<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, 1999
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 X No .
--- ---
<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,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................. $ 7,491 $ 8,827
Accounts receivable, net .............................. 82,666 92,209
Inventories ........................................... 31,743 34,205
Prepaid expenses and other assets ..................... 3,235 4,846
------------ ------------
Total current assets ........................ 125,135 140,087
------------ ------------
Property, plant and equipment, at cost ..................... 226,284 213,597
Less: accumulated depreciation and amortization ...... (45,500) (37,312)
------------ ------------
180,784 176,285
------------ ------------
Goodwill, net of accumulated amortization .................. 227,045 229,512
Trademarks and licenses, net ............................... 100,339 101,529
Deferred financing costs, net .............................. 11,231 11,929
Other assets ............................................... 4,553 2,066
------------ ------------
Total assets ................................ $ 649,087 $ 661,408
============ ============
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Raw milk accrual ...................................... $ 26,763 $ 32,035
Accounts payable ...................................... 41,064 46,464
Accrued expenses ...................................... 58,932 47,845
Current portion of long-term debt ..................... 368 600
------------ ------------
Total current liabilities ................... 127,127 126,944
Long-term debt ............................................. 286,847 313,608
Other long-term liabilities ................................ 11,923 10,784
Commitments and contingencies .............................. -- --
Partners' equity ........................................... 223,190 210,072
------------ ------------
Total liabilities and partners' equity ...... $ 649,087 $ 661,408
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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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,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales ........................................ $ 302,413 $ 277,648 $ 633,017 $ 549,673
Cost of sales .................................... 221,109 207,816 479,183 413,568
--------- --------- --------- ---------
81,304 69,832 153,834 136,105
--------- --------- --------- ---------
Selling, distribution and general
and administrative expenses ................. 60,717 52,672 114,931 102,604
Amortization of goodwill and other
intangible assets ........................... 3,846 3,747 7,609 7,432
--------- --------- --------- ---------
Income from operations ........................... 16,741 13,413 31,294 26,069
Interest expense ............................ 6,987 7,768 14,314 15,892
Other (income) expense, net ................. (253) (542) (537) (912)
--------- --------- --------- ---------
Net income ....................................... $ 10,007 $ 6,187 $ 17,517 $ 11,089
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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SOUTHERN FOODS GROUP, L.P.
STATEMENTS OF PARTNERS' EQUITY
(unaudited - in thousands)
<TABLE>
<CAPTION>
Common
Preferred ----------------------------
Limited General Limited
Partner Partner Partner Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Partners' equity, December 31, 1998 ......... $ 201,514 $ 419 $ 8,139 $ 210,072
Conversion of common equity
to preferred ....................... 2,958 -- (2,958) --
Distributions .......................... (1,437) (6) (2,956) (4,399)
Net income ............................. 13,032 45 4,440 17,517
------------ ------------ ------------ ------------
Partners' equity, June 30, 1999 ............. $ 216,067 $ 458 $ 6,665 $ 223,190
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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SOUTHERN FOODS GROUP, L.P.
STATEMENTS OF CASH FLOWS
(unaudited - in thousands)
<TABLE>
<CAPTION>
For the six months ended
----------------------------
June 30, June 30,
1999 1998
------------ ------------
<S> <C> <C>
Net cash provided by operating activities .......... 48,307 36,536
------------ ------------
Cash flows from investing activities:
Acquisitions, net of cash acquired ................. (4,800) --
Additions to property, plant and equipment ......... (13,451) (5,824)
Decrease in other assets ........................... 1,018
------------ ------------
Net cash used in investing activities .............. (18,251) (4,806)
------------ ------------
Cash flows from financing activities:
Repayments - long-term debt ........................ (20,393) (644)
Net repayments - revolving credit facility ......... (6,600) (14,300)
Partner contributions - common equity .............. 119
Partner distributions - common equity .............. (4,399) (2,495)
------------ ------------
Net cash used in financing activities .............. (31,392) (17,320)
------------ ------------
Net increase (decrease) in cash .................... (1,336) 14,410
Cash at beginning of period ........................ 8,827 4,747
------------ ------------
Cash at end of period .............................. $ 7,491 $ 19,157
============ ============
Cash paid during the period for interest ........... $ 12,816 $ 15,064
</TABLE>
The accompanying notes are an integral part of these financial statements.
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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 1998 Annual Report on Form 10-K. No
significant accounting changes have occurred during the six months ended June
30, 1999.
2. INVENTORIES
A summary of inventories is as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- -------------
<S> <C> <C>
Finished goods................. $ 15,810 $ 16,551
Packaging and supplies......... 1,243 4,709
Raw materials.................. 13,598 11,896
Truck parts.................... 1,092 1,049
-------------- -------------
$ 31,743 $ 34,205
============== =============
</TABLE>
3. EQUITY TRANSACTIONS
In accordance with SFG's partnership agreement, the Partnership made tax
payment distributions to the management owner totalling $2.0 million for the six
months ended June 30, 1999. As also required by the partnership agreement, the
Partnership converted equal amounts of DFA's limited partner common equity to
Series E Preferred Interests with a cumulative return of 10%. In January 1999,
the Partnership distributed $1.4 million in payment of preferred return on the
Series D Preferred Interests. In June 1999, the Partnership recorded a
distribution to DFA of approximately $1.0 million for final settlement of 1994
federal income taxes for Southern Foods Group, Inc., the predecessor of the
Partnership. As required by the partnership agreement, the Partnership converted
equal amounts of the management owner'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, 1999 was approximately $279 million,
including unpaid preferred returns.
4. 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, 2000 (January 1, 2001 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Partnership owns 26 facilities 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, Mountain High, Viva, Foremost, Flav-O-Rich,
Borden, Barbe's Dairy and Brown's Velvet Dairy 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, ice
cream products and other dairy related products such as cheese, eggs, butter and
non-dairy creamers purchased from third parties.
The comparability of results between periods is significantly impacted by
the acquisitions of the dairy and juice processing operations of Excelsior Dairy
in Hawaii in July 1998, the acquisition of the dairy processing plant and
distribution operations in Huntsville, Alabama from Dean Foods Company in August
1998, and the acquisition of the dairy operations of Haleakala Dairy in Hawaii
in January 1999.
RESULTS OF OPERATIONS
Quarter and Six Months Ended June 30, 1999 Compared to the Quarter and Six
Months Ended June 30, 1998
The Partnership's net sales were $302.4 million for the quarter ended June
30, 1999, an increase of $24.8 million, or 8.9%, over the quarter ended June 30,
1998. Net sales for the six months ended June 30, 1999 were $633.0 million, an
increase of 15.2% over the prior year. This increase is due primarily to
additional sales volumes from the acquired businesses and growth in the
Partnership's existing and new customer base.
The Partnership's gross profit was $81.3 million for the quarter ended June
30, 1999, an increase of $11.5 million, or 16.4%, over the quarter ended June
30, 1998. Gross profit for the six months ended June 30, 1999 was $153.9
million, an increase of 13.0% over the prior year. The increase in gross profit
is primarily attributable to the increase in sales volume.
The Partnership's selling, general and administrative expenses were $60.7
million for the quarter ended June 30, 1999, an increase of $8.0 million, or
15.3%, over the quarter ended June 30, 1998. Selling, general and administrative
expenses for the six months ended June 30, 1999 were $114.9 million, an increase
of 12.0% over the prior year. The increase is attributable primarily to the
acquired businesses, along with the general increase in selling activity.
The Partnership's interest expense was $7.0 million for the quarter ended
June 30, 1999, an decrease of 0.8 million, or 10.1%, from the quarter ended June
30, 1998. Interest expense for the six months ended June 30, 1999 was $14.3
million, a decrease of 9.9% from the prior year. The decrease in interest
expense is due to lower average interest rates and a decline in average debt
outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities of $48.3 million for the six months
ended June 30, 1999 was $11.8 million higher than the six months ended June 30,
1998, due primarily to higher net income and an increase in cash provided by
working capital changes. Cash and cash equivalents on hand at June 30, 1999 were
$7.5 million compared to $8.8 million at December 31, 1998.
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Cash used in investing activities for the six months ended June 30, 1999 of
$18.2 million was $13.4 million higher than the six months ended June 30, 1998
due primarily to the acquisition of Haleakala Dairy for $4.8 million in January
1999 and an increase in capital expenditures of $7.6 million.
Cash used in financing activities was $31.4 million for the six months
ended June 30, 1999, primarily as a result of the net repayment of long-term
debt and revolving loans of $27.0 million and distributions to partners of $4.4
million. Cash used in financing activities of $17.3 million for the six months
ended June 30, 1998 was primarily a result of net repayments of long-term debt
and revolving loans of $14.9 million and distributions to partners of $2.5
million.
The Partnership's total debt at June 30, 1999 was $287.2 million. The
$130.8 million of the Partnership's senior subordinated notes (the "Notes")
which remain outstanding bear interest at a rate of 9 7/8%, payable
semi-annually each March 1 and September 1, and mature September 1, 2007. The
term loan portions of the Partnership's Senior Bank Facilities consist of
borrowings under two tranches, Tranche A for $63.2 million and Tranche B for
$77.3 million. Both tranches bear interest at variable rates, which weighted
average rates were 7.02% and 8.06% for Tranche A and Tranche B, respectively, at
June 30, 1999. At June 30, 1999, $15.4 million of revolving loans and $0.1
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 $12.9 million and the Senior Bank Facilities will require
substantial interest payments based on the unamortized loan balance and variable
interest rates in effect (approximately $12.0 million annually based on June 30,
1999 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 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.
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.
YEAR 2000 ISSUES
The information provided below constitutes a "Year 2000 Readiness
Disclosure" for purposes of the Year 2000 Information and Readiness Disclosure
Act.
The Partnership is continuing 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.
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The Partnership's initiatives to minimize failures of its electronic
systems to process date sensitive information in the Year 2000 and beyond
include efforts to identify all mission critical information technology (IT)
systems, such as financial and distribution applications, and non-IT systems
such as plant production systems, and remediate those systems which are
non-compliant. Identification of IT systems includes taking an inventory of all
mission critical computer hardware and software and testing these systems for
Year 2000 compatability. Those systems that are not Year 2000 compliant will be
repaired or replaced as necessary. The Partnership's Year 2000 initiatives also
include identifying critical vendors and communicating with those vendors
regarding their Year 2000 readiness. These initiatives are underway.
Additionally, remediation efforts have been undertaken on systems that have been
identified as non-compliant. Utilizing internal resources to identify and assess
needed Year 2000 remediation, the Partnership currently anticipates that its
Year 2000 identification, assessment, remediation and testing efforts will be
completed by December 31, 1999.
The Partnership has begun, but not yet completed, a comprehensive analysis
of the operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by the Partnership and certain
third parties to complete efforts necessary to achieve Year 2000 compliance on a
timely basis. The Partnership faces the risk that third-parties which the
Partnership relies upon for products or services will not be Year 2000 ready.
Services provided by these parties include power, telecommunications and public
utilities. Products include raw materials used in the processing or distribution
of the Partnership's products. The Partnership will also be reliant upon the
proper functioning of its banks for cash management services, and customers must
be able to receive products and process information for invoicing and payment. A
failure in any of these areas by third parties could result in the Partnership's
inability to process and deliver its products to customers, or to exchange
information required for the Partnership to receive or make payments. The
Partnership also faces the risk that third parties could confirm their systems
or products as being Year 2000 ready when they actually are not. The Partnership
continues the process of identifying these risks and will include, where
possible, mitigation of these risks in its contingency plan, which should be
substantially completed by the end of the third quarter of 1999.
The Partnership does not anticipate that the total costs related to its
Year 2000 compliance efforts will be material to its financial position.
However, given the complexity of the Year 2000 issue, the impact on business
operations due to failure by the Partnership to achieve compliance or failure by
third parties to achieve compliance, which the Partnership cannot control, could
adversely affect the Partnership's results of operations.
Even if the Partnership acts in a timely manner to complete all of its
assessments and identify, develop and implement remediation plans believed to be
adequate, some problems may not be identified or corrected in time to prevent
material adverse consequences to the Partnership. The discussion above regarding
estimated completion dates, costs, risks and other forward looking statements
regarding Year 2000 is based on the Partnership's best estimates given
information that is currently available, and is subject to change. As the
Partnership continues to progress with its Year 2000 initiatives, it may
discover that actual results will differ materially from these estimates.
Uncertainties and Disclosure Regarding Forward-Looking Statements
Certain statements in this report are "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Forward
looking statements include all statements other than those of historical fact.
Those statements may be found in Management's Discussion and Analysis of
Financial Condition and Results of Operations. These statements involve risks
and uncertainties which may cause actual results to differ materially from the
forward looking statements. Among the risks or uncertainties faced by the
Partnership are 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 if
they are less favorable than expected; unanticipated changes in industry trends;
the ability of the Partnership to sustain, manage or forecast its growth; 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; the inability to carry out marketing and sales
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plans; the loss of significant suppliers; business disruptions; changes in
business strategy or development plans; liability and other claims asserted
against the Partnership; the ability to attract and retain qualified personnel;
and other statements made in this report may include additional factors which
could adversely impact the Partnership's business and financial performance.
Moreover, the Partnership 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 Partnership'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. Given these risks and
uncertainties, undue reliance should not be placed on forward looking statements
as a prediction of actual results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In its normal operations, the Partnership has market risk exposure to
interest rates due to its interest bearing debt obligations and interest rate
collars, which were entered into for purposes other than trading purposes. The
Partnership has performed a sensitivity analysis assuming a hypothetical 10%
adverse movement in interest rates applied to the interest rate exposures
described above. As of June 30, 1999, the analysis indicated that such interest
rate movement would not have a material effect on the Partnership's financial
position, results of operations or cash flows. However, actual gains and losses
in the future may differ materially from that analysis based on changes in the
timing and amount of interest rate movements and the Partnership's actual
exposure and hedges.
PART II. OTHER INFORMATION
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 16, 1999 By: /s/ PATRICK K. FORD
----------------------------------
Patrick K. Ford
Chief Financial Officer, Secretary
and Treasurer
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27.1 Article 5 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,491
<SECURITIES> 0
<RECEIVABLES> 82,666
<ALLOWANCES> 0
<INVENTORY> 31,743
<CURRENT-ASSETS> 125,135
<PP&E> 226,284
<DEPRECIATION> 45,500
<TOTAL-ASSETS> 649,087
<CURRENT-LIABILITIES> 127,127
<BONDS> 287,215
0
216,067
<COMMON> 7,123
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 649,087
<SALES> 633,017
<TOTAL-REVENUES> 633,017
<CGS> 479,183
<TOTAL-COSTS> 479,183
<OTHER-EXPENSES> (537)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,314
<INCOME-PRETAX> 17,517
<INCOME-TAX> 0
<INCOME-CONTINUING> 17,517
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,517
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
