<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
Commission file number: 333-49289
SOUTHERN FOODS GROUP, L.P.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 75-2571364
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3114 SOUTH HASKELL, DALLAS, TEXAS 75223
- -----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(214) 824-8163
---------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------------------------------------------
(Former name, former address and
former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X].
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHERN FOODS GROUP, L.P.
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1998 1997
---------- ----------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................. $ 19,157 $ 4,747
Accounts receivable, net .............................. 74,035 77,987
Inventories ........................................... 31,324 30,548
Prepaid expenses and other assets ..................... 3,840 2,947
---------- ----------
Total current assets ........................ 128,356 116,229
---------- ----------
Property, plant and equipment, at cost ..................... 200,208 194,384
Less: accumulated depreciation and amortization ...... (28,618) (20,321)
---------- ----------
171,590 174,063
---------- ----------
Goodwill, net of accumulated amortization .................. 232,382 238,323
Trademarks and licenses, net ............................... 102,842 104,154
Deferred financing costs, net .............................. 11,095 11,714
Other assets ............................................... 1,858 1,830
---------- ----------
Total assets ................................ $ 648,123 $ 646,313
========== ==========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Raw milk accrual ...................................... $ 23,910 $ 25,511
Accounts payable ...................................... 28,899 27,396
Accrued expenses ...................................... 53,088 45,668
Current portion of long-term debt ..................... 744 777
---------- ----------
Total current liabilities ................... 106,641 99,352
Long-term debt ............................................. 331,002 345,914
Other long-term liabilities ................................ 11,388 10,668
Commitments and contingencies .............................. -- --
Partners' equity ........................................... 199,092 190,379
---------- ----------
Total liabilities and partners' equity ...... $ 648,123 $ 646,313
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 3
SOUTHERN FOODS GROUP, L.P.
STATEMENTS OF INCOME
(unaudited - in thousands)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
-------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales ......................... $ 277,648 $ 147,130 $ 549,673 $ 292,784
Cost of sales ..................... 207,816 108,884 413,568 215,966
---------- ---------- ---------- ----------
69,832 38,246 136,105 76,818
---------- ---------- ---------- ----------
Selling, distribution and general
and administrative expenses .. 52,672 28,679 102,604 55,347
Amortization of goodwill and other
intangible assets ............ 3,747 1,984 7,432 3,972
---------- ---------- ---------- ----------
Income from operations ............ 13,413 7,583 26,069 17,499
Interest expense .................. 7,768 2,265 15,892 4,329
Other (income) expense, net ....... (542) (74) (912) (23)
---------- ---------- ---------- ----------
Net income ........................ $ 6,187 $ 5,392 $ 11,089 $ 13,193
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
SOUTHERN FOODS GROUP, L.P.
STATEMENTS OF PARTNERS' EQUITY
(unaudited - in thousands)
<TABLE>
<CAPTION>
Preferred Common
---------- -------------------------
Limited General Limited
Partner Partner Partner Total
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Partners' equity, December 31, 1997 .... $ 176,199 $ 409 $ 13,771 $ 190,379
Conversion of common equity
to preferred .................. 2,490 -- (2,490) --
Contributions ..................... -- -- 119 119
Distributions ..................... -- -- (2,495) (2,495)
Net income ........................ 11,089 -- -- 11,089
---------- ---------- ---------- ----------
Partners' equity, June 30, 1998 ........ $ 189,778 $ 409 $ 8,905 $ 199,092
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
SOUTHERN FOODS GROUP, L.P.
STATEMENTS OF CASH FLOWS
(unaudited - in thousands)
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................................... $ 11,089 $ 13,193
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ...................................................... 9,009 3,233
Amortization ...................................................... 8,032 4,225
Interest added to long-term debt .................................. -- 700
Change in assets and liabilities, net of effects
of business acquisitions:
(Increase) decrease in accounts receivable ..................... 3,952 6,012
(Increase) decrease in inventories ............................. (775) 1,040
(Increase) decrease in prepaid expenses and
other assets ................................................. (1,510) (801)
Increase (decrease) in accounts payable and
accrued expenses ............................................. 6,739 (483)
---------- ----------
Net cash provided by operating activities ................................. 36,536 27,119
---------- ----------
Cash flows from investing activities:
Acquisitions, net of cash acquired ........................................ -- (4,923)
Additions to property, plant and equipment ................................ (5,824) (2,437)
Decrease in other assets .................................................. 1,018 808
---------- ----------
Net cash used in investing activities ..................................... (4,806) (6,552)
---------- ----------
Cash flows from financing activities:
Borrowings - long-term debt ............................................... -- 96,682
Repayments - long-term debt ............................................... (644) (72,268)
Borrowings - related party notes .......................................... -- 20,490
Repayments - related party notes .......................................... -- (34,914)
Net repayments - revolving credit facility ................................ (14,300) (10,200)
Partner contributions - common equity ..................................... 119 6,195
Partner distributions - common equity ..................................... (2,495) (24,174)
---------- ----------
Net cash used in financing activities ..................................... (17,320) (18,189)
---------- ----------
Net increase in cash ...................................................... 14,410 2,378
Cash at beginning of period ............................................... 4,747 1,995
---------- ----------
Cash at end of period ..................................................... $ 19,157 $ 4,373
========== ==========
Cash paid during the period for interest .................................. $ 15,064 $ 3,363
Noncash investing and financing activities
Barbe's Dairy contribution:
Net assets contributed ............................................... $ $ 8,000
Preferred equity interests issued .................................... (8,000)
---------- ----------
$ -- $ --
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
SOUTHERN FOODS GROUP, L.P.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements of Southern Foods Group, L.P. ("SFG"
or the "Partnership") included herein have been prepared by the Partnership,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). In the opinion of management, the information
furnished reflects all adjustments, consisting only of normal recurring
adjustments, which are necessary for a fair presentation of the results of the
interim periods. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the SEC's rules
and regulations. However, management believes that the disclosures contained
herein are adequate to make the information presented not misleading. The
results of operations for the periods presented are not necessarily indicative
of the results to be expected for the full year. These consolidated financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Partnership's Registration Statement on Form S-4,
as amended, filed with the SEC on June 15, 1998. No significant accounting
changes have occurred during the six months ended June 30, 1998.
2. ACQUISITIONS
On September 4, 1997, Dairy Farmers of America, Inc. ("DFA"), a partner in
the Partnership, acquired Borden/Meadow Gold Dairies Holdings, Inc.
("Holdings"), a subsidiary comprising the fluid milk operations of Borden, Inc.
and an affiliate ("Borden") for $380 million (the "Borden Acquisition").
Holdings owned 1) the Meadow Gold dairy operations located primarily in the
Western United States and Hawaii and 2) other dairies in Texas, Louisiana and
New Mexico. 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. The results of Meadow
Gold are included in the accompanying financial statements from September 4,
1997, the date of contribution.
The following unaudited pro forma summary results of operations assume that
the Meadow Gold contribution and the related transactions occurred on January 1,
1997 (in thousands):
<TABLE>
<CAPTION>
For the six
months ended
June 30, 1997
---------------
<S> <C>
Net sales $ 520,790
Net income $ 8,390
</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, 1997, or of future results of operations
of the combined businesses.
<PAGE> 7
SOUTHERN FOODS GROUP, L.P.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
3. INVENTORIES
A summary of inventories is as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- ----------
<S> <C> <C>
Finished goods .......... $ 14,988 $ 14,776
Packaging and supplies .. 3,418 3,389
Raw materials ........... 11,087 10,563
Truck parts ............. 1,831 1,820
---------- ----------
$ 31,324 $ 30,548
========== ==========
</TABLE>
4. EQUITY TRANSACTIONS
In accordance with SFG's partnership agreement, the Partnership made tax
payment distributions to management owners totalling $362,280 in January 1998,
$1,628,070 in April 1998, and $500,000 in June 1998. As also required by the
partnership agreement, on those dates the Partnership converted equal amounts of
DFA's limited partner common equity to Series E Preferred Interests with a
cumulative return of 10%. The total stated value of Preferred Interests
outstanding at June 30, 1998 was $253 million, including unpaid preferred
returns.
5. CONTINGENCIES
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 1997 raw milk sales. This
decision was reversed on August 13, 1998 upon USDA's appeal to the U.S. Court of
Appeals for the 8th Circuit. The USDA had obtained a stay of the November 1997
ruling pending the outcome of their appeal. 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, and Congress is
considering extending the deadline for implementation of federal order reform
from April 1999 to October 1999. 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 Partnership'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 Partnership can be predicted with any certainty.
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.
<PAGE> 8
SOUTHERN FOODS GROUP, L.P.
NOTES TO FINANCIAL STATEMENTS (CONT'D)
6. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This new standard is effective for fiscal
years beginning after June 15, 1999 (January 1, 2000 for the Partnership). SFAS
133 requires that all derivative financial instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. The Partnership has not yet
adopted this new standard or completed its evaluation of the impact of such
adoption.
7. SUBSEQUENT EVENTS
On July 24, 1998, SFG acquired the dairy and juice processing operations of
Excelsior Dairy in Hawaii from Mountain View Dairies, Inc. for approximately
$2.7 million of cash consideration. Additionally, on August 11, 1998, SFG
acquired the milk processing plant and distribution operations located in
Huntsville, Alabama formerly owned by Barber Dairies, Inc. from Dean Foods
Partnership for cash consideration of approximately $3.5 million. These
acquisitions will be accounted for using the purchase method and their results
will be included in the Partnership's financial statements from the dates of
acquisition.
<PAGE> 9
ITEM 2. 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 the Partnership. 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. 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. Barbe's Dairy
has continued as an operating dairy plant, while production and routes from
Land-of-Pines Dairy have been consolidated into other processing and
distribution facilities.
GENERAL
The Partnership owns 26 plants which process and distribute fluid milk
products, cultured products, ice cream products, fruit juices and drinks and
other dairy related products. The majority of the Partnership'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. The Partnership
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. The Partnership also distributes cultured
products, fruit juices and drinks and ice cream products and other dairy related
products such as cheese, eggs, butter and non-dairy creamers purchased from
third parties.
RESULTS OF OPERATIONS
The Meadow Gold operations contributed $242.9 million and $124.1 million to
net sales for the six months and quarter ended June 30, 1998, respectively.
Excluding the results of Meadow Gold, net sales increased 4.8% to $306.7 million
for the six months ended June 30, 1998 and 4.4% to $153.5 million for the
quarter ended June 30, 1998. The increase is due to an increase in volumes sold
of approximately 2.5% over the prior periods, combined with an increase in
prices due to an increase in raw milk costs over the prior year. The increase in
volumes is primarily attributable to growth in the Partnership's existing
customer base as large customers continue to expand operations and open new
stores, as well as the addition of new customers across many market areas.
The Meadow Gold operations contributed $54.7 million and $28.4 million to
gross profit for the six months and quarter ended June 30, 1998, respectively.
Excluding the results of Meadow Gold, gross profit increased 6.0% to $81.4
million for the six months ended June 30, 1998 and 8.3% to $41.4 million for the
quarter ended June 30, 1998. This increase is attributable to the increase in
net sales combined with a slight increase in gross margin percentage compared to
the prior periods. The gross margin percentage increase is due primarily to
improved results in two of the Partnership's smaller plants resulting from
increased volumes and capital improvements, which improved plant efficiencies.
The Meadow Gold operations contributed $44.5 million and $23.0 million to
selling, general and administrative expenses during the six months and quarter
ended June 30, 1998, respectively. Excluding the results of Meadow Gold,
selling, distribution and general and administrative expenses increased 3.6% to
$58.1 million for the six months ended June 30, 1998 and 5.0% to $29.7 million
for the quarter ended June 30, 1998. Selling, general and administrative
expenses as a percentage of revenues have remained consistent with the prior
periods.
Amortization of goodwill and other intangible assets increased
significantly to $7.4 million for the six months ended June 30, 1998 and $3.7
million for the quarter ended June 30, 1998. This increase is due to higher
amortization of goodwill, trademarks and other intangible assets resulting from
the Meadow Gold transactions.
<PAGE> 10
Interest expense increased significantly to $15.9 million and $7.8 million
for the six months and quarter ended June 30, 1998, respectively. This increase
is a result of the higher interest expense associated with the proceeds from the
Senior Bank Facilities and the Notes, which were assumed in or used to finance
the Meadow Gold transactions.
Other income increased to $0.9 million and $0.5 million for the six months
and quarter ended June 30, 1998, respectively, primarily due to royalties
received from the sublicensing of the Borden Trademarks to third parties. As the
Partnership did not own the Borden License until September 1997, there were no
such royalties for the comparable periods in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities of $36.5 million for the six months
ended June 30, 1998 was $9.4 million higher than the prior year, due primarily
to increased cash provided by working capital changes combined with higher
income from operations. The increase in cash provided by operating activities
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. Cash and cash equivalents on hand at June 30, 1998 were
$19.2 million compared to $4.7 million at December 31, 1997.
Cash used in investing activities for the six months ended June 30, 1998 of
$4.8 million was $1.7 million less than the six months ended June 30, 1997. This
decrease is a result of the cash used for acquisitions during the six months
ended June 30, 1997 for amounts paid for Land-of-Pines Dairy in March 1997,
partially offset by increased additions to property, plant and equipment in 1998
as a result of the Meadow Gold contribution.
Cash used in financing activities was $17.3 million for the six months
ended June 30, 1998, primarily as a result of the net repayment of amounts
outstanding under the Revolving Credit Facility of $14.3 million as of December
31, 1997. Additionally, $2.5 million was distributed to the management owners
during the six months ended June 30, 1998 as tax payment distributions in
accordance with the partnership agreement. Cash used in financing activities in
1997 relates to the refinancing of outstanding debt in February 1997.
Additionally, in February 1997 the Partnership issued $8 million in Preferred
Interests to an affiliate of DFA in conjunction with the affiliate's
contribution of Barbe's Dairy to the Partnership.
The Partnership's total debt at June 30, 1998 was $331.7 million. The $150
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 loan portions of
the Senior Bank Facilities consist of borrowings under two tranches, Tranche A
for $90 million and Tranche B for $100 million. Both tranches bear interest at
variable rates, which weighted average rates were 7.79% and 8.85% for Tranche A
and Tranche B, respectively, at June 30, 1998. At June 30, 1998, no revolving
loans and $1.8 million of letters of credit were outstanding under the
Partnership's $60 million revolving credit facility.
Interest payments on the Notes and on the Senior Bank Facilities represent
significant liquidity requirements for the Partnership. The Partnership
anticipates that the Notes will require annual interest payments of
approximately $14.8 million and the Senior Bank Facilities will require
substantial interest payments based on the unamortized loan balance and variable
interest rates in effect (approximately $15.1 million annually based on June 30,
1998 balances and applicable interest rates). In addition to its debt service
obligations, the Partnership 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. The
Partnership'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 the Partnership's control.
The Senior Bank Facilities and the Notes impose restrictions on the
Partnership's ability to make capital expenditures and limit the Partnership's
ability to incur additional indebtedness. Such restrictions, together with the
highly leveraged nature of the Partnership, could limit the Partnership's
ability to respond to market
<PAGE> 11
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 the Partnership 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.
In 1997 and 1998, the Partnership 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 Partnership 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 Partnership 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
Partnership's bank debt, 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
Partnership 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.
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 1997
raw milk sales. This decision was reversed on August 13, 1998 upon the USDA's
appeal to the U.S. Court of Appeals for the 8th Circuit. The USDA had obtained a
stay of the November 1997 ruling pending the outcome of their appeal.
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, and Congress is considering extending the deadline for
implementation of federal order reform from April 1999 to October 1999. 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
Partnership'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 Partnership can
be predicted with any certainty.
The Partnership is involved in certain threatened and pending legal matters
in the ordinary course of business. Although neither the outcome of these
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
the Partnership.
The Partnership is in the process of conducting 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
Partnership'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
Partnership presently believes that the Year 2000 issue will not pose
significant operational problems for the Partnership's computer systems.
However, the Partnership intends to utilize internal resources and outside
consultants to test its computer systems for Year 2000 compliance. The
Partnership also intends to use reasonable efforts to assess whether any Year
2000 noncompliance of the computer systems of entities with which the
Partnership's computer systems interact, including suppliers, customers and
financial services organizations, could have an adverse impact on the
Partnership. The Partnership expects its Year
<PAGE> 12
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
Partnership'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 Partnership.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 6, 1997, a lawsuit entitled David Curry, et al v. Borden, Inc.,
Southern Foods Group, L.P., et al was filed in the District Court of Harris
County, Texas 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 tests
allegedly performed by the USDA. The Partnership believed that it had
meritorious defenses and began to vigorously defend the lawsuit. On June 16,
1998, the lawsuit was dismissed without prejudice upon the court granting
plaintiffs' motion for nonsuit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Article 5 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHERN FOODS GROUP, L.P.
--------------------------
(Registrant)
Date: August 14, 1998 By: /s/ PATRICK K. FORD
--------------------------
Patrick K. Ford
Chief Financial Officer, Secretary
and Treasurer
<PAGE> 13
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 19,157
<SECURITIES> 0
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<PP&E> 200,208
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<TOTAL-ASSETS> 648,123
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0
189,778
<COMMON> 9,314
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<SALES> 549,673
<TOTAL-REVENUES> 549,673
<CGS> 413,568
<TOTAL-COSTS> 413,568
<OTHER-EXPENSES> (912)
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<INCOME-PRETAX> 11,089
<INCOME-TAX> 0
<INCOME-CONTINUING> 11,089
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,089
<EPS-PRIMARY> 0
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</TABLE>
