sales are recognized upon delivery to the customer.
F-7
<PAGE> 116
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
on the first-in, first-out basis.
Property, Plant and Equipment
Depreciation is calculated using the straight-line method of depreciation
over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and improvements.................................. 5-40
Machinery and equipment..................................... 2-15
Vehicles.................................................... 5-7
</TABLE>
Maintenance and repairs are charged to expense as incurred; renewals and
betterments are capitalized and depreciated over the related assets' remaining
useful lives. Leasehold improvements are depreciated over the life of the
related asset or the lease term, whichever is less.
Goodwill
Goodwill related to Meadow Gold, which totals approximately $169 million,
is amortized using the straight-line method over an estimated useful life of 40
years. Other goodwill is amortized primarily over an estimated useful life of 13
years. Accumulated amortization of goodwill was approximately $20 million and
$28 million at December 31, 1996 and 1997, respectively.
Other Intangible Assets
Trademarks and licenses, net includes the Meadow Gold Trademarks and the
licenses to use the Borden Trademarks (see Note 2). The trademarks and licenses
are amortized using the straight-line method over their estimated useful lives
of 40 years. Deferred financing costs are amortized over the term of the related
debt issue using the straight-line method, which approximates the effective
interest method. Amortization of deferred financing costs is included in
interest expense. Accumulated amortization of trademarks and deferred financing
costs were approximately $.8 million and $.5 million at December 31, 1997,
respectively.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset or group of assets may
not be recoverable. The impairment review includes a comparison of future cash
flows expected to be generated by the asset or group of assets with their
associated carrying value. If the carrying value of the asset or group of assets
exceeds expected cash flows (undiscounted and without interest charges), an
impairment loss is recognized to the extent carrying amount exceeds fair value.
Postretirement Benefits
Pension plans covering certain employees are funded sufficiently to at
least meet minimum funding requirements under applicable law. The Partnership
accrues the estimated costs of pension and other retiree benefits during the
employees' active service periods.
F-8
<PAGE> 117
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Partnership is not subject to federal and state income taxes.
Accordingly, no recognition has been given to income taxes in the accompanying
financial statements of the Partnership since the income or loss of the
Partnership is to be included in the tax returns of the individual partners.
The tax attributes of the Partnership's net assets flow directly to each
individual partner. Each partner's tax accounting, which is partially dependent
upon their individual tax position, may differ from the accounting followed in
the financial statements. Accordingly, there could be significant differences
between each individual partner's tax basis and their proportionate share of the
net assets reported in the financial statements. At December 31, 1996 and 1997,
the financial accounting basis of the net assets of the Partnership exceeded its
tax basis by approximately $69 million and $267 million, respectively. These
differences are related primarily to goodwill, fixed assets and accrued
liabilities.
Fair Value of Financial Instruments
The fair value of the $150 million of senior subordinated notes (See Note
2) was approximately $157 million at December 31, 1997 based on trading in the
PORTAL Market reported by Chase Securities Inc. Management believes the recorded
values of all other financial instruments approximate their current fair values
as such items are current in nature or generally bear variable interest rates
which adjust yield to derive current market value.
Interest Rate Contracts
Interest rate collar and swap agreements, which are used by the Partnership
in the management of interest rate exposure, are accounted for on an accrual
basis. Income and expense are recorded in the same category as that arising from
the related liability. Amounts to be paid or received under interest rate collar
and swap agreements are recognized as an increase or decrease to interest
expense in the periods in which they accrue.
2. ACQUISITIONS
On September 4, 1997, DFA acquired Borden/Meadow Gold Dairies Holdings,
Inc., a subsidiary comprising the fluid milk operations of Borden, for $380
million (the "Borden Acquisition.") This acquisition was partially funded
through new senior term debt (the "Senior Bank Facilities") obtained by DFA from
a syndicate of lenders led by The Chase Manhattan Bank. Certain of these assets
and liabilities, consisting of the operations of Meadow Gold, were then
contributed to the Partnership. In conjunction with the Meadow Gold
contribution, the Partnership assumed the Senior Bank Facilities and issued
non-voting, limited partner preferred interests ("Preferred Interests") to DFA
with a stated amount and fair value of $90 million. The fair value of the net
assets contributed to the Partnership was $265 million, including property,
plant and equipment of $114 million and goodwill of $169 million.
Concurrent with the Borden Acquisition, the Partnership acquired the
license to use certain trademarks owned by Borden (the "Borden Trademarks") for
$55 million and repaid the Partnership's existing bank debt and related party
notes of approximately $92 million. The acquisition of the Borden Trademarks and
the repayment of debt was funded through the issuance of $150 million of senior
subordinated notes (the "Notes") and an equity contribution of $45 million from
Mid-Am Capital, L.L.C. , an affiliate of DFA, for Preferred Interests. The
remaining proceeds, along with proceeds from the Senior Bank Facilities, were
used to purchase the trademarks used by Meadow Gold (the "Meadow Gold
Trademarks") from an affiliate of DFA for $50 million. See Note 6 for a
discussion of the Senior Bank Facilities and the Notes and Note 10 for a
discussion of the Preferred Interests. The results of Meadow Gold are included
in the accompanying financial statements from September 4, 1997, the date of
contribution.
F-9
<PAGE> 118
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma summary results of operations assume that
the Meadow Gold contribution and the related transactions occurred on January 1
of the indicated period:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net sales................................................... $1,044,173 $1,054,335
Net income.................................................. $ 3,005 $ 18,409
</TABLE>
The unaudited pro forma summary results of operations are not necessarily
indicative of results of operations that would have occurred had the
transactions taken place on January 1, 1996 or 1997, or of future results of
operations of the combined businesses.
In March 1997, the Partnership purchased certain assets of Land-O-Pines
Dairy for approximately $4.9 million. The purchase price has been allocated to
the acquired assets based on their estimated fair value.
In February 1997, DFA contributed the operations of Barbe's Dairy to the
Partnership. DFA purchased Barbe's Dairy in October 1996 for approximately $8.2
million. The related assets and liabilities were recorded on the Partnership's
books at DFA's historical cost.
In 1996, the Partnership acquired the assets of Pure Milk and Ice Cream,
Inc. for approximately $6 million. The purchase price was allocated among the
assets acquired based on their estimated fair value. The assets acquired are
currently operated as Oak Farms-Waco (Texas).
The results of Land-O-Pines Dairy, Barbe's Dairy, and Oak Farms-Waco are
included in the accompanying financial statements from the date of
contribution/acquisition.
3. ACCOUNTS RECEIVABLE
A summary of accounts receivable is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Trade....................................................... $41,297 $74,768
Other....................................................... 2,757 7,390
------- -------
44,054 82,158
Less allowance for doubtful accounts........................ (2,546) (4,171)
------- -------
$41,508 $77,987
======= =======
</TABLE>
SFG sells to customers primarily in the southern and western United States
and Hawaii. The Partnership sells primarily to retail, food service and
institutional customers. Only one customer, which contributed 12% to sales in
1997, contributed over 10% to SFG's total sales.
F-10
<PAGE> 119
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORIES
A summary of inventories is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------- -----------
1996 1997 1998
------ ------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Finished goods......................................... $4,282 $14,776 $16,461
Packaging and supplies................................. 2,850 3,389 3,204
Raw materials.......................................... 1,674 10,563 11,322
Truck parts............................................ 896 1,820 1,864
------ ------- -------
$9,702 $30,548 $32,851
====== ======= =======
</TABLE>
5. ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued insurance expense................................... $ 4,559 $14,572
Accrued payroll and related benefits........................ 6,820 10,448
Accrued interest expense.................................... 12 5,724
Accrued expenses -- other................................... 3,680 14,924
------- -------
$15,071 $45,668
======= =======
</TABLE>
The Partnership is insured for liability claims arising from on the job
injuries of its employees in most states with varying levels of step-loss
coverage and high deductible amounts. The Partnership also offers a selection of
health plans which includes health maintenance organization ("HMO") plans as
well as indemnity plans for which the Partnership is responsible for employees'
medical and dental claims, also with stop-loss coverages of varying amounts. The
Partnership maintains partially funded accruals for these claims. The accruals
are comprised of estimates for both claims that have been reported but not yet
paid, and claims that have been incurred but not yet reported.
6. LONG-TERM DEBT
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
------- --------
(IN THOUSANDS)
<S> <C> <C>
Term loans.................................................. $49,972 $181,000
Notes....................................................... -- 150,000
Revolving loan.............................................. 10,200 14,300
Other notes................................................. 1,370 1,391
------- --------
$61,542 $346,691
======= ========
</TABLE>
The Senior Bank Facilities discussed in Note 2 were entered into on
September 4, 1997 and consist of term loans of $190 million and a revolving
credit facility of $60 million. The term loans are comprised of a Tranche A loan
of $90 million and a Tranche B loan of $100 million. These loans bear interest
at a margin above either the Alternate Base Rate, as defined in the credit
agreement, or LIBOR rates, at the Partnership's election. For Tranche A loans,
this margin ranges between 0.5% and 1.25% for Alternate Base Rate loans, and
F-11
<PAGE> 120
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
between 1.75% and 2.5% for LIBOR loans, based on earnings levels. For Tranche B
loans, the margin is 1.75% for Alternate Base Rate loans, and 3.0% for LIBOR
loans. These weighted average rates were 8.39% and 8.87% for Tranche A and
Tranche B at December 31, 1997, respectively, and were based on LIBOR rates. The
revolving credit facility also bears interest at a variable rate based on the
same margins as the Tranche A loan (9.75% at December 31, 1997 based on the
Alternate Base Rate). At December 31, 1997, $181 million of term loans were
outstanding, and $14.3 million of revolving loans and $1.8 million of letters of
credit were outstanding under the revolving credit facility. Available
borrowings under the revolving credit facility were $43.9 million at December
31, 1997. The term loans are payable in quarterly principal installments over a
period of seven years for Tranche A and eight and one-half years for Tranche B,
and may be prepaid. The revolving credit facility expires after seven years. The
Partnership pays customary fees under these credit facilities such as commitment
fees, letter of credit fees and administrative fees. The Senior Bank Facilities
are secured by substantially all of the Partnership's assets.
The Partnership entered into an interest rate collar in October 1997 with a
notional amount of $28 million and a LIBOR rate cap of 7.0% and a floor of
5.65%. This agreement expires in October 2000. Any payments made or received
under the collar will be recognized as an adjustment to interest expense.
In January 1998, the Partnership entered into various interest rate swap
agreements. The fixed LIBOR rate under these agreements ranges between 5.565%
and 5.63%. These agreements have an aggregate initial notional amount of $127
million, which declines annually over a five-year period to a final aggregate
notional amount of $23 million, and are cancellable at the counterparty's option
at the end of three or four years, based on the individual agreement.
The Notes bear interest at a rate of 9 7/8% payable in semi-annual
installments beginning March 1998, and mature in September 2007. Except as set
forth below, the Notes are not redeemable at the option of the Partnership prior
to September 1, 2002. On and after such date, the Notes will be redeemable, at
the Partnership's option at the following redemption prices, plus accrued and
unpaid interest to the redemption date, if redeemed during the 12-month period
commencing on September 1 of the years set forth below:
<TABLE>
<CAPTION>
PERIOD REDEMPTION PRICE
------ ----------------
<S> <C>
2002........................................................ 104.938%
2003........................................................ 103.292%
2004........................................................ 101.646%
2005 and thereafter......................................... 100.000%
</TABLE>
Also, at any time and from time to time prior to September 1, 2000, the
Partnership may redeem in the aggregate up to one-third of the original
aggregate principal amount of the Notes with the proceeds of one or more public
equity offerings by the Partnership at a redemption price of 109.875% plus
accrued and unpaid interests to the redemption date; provided, however, that at
least two-thirds of the original aggregate principal amount of the Notes must
remain outstanding after each such redemption. Additionally, upon the occurrence
of a change of control, as defined, each Note holder will have the right to
require the Partnership to offer to repurchase such Notes at a price equal to
101% of the principal amount plus accrued and unpaid interest.
Both the Senior Bank Facilities and the Notes are subject to certain
financial and other restrictive covenants. These covenants, among other things,
limit the ability of the Partnership to incur additional indebtedness, dispose
of assets, make distributions, make acquisitions and otherwise restrict certain
business activities. The Partnership is required to comply with certain
financial ratios and tests including interest coverage ratios, leverage ratios
and other requirements.
F-12
<PAGE> 121
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future maturities of the Partnership's debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SCHEDULED
DECEMBER 31, DEBT PAYMENTS
------------ --------------
(IN THOUSANDS)
<S> <C>
1998..................................................... $ 777
1999..................................................... 8,308
2000..................................................... 11,306
2001..................................................... 13,500
2002..................................................... 16,000
Thereafter............................................... 296,800
--------
Total............................................. $346,691
========
</TABLE>
7. RELATED PARTY TRANSACTIONS
The Partnership borrowed $26 million from Mid-Am Finance, Inc., an
affiliate of DFA, in 1994. The subordinated note bore interest at 10% and was
due February 17, 2000. Interest was payable through the periodic issuance of
additional subordinated notes which were also due February 17, 2000. These loans
were repaid in February 1997, at which time the Partnership borrowed $20 million
from Mid-Am Capital. The $20 million note was repaid in September 1997 as
discussed in Note 2. At December 31, 1997, there were no borrowings outstanding
with related parties.
The Partnership sources principally all of its raw milk from DFA. Amounts
due for raw milk purchases are paid to the Federal Milk Market Administrator and
are reflected on the accompanying balance sheet in the raw milk accrual.
Effective January 1, 1998 the Partnership entered into an agreement with
DFA pursuant to which the Partnership has agreed to source all of its milk from
DFA subject to the Partnership's existing supply agreements, all of which except
one have expired. Prices charged to the Company by DFA under the supply
arrangement are at competitive market prices. The agreement is initially for a
term of one year and thereafter may be canceled on 12 months' notice.
8. RETIREMENT PLANS
As a result of the addition of the Meadow Gold operations in September,
1997, the Partnership currently has separate retirement plans covering Meadow
Gold employees.
Retirement plans -- excluding Meadow Gold employees
The Partnership has a 401(k) plan in which all employees are eligible to
participate upon completion of six months of service, as defined. The
Partnership matches contributions equal to 50% or more of the participant's
contribution up to 3% of each participant's compensation, and may match
additional contributions on a discretionary basis. Employees vest in the
Partnership's contribution over two to ten years of service for Plan years
beginning before 1989 and two to five years, thereafter. The Partnership also
has a non-qualified contributory plan in which only selected management
personnel are eligible to participate. Under this non-qualified plan, the
Partnership matches 100% of contributions up to 3% of each participant's
compensation. Employees vest in the Partnership's contribution after two years
of service. Contributions to these plans by the Partnership were approximately
$1.6 million for the year ended December 31, 1995, $2.0 million for the year
ended December 31, 1996 and $2.1 million for the year ended December 31, 1997.
Effective October 1, 1996, the Partnership adopted the Supplemental
Executive Retirement Plan ("SERP"). The SERP is available to certain specified
executives of the Partnership and provides annual
F-13
<PAGE> 122
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
benefits based on a percentage of the executives' salaries. Benefits are payable
upon retirement at specified retirement ages, or upon disability or involuntary
termination. The pension liability associated with this plan was approximately
$.6 million at December 31, 1996.
Retirement plans -- Meadow Gold employees
Meadow Gold employees are eligible to participate in a 401(k) plan upon
date of hire. The Partnership matches contributions equal to 50% of the
participant's contribution up to 5% of each participant's compensation.
Employees vest in the Partnership's contribution over five years. Employer
contributions to this plan were $.3 million for the period from September 4,
1997 through December 31, 1997.
Most Meadow Gold employees participate in a domestic pension plan where
benefits are based generally on compensation and credited service. For most
hourly employees, benefits under this plan are based on specified amounts per
year of credited service. Plan assets are currently held by Borden's trustee. In
accordance with the terms of the Borden Transaction, Borden's trustee is
required to transfer these assets to the Partnership's trustee by June 30, 1998.
Most employees who are not covered by Meadow Gold sponsored retirement
plans are covered by collectively bargained agreements which are generally
effective for five years. There would be a continuing liability to these pension
trusts if the Partnership ceased all or substantially all participation in any
such trust, and under certain other specified conditions. The Partnership
contributed $.9 million to these trusts during the period from September 4, 1997
to December 31, 1997.
The Partnership provides certain health and life insurance benefits for
eligible Meadow Gold retirees and their dependants. The costs of these benefits
are accrued during the period that employees render service. Supplemental
benefits are provided to participants who are eligible for Medicare. The
postretirement medical benefits are contributory for retirements after 1983; the
postretirement life insurance benefit is noncontributory. The Partnership's
contribution under the health plan is gradually phased out where employees
retiring in the year 2000 will fund 100% of the health benefit.
The Partnership provides certain postemployment benefits, primarily medical
and life insurance benefits for long-term disabled Meadow Gold employees, to
qualified former or inactive employees.
SUMMARY OF SERP AND MEADOW GOLD DOMESTIC PENSION PLAN
The minimum liability which must be recorded is equal to the excess of the
accumulated benefit obligation over plan assets. For the SERP plan, this results
in additional liability being recorded. In connection with the recording of the
additional liability, corresponding amounts are recorded as an intangible asset.
At December 31, 1997, the Partnership recorded $.6 million of additional
liability and $.6 million of intangible assets.
Pension expense includes the following components (in thousands):
<TABLE>
<CAPTION>
1997
----
<S> <C>
Service cost for benefits earned during the year............ $215
Interest cost on projected benefit obligation............... 461
Actual return on plan assets................................ (381)
Net amortization and deferral............................... 78
----
Net pension costs........................................... $373
====
</TABLE>
F-14
<PAGE> 123
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The actuarial assumptions used were as follows:
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Discount rate............................................... 7.0%
Expected long-term rate of return on assets................. 8.5%
Rate of increase in compensation levels..................... 3.0% - 4.5%
</TABLE>
The funded status of the plans was as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................... $14,321
=======
Accumulated benefit obligation.............................. $15,459
=======
Projected benefit obligation................................ $17,645
Plan assets at fair value................................... 13,896
-------
Projected benefit obligation over plan assets............... 3,749
Unrecognized net gain....................................... 179
Unrecognized prior service cost............................. (1,368)
Adjustment to recognize minimum liability................... 593
-------
Pension liability recognized as of December 31.............. $ 3,153
=======
</TABLE>
SUMMARY OF MEADOW GOLD HEALTH AND LIFE RETIREE BENEFITS
The components of net periodic postretirement benefit cost were as follows
(in thousands):
<TABLE>
<CAPTION>
1997
----
<S> <C>
Service cost................................................ $ --
Interest cost............................................... 163
----
Net periodic postretirement benefit cost.................... $163
====
</TABLE>
The Meadow Gold postretirement health care and life insurance plan is not
funded. The amounts recognized on the Partnership's balance sheet for the
obligations relating to the plan were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................... $ 6,769
Fully eligible plan participants............................ 246
Other active plan participants.............................. 30
--------
Accrued postretirement benefit cost recognized in the
balance sheet............................................. $ 7,045
========
</TABLE>
The discount rate used in determining the accumulated benefit obligation
was 7% at December 31, 1997. The per capita cost of covered health care benefits
is assumed to have increased at an annual rate of 9.9% for 1997, which rate was
assumed to decrease gradually to 5% per annum in 2017 and to remain at that
level thereafter. Based on these assumptions, a one percentage point increase in
the assumed health care cost trend rate would increase the annual net periodic
postretirement benefit cost and the accumulated benefit obligation by
approximately $50,000 and $740,000, respectively.
F-15
<PAGE> 124
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
A summary of future minimum lease payments under noncancelable operating
leases as of December 31, 1997 for buildings, vehicles and equipment is as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, (IN THOUSANDS)
------------ --------------
<S> <C>
1998..................................................... $10,183
1999..................................................... 8,014
2000..................................................... 5,186
2001..................................................... 3,528
2002..................................................... 2,163
</TABLE>
Rental expense of $5 million was incurred for the year ended December 31,
1995, $5.3 million for the year ended December 31, 1996 and $9.4 million for the
year ended December 31, 1997.
On November 6, 1997, a federal judge in Minnesota enjoined the United
States Department of Agriculture ("USDA") from collecting Class I differentials
in most federal market orders, beginning with November raw milk sales. The USDA
has obtained a stay of this ruling pending the outcome of the USDA's appeal to
the U.S. Court of Appeals for the 8th Circuit. Additionally, the USDA has
proposed new rules for the federal milk marketing program which have been
published for public comment. The comment period expired April 30, 1998. The
USDA is also considering, as part of formal rulemaking, a proposal to establish
a temporary price floor for raw milk. In addition, certain states have formed or
are in the process of attempting to form regional milk-price compacts designed
to ensure that cheaper milk from other regions does not undercut local
producers' prices, which may result in higher milk prices than the federally
mandated minimum prices. While management does not believe that these matters
should have a material adverse affect on the Partnership's business, neither the
outcome of the court proceedings, the final form of the federal regulations or
the existence or location of any additional state compacts nor the effect of
such matters on the Company can be predicted with any certainty.
On August 6, 1997, a lawsuit was filed against the Partnership and other
dairy processors in Texas alleging that containers of processed milk sold by the
Partnership and the other dairy processing defendants to grocery stores and
schools were under-filled and did not contain the volume of milk as stated on
the carton based upon certain tests allegedly performed by the USDA. The
plaintiff is asserting a claim for an unspecified amount of damages. The
plaintiff seeks to maintain the case as a class action on behalf of all persons
who purchased retail milk from the defendants in gallon, quart, pint or
half-pint containers in the State of Texas from August 5, 1993 to August 5,
1997. A hearing on whether the case will be maintained as a class is set for
August 17, 1998. The case is not set for trial. This matter is in the early
stages of discovery. The Partnership believes it has meritorious defenses and
intends to vigorously defend the lawsuit. Although the outcome of this matter is
uncertain, management does not believe that the lawsuit will have a material
adverse effect on the Partnership.
The Partnership is party to certain litigation in the normal course of
business. Management does not believe the outcome of any of these proceedings
will materially affect the Partnership's financial position or results of
operations.
10. EQUITY TRANSACTIONS
At December 31, 1996, the Partnership had only common equity interests
outstanding. The general partner interest of 1% was owned by SFG Management
Limited Liability Company ("SFG Management"), which was owned 80% by DFA and 10%
by each of two management owners. The 99% limited partner interest was owned by
an affiliate of DFA.
F-16
<PAGE> 125
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain equity transactions and refinancing of debt occurred during
February 1997 which resulted in partner distributions of $24 million and partner
contributions of $6.2 million. Additionally, as discussed in Note 2, Barbe's
Dairy was contributed to the Partnership in exchange for Preferred Interests
with a cumulative return of 10% on a stated value of $8 million. In connection
with these transactions, $14.5 million of DFA's limited partner common equity
was converted to a Preferred Interest with a cumulative return of 10% on a
stated value of $76.9 million. The conversion was accounted for at book value;
the stated value is an agreed-upon value that represents the liquidation value
of the Preferred Interest. These transactions resulted in SFG Management and the
common equity of the Partnership being owned 50% by DFA and 50% by two
management owners.
As discussed in Note 2, additional Preferred Interests of $135 million were
issued in connection with the Meadow Gold contribution and related transactions
on September 4, 1997. Of the $135 million of Preferred Interests, $90 million
with a cumulative preferred return of 10% was issued to DFA, and Preferred
Interests of $45 million were issued to Mid-Am Capital, of which $15 million
bears a cumulative return of 10% and $30 million bears a cumulative return of
9.5%. Also on September 4, 1997, special distributions were made to the partners
of $1.8 million in cash and $1.8 million of DFA's limited partner common equity
was converted to Preferred Interests. As a result of the September 4, 1997
transactions, both SFG Management and the common equity of the Partnership are
owned 50% each by DFA and one management owner.
Under the terms of SFG's partnership agreement, the Partnership is required
to make distributions to each management owner in an amount equal to such
owner's federal, state and local income tax liability for income attributable to
SFG. The partnership agreement also requires the Partnership to convert an
equivalent amount of DFA's common equity to Preferred Interests with a
cumulative return of 10%. On September 10, 1997, tax payment distributions were
made to the management owners in accordance with the partnership agreement
totaling $4 million, and $4 million of DFA's limited partner common equity was
converted to Preferred Interests.
Issuances of Preferred Interests are accounted for based on the fair value
of consideration received or at the book value of common interests converted.
The stated value of Preferred Interests equals book value except for the Series
A Preferred Interests as discussed above and except to the extent preferred
returns exceed net income (Zero at December 31, 1997 and $1.0 million
(unaudited) at March 31, 1998). Preferred returns on Preferred Interests
accumulate on a semi-annual basis and are payable only in-kind, except that
amounts may be paid in cash on Series D if certain earnings levels are achieved.
All of the Preferred Interests hold equal rank with respect to liquidation of
the Partnership, and have preference over the common equity interests. The
Preferred Interests are not convertible into common interests.
Preferred Interests, by Series and including unpaid preferred returns, were
as follows at December 31, 1997:
<TABLE>
<CAPTION>
SERIES RETURN STATED VALUE BOOK VALUE
- ------ ------ ------------ ----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C>
A 10% $ 93,374 $ 30,902
B 10% 92,910 92,910
C 10% 15,485 15,485
D 9.5% 30,921 30,921
E 10% 5,981 5,981
-------- --------
$238,671 $176,199
======== ========
</TABLE>
Net income of the Partnership is allocated first to the Preferred Interests
to the extent of preferred returns. No Preferred Series has preference over any
other Series in the allocation of net income. Any remaining net income is
allocated to the common equity owners in proportion to their ownership interest.
If net income for a period is less than preferred returns for such period, the
deficiency will be recovered from
F-17
<PAGE> 126
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
future net income, if any. Net losses are allocated to the common equity owners
in proportion to their ownership interest.
At any time after January 1, 2003, the management owner may require the
Partnership or DFA to purchase all of his partnership interest. In the event of
the management owner's death, his successors-in-interest have the right to
require the Partnership or DFA to purchase all of his interests in the
Partnership. The Partnership has the option not to elect to purchase the
management owner's interests when the put option is exercised. If this occurs,
DFA is required to purchase the interests. In the event DFA is unable to
purchase the interests due to its own contractual or legal restrictions, DFA
must either find an alternative buyer or deliver to the management owner an
installment note in the amount of the put price. In addition, the Partnership or
DFA has a right to require the management owner's successors-in-interest to sell
to the Partnership or DFA all of his interests in the Partnership in the event
of his death or disability.
F-18
<PAGE> 127
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Southern Foods Group, L.P.
We have audited the accompanying statements of revenues and expenses and of
cash flows of Meadow Gold Dairy Operations (the "Meadow Gold Dairies"), a
division of Borden/Meadow Gold Dairies Holdings, Inc. ("Holdings") for the
period from January 1, 1997 to September 4, 1997. These historical statements
are the responsibility of the Meadow Gold Dairies' management. Our
responsibility is to express an opinion on these historical statements based on
our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the historical statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the historical statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
historical statements. We believe that our audit provides a reasonable basis for
our opinion.
The accompanying historical statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission (for inclusion in the registration statement on Form S-4 of Southern
Foods Group, L.P. and SFG Capital Corporation) as described in Note 1 and are
not intended to be a complete presentation.
In our opinion, the historical statements referred to above present fairly,
in all material respects, the revenues and expenses described in Note 1 to the
historical statements and the cash flows of the Meadow Gold Dairies for the
period from January 1, 1997 to September 4, 1997, in conformity with generally
accepted accounting principles.
As described in Note 1 to the historical statements, Borden, Inc., the
parent corporation of Holdings, sold Holdings, including the Meadow Gold
Dairies, to Dairy Farmers of America, Inc. on September 4, 1997.
PRICE WATERHOUSE LLP
Dallas, Texas
December 17, 1997
F-19
<PAGE> 128
INDEPENDENT AUDITORS' REPORT
Board of Directors
Borden/Meadow Gold Dairies Holdings, Inc.
Ogden, Utah
We have audited the accompanying statements of revenues and expenses and of
cash flows of Meadow Gold Dairy Operations (the "Meadow Gold Dairies" or
"Dairies"), a division of Borden/Meadow Gold Dairies Holdings, Inc.
("Holdings"), for each of the two years in the period ended December 31, 1996.
These financial statements are the responsibility of the Dairies' management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the revenues and expenses and cash flows of Meadow Gold Dairy
Operations for each of the two years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared from the separate
records maintained by Meadow Gold Dairies Operations and may not necessarily be
indicative of the conditions that would have existed or the results of
operations if Dairies had been operated as an unaffiliated company. Portions of
certain income and expenses represent allocations made from home office items
applicable to Holdings and Borden, Inc. ("Borden") as a whole.
As described in Note 1 to the financial statements, Borden, the parent
corporation of Holdings, sold Holdings, including Meadow Gold Dairies, to Dairy
Farmers of America, Inc. on September 4, 1997.
DELOITTE & TOUCHE LLP
June 27, 1997
Kansas City, Missouri
F-20
<PAGE> 129
MEADOW GOLD DAIRY OPERATIONS
(A DIVISION OF BORDEN/MEADOW GOLD DAIRIES HOLDINGS, INC.)
STATEMENTS OF REVENUES AND EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED FOR THE PERIOD FROM
DECEMBER 31, JANUARY 1, 1997
------------------- THROUGH SEPTEMBER 4,
1995 1996 1997
-------- -------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales.............................................. $453,428 $492,537 $313,353
Costs of sales......................................... 346,972 384,629 238,617
-------- -------- --------
106,456 107,908 74,736
Selling, distribution, general and administrative
expenses:
Plant-level expenses................................. 75,092 74,546 53,045
Corporate-level expenses............................. 9,004 10,270 8,605
-------- -------- --------
84,096 84,816 61,650
Amortization of goodwill............................... 1,894 1,894 1,215
-------- -------- --------
Income from operations............................... 20,466 21,198 11,871
-------- -------- --------
Other income (expense):
Interest expense..................................... (75) (56) (22)
Other income, net.................................... 350 79 531
-------- -------- --------
275 23 509
-------- -------- --------
Division income........................................ $ 20,741 $ 21,221 $ 12,380
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 130
MEADOW GOLD DAIRY OPERATIONS
(A DIVISION OF BORDEN/MEADOW GOLD DAIRIES HOLDINGS, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED FOR THE PERIOD FROM
DECEMBER 31, JANUARY 1, 1997
-------------------- THROUGH SEPTEMBER 4,
1995 1996 1997
-------- -------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Division income................................... $ 20,741 $ 21,221 $ 12,380
Adjustments to reconcile division income to net
cash provided by operating activities:
Depreciation................................... 8,587 8,963 5,789
Amortization................................... 1,894 1,894 1,215
(Gain) loss on sale or disposal of property,
plant and equipment.......................... 165 470 (159)
Changes in operating assets and liabilities:
Accounts receivable.......................... 1,190 (5,154) 1,479
Inventories.................................. 1,123 (1,110) (826)
Prepaid expenses and other current assets.... 121 (398) (247)
Accounts and drafts payable.................. (4,723) 6,497 (3,721)
Affiliate payables........................... 1,389 (1,950)
Accrued expenses............................. 10,261 156 5,819
Other........................................ 604 142 15
-------- -------- --------
Net cash provided by operating
activities.............................. 39,963 34,070 19,794
-------- -------- --------
Cash flows from investing activities:
Proceeds from sales of property, plant and
equipment...................................... 717 322 387
Additions to property, plant and equipment........ (7,718) (20,959) (7,015)
-------- -------- --------
Net cash used in investing activities..... (7,001) (20,637) (6,628)
-------- -------- --------
Cash flows from financing activities:
Repayments on capital lease obligations........... (62) (57) (64)
Distributions, net................................ (30,789) (13,840) (12,948)
-------- -------- --------
Net cash used in financing activities..... (30,851) (13,897) (13,012)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 2,111 (464) 154
Cash and cash equivalents:
Beginning of period............................... 4,013 6,124 5,660
-------- -------- --------
End of period..................................... $ 6,124 $ 5,660 $ 5,814
======== ======== ========
Supplemental information:
Interest paid..................................... $ 75 $ 56 $ 22
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 131
MEADOW GOLD DAIRY OPERATIONS
(A DIVISION OF BORDEN/MEADOW GOLD DAIRIES HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business -- Prior to September 4, 1997, the Meadow Gold Dairy
Operations ("Dairies" or "Meadow Gold Dairies") was a division of Borden/Meadow
Gold Dairies Holdings, Inc. ("Holdings"). Dairies is a processor and distributor
of a wide variety of dairy products in the western United States. Dairies
products fall into three general categories: fluid milk products, cultured
products and ice cream products. Dairies also distributes a variety of fruit
juices and nectars. Most of Dairies' products are sold under brand names such as
Meadow Gold, Mountain High and Viva, as well as under private labels.
On May 22, 1997, Dairy Farmers of America, Inc., formerly Mid-America
Dairymen, Inc. ("DFA"), entered into a stock purchase and merger agreement with
Borden, Inc. and an affiliate ("Borden") to acquire Holdings and certain
trademarks for total consideration of approximately $435 million. This and other
related transactions were completed on September 4, 1997.
Basis of Presentation -- Prior to November 1995, Dairies operated as a
profit center of Borden. Holdings was formed in November 1995 as a
majority-owned subsidiary of Borden and was included in Borden's consolidated
financial statements. Under this structure, Borden incurred various costs in
connection with the operation of Holdings which included corporate controlled
expenses such as general and group insurance and employee benefits and
administrative/departmental overhead such as accounting, legal, tax, credit,
information services and executive management. Such amounts have been allocated
to Holdings in a reasonable manner in order to depict the stand-alone historical
operations of Holdings.
Holdings was composed of two divisions; the Meadow Gold Dairies which
contained seventeen dairy facilities located in Colorado, Hawaii, Idaho, Iowa,
Montana, Nebraska, Oklahoma and Utah and the other division (Borden Dairies)
which contained ten dairy facilities located in Louisiana, New Mexico and Texas.
Holdings' corporate offices were located in Ogden, Utah, and provided
administrative services to both the Meadow Gold Dairies and Borden Dairies
Divisions. Holdings incurred various costs in connection with the operation of
its two divisions including administrative overhead such as accounting, legal,
tax, credit and information services as well as executive management. Such
amounts have been allocated in a reasonable and consistent manner in the
accompanying financial statements in order to depict the historical statements
of revenues and expenses and cash flows of Meadow Gold Dairies on a stand-alone
basis. Such allocations represent management's best estimate of costs that would
have been incurred had Meadow Gold Dairies operated on a stand-alone basis.
Administrative service costs allocated to Meadow Gold Dairies totaled $9,004 and
$10,270 for the years ended December 31, 1995 and 1996, respectively, and $8,605
for the period from January 1, 1997 through September 4, 1997, respectively.
These amounts include allocations of costs from Borden, Inc. to Holdings as
described previously.
The operations of Holdings are included in Borden's consolidated tax
returns. Borden uses the liability method of accounting for deferred income
taxes which reflect the temporary difference between amounts of assets and
liabilities recognized for financial reporting purposes and such amounts
recognized for tax purposes. Borden did not allocate income taxes to Dairies on
a stand-alone basis and the transaction described under Nature of Business above
resulted in Meadow Gold Dairies being owned and operated by a non-taxable
entity. Accordingly, the accompanying statements of revenues and expenses do not
reflect an income tax provision because such information is not considered
meaningful.
The accompanying statements of revenues and expenses consist of the net
sales; direct operating expenses, interest expense and other income; and
allocated expenses of the Meadow Gold Dairies as discussed above.
Use of Estimates -- The preparation of these financial statements requires
management to make estimates and assumptions about reported amounts of revenues
and expenses. Management must also make
F-23
<PAGE> 132
MEADOW GOLD DAIRY OPERATIONS
(A DIVISION OF BORDEN/MEADOW GOLD DAIRIES HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
estimates and judgments about future results of operations related to specific
elements of the business in assessing recoverability of assets and recorded
values of liabilities. Actual results could differ from those estimates.
Revenue Recognition -- Revenues on product sales are recognized upon
delivery to the customer.
Inventories -- Finished goods inventories are valued at the lower of cost
or market. Cost is determined using the average cost and first-in, first-out
methods. Raw materials inventories are stated at actual cost.
Property, Plant and Equipment -- Depreciation is calculated using the
straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and improvements.............................. 5-40
Machinery and equipment................................. 2-15
Leasehold improvements.................................. shorter of lease term
or 10 years
Vehicles................................................ 5-10
</TABLE>
Maintenance and repairs are charged to expense as incurred; renewals and
betterments are capitalized.
Impairment of Long-lived Assets -- Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate the carrying
amount of an asset or group of assets may not be recoverable. The impairment
review includes a comparison of future cash flows expected to be generated by
the asset or group of assets with their associated carrying value. If the
carrying value of the asset or group of assets exceeds expected cash flows
(undiscounted and without interest charges), an impairment loss is recognized to
the extent carrying amounts exceed fair value.
Goodwill -- Goodwill represents the excess of the purchase price over the
fair value of identifiable assets. Goodwill is amortized on a straight-line
basis over a remaining life of twenty-nine years at December 31, 1996.
Advertising and Promotion Expense -- Production costs of future media
advertising are deferred until the advertising commences. All other advertising
and promotion expenses are expensed when incurred. Advertising and promotion
expenses were $10,016 and $10,717 for the years ended December 31, 1995 and
1996, respectively, and $10,756 for the period from January 1, 1997 through
September 4, 1997.
F-24
<PAGE> 133
MEADOW GOLD DAIRY OPERATIONS
(A DIVISION OF BORDEN/MEADOW GOLD DAIRIES HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. PENSION AND RETIREMENT SAVINGS PLANS
Most employees of Meadow Gold Dairies participated in a domestic pension
plan sponsored by Borden. For most salaried employees, benefits under this plan
generally were based on compensation and credited service. For most hourly
employees, benefits under this plan were based on specified amounts per year of
credited service.
A portion of Borden's net pension expense was allocated annually to Dairies
(see Note 6). Management does not believe that these allocations are materially
different from amounts that would be calculated historically for Dairies on a
stand-alone basis. The following are the components of Borden's annual net
pension expense:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996
-------- --------
(IN MILLIONS)
<S> <C> <C>
Service cost-benefits earned during the year................ $ 7.5 $ 7.9
Interest cost on the projected benefit obligation........... 31.6 27.6
Return on plan assets....................................... (87.1) (26.9)
Net amortization and deferral............................... 56.2 (1.2)
------ ------
$ 8.2 $ 7.4
====== ======
</TABLE>
The weighted average rates used to determine net periodic pension expense
were as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Discount rate............................................... 8.8% 6.8%
Rate of increase in future compensation levels.............. 5.3% 4.3%
Expected long-term rate of return on plan assets............ 9.8% 7.8%
</TABLE>
Most employees who were not covered by Borden-sponsored plans were covered
by collectively bargained agreements which were generally effective for five
years. Under federal pension law, there would be a continuing liability to these
pension trusts if Borden ceased all or substantially all participation in any
such trust, and under certain other specified conditions. Dairies was charged
$2,933 and $2,635 for 1995 and 1996, respectively, and $1,896 for the period
from January 1, 1997 through September 4, 1997, for payments to pension trusts
on behalf of employees not covered by Borden's plans.
Charges to Dairies for matching contributions under the Borden-sponsored
retirement savings plans were $843 and $817 in 1995 and 1996, respectively, and
$593 for the period from January 1, 1997 through September 4, 1997. Eligible
salaried and hourly non-bargaining employees contributed up to 15% of their pay
(7% for certain longer service salaried employees). Dairies' matching
contribution was 50% of employee contributions up to 5% of their pay during the
periods presented.
3. POSTRETIREMENT AND EMPLOYMENT BENEFIT OBLIGATIONS
Borden provided certain health and life insurance benefits for eligible
domestic retirees and their dependents. The costs of these benefits were accrued
as a form of deferred compensation earned during the period that employees
rendered service.
Participants who were not eligible for Medicare were provided with the same
medical benefits as active employees, while those who were eligible for Medicare
were provided with supplemental benefits. The postretirement medical benefits
were contributory for retirements after 1983; the postretirement life insurance
benefit was noncontributory.
F-25
<PAGE> 134
MEADOW GOLD DAIRY OPERATIONS
(A DIVISION OF BORDEN/MEADOW GOLD DAIRIES HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A portion of Borden's expense for postemployment and postretirement
benefits was allocated annually to Dairies (see Note 6). Management does not
believe that these allocations are materially different from amounts that would
be calculated historically for Dairies on a stand-alone basis. The following are
the components of Borden's annual expense for postretirement benefits:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996
-------- --------
(IN MILLIONS)
<S> <C> <C>
Service cost................................................ $ 1.1 $ 0.2
Interest cost............................................... 13.3 11.3
Net amortization and deferral............................... (16.7) (13.7)
------ ------
Net postretirement benefit expense.......................... $ (2.3) $ (2.2)
====== ======
</TABLE>
The discount rates used in determining Borden's accumulated postretirement
benefit obligation were 6.75% and 7.5% at December 31, 1995 and 1996,
respectively.
The assumed health care cost trend rate used in measuring Borden's
accumulated postretirement benefit obligation at December 31, 1996 was 9.5% for
1997, gradually declining to 5.5% in 2004 and thereafter. The comparable
assumptions for the prior year were 9.5% and 4.8%, respectively. A
one-percentage point increase in the health care cost trend rate would increase
the sum of Borden's service and interest costs in 1996 by $1.4 million.
Borden provided certain postemployment benefits, primarily medical and life
insurance benefits for long-term disabled employees, to qualified former or
inactive employees. Such postemployment benefit costs have been allocated to
Dairies' operations on a rational and consistent basis.
4. COMMITMENTS AND CONTINGENCIES
Lease Obligations -- Dairies leases warehouse facilities, production
facilities and vehicles under operating leases.
Total rental expenses for operating leases in 1995 and 1996 were $5,733 and
$5,117, respectively, and $4,510 for the period from January 1, 1997 through
September 4, 1997.
Self-Insurance -- Borden had insurance policies to cover potential losses
and liabilities related to workers' compensation, health and welfare claims,
physical damage to property other than autos, business interruption and
comprehensive general, product and vehicle liability. However, many of these
policies had deductibles of $500 and in some cases higher amounts. Losses were
accrued for the estimated aggregate liability for claims incurred using certain
actuarial assumptions followed in the insurance industry and Dairies'
experience.
Subsequent to December 31, 1996, Holdings obtained outside commercial
workers compensation insurance under substantially the same terms as the
previous Borden policies.
Litigation -- Dairies is subject to various investigations, claims and
legal proceedings covering a wide range of matters in the ordinary course of its
business activities. Each of these matters is subject to various uncertainties
and some of these matters may be resolved unfavorably to Dairies. Dairies has
established accruals for matters that are probable and reasonably estimatable.
Management believes that any liability that may ultimately result from the
resolution of these matters in excess of amounts provided will not have a
material adverse effect on the financial statements of Dairies.
F-26
<PAGE> 135
MEADOW GOLD DAIRY OPERATIONS
(A DIVISION OF BORDEN/MEADOW GOLD DAIRIES HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. MAJOR CUSTOMERS
Revenues from one major customer were $56,601 and $64,565 as of December
31, 1995 and 1996, respectively, and $40,607 for the period from January 1, 1997
through September 4, 1997.
6. RELATED PARTIES
Holdings was engaged in various transactions with Borden and its affiliated
companies in the ordinary course of business. Such transactions included, among
other items, participation in Borden's cash management system and the sharing of
certain general and administrative costs which were allocated to Holdings.
Holdings was operated as a profit center of Borden whereby essentially all
treasury functions including financing for working capital and other cash needs,
were performed by Borden; therefore, allocation of interest expense associated
with this financing was not practical and not included in the accompanying
financial statements.
Borden charged Holdings for domestic pension and postretirement and
postemployment benefits based on allocations provided to its actuary. The
allocations were determined by the actuary from actual employee census data
which was collected annually. Holdings was charged for group and general
insurance expense, which included workers' compensation liability and property
damage insurance, based on actual claims costs. A pro rata share of Borden's
catastrophic insurance coverage premiums was charged for general insurance
claims.
The various expenses allocated by Borden through Holdings to Dairies
included the following for the periods indicated:
<TABLE>
<CAPTION>
FOR THE PERIOD
YEARS ENDED FROM
DECEMBER 31, JANUARY 1, 1997
----------------- THROUGH
1995 1996 SEPTEMBER 4, 1997
------- ------- -----------------
<S> <C> <C> <C>
Group and general insurance....................... $ 9,879 $ 9,349 $4,989
Corporate information systems..................... 2,086 1,711 1,089
Employee benefits, including pension expense...... 576 757 368
Other............................................. 327 1,130 921
------- ------- ------
12,868 12,947 7,367
Allocation of corporate governance from Borden,
Inc............................................. 1,028 937 613
------- ------- ------
$13,896 $13,884 $7,980
======= ======= ======
</TABLE>
These amounts in the accompanying financial statements have been allocated
in a reasonable and consistent manner in order to depict the historical
statements of revenues and expenses and of cash flows of Dairies on a
stand-alone basis and represent management's best estimates of a cost that would
have been incurred had Dairies operated on a stand-alone basis. For
classification purposes in the statements of revenues and expenses, $10,897 and
$10,283 for the years ended December 31, 1995 and 1996, respectively, and $6,724
for the period from January 1, 1997 through September 4, 1997, respectively, of
such expenses were allocated to the plant-level for selling, distribution and
general and administrative expenses; the remaining expenses were allocated to
the corporate-level for selling, distribution and general and administrative
expenses.
F-27
<PAGE> 136
======================================================
UNTIL OCTOBER , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. NEITHER THE PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL
NOR BOTH TOGETHER CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH THE PROSPECTUS RELATES OR
ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS OR THE LETTER OF TRANSMITTAL OR BOTH TOGETHER NOR
ANY EXCHANGE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREIN OR THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE ISSUERS SINCE SUCH DATE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................. iii
Prospectus Summary..................... 1
Risk Factors........................... 11
The Exchange Offer..................... 17
The Transactions....................... 26
Use of Proceeds........................ 30
Capitalization......................... 30
Unaudited Pro Forma Combined
Consolidated Statement of Income..... 31
Selected Historical Financial Data..... 33
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 34
Business............................... 39
Management............................. 53
Certain Relationships and
Transactions......................... 56
Description of the Partnership
Agreement and Operating Agreement.... 59
Description of Preferred Interests..... 63
Description of Senior Bank
Facilities........................... 65
Description of the Notes............... 67
Federal Income Tax Consequences........ 97
Exchange And Registration Rights
Agreement............................ 98
Book-Entry; Delivery and Form.......... 100
Plan of Distribution................... 101
Legal Matters.......................... 102
Experts................................ 103
Index to Financial Statements.......... F-1
</TABLE>
======================================================
======================================================
$150,000,000
SOUTHERN FOODS LOGO
SOUTHERN FOODS GROUP, L.P.
SFG CAPITAL CORPORATION
9 7/8% SENIOR SUBORDINATED SERIES A NOTES DUE 2007
PROSPECTUS
, 1998
======================================================
<PAGE> 137
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
SFG Capital. As authorized by Section 145 of the General Corporation Law of
Delaware (the "Delaware Corporation Law"), each director and officer of SFG
Capital may be indemnified by SFG Capital against expenses (including attorney's
fees, judgments, fines and amounts paid in settlement) actually and reasonably
incurred in connection with the defense or settlement of any threatened, pending
or completed legal proceedings in which he is involved by reason of the fact
that he is or was a director or officer of SFG Capital if he acted in good faith
and in a manner that he reasonably believed to be in or not opposed to the best
interests of SFG Capital, and, with respect to any criminal action or
proceeding, if he had no reasonable cause to believe that his conduct was
unlawful. In each case, such indemnity shall be to the fullest extent authorized
by the Delaware Corporation Law, as amended, to the extent such amendment
permits SFG Capital to provide broader indemnification rights. If the legal
proceeding, however, is by or in the right of SFG Capital, the director or
officer may not be indemnified in respect of any claim, issue or matter as to
which he shall have been adjudged to be liable for negligence or misconduct in
the performance of his duty to SFG Capital unless a court determines otherwise.
Article Eight of the Certificate of Incorporation of SFG Capital, a copy of
which is filed as Exhibit 3.2 to this Registration Statement, provides that no
Director of SFG Capital shall be personally liable to SFG Capital or its
shareholders for monetary damages for any breach of fiduciary duty as a Director
except for liability: (1) for any breach of duty of loyalty to SFG Capital or
its shareholders, (2) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) under Section 174 of
the General Corporation Law of the State of Delaware, or (4) for any transaction
from which the Director derived an improper personal benefit. In addition,
Article Seven of the Certificate of Incorporation and Article VI of the By-laws
of SFG Capital, a copy of which is filed as Exhibit 3.5 hereto, require SFG
Capital to indemnify to the fullest extent permitted by law any person or such
person's heirs, distributees, next of kin, successors, appointees, executors,
administrators, legal representatives or assigns who was or is made or
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether criminal, civil, administrative, or investigative,
by reason of the fact that such person is or was a director, officer, employee
or agent of SFG Capital or serves or served at the request of SFG Capital any
other enterprise as a director, officer, employee or agent.
The Company. Section 3.5 of the Second Amended and Restated Agreement of
Limited Partnership, effective on September 3, 1997 (as amended, the
"Partnership Agreement"), states that the Company shall indemnify to the fullest
extent permitted by law SFG Management Limited Liability Company, the General
Partner of the Company, and its officers, managers, employees, members and
agents (individually, an "Indemnified Party," collectively, the "Indemnified
Parties") from and against all costs and expenses, including attorneys' fees,
judgments, fines, settlements and/or liabilities incurred by or imposed upon any
Indemnified Party in connection with, or resulting from, investigating,
preparing or defending any action, suit or proceeding whether civil, criminal,
legislative or otherwise (or any appeal thereof) to which any Indemnified Party
may be made a party or become otherwise involved or with which any Indemnified
Party may be threatened, in each case by reason of, or in connection with, the
Indemnified Party being or having been associated with or otherwise acting for
the Company, or by reason of any action or alleged action, omission or alleged
omission by any Indemnified Party in any such capacity, provided that the
Indemnified Party is not ultimately adjudged to have engaged in gross
negligence, willful misconduct or breach of a material provision of the
Partnership Agreement. Further, the Company must pay the expenses incurred by an
Indemnified Party in investigating, preparing or defending any civil or criminal
action, suit or proceeding, in advance of the final disposition thereof, upon
receipt of an undertaking by the Indemnified Party to repay such payment if
there is a final adjudication or determination that such Indemnified Party is
not entitled to indemnification as provided in the Partnership Agreement.
II-1
<PAGE> 138
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(i) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1* -- Certificate of Limited Partnership for Southern Foods
Group, L.P. ("SFG") dated December 19, 1994
3.2* -- Certificate of Incorporation of SFG Capital Corporation
("SFG Capital") dated July 23, 1997
3.3* -- Certificate of Formation of SFG Management Limited
Liability Company ("SFG Management") dated December 16,
1994
3.4* -- Second Amended and Restated Agreement of Limited
Partnership of SFG dated as of September 3, 1997
3.5* -- First Amendment to Second Amended and Restated Agreement
of Limited Partnership of SFG dated as of March 31, 1998
3.6* -- Bylaws of SFG Capital
3.7* -- Second Amended and Restated Limited Liability Company
Agreement of SFG Management dated as of September 3, 1997
3.8* -- First Amendment to Second Amended and Restated Limited
Liability Company Agreement of SFG Management dated as of
March 31, 1998
4.1* -- Indenture dated as of September 4, 1997, among SFG
Capital, SFG and Texas Commerce Bank, N.A. (now Chase
Bank of Texas, National Association) as Trustee
4.2* -- Specimen Global Note Certificate
4.3* -- Exchange and Registration Rights Agreement dated
September 4, 1997 among SFG, SFG Capital, and Chase
Securities Inc.
5.1** -- Opinion of Strasburger & Price, L.L.P. regarding legality
of securities being issued
10.1* -- Stock Purchase and Merger Agreement, dated as of May 22,
1997, among Mid-America Dairymen, Inc. (now Dairy Farmers
of America, Inc. ("DFA")), Borden/Meadow Gold Dairies
Holdings, Inc. ("Holdings"), BDH Two, Inc. and Borden,
Inc. (the "Stock Purchase and Merger Agreement")
10.2* -- Assignment and Assumption Agreement Relating to Stock
Purchase and Merger Agreement, dated September 4, 1997,
between DFA and SFG
10.3* -- Credit Agreement, dated September 4, 1997, among SFG,
DFA, the Lenders named therein and The Chase Manhattan
Bank, as Administrative Agent
10.4* -- Capital Contribution, Assignment and Assumption
Agreement, dated as of September 4, 1997, between DFA and
SFG
10.5* -- Capital Contribution Agreement, dated as of September 4,
1997, between Mid-Am Capital, L.L.C. and SFG
10.6* -- Sublease Agreement, dated as of September 4, 1997,
between DFA and SFG relating to Master Leasing Agreement
between BLC Corporation and DFA dated August 15, 1997
10.7* -- Trademark License Agreement, dated as of September 4,
1997, among Borden, Inc., BDH Two, Inc. and SFG
10.8* -- Trademark License Agreement (Meadow Gold), dated as of
September 4, 1997, between SFG and Borden Foods
Corporation
10.9* -- Trademark Sublicense Agreement (Eagle), dated as of
September 4, 1997, between SFG and Borden Foods
Corporation
10.10* -- Copyright Assignment, dated as of September 4, 1997, from
Borden, Inc. to SFG
10.11* -- Patent Assignment, dated as of September 4, 1997, from
Borden/Meadow Gold Dairies, Inc. ("BMGD") to SFG
</TABLE>
II-2
<PAGE> 139
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.12* -- Asset Purchase and Sale Agreement, dated as of September
4, 1997, between Borden/Meadow Gold Dairies Investments,
Inc. ("Investments"), DFA, and SFG
10.13* -- Trademark Assignment dated as of September 4, 1997,
between SFG and Milk Products LLC ("Milk Products")
10.14* -- Milk Products Sublicense Agreement, dated as of September
4, 1997, between SFG and Milk Products
10.15* -- Milk Products Trademark License Agreement, dated as of
September 4, 1997, between SFG and Milk Products
10.16* -- Patent License Agreement, dated as of September 4, 1997,
between SFG and Milk Products
10.17* -- Copyright License Agreement dated as of September 4,
1997, between SFG and Milk Products
10.18* -- License Assignment and Assumption Agreement dated as of
September 4, 1997, between SFG and BMGD
10.19* -- Trademark License Agreement between Flav-O-Rich, Inc. and
SFG dated as of February 28, 1995
10.20* -- Trademark License Agreement effective as of September 1,
1995, between Foremost Farms U.S.A. and SFG
10.21* -- Stipulation and Order among the United States of America,
DFA, SFG and Milk Products dated September 3, 1997 and
Final Order filed September 3, 1997
10.22* -- Agreed Consent Decree and Permanent Injunction among the
State of Texas, DFA, SFG and Milk Products dated
September 3, 1997
10.23* -- Compliance Agreement in Lieu of Debarment between SFG and
the Food and Consumer Service of the United States
Department of Agriculture (the "FCS") executed on January
13, 1995 by the FCS and on December 21, 1994 by SFG
10.24* -- Administrative Agreement between SFG, Inc. and the
Defense Logistics Agency executed on October 24, 1994
10.25* -- Promissory Note payable by Barbe's Dairy, Inc. to Walker
Resources, Inc. in the original principal amount of
$1,250,000 assumed by SFG
10.26* -- $600,000 Real Estate Note dated July 25, 1994, payable by
Southern Foods Group, Inc. to Lloyd Smoot, Jr.
10.27* -- Asset Purchase Agreement between Acadia Dairy, Inc. and
Schepps-Foremost, Inc. dated January 1, 1994
10.28* -- Executive Employment Agreement, dated as of September 4,
1997, between SFG and Pete Schenkel
10.29* -- Executive Employment Agreement, dated as of September 4,
1997, between SFG and Anthony R. Ward
10.30* -- Southern Foods Group, L.P. Supplemental Executive
Retirement Plan effective October 1, 1996
10.31* -- Borden, Inc. Executives Supplemental Pension Plan,
Amended and Restated as of December 9, 1993
10.31* -- Borden, Inc. Executives Supplemental Pension Plan,
Amended and Restated as of December 9, 1993
10.32* -- Borden, Inc. Executives Excess Benefits Plan, Amended and
Restated as of January 1, 1988
10.33* -- Borden, Inc. Executive Family Survivor Protection Plan,
Amended as of January 1, 1987
10.34* -- Purchase Agreement dated August 27, 1997, among SFG, SFG
Capital and Chase Securities, Inc.
</TABLE>
II-3
<PAGE> 140
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.35** -- Milk Supply Agreement dated February 17, 1998, between
DFA and SFG***
10.36* -- Lease and Agreement between BF Properties Company and
Beatrice Foods Co. dated as of February 15, 1972
10.37* -- Lease Agreement between LPD Salt Lake Assoc. and Safeway
Stores, Inc. dated as of March 15, 1978
10.38* -- Lease Agreement between SFG and Flav-O-Rich, Inc. dated
February 28, 1995
12.1** -- Computation of Ratio of Earnings to Fixed Charges
23.1** -- Consent of Price Waterhouse LLP, independent accountants
23.2** -- Consent of Deloitte Touche LLP, independent auditors
23.3** -- Consent of Strasburger & Price, L.L.P., counsel to the
Registrants (included in its opinion filed as exhibit
5.1)
24.1* -- Powers of Attorney
25.1* -- Form T-1 of Chase Bank of Texas, National Association
27.1** -- Southern Foods Group, L.P. Financial Data Schedule
99.1** -- Form of Letter of Transmittal
99.2* -- Form of Notice of Guaranteed Delivery
</TABLE>
(ii) Financial Statement Schedules:
IX Valuation and Qualifying Accounts*
- ---------------
* Incorporated by reference to the Registrants' Registration Statement on Form
S-4 (Nos. 333-49289 and 33-49289-01) dated April 2, 1998, which this
Amendment No. 1 amends.
** Filed herewith.
*** Portions of the Milk Supply Agreement have been omitted pursuant to a
request for confidential treatment. The omitted portions have been filed
separately with the Commission.
ITEM 22. UNDERTAKINGS.
The undersigned Registrants hereby undertake:
(a) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
1) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
2) to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in this Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed
that which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in this Registration Statement when it becomes effective; and
3) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement.
(b) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered
II-4
<PAGE> 141
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the foregoing provisions, or otherwise, the Registrants
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrants of expenses
incurred or paid by a director, officer or controlling person of the Registrants
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrants will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrants hereby undertake to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Commission under Section 305(b)(2) of the Trust
Indenture Act.
The undersigned Registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
II-5
<PAGE> 142
SIGNATURES
Pursuant to the requirements of the Securities Act, the undersigned
Registrant has duly caused this Amendment No. 1 to the registration statement to
be signed on their behalf by the undersigned, thereunto duly authorized, in the
City of Dallas, State of Texas, on this 22nd day of May, 1998.
SOUTHERN FOODS GROUP, L.P.
By: SFG Management Limited Liability
Company, its General Partner
By: /s/ PETE SCHENKEL
--------------------------------
Pete Schenkel
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the registration statement has been signed by or on behalf of the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ PETE SCHENKEL President and Chief May 22, 1998
- ----------------------------------------------------- Executive Officer of the
Pete Schenkel Company, and President,
Chief Executive Officer, and
Member of the Representative
Committee of SFG Management
(Principal Executive
Officer)
/s/ PATRICK K. FORD Chief Financial Officer, May 22, 1998
- ----------------------------------------------------- Secretary and Treasurer of
Patrick K. Ford the Company, and Chief
Financial Officer,
Secretary, and Treasurer of
SFG Management (Principal
Financial Officer)
* Member of the Representative May 22, 1998
- ----------------------------------------------------- Committee of SFG Management
Gary E. Hanman
* Member of the Representative May 22, 1998
- ----------------------------------------------------- Committee of SFG Management
Gerald L. Bos
* Member of the Representative May 22, 1998
- ----------------------------------------------------- Committee of SFG Management
Jerry W. Frie
*By: Pat Ford, Attorney-in-fact
</TABLE>
II-6
<PAGE> 143
SIGNATURES
Pursuant to the requirements of the Securities Act, the undersigned
Registrant has duly caused this Amendment No. 1 to the registration statement to
be signed on their behalf by the undersigned, thereunto duly authorized, in the
City of Dallas, State of Texas, on this 22nd day of May, 1998.
SFG CAPITAL CORPORATION
By: /s/ PETE SCHENKEL
----------------------------------
Pete Schenkel
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the registration statement has been signed by or on behalf of the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ PETE SCHENKEL President, Chief Executive May 22, 1998
- ----------------------------------------------------- Officer and Sole Director of
Pete Schenkel SFG Capital (Principal
Executive Officer)
/s/ PATRICK K. FORD Vice President, Treasurer May 22, 1998
- ----------------------------------------------------- and Secretary of SFG Capital
Patrick K. Ford (Principal Financial
Officer)
</TABLE>
II-7
<PAGE> 144
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1* -- Certificate of Limited Partnership for Southern Foods
Group, L.P. ("SFG") dated December 19, 1994
3.2* -- Certificate of Incorporation of SFG Capital Corporation
("SFG Capital") dated July 23, 1997
3.3* -- Certificate of Formation of SFG Management Limited
Liability Company ("SFG Management") dated December 16,
1994
3.4* -- Second Amended and Restated Agreement of Limited
Partnership of SFG dated as of September 3, 1997
3.5* -- First Amendment to Second Amended and Restated Agreement
of Limited Partnership of SFG dated as of March 31, 1998
3.6* -- Bylaws of SFG Capital
3.7* -- Second Amended and Restated Limited Liability Company
Agreement of SFG Management dated as of September 3, 1997
3.8* -- First Amendment to Second Amended and Restated Limited
Liability Company Agreement of SFG Management dated as of
March 31, 1998
4.1* -- Indenture dated as of September 4, 1997, among SFG
Capital, SFG and Texas Commerce Bank, N.A. (now Chase
Bank of Texas, National Association) as Trustee
4.2* -- Specimen Global Note Certificate
4.3* -- Exchange and Registration Rights Agreement dated
September 4, 1997 among SFG, SFG Capital, and Chase
Securities Inc.
5.1** -- Opinion of Strasburger & Price, L.L.P. regarding legality
of securities being issued
10.1* -- Stock Purchase and Merger Agreement, dated as of May 22,
1997, among Mid-America Dairymen, Inc. (now Dairy Farmers
of America, Inc. ("DFA")), Borden/Meadow Gold Dairies
Holdings, Inc. ("Holdings"), BDH Two, Inc. and Borden,
Inc. (the "Stock Purchase and Merger Agreement")
10.2* -- Assignment and Assumption Agreement Relating to Stock
Purchase and Merger Agreement, dated September 4, 1997,
between DFA and SFG
10.3* -- Credit Agreement, dated September 4, 1997, among SFG,
DFA, the Lenders named therein and The Chase Manhattan
Bank, as Administrative Agent
10.4* -- Capital Contribution, Assignment and Assumption
Agreement, dated as of September 4, 1997, between DFA and
SFG
10.5* -- Capital Contribution Agreement, dated as of September 4,
1997, between Mid-Am Capital, L.L.C. and SFG
10.6* -- Sublease Agreement, dated as of September 4, 1997,
between DFA and SFG relating to Master Leasing Agreement
between BLC Corporation and DFA dated August 15, 1997
10.7* -- Trademark License Agreement, dated as of September 4,
1997, among Borden, Inc., BDH Two, Inc. and SFG
10.8* -- Trademark License Agreement (Meadow Gold), dated as of
September 4, 1997, between SFG and Borden Foods
Corporation
10.9* -- Trademark Sublicense Agreement (Eagle), dated as of
September 4, 1997, between SFG and Borden Foods
Corporation
10.10* -- Copyright Assignment, dated as of September 4, 1997, from
Borden, Inc. to SFG
10.11* -- Patent Assignment, dated as of September 4, 1997, from
Borden/Meadow Gold Dairies, Inc. ("BMGD") to SFG
</TABLE>
<PAGE> 145
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.12* -- Asset Purchase and Sale Agreement, dated as of September
4, 1997, between Borden/Meadow Gold Dairies Investments,
Inc. ("Investments"), DFA, and SFG
10.13* -- Trademark Assignment dated as of September 4, 1997,
between SFG and Milk Products LLC ("Milk Products")
10.14* -- Milk Products Sublicense Agreement, dated as of September
4, 1997, between SFG and Milk Products
10.15* -- Milk Products Trademark License Agreement, dated as of
September 4, 1997, between SFG and Milk Products
10.16* -- Patent License Agreement, dated as of September 4, 1997,
between SFG and Milk Products
10.17* -- Copyright License Agreement dated as of September 4,
1997, between SFG and Milk Products
10.18* -- License Assignment and Assumption Agreement dated as of
September 4, 1997, between SFG and BMGD
10.19* -- Trademark License Agreement between Flav-O-Rich, Inc. and
SFG dated as of February 28, 1995
10.20* -- Trademark License Agreement effective as of September 1,
1995, between Foremost Farms U.S.A. and SFG
10.21* -- Stipulation and Order among the United States of America,
DFA, SFG and Milk Products dated September 3, 1997 and
Final Order filed September 3, 1997
10.22* -- Agreed Consent Decree and Permanent Injunction among the
State of Texas, DFA, SFG and Milk Products dated
September 3, 1997
10.23* -- Compliance Agreement in Lieu of Debarment between SFG and
the Food and Consumer Service of the United States
Department of Agriculture (the "FCS") executed on January
13, 1995 by the FCS and on December 21, 1994 by SFG
10.24* -- Administrative Agreement between SFG, Inc. and the
Defense Logistics Agency executed on October 24, 1994
10.25* -- Promissory Note payable by Barbe's Dairy, Inc. to Walker
Resources, Inc. in the original principal amount of
$1,250,000 assumed by SFG
10.26* -- $600,000 Real Estate Note dated July 25, 1994, payable by
Southern Foods Group, Inc. to Lloyd Smoot, Jr.
10.27* -- Asset Purchase Agreement between Acadia Dairy, Inc. and
Schepps-Foremost, Inc. dated January 1, 1994
10.28* -- Executive Employment Agreement, dated as of September 4,
1997, between SFG and Pete Schenkel
10.29* -- Executive Employment Agreement, dated as of September 4,
1997, between SFG and Anthony R. Ward
10.30* -- Southern Foods Group, L.P. Supplemental Executive
Retirement Plan effective October 1, 1996
10.31* -- Borden, Inc. Executives Supplemental Pension Plan,
Amended and Restated as of December 9, 1993
10.31* -- Borden, Inc. Executives Supplemental Pension Plan,
Amended and Restated as of December 9, 1993
10.32* -- Borden, Inc. Executives Excess Benefits Plan, Amended and
Restated as of January 1, 1988
10.33* -- Borden, Inc. Executive Family Survivor Protection Plan,
Amended as of January 1, 1987
10.34* -- Purchase Agreement dated August 27, 1997, among SFG, SFG
Capital and Chase Securities, Inc.
</TABLE>
<PAGE> 146
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.35** -- Milk Supply Agreement dated February 17, 1998, between
DFA and SFG***
10.36* -- Lease and Agreement between BF Properties Company and
Beatrice Foods Co. dated as of February 15, 1972
10.37* -- Lease Agreement between LPD Salt Lake Assoc. and Safeway
Stores, Inc. dated as of March 15, 1978
10.38* -- Lease Agreement between SFG and Flav-O-Rich, Inc. dated
February 28, 1995
12.1** -- Computation of Ratio of Earnings to Fixed Charges
23.1** -- Consent of Price Waterhouse LLP, independent accountants
23.2** -- Consent of Deloitte Touche LLP, independent auditors
23.3** -- Consent of Strasburger & Price, L.L.P., counsel to the
Registrants (included in its opinion filed as exhibit
5.1)
24.1* -- Powers of Attorney
25.1* -- Form T-1 of Chase Bank of Texas, National Association
27.1** -- Southern Foods Group, L.P. Financial Data Schedule
99.1** -- Form of Letter of Transmittal
99.2* -- Form of Notice of Guaranteed Delivery
</TABLE>
(ii) Financial Statement Schedules:
IX Valuation and Qualifying Accounts*
- ---------------
* Incorporated by reference to the Registrants' Registration Statement on Form
S-4 (Nos. 333-49289 and 33-49289-01) dated April 2, 1998, which this
Amendment No. 1 amends.
** Filed herewith.
*** Portions of the Milk Supply Agreement have been omitted pursuant to a
request for confidential treatment. The omitted portions have been filed
separately with the Commission.
<PAGE> 1
EXHIBIT 5.1
May 22, 1998
Southern Foods Group, L.P.
SFG Capital Corporation
3114 South Haskell
Dallas, Texas 75223
Ladies and Gentlemen:
We have acted as counsel for Southern Foods Group, L.P., a Delaware
limited partnership, and SFG Capital Corporation, a Delaware corporation
(collectively, the "Issuers"), in connection with the registration of $150
million aggregate principal amount 9 7/8% Senior Subordinated Series A Notes
due 2007 (the "Exchange Notes") under the Securities Act of 1933, as amended
(the "Securities Act"), on a Registration Statement on Form S-4 (the
"Registration Statement").
In reaching the opinion set forth in this letter, we have reviewed
originals or copies of the Registration Statement, an executed counterpart of
the Indenture dated as of September 4, 1997, between the Issuers and Chase Bank
of Texas, National Association, as trustee (the "Indenture"), and such other
agreements, certificates of public officials, certificates of officers of the
Issuers, certificates of other persons, records, documents and matters of law
as we deemed relevant.
Based on and subject to the foregoing and subject further to the
assumptions, exceptions and qualifications hereinafter stated, we express the
opinion that, subject to compliance with applicable federal and state
securities laws (as to which we express no opinion), the Exchange Notes, when
executed, authenticated, issued and delivered in accordance with the terms of
the Indenture and when delivered in exchange for the Outstanding Notes (as
defined in the Registration Statement), will constitute legally binding
obligations of the Issuers, subject to bankruptcy, insolvency, fraudulent
conveyance or transfer, reorganization, moratorium and other laws of general
applicability relating to or affecting creditors' rights and to general
equitable principles.
The opinion expressed above is subject to the following assumptions,
exceptions and qualifications:
(a) We have assumed that (i) all information contained in all
documents reviewed by us is true and correct, (ii) all signatures on all
documents reviewed by us are genuine, (iii) all documents submitted to us as
originals are true and complete, (iv) all documents submitted to us as copies
are true and complete copies of the originals thereof, (v) each natural person
signing any document reviewed by us had the legal capacity to do so, (vi) each
natural person signing in a representative capacity any document reviewed by us
had authority to sign in such capacity, and (vii) the laws of any jurisdiction
other than Texas that govern any of the documents reviewed by us (other than
the
<PAGE> 2
Southern Foods Group, L.P.
SFG Capital Corporation
May 22, 1998
Page 2
- ------------------------------------
Issuers' certificate of limited partnership and certificate of incorporation
and bylaws) do not modify the terms that appear in any such document.
(b) The opinion expressed in this letter is limited to the laws of
the State of Texas, the General Corporation Law of the State of Delaware, and
the federal laws of the United States of America. You should be aware that we
are not admitted to the practice of law in the State of Delaware.
(c) We note that the Indenture provides that it is governed by the
laws of the State of New York. While we express no opinion with respect to the
laws of the State of New York, we have assumed that the internal laws of the
State of New York are the same as the internal laws of the State of Texas. We
have made no investigation to confirm whether such assumption is correct.
This opinion may be filed as an exhibit to the Registration Statement.
Consent is also given to the reference to this firm under the caption "Legal
Matters" in the Prospectus included in the Registration Statement as having
passed on certain legal matters in connection with the Exchange Notes. In
giving this consent, we do not admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act or the
rules and regulations of the Securities and Exchange Commission promulgated
thereunder.
This opinion speaks as of the date hereof, and we disclaim any duty to
advise you regarding any changes subsequent to the date hereof in, or to
otherwise communicate with you with respect to, the matters addressed herein.
Very truly yours,
/s/
---------------------------
Strasburger & Price, L.L.P.
<PAGE> 1
EXHIBIT 10.35
MILK SUPPLY AGREEMENT*
This Agreement is entered into as of the 17th day of February, 1998,
by and between Dairy Farmers of America, Inc. ("Seller") and Southern Foods
Group, L.P. ("Buyer"). Seller is in the business of marketing unprocessed Grade
A milk ("Milk"). Buyer desires Seller to supply all of its requirements for Milk
at each of Buyer's plant(s), provided that the Plants do not include any
facilities as to which Buyer is contractually obligated on the date hereof to
purchase Milk from another supplier, for the term of such contractual
obligation. Seller and Buyer agree as follows:
1. Requirements.
On the terms and subject to the conditions stated in this Agreement,
Seller has assumed the responsibility for supplying all of Buyer's
requirements for Milk at Buyer's milk processing plant(s) as listed on
Schedule A hereto. Effective on or before sixty (60) days from the
date hereof, Seller will assume the responsibility for supplying all
of Buyer's requirements for Milk at Buyer's milk processing plant(s)
as listed on Schedule B hereto. Effective on or before one hundred
eighty (180) days from the date hereof, Seller will assume the
responsibility for supplying all of Buyer's requirements for Milk at
Buyer's milk processing plant(s) as listed on Schedule C hereto. Each
milk processing plant listed or to be listed on Schedule A, B, or C is
hereinafter referred to as "Plant" and collectively the "Plants". In
accordance with the terms and provisions hereof, Buyer agrees to order
from Seller all of the Plants' weekly Milk requirements, and Seller
agrees to sell to Buyer such requirements for the Plants as Buyer
orders.
2. Sources of Supply.
Seller may, at its discretion, supply Milk to the Plant from third
party sources.
3. Prices.
[omitted pursuant to a request for confidential treatment]
* Portions of the Milk Supply Agreement have been omitted pursuant to a request
for confidential treatment. The omitted portions will be filed separately with
the Commission.
<PAGE> 2
4. Term.
(a) The initial term of this Agreement shall commence on
January 1, 1998, and shall, unless earlier terminated as provided herein,
continue through December 31, 1998. This Agreement shall continue on a yearly
basis thereafter, unless either party elects to terminate this Agreement by
giving twelve (12) months prior written notice to the other party specifying a
termination date.
5. Manner of Payment.
Buyer shall pay Seller for all Milk received during any calendar month
at Seller's address set forth in Section 26 below, or at such other location
designated by Seller from time to time. The payment dates and the other terms
of payment shall be governed by the applicable Federal Milk Marketing Order. If
such Federal Milk Marketing Order is terminated, payment due dates in this
Agreement will be the same as specified in the terminated Federal Milk
Marketing Order.
6. Transportation of Milk.
Seller shall be responsible for the transportation and delivery of
Milk purchased and sold hereunder to Buyer. Transportation and delivery of
Milk shall be at Seller's sole risk and expense, and Seller shall have full
control over the method of transportation.
7. Schedule of Deliveries.
(a) Buyer will order its weekly Milk requirements for the
Plant from Seller on Thursday for delivery the following Sunday through
Saturday. Buyer shall specify the schedule and times of delivery.
(b) The parties hereto recognize that due to normal but
unanticipated business occurrences, it may be necessary from time to time for
Buyer to increase or decrease the amount of Milk ordered during the week it is
to be delivered. Buyer agrees to minimize these occurrences as much as possible
under the circumstances, and Seller agrees on such occasions to accommodate
Buyer's needs as rapidly as possible under the circumstances.
(c) Seller will make all reasonable efforts to supply
Buyer's Milk every day with loads from the same producers.
8. Insufficient Milk Supply.
In the event that Seller does not, at any time during the term of this
Agreement or any extension hereof, have on hand sufficient supplies of milk to
meet all of its outstanding obligations, including Buyer's requirements of Milk
hereunder, Seller shall be obligated to
2
<PAGE> 3
acquire from other sources sufficient supplies of milk of the same quality as
contracted for hereunder to satisfy Buyer's requirements of Milk, and Seller's
failure to do so hereunder shall entitle Buyer, in its sole discretion, to (a)
terminate this Agreement in accordance with the provisions of Section 16
hereunder, or (b) purchase Milk from other suppliers, in which event (i)
Buyer's obligation to purchase its requirements of Milk from Seller as provided
in Section 1 hereof shall be reduced to the extent of any such purchases from
other suppliers, and (ii) Seller shall pay Buyer for the difference in price
(including, without limitation, the cost for hauling the Milk to the Plant from
up to 2,000 miles away) between what Buyer would have paid hereunder and what
Buyer has to pay such other suppliers.
9. Quality of Milk.
Seller represents, warrants and agrees that:
(a) Seller shall comply with all laws and governmental
rules and regulations applicable to the production, storage and delivery of
Milk to be delivered to Buyer hereunder, and shall use reasonable commercial
efforts to assure that the dairy farmers producing Seller's milk do likewise;
(b) all Milk purchased and sold hereunder shall, when
delivered, meet all standards for Grade A fluid milk as prescribed under the
applicable laws, as amended from time to time, of the United States and the
respective states in which the Plant to which such Milk is delivered hereunder
is located, and the laws or ordinances of any municipalities or other political
subdivisions in which the Milk is produced or sold;
(c) all Milk purchased and sold hereunder shall, when
delivered, be reasonably acceptable as to flavor, odor and appearance;
(d) Seller will make all reasonable efforts to insure
that all Milk purchased and sold hereunder shall be shipped directly by Seller
from dairy farmers; and
(e) all Milk, when delivered, shall meet the following
standards of Buyer in addition to those set forth in subparagraphs 9(a) - 9(c)
above;
(i) the temperature shall be no greater than 40
degrees F., but Buyer may allow exceptions to this requirement on a
reasonable number of loads when circumstances make it impossible to
meet this requirement;
(ii) The titratable acidity ("T.A.") shall not
exceed .16% (unless a T.A. variance has been granted by Buyer for a
particular area);
(iii) the sediment test shall be less than #3 pad;
(iv) the freezing point shall be lower than or
equal to -.530 degrees C.; and
3
<PAGE> 4
(v) the standard plate count ("SPC") shall be
less than 100,000 bacteria per milliliter;
(vi) the somatic cell count shall be less than
750,000 per milliliter.
10. Indemnification.
(a) Seller agrees to defend, indemnify and hold harmless
Buyer, its subsidiaries and affiliates and its and their agents, officers,
directors, employees, representatives, successors and permitted assigns from
and against all obligations, liabilities, damages, penalties, fines,
violations, claims, causes of action, suits, judgments, costs and expenses
(including, without limitation, reasonable attorneys' fees) (together,
"Losses") that Buyer may suffer, arising out of, resulting from or connected
with (i) the negligent acts or omissions of Seller in the performance of this
Agreement, and/or (ii) Seller's breach of the representations, warranties and
agreements set forth in Section 9 hereof.
(b) Buyer agrees to defend, indemnify and hold harmless
Seller, its subsidiaries and its affiliates and its and their agents, officers,
directors, employees, representatives, successors and permitted assigns from
and against all Losses that Seller may suffer arising out of, resulting from or
connected with the negligent acts or omissions of Buyer in the production and
sale of products containing Milk to third parties.
(c) The obligations of Seller and Buyer in this Section
10 shall survive the termination or cancellation of this Agreement for any
reason whatsoever.
11. Testing and Rejection of Milk.
Before pumping Milk into Buyer's first receiving tank, Buyer shall (a)
test Milk for antibiotics using the Charm or Snap tests, and (b) sample Milk
for flavor, odor, appearance, aridity, temperature, freezing point and
sediment. Prior to title to the Milk passing to Buyer as provided in Section
12, Buyer shall have the right to reject any and all Milk which does not meet
the requirements of Section 9. Repeated tests of Milk from a dairy farmer route
(such as, but not limited to, 3 out of 5 consecutive loads of Milk) exceeding
the specifications of Section 9(d)(v) for SPC shall constitute grounds for
Buyer's rejection of any future loads of Milk from such route until Buyer is
satisfied that such route's SPC has been improved to meet the standards set
forth in Section 9(d)(v). Buyer shall promptly give notice to Seller of any
rejection of Milk and the reasons for such rejection. Provided that (i) Seller
has supplied all of Buyer's requirements for Milk at a particular Plant for a
particular period and (ii) Buyer has not commingled such Milk with Milk
purchased from another supplier as permitted under the terms of this Agreement,
Buyer may, within a reasonable time after delivery, reject Milk which does not
comply with the requirements set forth in Section 9 ("Returned Milk") for which
title has passed to Buyer as provided in Section 12, and such Returned Milk
shall be disposed of by Buyer in accordance with timely instructions, if any,
from Seller. Seller agrees to pay Buyer for all reasonable costs actually
incurred by Buyer in storing, handling and disposing of Returned Milk. The
disposition of Returned Milk shall be under the control of Seller unless, within
12 hours after notice of
4
<PAGE> 5
rejection is given to Seller by Buyer, Seller fails to furnish Buyer with
instructions regarding the disposal of Returned Milk, in which event Buyer
shall dispose of the Returned Milk at Seller's expense without liability
therefor. The foregoing obligation of Buyer to dispose of Milk, however, shall
be subject to Buyer's right to reject immediately any tanker which contains
Milk that fails to meet the requirements of Section 9.
12. Title.
Title and risk of loss to all Milk delivered to Buyer hereunder shall
remain with Seller until such Milk is delivered to Buyer's Plant, Buyer's hose
is connected to the tanker, and the tanker valve has been opened, at which time
title shall pass to Buyer.
13. Excuse for Nonperformance.
In the event that either Buyer or Seller is unable to perform
hereunder due to a strike, lockout, other labor trouble, riot, war, enemy act,
blackout, rebellion, quarantine of plant, fire, earthquake, or other Act of God
(a "Force Majeure Event"), such party shall not be liable hereunder for
nonperformance of this Agreement during the time or continuance of such Force
Majeure Event. The party who is unable to perform due to a Force Majeure Event
agrees to use reasonable efforts to mitigate any hardship suffered by the other
party during any period when performance is excused under the provisions of
this Section. Failure on the part of Seller to deliver or on the part of Buyer
to receive Milk for any of the reasons set forth in this Section 13 shall not
be deemed a ground for the termination or cancellation of this Agreement;
provided, however, if Seller is unable to deliver Milk due to a Force Majeure
Event, Buyer may purchase the same from other suppliers, in which event Buyer's
obligation to purchase its requirements of Milk from Seller as provided in
Section 1 above shall be temporarily reduced to the extent of any such
purchases from such other suppliers. Buyer's obligation to purchase its
requirement of Milk from Seller as provided in Section 1 above shall resume
upon Seller providing Buyer with written notice that the Force Majeure Event
which prevented Seller from delivering Milk to Buyer no longer exists.
14. Weights and Butterfat Tests.
Seller's invoices to Buyer shall, in support of payment by Buyer for
the prices charged therein, set forth for each delivery all weights and
butterfat tests of all Milk delivered. Seller's weights and butterfat tests
shall be used as the purchase weight and butterfat tests, subject to adjustment
by the Federal Milk Market Administrator.
15. Compliance With All Laws, Rules and Regulations.
Buyer and Seller each warrants that it will in every manner of its
business comply with and conform to all federal, state and local laws, rules
and regulations governing the subject matter of this Agreement. Any breach of
said warranty or claim of breach shall be the sole responsibility of the party
in breach, or claimed to be in breach, and said party shall, for said breach,
indemnify, defend and hold the other party free and harmless from and against
any loss
5
<PAGE> 6
or expense arising therefrom. The foregoing indemnity shall be in addition to
and not in limitation of the indemnities provided in Section 10 hereof and
shall survive the termination or cancellation of this Agreement for any reason
whatsoever.
16. Default or Breach.
Excepting out Section 3 and subject to Section 13 hereof, if either of
the parties hereto shall breach any of the provisions hereof or default in the
performance of any of the terms, conditions, covenants, obligations or
agreements herein made or agreed to be kept or performed under the terms of
this Agreement by said party, and such default or breach shall continue for a
period of thirty (30) consecutive days after written notice to said party
specifying the default or breach, then the party not in default may declare
this Agreement terminated and shall be under no further obligation hereunder,
and/or the party not in default may take such other action as may be available.
Notwithstanding the foregoing and subject to Section 13 hereof, in the event
that Seller does not deliver sufficient supplies of Milk to meet Buyer's
requirements hereunder, whether from Seller's own sources or from third parties
as required by Section 8 hereof, Buyer, in its sole discretion, may declare
Seller in default under this Agreement and may terminate this Agreement within
24 hours if such default is not remedied within such 24 hour period and/or
Buyer may take such other action as may be available to Buyer.
17. Sale of Plant.
Notwithstanding anything contained in this Agreement to the contrary,
upon the sale, exchange or closing of any Plant by Buyer during the term of
this Agreement or any extension hereof, Buyer and Seller shall have the option,
following thirty (30) days' notice to Seller, to either (a) terminate this
Agreement with respect to such Plant, or (b) subject to the prior written
approval of Seller, which approval will not be reasonably withheld, assign this
Agreement (as it relates to such Plant) to the purchaser of such Plant. In the
event that Buyer acquires a Plant or sells, replaces or exchanges a Plant for
another milk plant (individually "New Milk Plant", collectively "New Milk
Plants") in the same geographic area, Buyer shall substitute such New Milk
Plant for such Plant under the terms hereunder, and in such event this
Agreement shall continue in full force and effect and shall thereafter include
the New Milk Plant.
18. Arbitration.
Excepting out Section 3 and unless otherwise provided herein, should
any controversy arise between the parties relating to this Agreement, it shall
be settled by arbitration as provided herein. Each party will select and
appoint one arbitrator who is a person familiar with the subject of this
Agreement. The two arbitrators so appointed will select and appoint a third
arbitrator who possesses like qualifications within ten (10 days after the date
on which the last of these first two such arbitrators was appointed. If the
arbitrators fail to appoint a third, then such arbitrator shall be appointed in
accordance with Section 15 of the Commercial Arbitration Rules of the American
Arbitration Association ("AAA"). A decision in writing of any two of the
arbitrators will be binding and conclusive on both parties to this Agreement.
If either party fails to appoint an arbitrator as required by this Section
within ten (10) days after receiving written notice from
6
<PAGE> 7
the other party to do so, then the arbitrator for such party shall be selected
by the AAA in the method designated for selecting a neutral arbitrator. Such
neutral arbitrator shall thereafter be considered the appointed arbitrator for
such party. The costs, expenses and fees of the arbitrators will be borne
equally by the parties. The arbitration proceedings shall be held in Dallas
County, Texas. This Section 18 shall constitute a written agreement to submit
to arbitration. Except as modified herein, arbitration shall be governed by
the provisions of the Commercial Arbitration Rules of the AAA.
19. Confidentiality.
Buyer and Seller agree to keep the terms and conditions of this
Agreement confidential. Nothing in this Agreement shall prevent either party
from disclosing the existence or terms and conditions of this Agreement to its
Board of Directors, officers and employees or to proper governmental regulatory
authorities, if requested to do so; however, such disclosure shall be made only
after notification to the other party and after notifying the Board of
Directors, officers and employees or to the governmental regulatory authority
that the document is to be treated as a confidential business record not to be
disclosed to competitors of Buyer or Seller.
20. Assignment.
Subject to Buyer's right to assign this Agreement as provided in
Section 17 hereof, neither party to this Agreement may transfer, assign or
otherwise convey any rights or delegate any duties or obligations hereunder
without the prior written consent of the other party.
21. No Waiver, Amendment.
The failure of any party hereto at any time or times to require
performance of any provision hereof will in no manner affect its right at any
later time to enforce such provision. No waiver by either party of any
condition or of any breach of any term, covenant or representation or warranty
contained in this Agreement will be effective unless given in writing, and no
waiver in any one or more instances will be deemed to be a further or
continuing waiver of any such condition or breach in other instances or waiver
of any other condition or breach of any other term, covenant, representation or
warranty. The remedies available hereunder are cumulative, and the exercise of
any one or more of the remedies provided herein or otherwise available in law
or in equity shall not be construed as a waiver of any of the other remedies
available. Except as otherwise specified in Section 3 hereof or elsewhere
herein, this Agreement can be amended only by a writing signed by both parties
hereto. If Buyer acquires or otherwise begins to operate one or more New Milk
Plant(s) after the date hereof, Buyer shall promptly give Seller notice of such
fact and the addresses of such New Milk Plant(s), and such New Milk Plant(s)
shall automatically be added to Schedule A hereto as plants to be covered by
this Agreement.
22. Governing Law.
This Agreement and its application shall be governed by the laws of
the State of Texas.
7
<PAGE> 8
23. Captions.
Any captions to or headings of the Sections of this Agreement are
solely for the convenience of the parties, are not a part of this Agreement,
and shall not be used for interpretation or determination of the validity of
this Agreement or any part thereof.
24. Severability.
All provisions of this Agreement, and all portions of such provisions,
are intended to be, and shall be, independent and severable, and in the event
that any provision or portion thereof is determined to be unlawful, invalid or
unenforceable, such determination shall not affect the validity or
enforceability of any other provision, or portion thereof, of this Agreement,
and all other provisions and portions thereof shall continue to be valid and
enforceable.
25. Counterparts.
This Agreement may be executed in one or more counterparts, each of
which when so executed shall be deemed an original, but all of which taken
together shall constitute but one and the same instrument.
26. Notice.
All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given if delivered by
hand, sent by telecopy, or sent by United States mail, first class, registered
or certified, return receipt requested, with proper postage prepaid, in each
case to the following addresses of the respective parties.
If to Buyer:
Southern Foods Group, L.P.
3114 South Haskell
Dallas, TX 75223
Attention: Pete Schenkel
Fax: (214) 824-1526
If to Seller:
Dairy Farmers of America, Inc.
3253 East Chestnut Expressway
Springfield, Missouri 65802
Attention: David A. Geisler
Fax: (417) 865-1093
The parties agree that any notice required or permitted by this
Agreement may be made by a facsimile to be confirmed in writing within ten (10)
days to the fax numbers set forth above.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.
DAIRY FARMERS OF AMERICA, INC. SOUTHERN FOODS GROUP, L.P.
By: /s/ By: /s/ PETE SCHENKEL
------------------------ ------------------------
Its: President & CEO Its: President & CEO
------------------------ ------------------------
Date: February 11, 1998 Date: February 17, 1998
------------------------ ------------------------
9
<PAGE> 10
SCHEDULE A
PLANTS
1. Schepps Dairy
3114 South Haskell
Dallas, TX 75223
2. Oak Farms Dairy
1114 North Lancaster
Dallas, TX 75203
3. Oak Farms Dairy
3417 Leeland
Houston, TX 77003
4. Oak Farms Dairy
1314 Fredericksburg
San Antonio, TX 78201
5. Oak Farms Dairy
1148 Faulkner Lane
Waco, TX 75704
6. Foremost Dairy
5301 Interstate
Shreveport, LA 71164
7. Brown's Velvet Dairy
1300 Baronne Street
New Orleans, LA 70113
8. Flav-O-Rich
3091 South Liberty Street
Canton, MS 39046
9. Barbe's Dairy
1420 Fourth Street
Westwego, LA 70094
10. Meadow Gold Dairies, Inc.
1325 West Oxford Avenue
Englewood, CO 80110
11. Meadow Gold Dairies, Inc.
450 25th Street
Greeley, CO 80631
12. Meadow Gold Dairies, Inc.
124 West Fourth Street
Delta, CO 81416
13. Meadow Gold Dairies, Inc.
215 North Denver
Tulsa, OK 74103
14. Meadow Gold Dairies, Inc.
1418 Young Street
Island of Oahu
Honolulu, HI 96814
15. Meadow Gold Dairies, Inc.
925 Cedar Street
Honolulu, HI 96814
16. Meadow Gold Dairies, Inc.
1841 Leleiona Street
Puhi, HI 96766
17. Meadow Gold Dairies, Inc.
11 Railroad Avenue
Hilo, HI 96720
18. Meadow Gold Dairies, Inc.
715 1st Avenue
Perry, IA 50220
19. Meadow Gold Dairies, Inc.
1719 Grand Avenue
Des Moines, IA 50309
10
<PAGE> 11
SCHEDULE B
PLANTS
1. Meadow Gold Dairies, Inc.
1301 W. Bannock Street
Boise, ID 83702
2. Meadow Gold Dairies, Inc.
1131 Rowland
Pocatello, ID 83204
3. Meadow Gold Dairies, Inc.
3730 West 1820 South
Salt Lake City, UT 84104
4. Meadow Gold Dairies, Inc.
845 South State Street
Orem, UT 84058
5. Meadow Gold Dairies, Inc.
109 South Broadway
Billings, MT 59101
6. Meadow Gold Dairies, Inc.
312 Third Avenue South
Great Falls, MT 59403
7. Meadow Gold Dairies, Inc.
1300 Two Mile Drive
Kalispell, MT 59901
12
<PAGE> 12
SCHEDULE C
PLANTS
1. Meadow Gold Dairies, Inc.
726 "L" Street
Lincoln, NE 68508
13
<PAGE> 1
EXHIBIT 12.1
SOUTHERN FOODS GROUP, L.P.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in millions, except for ratios)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------------------------------------------
SFG
----------------------------------------------
Predecessor 1/1/94 2/17/94
1993 to 2/16/94 to 12/31/94 1995 1996 1997
----------- ---------- ----------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges
Interest expense (includes amortization
of debt issuance costs) $ 4.1 $ 0.6 $ 8.3 $ 9.1 $ 7.6 $ 16.5
One third of rent expense 1.6 0.2 1.4 1.7 1.8 3.1
----- ------- ----- ----- ----- ------
Total fixed charges 5.7 0.8 9.7 10.8 9.4 19.6
Pre tax income (loss) 10.0 (3.9) 4.3 10.1 11.5 26.1
----- ------- ----- ----- ----- ------
Earnings (loss) before tax and fixed
charges 15.7 (3.1) 14.0 20.9 21.0 45.7
Divided by fixed charges 5.7 0.8 9.7 10.8 9.4 19.6
----- ------- ----- ----- ----- ------
2.8 x (a) 1.4 x 1.9 x 2.2 x 2.3 x
===== ======= ===== ===== ===== ======
<CAPTION>
HISTORICAL
----------------------
SFG PRO FORMA
---------------------- ------------------
THREE MONTHS ENDED
MARCH 31,
1997 1998 1997
----- ------- ------------------
(unaudited)
<S> <C> <C> <C>
Ratio of earnings to fixed charges
Interest expense (includes amortization
of debt issuance costs) $ 2.1 $ 8.1 $ 32.9
One third of rent expense 0.6 1.2 3.1
----- ----- -------
Total fixed charges 2.7 9.3 36.0
Pre tax income (loss) 7.8 4.9 26.1
----- ----- -------
Earnings (loss) before tax and fixed
charges 10.5 14.2 62.1
Divided by fixed charges 2.7 9.3 36.0
----- ----- -------
3.9x 1.5x 1.7x
===== ===== =======
</TABLE>
(a) Earnings were inadequate to cover fixed charges during the period from
January 1, 1994 to February 16, 1994. The deficiency was $3.9 million.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 1 to the Registration Statement on Form S-4 of Southern Foods
Group, L.P. and SFG Capital Corporation of our report dated March 31, 1998
relating to the consolidated financial statements of Southern Foods Group, L.P.,
and of our report dated December 17, 1997 relating to the statements of revenues
and expenses and of cash flows of Meadow Gold Dairy Operations, which appear in
such Prospectus. We also consent to the application of our report dated March
31, 1998 to the Financial Statement Schedule for the three years ended December
31, 1997 listed under Item 21(ii) of this Registration Statement when such
schedule is read in conjunction with the financial statements of Southern Foods
Group L.P. referred to in our report. The audits referred to in such report also
included this schedule. We also consent to the reference to us under "Experts"
in such Prospectus.
PRICE WATERHOUSE LLP
Dallas, Texas
May 22, 1998
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement
Nos. 333-49289 and 333-49289-01 of Southern Foods Group, L.P. and SFG Capital
Corporation to the Form S-4 of our report on Meadow Gold Dairy Operations dated
June 27, 1997, appearing in the Prospectus, which is part of such Registration
Statement, and to the reference to us under the heading "Experts" in such
Prospectus.
Deloitte & Touche LLP
Kansas City, Missouri
May 22, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998 AND IS
QUALIFIED IN IT ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS FOR THE THREE
MONTH PERIOD ENDED MARCH 31, 1998.
</LEGEND>
<CIK> 0001057231
<NAME> SFG CAPITAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,002
<SECURITIES> 0
<RECEIVABLES> 79,486
<ALLOWANCES> 0
<INVENTORY> 32,851
<CURRENT-ASSETS> 117,966
<PP&E> 196,623
<DEPRECIATION> 24,582
<TOTAL-ASSETS> 641,440
<CURRENT-LIABILITIES> 103,926
<BONDS> 332,594
0
181,464
<COMMON> 13,575
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 641,440
<SALES> 272,025
<TOTAL-REVENUES> 272,025
<CGS> 205,751
<TOTAL-COSTS> 205,751
<OTHER-EXPENSES> 49,532
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,124
<INCOME-PRETAX> 4,903
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,903
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,903
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
TO TENDER
OUTSTANDING 9 7/8% SENIOR SUBORDINATED NOTES DUE 2007
OF
SOUTHERN FOODS GROUP, L.P.
SFG CAPITAL CORPORATION
PURSUANT TO THE EXCHANGE OFFER AND PROSPECTUS DATED __________, 1998
================================================================================
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON ____________, 1998 (THE "EXPIRATION DATE"), UNLESS THE EXCHANGE
OFFER IS EXTENDED BY THE ISSUERS.
================================================================================
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION
By Registered or Certified Mail,
Overnight Courier or by Hand:
Chase Bank of Texas, National Association
c/o Texas Commerce Trust Company of New York
Attn: Steve Horowitz, Corporate Trust Securities Window
North Building, Room 234, Window 20
55 Water Street
New York, New York 10041
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
IF YOU WISH TO EXCHANGE OUTSTANDING 9 7/8% SENIOR SUBORDINATED NOTES
DUE 2007 FOR AN EQUAL AGGREGATE PRINCIPAL AMOUNT OF 9 7/8% SENIOR SUBORDINATED
SERIES A NOTES DUE 2007 PURSUANT TO THE EXCHANGE OFFER, YOU MUST VALIDLY TENDER
(AND NOT WITHDRAW) OUTSTANDING NOTES TO THE EXCHANGE AGENT PRIOR TO THE
EXPIRATION DATE.
DESCRIPTION OF TENDERED OUTSTANDING NOTES
<TABLE>
<CAPTION>
==============================================================================================
Aggregate
Name(s) and Address(es) of Registered Owner(s) Certificate Principal Amount
(Please fill in, if blank) Number(s) Tendered
<S> <C> <C>
--------------------------------------
--------------------------------------
--------------------------------------
Total Principal
Amount of Notes
Tendered
==============================================================================================
</TABLE>
SIGNATURES MUST BE PROVIDED.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
1
<PAGE> 2
LADIES AND GENTLEMEN:
1. The undersigned hereby tenders to Southern Foods Group, L.P.
and SFG Capital Corporation (collectively, the "Issuers"), the 9 7/8% Senior
Subordinated Notes due 2007 (the "Outstanding Notes") described above pursuant
to the Issuers' offer of $1,000 principal amount of 9 7/8% Senior Subordinated
Series A Notes due 2007 (the "Exchange Notes") in exchange for each $1,000
principal amount of the Outstanding Notes, upon the terms and conditions
contained in the Prospectus dated ____________, 1998 (the "Prospectus"),
receipt of which is hereby acknowledged, and in this Letter of Transmittal
(which together constitute the "Exchange Offer").
2. The undersigned hereby represents and warrants that it has
full authority to tender the Outstanding Notes described above. The
undersigned will, upon request, execute and deliver any additional documents
deemed by the Issuers to be necessary or desirable to complete the tender of
Outstanding Notes.
3. The undersigned understands that the tender of the Outstanding
Notes pursuant to all of the procedures set forth in the Prospectus will
constitute an agreement between the undersigned and the Issuers as to the terms
and conditions set forth in the Prospectus.
4. By tendering in the Exchange Offer, the undersigned hereby
represents and warrants that:
(i) the Exchange Notes acquired pursuant to the Exchange
Offer are being obtained in the ordinary course of
business of the undersigned, whether or not the
undersigned is the holder;
(ii) neither the undersigned nor any such other person is
engaging in or intends to engage in a distribution of
such Exchange Notes;
(iii) neither the undersigned nor any such other person has
an arrangement or understanding with any person to
participate in the distribution of such Exchange
Notes; and
(iv) neither the holder nor any such other person is an
"affiliate," as such term is defined under Rule 405
promulgated under the Securities Act of 1933, as
amended (the "Securities Act"), of the Issuers.
5. If the undersigned is not a broker-dealer, the undersigned
represents that it is not engaged in, and does not intend to engage in, a
distribution of Exchange Notes. If the undersigned is a broker-dealer that will
receive Exchange Notes for its own account in exchange for Outstanding Notes,
it acknowledges that it (i) acquired the Outstanding Notes for its own account
as a result of market-making activities or other trading activities, (ii) has
not entered into any arrangement or understanding with the Issuers or any
"affiliate" of the Issuers (within the meaning of Rule 405 of the Securities
Act) to distribute the Exchange Notes to be received in the Exchange Offer and
(iii) will deliver a prospectus in connection with any resale of such Exchange
Notes; however, by so acknowledging and delivering a prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. If the undersigned may be deemed to be an "affiliate," as
such term is defined under Rule 405 of the Securities Act, of the Issuers, the
undersigned understands and acknowledges that the Exchange Notes may not be
offered
2
<PAGE> 3
for resale, resold or otherwise transferred by the undersigned without
registration under the Securities Act or an exemption therefrom.
6. Any obligation of the undersigned hereunder shall be binding
upon the successors, assigns, executors, administrators, trustees in bankruptcy
and legal and personal representatives of the undersigned.
7. Unless otherwise indicated herein under "Special Delivery
Instructions," please issue the certificates for the Exchange Notes in the name
of the undersigned.
================================================================================
SPECIAL DELIVERY INSTRUCTIONS
(See Instruction 3 below)
To be completed ONLY IF the Exchange Notes are to be issued or sent to
someone other than the undersigned or to the undersigned at an address other
than that provided above.
Mail [ ] Issue [ ] (check appropriate boxes) certificates to:
Name:
---------------------------------------------------------------------------
(PLEASE PRINT)
Address:
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
(INCLUDING ZIP CODE)
================================================================================
================================================================================
SPECIAL BROKER-DEALER INSTRUCTIONS
(See Item 5 above)
[ ] Check here if you are a broker-dealer and wish to receive 10
additional copies of the Prospectus and 10 copies of any amendments or
supplements thereto.
Name:
---------------------------------------------------------------------------
(PLEASE PRINT)
Address:
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
(INCLUDING ZIP CODE)
================================================================================
3
<PAGE> 4
================================================================================
SIGNATURE
TO BE COMPLETED BY EXCHANGING HOLDERS. MUST BE SIGNED BY REGISTERED HOLDER
EXACTLY AS NAME APPEARS ON OUTSTANDING NOTES. IF SIGNATURE IS BY TRUSTEE,
EXECUTOR, ADMINISTRATOR, GUARDIAN, ATTORNEY-IN-FACT, OFFICER OF A CORPORATION OR
OTHER PERSON ACTING IN A FIDUCIARY OR REPRESENTATIVE CAPACITY, PLEASE SET FORTH
FULL TITLE. SEE INSTRUCTION 4 BELOW.
X
-----------------------------------------------------------------------------
X
-----------------------------------------------------------------------------
SIGNATURE(S) OF REGISTERED HOLDER(S) OR AUTHORIZED SIGNATURE
Dated:
------------------------------------------------------------------------
Name(s):
----------------------------------------------------------------------
-----------------------------------------------------------------------------
(PLEASE TYPE OR PRINT)
Capacity:
---------------------------------------------------------------------
-----------------------------------------------------------------------------
Address:
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
(INCLUDING ZIP CODE)
Area Code and Telephone No.:
--------------------------------------------------
SIGNATURE GUARANTEE (IF REQUIRED BY INSTRUCTION 3 BELOW)
Certain Signatures Must be Guaranteed by an Eligible Institution
- --------------------------------------------------------------------------------
(NAME OF ELIGIBLE INSTITUTION GUARANTEEING SIGNATURES)
- --------------------------------------------------------------------------------
(ADDRESS (INCLUDING ZIP CODE) AND TELEPHONE NUMBER
(INCLUDING AREA CODE) OF FIRM)
- --------------------------------------------------------------------------------
(AUTHORIZED SIGNATURE)
- --------------------------------------------------------------------------------
(PRINTED NAME)
- --------------------------------------------------------------------------------
(TITLE)
Dated:
--------------------------------------------------------------------------
================================================================================
PLEASE READ THE INSTRUCTIONS ON THE FOLLOWING PAGE,
WHICH FORM A PART OF THIS LETTER OF TRANSMITTAL.
4
<PAGE> 5
INSTRUCTIONS
1. BOOK-ENTRY TRANSFER. Any beneficial owner whose Outstanding
Notes are registered in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender should contact the registered
holder promptly and instruct such registered holder to tender on such
beneficial owner's behalf.
The Issuers understand that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish an account with respect
to the Outstanding Notes at The Depositary Trust Company ("DTC") for purposes
of the Exchange Offer, and any financial institution that is a participant in
DTC's system may make book-entry delivery of the Outstanding Notes by causing
DTC to transfer such Outstanding Notes into the Exchange Agent's account at DTC
in accordance with DTC's procedures for such transfer. Although delivery of
the Outstanding Notes may be effected through book-entry transfer into the
Exchange Agent's account at DTC, this Letter of Transmittal properly completed
and duly executed with any required signature guarantees and all other required
documents must in each case be transmitted to and received or confirmed by the
Exchange Agent at its address set forth above on or prior to the Expiration
Date, or, if the guaranteed delivery procedures described below are complied
with, within the time period provided under such procedures; provided, however,
that a participant in DTC's book-entry system may, in accordance with DTC's
Automated Tender Offer Program ("ATOP") procedures and in lieu of physical
delivery to the Exchange Agent of a Letter of Transmittal, electronically
acknowledge its receipt of, and agreement to be bound by, the terms of this
Letter of Transmittal. Delivery of documents to DTC does not constitute
delivery to the Exchange Agent.
2. PHYSICAL DELIVERY OF LETTER OF TRANSMITTAL AND OUTSTANDING
NOTES. The Outstanding Notes, together with a properly completed and duly
executed Letter of Transmittal (or copy thereof), should be mailed or delivered
to the Exchange Agent at the address set forth above.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND THIS LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE
ELECTION AND RISK OF THE HOLDER. IF THE HOLDER IS NOT USING DTC'S ATOP, IT IS
RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE INSTEAD OF
DELIVERY BY MAIL. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF
TRANSMITTAL OR OUTSTANDING NOTES SHOULD BE SENT TO THE ISSUERS. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES,
OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
3. GUARANTEE OF SIGNATURES. Unless the box titled "Special
Delivery Instructions" above has not been completed or the Outstanding Notes
described above are tendered for the account of an Eligible Institution,
signatures on this Letter of Transmittal must be guaranteed by an eligible
guarantor institution that is a member of or participant in the Securities
Transfer Agents Medallion Program, the New York Stock Exchange Medallion
Signature Program, the Stock Exchange Medallion Program, or by an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 promulgated under the
Securities Exchange Act of 1934, as amended (an "Eligible Institution").
5
<PAGE> 6
4. SIGNATURE ON LETTER OF TRANSMITTAL, BOND POWERS AND
ENDORSEMENTS. If this Letter of Transmittal is signed by a person other than a
registered holder of any Outstanding Notes, such Outstanding Notes must be
endorsed or accompanied by appropriate bond powers, signed by such registered
holder exactly as such registered holder's name appears on such Outstanding
Notes.
If this Letter of Transmittal or any Outstanding Notes or bond powers
are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations, or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing and,
unless waived by the Issuers, evidence satisfactory to the Issuers of their
authority to so act must be submitted with this Letter of Transmittal.
5. TRANSFER TAXES. The Issuers will pay all transfer taxes, if
any, applicable to the exchange of the Outstanding Notes pursuant to the
Exchange Offer. If, however, certificates representing the Exchange Notes or
the Outstanding Notes for the principal amounts not tendered or accepted for
exchange are to be delivered to, or are to be issued in the name of, any person
other than the person signing this Letter of Transmittal, or if a transfer tax
is imposed for any reason other than the exchange of the Outstanding Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other person) will be payable
by the tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with this Letter of Transmittal, the
amount of such transfer taxes will be billed directly to such tendering holder.
6. WITHDRAWAL. Except as otherwise provided herein, tenders of
Outstanding Notes may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the Expiration Date by following the procedures set forth in
section of the Prospectus titled "The Exchange Offer -- Withdrawal of Tenders."
Any Outstanding Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer and no Exchange Notes will be
issued with respect thereto unless the Outstanding Notes so withdrawn are
validly retendered. Properly withdrawn Outstanding Notes may be retendered by
following one of the procedures described above for tendering Outstanding Notes
under this Letter of Transmittal at any time prior to the Expiration Date.
7. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender
their Outstanding Notes and (i) whose Outstanding Notes are not immediately
available, (ii) who cannot deliver their Outstanding Notes, this Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book- entry transfer, prior to the
Expiration Date, may effect a tender if they follow the guaranteed delivery
procedures set forth in the section of the Prospectus titled "The Exchange
Offer -- Guaranteed Delivery Procedures." Upon request to the Exchange Agent,
a Notice of Guaranteed Delivery will be sent to holders who wish to tender
their Outstanding Notes according to such guaranteed delivery procedures.
8. MISCELLANEOUS. All questions as to the validity, form,
eligibility (including time of receipt), acceptance, and withdrawal of tendered
Outstanding Notes will be resolved by the Issuers in their sole discretion,
which determination will be final and binding. The Issuers reserve the
absolute right to reject any or all Outstanding Notes not properly tendered or
any Outstanding Notes the Issuers' acceptance of which would, in the opinion of
counsel for the Issuers, be unlawful. The Issuers also reserve the right to
waive any defects, irregularities, or conditions of tender as to
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particular Outstanding Notes. The Issuers' interpretation of the terms and
conditions of the Exchange Offer (including the instructions in this Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Outstanding Notes must
be cured within such time as the Issuers shall determine. Although the Issuers
intend to notify holders of defects or irregularities with respect to tenders
of Outstanding Notes, neither the Issuers, the Exchange Agent nor any other
person shall incur any liability for failure to give such notification.
Tenders of Outstanding Notes will not be deemed to have been made until such
defects or irregularities have been cured or waived. Any Outstanding Notes
received by the Exchange Agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned by
the Exchange Agent to the tendering holder thereof, unless otherwise provided
in this Letter of Transmittal, as soon as practicable following the Expiration
Date.
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