SOUTHERN FOODS GROUP L P, 10-K405, 1999-03-31

SOUTHERN FOODS GROUP L P
10-K405, 1999-03-31
DAIRY PRODUCTS

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<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

[ ] 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)

SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE

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 .
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. X
---

No voting interest in the partnership was held by non-affiliates as of March 30,
1999.

DOCUMENTS INCORPORATED BY REFERENCE

See Item 14 on Page 38

<PAGE> 2

PART I

ITEM 1. BUSINESS.

Description of Business

Southern Foods Group, L.P. ("SFG" or the "Partnership") is a leading
processor and distributor of fluid milk products in the United States. The
Partnership markets its products primarily in the Southern and Western United
States and Hawaii. SFG has attained its strong market positions through a series
of strategic acquisitions as well as through internal growth. The Partnership, a
Delaware limited partnership, was formed in and succeeded to the business of
Southern Foods Group, Inc. ("SFG Inc.") in December 1994. SFG Inc. was formed in
1987 for the purpose of acquiring dairy companies in the Southern United States.

The dairy businesses owned by SFG have produced premium quality dairy
products for over 50 years. These dairies process and distribute fluid milk
products, cultured products, ice cream products and fruit juices and drinks
under proprietary brand names, third party labels and private labels. SFG's
brand names include Schepps, Oak Farms, Meadow Gold, Mountain High, Viva,
Foremost, Flav-O-Rich, Borden, Barbe's Dairy and Brown's Velvet Dairy. These
brand names are widely recognized in their respective markets. The Partnership
also distributes branded dairy products under various third party labels, as
well as other dairy related products such as cheese, eggs, butter, margarine and
non-dairy creamers.

Recent Developments

In July 1998, the Partnership acquired the dairy and juice processing
operations of Excelsior Dairy in Hawaii for approximately $2.7 million in cash.
Additionally, in August 1998, the Partnership acquired the milk processing plant
and distribution operations located in Huntsville, Alabama formerly owned by
Barber Dairies, Inc. from Dean Foods Company for cash consideration of
approximately $3.5 million. The Excelsior Dairy operations were consolidated
into existing processing operations in Hawaii, while the Huntsville, Alabama
plant is now operated under the Meadow Gold brand.

In September 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. for $380
million. 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 (the "Borden Dairies") that manufacture and sell dairy products
primarily under Borden trademarks. 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 $170 million.

Concurrent with these transactions, 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 Partnership's financial statements from September 4,
1997, the date of contribution.

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<PAGE> 3

The license to use the Borden Trademarks (the "Borden License") grants to
the Partnership the right to process, sell and distribute milk and certain other
dairy products under the Borden and Elsie and related trademarks in all 50 of
the United States and to sell and distribute such products in Mexico. The Borden
License is subject to existing licenses which were assigned, along with related
royalties, to the Partnership. In conjunction with the Borden Acquisition, Milk
Products LLC ("Milk Products"), an unrelated entity, purchased the Borden
Dairies from DFA and received a royalty-free sublicense to use the Borden
Trademarks primarily in Texas, Louisiana and New Mexico. The terms of this
sublicense are essentially the same as the Borden License. The purchase price
allocated to the Borden Trademarks of $55 million does not include any value
associated with the sublicense to Milk Products.

Other 1997 activities include the March 1997 acquisition of Land-of-Pines
Dairy for approximately $4.9 million, and the contribution of the operations of
Barbe's Dairy to the Partnership by DFA in February 1997 in exchange for $8.2
million of Preferred Interests. Barbe's Dairy has continued as a dairy
processing facility, while production and routes from Land-of-Pines Dairy have
been consolidated into other processing and distribution facilities.

Overview of the Dairy Industry

Management considers the Partnership's operations to comprise one segment,
dairy processing, which is characterized as a mature industry. 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 continued a trend of consolidation in
recent years and larger, regional dairy processors have emerged.

The demand for fluid milk has been generally flat over the past several
years, with declines in per capita consumption largely offset by population
growth. Although milk demand as a whole has remained fairly stable, changes in
the mix of fluid milk products have occurred as demand has increased for
products with lower fat content and decreased for products with higher fat
content.

Raw milk is generally the most significant raw material in a dairy
processing operation. 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 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 with other states that establish minimum prices for raw
milk.

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 the new regulations are currently scheduled to be released by April 4,
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 final form of any new federal
regulations or existence or location of any additional state compacts nor the
effect of such matters on the Partnership can be predicted with any certainty.

3
<PAGE> 4

Products

The Partnership processes a variety of dairy products, fruit juices and
drinks. The Partnership's product mix is heavily weighted towards fluid milk,
which includes products such as fresh packaged milk and chocolate milk in whole,
reduced fat and fat-free varieties, buttermilk, half-and-half and whipping
cream. The Partnership also processes cultured products such as cottage cheese,
sour cream and yogurt, and ice cream products such as ice cream and ice cream
mixes and novelties. The Partnership sells these products under its branded
labels, private labels and various third party labels. In addition to the
products processed by the Partnership, the Partnership distributes a wide range
of dairy and dairy related products produced by third parties.

Customers and Distribution

SFG's customer base includes retail accounts, such as supermarkets and
convenience stores, and food service accounts, such as restaurants, hotels,
schools and hospitals. SFG sells products through its own sales force, while
independent distributors are also utilized mostly in rural areas. SFG processes
its products in 27 dairy processing plants and distributes its products from
those plants and from numerous distribution facilities. The Partnership delivers
products primarily through its own fleet directly to customers. The dairy
industry is somewhat seasonal in nature in that sales of fresh milk products
somewhat decline in summer months as a result of decreased school milk sales,
offset by increased sales of ice cream. During 1998, Albertson's, Inc.
contributed approximately 13% to the Partnership's net sales and was the only
customer which accounted for more than 10% of net sales.

Raw Materials

Raw Milk. The most significant raw material used in the Partnership's
operations is raw milk. Effective January 1, 1998, the Partnership entered into
an agreement with DFA pursuant to which SFG has agreed to source most of its raw
milk from DFA. Prices charged to the Partnership 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. The
Partnership does not anticipate a shortage in the availability of raw milk for
processing.

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 Partnership also
purchases resins for blowmolding into plastic containers. The Partnership is not
dependent upon any single supplier for such commodities.

Trademarks

The Partnership owns and has filed for a number of registered United States
trademarks. The Partnership is also licensed to use trademarks owned by other
parties on certain dairy products.

The Partnership has significant investments in the Meadow Gold and Borden
Trademarks. The Partnership owns the Meadow Gold trademarks. The use of the
Borden Trademarks are subject to the Borden License, which has an initial term
of five years, but will be automatically renewed for unlimited five-year periods
subject to the Partnership remaining in compliance with the terms of the
license. The Partnership expects to benefit from this license over a period not
less than the 40 year amortization period. However, if the license were to be
terminated, the Partnership would record a charge to earnings in the period the
decision to terminate the license occurred equal to the amount of the
unamortized intangible asset, which was $53.2 million at December 31, 1998. The
terms of the license agreement require the Partnership to maintain standards of
appearance and quality of the Borden Trademarks and the related products.

Management is not aware of any facts that would materially adversely impact
continuing use of the trademarks and tradenames currently utilized by the
Partnership.

4
<PAGE> 5

Competition

The Partnership'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 Partnership.
Competition in these businesses is based primarily upon service, price, brand
recognition, quality and breadth of product line. Management believes that its
competetive strengths are customer service, strong brand recognition and its
experienced management team. Notwithstanding these strengths, the Partnership
faces increased competition 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 operation by large grocery retailers of captive dairy product
processing plants.

Employees

As of March 15, 1999, the Partnership employed approximately 5,100 people,
of whom approximately 10% are supervisory level employees. Approximately 32% of
employees are members of collective bargaining units, including units of the
International Brotherhood of Teamsters. The Partnership'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 Partnership.
The Partnership has never experienced a work stoppage.

Regulatory and Environmental

Public Health. As a processor and distributor of food products, the
Partnership is subject to the Federal Food, Drug and Cosmetic Act and
regulations promulgated thereunder by the FDA, which govern the manufacture,
labeling, packaging and safety of food. The FDA specifies good manufacturing
practices regulations, the standards of identity for certain foods, and the
format and content of 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 Partnership's products and
facilities are subject to inspections by the FDA and USDA and by various state
agencies. The Partnership and its products are also subject to similar state and
local regulation and inspection.

Environmental Matters. The Partnership'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 Partnership's operations, is
considered an "extremely" hazardous substance pursuant to federal environmental
law due to its toxicity. Wastewater discharges from the Partnership's
processing plants are typically subject to sewer use ordinances, pretreatment
regulations and permit requirements imposed by the municipalities that receive
and treat the plants' wastewater. In addition, many of the Partnership'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 aboveground or underground storage tanks. In addition to ammonia,
the Partnership's facilities utilize a variety of other hazardous substances in
the ordinary course of business.

The Partnership 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 Partnership's capital
expenditures, earnings or competetive position.

5
<PAGE> 6

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 the Partnership's Business description, in
Management's Discussion and Analysis of Financial Condition and Results of
Operations and in Quantitative and Qualitative Disclosures About Market Risk.
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 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.

6
<PAGE> 7

ITEM 2. PROPERTIES.

The Partnership operates a total of 27 processing facilities in 12 states.
All of these plants produce fluid milk except for the facilities in Des Moines,
Orem and Perry, which only produce ice cream. The following table provides
additional information regarding the Partnership's processing facilities:

<TABLE>
<CAPTION>
OWNED/
LEASED
------
<S> <C>
Dallas, TX (Schepps Dairy)................... Owned
Houston, TX.................................. Owned
Dallas, TX (Oak Farms Dairy)................. Owned
Salt Lake City, UT........................... Leased
San Antonio, TX.............................. Owned
Boise, ID.................................... Owned
Shreveport, LA............................... Owned
Englewood, CO................................ Owned
Tulsa, OK.................................... Leased
Lincoln, NE.................................. Leased
New Orleans, LA.............................. Owned
Greeley, CO.................................. Owned
Waco, TX..................................... Owned
Delta, CO.................................... Owned
Canton, MS................................... Leased
Great Falls, MT.............................. Owned
Pocatello, ID................................ Leased
Westwego, LA................................. Owned
Des Moines, IA............................... Owned
Honolulu, HI................................. Leased
Billings, MT................................. Owned
Kalispell, MT................................ Owned
Perry, IA.................................... Owned
Orem, UT..................................... Owned
Hilo, HI..................................... Leased
Huntsville, AL............................... Owned
Puhi, HI..................................... Leased
</TABLE>

Each of the Partnership's processing facilities serves as a distribution
facility. The Partnership also has numerous distribution branches located
throughout its service area, some of which are owned and some of which are
leased. The Partnership considers its properties suitable and adequate for the
conduct of its business.

The Partnership's corporate offices are located in owned property at 3114
S. Haskell in Dallas, Texas.

ITEM 3. LEGAL PROCEEDINGS.

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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

7
<PAGE> 8

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Not Applicable.

ITEM 6. SELECTED FINANCIAL DATA

SELECTED HISTORICAL FINANCIAL DATA

The following selected financial data of the Partnership for the period from
February 17, 1994 through December 31, 1994 and for the four years in the period
ended December 31, 1998 are derived from the Partnership's audited historical
financial statements. The table also sets forth selected financial data 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 to the
Partnership. The selected financial data below should be read in conjunction
with Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the historical financial statements and notes thereto
included in Item 8 of this Form 10-K.

<TABLE>
<CAPTION>
SFG SFG, Inc (a).
----------------------------------------- ---------------
February 17 January 1
Year Ended December 31, to December 31, to February 16,
1998(b) 1997(b) 1996 1995 1994 1994
-------- -------- -------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
INCOME DATA:
Net sales ........... $1,158.3 $ 741.0 $ 551.6 $ 475.2 $ 387.5 $ 55.6
Gross profit ........ 279.2 193.8 126.6 115.6 91.4 12.4
Selling, distribution
and general and
administrative .... 209.0 140.4 100.2 89.7 72.3 15.6
Interest expense .... 31.4 16.5 7.6 9.1 8.3 0.6
Net income (loss) ... 25.4 26.1 11.5 10.1 4.3 (2.4)
BALANCE SHEET DATA:
Total assets ........ $ 661.4 $ 646.3 $ 182.5 $ 177.7 $ 181.7 $ 96.4
Total indebtedness .. 314.2 346.7 96.0 103.2 120.8 43.1
</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 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. SFG, Inc. was
subject to income taxes, but SFG, as a partnership, is not subject to
income taxes. Additionally, the total of the operations 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 Partnership are
not necessarily comparable to financial information of the Partnership for
the four years in the period ended December 31, 1998.

(b) Results for the year ended December 31, 1998 and 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.

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<PAGE> 9

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

This discussion and analysis should be read in conjunction with the
historical financial statements of the Partnership and the notes thereto
included in Item 8 of this Form 10-K.

HISTORICAL RESULTS OF OPERATIONS

The comparability of the results of operations for the three years in the
period ended December 31, 1998 is significantly impacted by the acquisitions of
the Excelsior Dairy and Meadow Gold Huntsville operations in 1998, the
acquisition of the dairy operations of Land-of-Pines Dairy in 1997, and the 1997
contributions of the Meadow Gold and Barbe's Dairy operations to the Partnership
by DFA. See Item 1 - "Business" and the historical financial statements of the
Partnership included in Item 8 of this Form 10-K for further information on
these transactions.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

The Partnership's net sales were $1,158.3 million for the year ended
December 31, 1998, an increase of $417.3 million over the prior year. The
operations of Meadow Gold contributed $351.5 million to this increase. Excluding
the results of Meadow Gold, net sales for the year ended December 31, 1998
increased 11%, due primarily to an increase in volumes as a result of the
Excelsior Dairy and Meadow Gold Huntsville acquisitions, along with an increase
in milk prices due to an increase in raw milk costs over the prior year. Sales
also increased due to growth in SFG's existing and new customer base.

The Partnership's gross profit was $279.2 million for the year ended
December 31, 1998, an increase of $85.4 million over the prior year. Meadow Gold
contributed $74.3 million to this increase. The remaining increase is due
primarily to the increase in net sales.

The Partnership's selling, general and administrative expenses of $209.0
million for the year ended December 31, 1998 were $68.6 million higher than in
the prior year. The increase is attributable primarily to the addition of the
Meadow Gold operations combined with the general increase in selling activity.

Amortization of goodwill and other intangible assets increased to $14.9
million for the year ended December 31, 1998 from $11.9 million in the prior
year. This increase is due primarily to the amortization of goodwill, trademarks
and other intangible assets related to the Meadow Gold transactions.

Interest expense increased significantly to $31.4 million for the year ended
December 31, 1998 compared to $16.5 million in the prior year. This increase is
due to higher average outstanding debt balances as a result of the Meadow Gold
transactions as well as higher interest rates under the Notes.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

The Partnership's net sales were $741.0 million for the year ended December
31, 1997, an increase of $189.3 million over the prior year. The operations of
Meadow Gold contributed $149.8 million to this increase. Net sales also
increased due to the acquisitions of 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.

The Partnership's gross profit was $193.8 million for the year ended
December 31, 1997, an increase of $67.2 million over the prior year. Meadow Gold
contributed $33.9 million to this increase. Gross profit also increased due to
the addition of the operations of Barbe's Dairy and Land-of-Pines Dairy, as well
as from the general increase in sales. The gross margin percentage increase is a
result of the Partnership'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.

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<PAGE> 10

The Partnership's selling, distribution and general and administrative
expenses of $140.4 million for the year ended December 31, 1997 were $40.2
million higher than the prior year. This increase is primarily attributable to
the addition of the Meadow Gold operations, which contributed $29.3 million to
this increase. The increase is also attributable to the addition of the
operations of Barbe's Dairy and an increase in distribution costs to support the
higher level of sales.

Amortization of goodwill and other intangible assets increased 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 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 Meadow Gold transactions, as well
as higher weighted average interest rates under the Notes and Senior Bank
Facilities.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operating activities of $66.8 million for the year ended
December 31, 1998 was $23.1 million higher than the prior year, due primarily to
the addition of the Meadow Gold operations. Cash and cash equivalents on hand at
December 31, 1998 were $8.8 million compared to $4.7 million at December 31,
1997.

Cash used in investing activities during 1998 consists of $6.2 million for
the acquisitions of the Excelsior Dairy and Meadow Gold Huntsville operations,
combined with $18.0 million for additions to property, plant and equipment. Cash
used in investing activities for the year ended December 31, 1997 of $125.1
million is primarily the result of the acquisitions of the Meadow Gold
Trademarks and the Borden License for aggregate consideration of $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 transactions. Cash used for additions to property, plant and
equipment was $12.1 million in 1997.

In 1998, the Partnership repaid $40.5 million in long-term debt, including
the repurchase of $19.2 million of Notes. The Partnership also made tax payment
distributions of $3.3 million and cash distributions for return on preferred
interests of $2.4 million in 1998. Balances outstanding under the Partnership's
revolving credit facility increased by $7.7 million in 1998.

SFG's total debt at December 31, 1998 was $314.2 million, compared to $346.7
million at December 31, 1997. The $130.8 million of Notes which remain
outstanding 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 which bear interest at variable rates. These
weighted average rates were 7.3% and 8.3% for Tranche A and Tranche B,
respectively, at December 31, 1998. SFG had $22.0 million of borrowings and $2.0
million of letters-of-credit outstanding against its $60.0 million revolving
credit facility, leaving available borrowings of $36.0 million at December 31,
1998. The weighted average interest rate on borrowings outstanding under the
revolving credit facility was 8.5% at December 31, 1998.

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.

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<PAGE> 11
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. At December 31, 1998, the Partnership would have had to pay
approximately $1.5 million to terminate these agreements based on quotes from
the counterparties.

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 $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
$14.5 million annually based on December 31, 1998 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.

During 1998, the Partnership repurchased $19.2 million of the original $150
million of Notes. At management's discretion and as allowed under the
Partnership's credit facilities, the Partnership may make additional repurchases
of Notes from time to time. At present, there are no current plans to purchase
additional Notes.

SFG is involved in certain threatened and pending legal proceedings 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 SFG.

11
<PAGE> 12

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.

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 second 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.

12
<PAGE> 13

ITEM 7A. 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, which were entered
into for purposes other than trading purposes. To manage its interest rate
exposure, the Partnership has utilized the interest rate collars and swap
agreements described in Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources.

The Partnership has performed a sensitivity analysis assuming a hypothetical
10% adverse movement in interest rates applied to the interest rate collars and
swap agreements and exposures described above. As of December 31, 1998, 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.

13
<PAGE> 14

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SOUTHERN FOODS GROUP, L.P.
Report of Independent Accountants........................................................ 15
Consolidated Balance Sheets as of December 31, 1998 and 1997............................. 16
Consolidated Statements of Income for the three years in the period ended
December 31, 1998,..................................................................... 17
Consolidated Statements of Partners' Equity for the three years in the period ended
December 31, 1998...................................................................... 18
Consolidated Statements of Cash Flows for the three years in the period ended
December 31, 1998...................................................................... 19
Notes to the Consolidated Financial Statements........................................... 20

Financial Statement Schedule:
Schedule IX Valuation and Qualifying Accounts.......................................... 32
</TABLE>

14
<PAGE> 15

REPORT OF INDEPENDENT ACCOUNTANTS

To the Partners of Southern Foods Group, L.P.

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Southern Foods Group, L.P. and its subsidiary at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, 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.

PRICEWATERHOUSECOOPERS LLP

Dallas, Texas
March 5, 1999

15
<PAGE> 16

SOUTHERN FOODS GROUP, L.P.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash ............................................... $ 8,827 $ 4,747
Accounts receivable, net ........................... 92,209 77,987
Inventories ........................................ 34,205 30,548
Prepaid expenses and other assets .................. 4,846 2,947
--------- ---------
Total current assets ....................... 140,087 116,229
--------- ---------
Property, plant and equipment, at cost:
Land ............................................... 29,774 30,678
Buildings and improvements ......................... 45,426 39,931
Machinery and equipment ............................ 129,441 114,424
Vehicles ........................................... 8,956 9,351
--------- ---------
213,597 194,384
Less: Accumulated depreciation and amortization .... (37,312) (20,321)
--------- ---------
176,285 174,063
--------- ---------
Goodwill, net ........................................ 229,512 238,323
Trademarks, net ...................................... 101,529 104,154
Deferred financing costs, net ........................ 11,929 11,714
Other assets ......................................... 2,066 1,830
--------- ---------
Total assets ............................... $ 661,408 $ 646,313
========= =========

LIABILITIES AND PARTNERS' EQUITY

Current liabilities:
Accounts payable ................................... $ 46,464 $ 27,396
Raw milk accrual ................................... 32,035 25,511
Accrued expenses ................................... 47,845 45,668
Current portion of long-term debt .................. 600 777
--------- ---------
Total current liabilities ............................ 126,944 99,352
--------- ---------

Long-term debt ....................................... 313,608 345,914
Other long-term liabilities .......................... 10,784 10,668

Commitments and contingencies (Note 9)

Partners' equity:
Limited partner preferred, stated amount of $264,024
and $238,671, respectively ........................ 201,514 176,199
Limited partner common ............................. 8,139 13,771
General partner common ............................. 419 409
--------- ---------
210,072 190,379
--------- ---------
Total liabilities and partners' equity ... $ 661,408 $ 646,313
========= =========
</TABLE>

The accompanying notes are an integral part of these financial statements.

16
<PAGE> 17

SOUTHERN FOODS GROUP, L.P.

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)

<TABLE>
<CAPTION>
FOR EACH OF THE YEARS ENDED
DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales ....................... $ 1,158,256 $ 740,983 $ 551,636
Cost of sales ................... 879,041 547,182 425,079
----------- ----------- -----------

279,215 193,801 126,557
----------- ----------- -----------

Selling, distribution and general
and administrative expenses ... 209,003 140,429 100,192
Amortization of goodwill and
other intangible assets ....... 14,942 11,950 7,658
----------- ----------- -----------

Income from operations .......... 55,270 41,422 18,707

Interest expense .............. 31,446 16,500 7,640
Other income, net ............. (1,565) (1,174) (480)
----------- ----------- -----------

Net income ...................... $ 25,389 $ 26,096 $ 11,547
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

17
<PAGE> 18

SOUTHERN FOODS GROUP, L.P.

CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
FOR EACH OF THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
------------------------------------------------
Preferred Common
--------- ----------------------
Limited General Limited
Partner Partner Partner Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Partners' equity, January 1, 1996 ...... $ -- $ 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 ................. 3,303 (3,303) --
Partner distributions ................. (2,386) - (3,310) (5,696)
Net income ............................ 24,398 10 981 25,389
--------- --------- --------- ---------
Partners' equity, December 31, 1998 .... $ 201,514 $ 419 $ 8,139 $ 210,072
========= ========= ========= =========
</TABLE>

The accompanying notes are an integral part of these financial statements.

18
<PAGE> 19

SOUTHERN FOODS GROUP, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

FOR EACH OF THE YEARS ENDED
DECEMBER 31,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................... $ 25,389 $ 26,096 $ 11,547
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ............................................ 18,614 9,769 5,652
Amortization ............................................ 16,456 12,829 8,165
Interest added to long-term debt ........................ 3,208
Change in assets and liabilities, net of
effects of business acquisitions:
(Increase) decrease in accounts receivable ............ (14,222) (3,682) (3,700)
(Increase) decrease in inventories .................... (3,656) (869) (658)
(Increase) decrease in prepaid expenses and
other assets ........................................ (896) 313 96
Increase (decrease) in accounts payable and
accrued expenses .................................... 25,123 (708) 8,933
--------- --------- ---------
Net cash provided by operating activities .......... 66,808 43,748 33,243
--------- --------- ---------
Cash flows from investing activities:
Purchase of trademarks .................................... (105,000)
Business acquisitions, net of cash acquired ............... (6,161) (8,851) (5,998)
Additions to property, plant and equipment ................ (17,977) (12,123) (7,167)
(Increase) decrease in other assets ....................... 568 894 74
--------- --------- ---------
Net cash used in investing activities .............. (23,570) (125,080) (13,091)
--------- --------- ---------
Cash flows from financing activities:
Borrowings on long-term debt .............................. 255,000 6,000
Repayments on long-term debt .............................. (40,524) (149,706) (16,820)
Borrowings on related party notes payable ................. 20,490
Repayments on related party notes payable ................. (54,914)
Net borrowings (repayments) - revolving credit facility ... 7,700 4,100 400
Borrowings - short-term debt .............................. 575
Repayments - short-term debt .............................. (234)
Payment of deferred financing costs ....................... (979) (12,141)
Partner contributions - preferred equity .................. 45,000
Partner distributions - preferred equity .................. (2,386)
Partner contributions - common equity ..................... 6,208 15
Partner distributions - common equity ..................... (3,310) (29,953) (9,069)
--------- --------- ---------
Net cash provided by (used in) financing activities . (39,158) 84,084 (19,474)
--------- --------- ---------
Net increase in cash ........................................ 4,080 2,752 678
Cash at beginning of period ................................. 4,747 1,995 1,317
--------- --------- ---------
Cash at end of period ....................................... $ 8,827 $ 4,747 $ 1,995
========= ========= =========
Supplemental information:
Interest paid ............................................... $ 30,818 $ 10,248 $ 4,901
========= ========= =========
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
Preferred equity interests issued ................... (8,000)
---------
--
=========
</TABLE>

The accompanying notes are an integral part of these financial statements.

19
<PAGE> 20

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 27 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 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, Mountain High, Viva, Foremost,
Flav-O-Rich, Borden, Barbe's Dairy and Brown's Velvet Dairy 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.

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.

Inventories

Inventories are valued at the lower of cost or market. Cost is determined on
the first-in, first-out basis.

20
<PAGE> 21
SOUTHERN FOODS GROUP, L.P.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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 $170 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 $41 million and
$29 million at December 31, 1998 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 $3.5 million and $1.9 million at December 31, 1998,
respectively.

The license to use the Borden Trademarks is for an initial term of five
years, but will be automatically renewed for unlimited five-year periods subject
to the Partnership remaining in compliance with the terms of the license. The
Partnership expects to benefit from this license over a period not less than the
40 year amortization period. However, if the license were to be terminated, the
Partnership would record a charge to earnings in the period the decision to
terminate the license occurred equal to the amount of the unamortized intangible
asset, which was $53.2 million at December 31, 1998. The terms of the license
agreement require the Partnership to maintain standards of appearance and
quality of the Borden Trademarks and the related products.

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.

21
<PAGE> 22

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, 1998 and 1997,
the financial accounting basis of the net assets of the Partnership exceeded its
tax basis by approximately $252 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 $130.8 million and $150.0 million of senior
subordinated notes (See Note 2) that remain outstanding was approximately $137
million and $157 million at December 31, 1998 and 1997, respectively, based on
trading as 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
to hedge 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. Management does not believe the Partnership is
exposed to significant counterparty credit risk under these contracts.

New Accounting Standards

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.

2. ACQUISITIONS

22
<PAGE> 23
SOUTHERN FOODS GROUP, L.P.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

On September 4, 1997, DFA acquired Borden/Meadow Gold Dairies Holdings, Inc.
("Holdings"), a subsidiary comprising the fluid milk operations of 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 (the "Borden Dairies") that
manufacture and sell dairy products primarily under the Borden Trademarks. 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 $170 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.

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, DECEMBER 31,
1997 1996
------------- --------------
(in thousands)
<S> <C> <C>
Net sales............... $ 1,054,335 $ 1,044,173
Net income.............. $ 18,409 $ 3,005
</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 of the indicated period, 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.

23
<PAGE> 24
SOUTHERN FOODS GROUP, L.P.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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,
--------------------
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Trade ................................... $ 89,281 $ 74,768
Other ................................... 7,393 7,390
-------- --------
96,674 82,158
Less allowance for doubtful accounts .... (4,465) (4,171)
-------- --------
$ 92,209 $ 77,987
======== ========
</TABLE>

SFG sells to customers primarily in the southern and western United
States and Hawaii. SFG's sales are primarily to retail, food service and
institutional customers. Only one customer, which contributed 13% and 12% to
sales in 1998 and 1997, respectively, contributed over 10% to SFG's total sales.

4. INVENTORIES

A summary of inventories is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Finished goods ......................... $16,551 $14,776
Packaging and supplies ................. 4,709 3,389
Raw materials .......................... 11,896 10,563
Truck parts ............................ 1,049 1,820
------- -------
$34,205 $30,548
======= =======
</TABLE>

5. ACCRUED EXPENSES

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Accrued insurance expense ............... $14,051 $14,572
Accrued payroll and related benefits..... 11,737 10,448
Accrued interest expense ................ 4,790 5,724
Accrued expenses - other ................ 17,267 14,924
------- -------
$47,845 $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 stop-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

24
<PAGE> 25
SOUTHERN FOODS GROUP, L.P.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

estimates for both claims that have been reported but not yet paid, and claims
that have been incurred but not yet reported. Accrued expenses -- other includes
accrued costs assumed in connection with or associated with the acquisition of
Meadow Gold, including severance costs and costs to terminate contracts, as well
as accrued taxes other than income, accrued promotional allowances, accrued
legal costs and other items.

6. LONG-TERM DEBT

A summary of long-term debt is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Term loans ........ $160,500 $181,000
Senior Notes ...... 130,770 150,000
Revolving loan .... 22,000 14,300
Other notes ....... 938 1,391
-------- --------
$314,208 $346,691
======== ========
</TABLE>

The Senior Bank Facilities discussed in Note 2 were entered into on
September 4, 1997 and consisted of initial term loans of $190 million and a
revolving credit facility with availability of $60 million. The initial term
loans were 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 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
7.3% and 8.3% for Tranche A and Tranche B at December 31, 1998, 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 loans. The
weighted average rate on the revolving credit facility was 8.5% at December 31,
1998. At December 31, 1998, $160.5 million of term loans were outstanding, and
$22.0 million of revolving loans and $2.0 million of letters of credit were
outstanding under the revolving credit facility. Available borrowings under the
revolving credit facility were $36 million at December 31, 1998. 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 are 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. At December 31, 1998,
the Partnership would have had to pay approximately $1.5 million to terminate
these agreements based on quotes from the counterparties.

25
<PAGE> 26
SOUTHERN FOODS GROUP, L.P.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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.

During September, 1998, the Partnership repurchased approximately $19.2
million of Notes on the open market. Approximately $130.8 million of Notes
remain outstanding at December 31, 1998.

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.

Future maturities of the Partnership's debt are as follows:

<TABLE>
<CAPTION>
SCHEDULED
YEAR ENDING DECEMBER 31, DEBT PAYMENTS
------------------------ -----------------
(in thousands)
<S> <C>
1999.......................... $ 600
2000.......................... 8,538
2001.......................... 12,500
2002.......................... 15,000
2003.......................... 17,500
Thereafter.................... 260,070
-----------------
Total......................... $ 314,208
=================
</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, 1998 and 1997, there were no borrowings
outstanding with related parties.

26
<PAGE> 27
SOUTHERN FOODS GROUP, L.P.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The Partnership sources principally all of its raw milk from DFA. Effective
January 1, 1998, the Partnership entered into an agreement with DFA pursuant to
which the Partnership has agreed to source principally all of its milk from DFA
subject to the Partnership's existing supply agreements. Prices charged to the
Partnership 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. Amounts due for raw milk purchases are reflected
on the accompanying balance sheet in the raw milk accrual.

8. RETIREMENT PLANS

Prior to the Meadow Gold transactions in 1997, the Partnership maintained a
401(k) plan (the "SFG 401(k) Plan"), a non-qualified defined contribution plan
for selected management personnel (the "MSP Plan"), and a non-qualified
supplemental executive retirement plan (the "SERP"). Also prior to the
acquisition, Meadow Gold employees not covered by union plans were covered by a
401(k) plan, a domestic pension plan and a postretirement plan sponsored by
Borden or its affiliates (the "Borden Plans"). As a result of the addition of
the Meadow Gold operations in September 1997, the Partnership established
separate retirement plans covering these Meadow Gold employees with terms
essentially identifical to those contained in the Borden Plans. To continue the
integration of the Meadow Gold operations into SFG, the Partnership merged
Meadow Gold's 401(k) plan into the Partnership's 401(k) plan effective December
31, 1998. Also, service credits under the pension plan were discontinued
effective December 31, 1998 and company contributions under the postretirement
medical plan are being phased out through January 1, 2000. These changes were
made to establish uniform benefits for all SFG non-bargaining employees.

Retirement plans -- Defined Contribution Plans

Employees are eligible to participate in the SFG 401(k) Plan 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. Only selected management personnel are eligible to
participate in the MSP Plan. Under this non-qualified plan, the Partnership
matches 100% of contributions up to 3% of each participant's compensation.
Contributions to these plans by the Partnership were approximately $1.9 million
for the year ended December 31, 1998, $2.1 million for the year ended December
31, 1997, and $2.0 million for the year ended December 31, 1996.

Prior to December 31, 1998, Meadow Gold employees were eligible to
participate in a 401(k) plan upon date of hire. The Partnership matched
contributions equal to 50% of the participant's contribution up to 5% of each
participant's compensation. Employees vested in the Partnership's contribution
over five years. Employer contributions to this plan were $1.2 million for the
year ended December 31, 1998 and $.3 million for the period from September 4,
1997 through December 31, 1997. Effective December 31, 1998, this plan was
merged into the SFG 401(k) Plan.

Retirement plans -- Defined Benefit Plans

Effective October 1, 1996, the Partnership adopted the SERP. The SERP is
available to certain specified executives of the Partnership and provides annual
benefits based on a percentage of the executives' salaries. Benefits are payable
upon retirement at specified retirement ages, or upon disability or involuntary
termination.

Most Meadow Gold nonbargaining employees participated in a domestic pension
plan where benefits were 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. Effective December 31, 1998, service
credits were discontinued under this plan.

27
<PAGE> 28
SOUTHERN FOODS GROUP, L.P.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Most employees who are not covered by Partnership sponsored retirement plans
are covered by retirement plans under 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 $2.9 million to these trusts during the year ended
December 31, 1998, and $.9 million during the period from September 4, 1997 to
December 31, 1997.

The Partnership provided certain health and life insurance benefits for
eligible Meadow Gold retirees and their dependents. 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. Effective
January 1, 1999, the Partnership amended the plan whereby the cost of medical
benefits will become fully contributory by the retirees by January 2000.

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 amounts recognized in the Partnership's financial statements for the
obligations relating to the defined benefit plans at December 31 were as follows
(in thousands):

<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Benefit obligation at beginning of year ......... $ 22,418 $ 22,401
Service cost .................................... 582 215
Interest cost ................................... 1,511 461
Amendments ...................................... (856) --
Net actuarial loss/(gain) ....................... 1,108 --
Benefits paid ................................... (2,077) (659)
-------- --------
Benefit obligation at end of year ............... $ 22,686 $ 22,418
======== ========

1998 1997
-------- --------
Fair value of plan assets at beginning of year .. $ 19,664 $ 19,781
Actual return on plan assets .................... 1,622 542
Benefits paid ................................... (2,077) (659)
-------- --------
Fair value of plan assets at end of year......... $ 19,209 $ 19,664
======== ========

1998 1997
-------- --------
Funded status ................................... $ (3,477) $ (2,754)
Unrecognized actuarial loss/(gain) .............. 988 (179)
Unrecognized prior service cost ................. 431 (1,470)
-------- --------
Net amount recognized ........................... $ (2,058) $ (1,463)
======== ========
</TABLE>

Pension expense includes the following components (in thousands):

<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Service cost for benefits earned during the
year .......................................... $ 582 $ 215
Interest cost on projected benefit obligation ... 1,511 461
Expected return on plan assets .................. (1,578) (381)
Net amortization and deferral ................... 80 78
------- -------
Net periodic benefit cost ....................... $ 595 $ 373
======= =======
</TABLE>

28
<PAGE> 29
SOUTHERN FOODS GROUP, L.P.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The actuarial assumptions used were as follows:

<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Discount rate .................................. 6.5% 7.0%
Expected long-term rate of return on assets .... 8.5% 8.5%
Rate of increase in compensation levels ........ 3.0%-4.5% 3.0%-4.5%
</TABLE>

SUMMARY OF MEADOW GOLD HEALTH AND LIFE RETIREE BENEFITS

The Meadow Gold postretirement health care and life insurance plan is not
funded. The amounts recognized in the Partnership's financial statements for the
obligations relating to the plan at December 31 were as follows (in thousands):

<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Benefit obligation at beginning of year ........ $ 8,007 $ 7,732
Service cost ................................... 29 --
Interest cost .................................. 540 163
Amendments ..................................... (9,012) --
Actuarial loss/(gain) .......................... 2,210 275
Benefits paid .................................. (707) (163)
------- -------
Benefit obligation at end of year .............. $ 1,067 $ 8,007
======= =======

1998 1997
------- -------
Fair value of plan assets at beginning of year . $ -- $ --
Employer contribution .......................... 707 163
Benefits paid .................................. (707) (163)
------- -------
Fair value of plan assets at end of year........ $ -- $ --
======= =======

1998 1997
------- -------
Funded status .................................. $(1,067) $(8,007)
Unrecognized actuarial loss/(gain) ............. 2,485 275
Unrecognized prior service cost ................ (9,012) --
------- -------
Net amount recognized ........... .............. $(7,594) $(7,732)
======= =======
</TABLE>

The discount rate used in determining the accumulated benefit obligation was
6.5% at December 31, 1998 and 7% at December 31, 1997. The per capita cost of
covered health care benefits is assumed to have increased at an annual rate of
9.3% for 1998, 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 $53,000 and zero, respectively.

The components of net periodic postretirement benefit cost were as follows
(in thousands):

<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Service cost................................. $ 29 $ --
Interest cost................................ 540 163
---------- ----------
Net periodic postretirement benefit cost..... $ 569 $ 163
========== ==========
</TABLE>

29
<PAGE> 30
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, 1998 for buildings, vehicles and equipment is as
follows:

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, (In Thousands)
------------ -------------
<S> <C>
1999.................................... $ 9,999
2000.................................... 7,658
2001.................................... 5,872
2002.................................... 4,395
2003.................................... 2,797
</TABLE>

Rental expense of $14.5 million was incurred for the year ended December 31,
1998, $9.4 million for the year ended December 31, 1997 and $5.3 million for the
year ended December 31, 1996.

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.

In February 1997, two management owners contributed $6.2 million to the
Partnership in exchange for a 50% interest in the limited partner common equity
of the Partnership. In connection with this transaction, the Partnership issued
$76.9 million in stated amount of Series A Preferred Interests with a cumulative
return of 10% to DFA, and made distributions of $24 million. The stated amount
of the Series A Preferred Interests issued was based on an agreed-upon
liquidation value. The issuance of the Series A Preferred Interests was
accounted for based on the book value of DFA's limited partner common equity,
which resulted in the conversion of $14.5 million of DFA's common equity to
Preferred Interests and a remaining limited partner common equity balance of
$6.2 million associated with DFA's 50% interest. Additionally, as discussed in
Note 2, Barbe's Dairy was contributed to the Partnership in exchange for Series
A Preferred Interests with a cumulative return of 10% on a stated value of $8
million. 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 of
Series B Preferred Interests 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 of Series C Preferred Interests bears a cumulative
return of 10% and $30 million of Series D Preferred Interests bears a cumulative
return

30
<PAGE> 31
SOUTHERN FOODS GROUP, L.P.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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 Series E 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 Series E Preferred Interests with a
cumulative return of 10%. In 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
Series E Preferred Interests. In 1998, tax payment distributions were made to
management owners totaling $3.3 million, and $3.3 million of DFA's limited
partner common equity was converted to Series E Preferred Interests.

Issuances of Preferred Interests are accounted for based on fair value if
consideration is received in exchange for issuance. Preferred Interests issued
upon conversion of common interests are accounted for at the book value of the
common interest 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, 1998 and
1997). 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, 1998:

<TABLE>
<CAPTION>
SERIES RETURN STATED VALUE BOOK VALUE
------ ------ ------------ ----------
(in thousands)
<S> <C> <C> <C>
A 10% $ 102,944 $ 40,434
B 10% 102,460 102,460
C 10% 17,077 17,077
D 9.5% 31,437 31,437
E 10% 10,106 10,106
----------- -----------
$ 264,024 $ 201,514
=========== ===========
</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 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.

31
<PAGE> 32

SOUTHERN FOODS GROUP, L.P.
SCHEDULE IX
VALUATION AND QUALIFYING ACCOUNTS (a)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)

<TABLE>
<CAPTION>
Additions
Balance at Charged to Additions from Balance at
Beginning of Costs and Acquired End of
Classification Period Expenses (b) Companies (c) Deductions Period
- -------------- ------------ ------------ -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
December 31, 1996:
Allowance for doubtful accounts .... $2,156 493 (103) $2,546

December 31, 1997:
Allowance for doubtful accounts .... $2,546 876 1,157 (408) $4,171

December 31, 1998:
Allowance for doubtful accounts .... $4,171 946 (652) $4,465
</TABLE>

(a) This schedule should be read in conjuction with the Partnership's audited
consolidated financial statements and related notes thereto.

(b) Additions to expense are stated net of recoveries.

32
<PAGE> 33

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The following table sets forth the executive officers of the Partnership and
the executive officers and Representatives on the Representative Committee of
SFG Management Limited Liability Company, the general partner of the
Partnership.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Pete Schenkel........ 63 President, Chief Executive
Officer and Representative
Anthony R. Ward...... 58 Vice Chairman
Patrick K. Ford...... 32 Chief Financial Officer,
Secretary, Treasurer
Gary E. Hanman....... 65 Representative
Gerald L. Bos........ 59 Representative
Jerry W. Frie........ 59 Representative
</TABLE>

Pete Schenkel has served as President of the Partnership 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. Mr. Schenkel is also the
President and Chief Executive Officer of SFG Capital Corporation ("SFG
Capital"), a subsidiary of the Partnership formed to facilitate the incurrence
of debt by the Partnership and a co-obligor on the Notes.

Anthony R. Ward serves as Vice Chairman of the Partnership. 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
Partnership.

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
continues to serve as a part time employee of the Partnership for various
matters such as raw milk pricing policies.

33
<PAGE> 34

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.

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 September 1997, the Partnership 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 Partnership 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 Partnership, which in the case of Mr. Ward
is 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 Partnership terminates the
executive without cause or if the Partnership materially breaches the agreement
and such breach is not cured within 30 days, the Partnership 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 Partnership other than as a
part of a reorganization or sale of all or substantially all of the assets of
the Partnership where the Partnership'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 Partnership; or any material breach by the
employee of the agreement which is not cured within 30 days after written notice
from the Partnership.

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 Partnership in any of the states of the United States located
west of the Mississippi River as long as the Partnership continues to conduct
business in that area. In addition, he may not solicit customers or employees of
the Partnership 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 Partnership maintains the Southern Foods Group, L.P. Employees Savings
and Profit Sharing Plan ("Profit Sharing Plan"). All employees of the
Partnership are eligible to participate in the Profit Sharing Plan upon
completion of six months of service, as defined. The Partnership matches
employee contributions equal to 50% of the participant's contribution up to 3%
of the participant's compensation. The Partnership may also make discretionary
contributions based on profits. Employees vest in the Partnership'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 Partnership matches 100% of
contributions up to 3% of each participant's compensation. Employees vest in the
Partnership's contribution immediately.

34
<PAGE> 35

Effective October 1, 1996, the Partnership adopted the Supplemental
Executive Retirement Plan ("SERP"). The SERP is available to certain specified
executives of the Partnership ("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 Partnership 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 Patrick Ford are approximately $210,000 and
$15,000, respectively.

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. 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. Effective December 31, 1998, service credits were discontinued under
this plan.

ITEM 11. EXECUTIVE COMPENSATION.

The following table sets forth information concerning the compensation paid
to the Partnership's Chief Executive Officer and the other executive officers of
the Partnership for the fiscal years shown.

SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION(a)
OTHER ANNUAL ALL OTHER
NAME AND COMPENSATION COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(b) ($)(c)
------------------ ---- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Pete Schenkel 1998 $369,435 $602,818 $3,303,097 $ 48,668
Chief Executive 1997 358,651 455,888 2,000,000 740,263(d)
Officer.................. 1996 361,800 319,507 746,563 20,354
Tony Ward 1998 336,000 240,187 23,287
Vice Chairman............ 1997 110,200 119,301 6,612
Patrick Ford
Chief Financial
Officer.................. 1998 127,890 40,000 61,837
</TABLE>

- ----------

(a) Excludes the aggregate, incremental cost to the Partnership 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 Mr. Schenkel as a partner of the
Partnership as Partnership Tax Amounts to pay federal and state income tax
due on Partnership income.

(c) Represents amounts contributed by the Partnership under retirement plans,
less the amounts set forth in footnote (d) below, where applicable.

(d) Includes special distributions made to Mr. Schenkel ($700,000), as a partner
in the Partnership, in connection with the Meadow Gold transactions.

(e) Tony Ward became an employee of the Partnership on September 4, 1997.
Amounts shown for 1997 represent amounts earned by Mr. Ward for the period
September 4, 1997 to December 31, 1997.

35
<PAGE> 36

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The voting equity of the Partnership is owned as follows:

<TABLE>
<CAPTION>
Amount and Nature
Title of Name of of Beneficial Percent of
Class Beneficial Owner Ownership Class
-------- ---------------- ----------------- ----------
<S> <C> <C> <C>
Common Partner SFG Management Limited
Interest Liability Company General Partner 1%

Pete Schenkel Limited Partner 49.5%

Dairy Farmers of America, Inc. Limited Partner 49.5%
</TABLE>

SFG Management Limited Liability Company is owned 50% each by Pete Schenkel
and DFA.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

AFFILIATION WITH DFA

The Partnership 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 Partnership. SFG
Management is owned 50% by DFA and 50% by Mr. Schenkel. In addition, as of
December 31, 1998, DFA owns $215.5 million in net stated amount of Preferred
Interests, including unpaid preferred returns, and Mid-Am Capital, L.L.C. owns
an additional $48.5 million in stated amount of Preferred Interests, including
unpaid preferred returns, of the Partnership. Mid-Am Capital is owned 50% by DFA
and 50% by seven other companies, including the Partnership, which has a seven
percent equity interest in Mid-Am Capital.

Effective January 1, 1998, DFA and the Partnership entered into a written
milk supply agreement pursuant to which the Partnership 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.

DFA subleases to the Partnership certain fleet equipment used by the
Partnership on a pass through basis.

The Partnership employs Mr. Jerry Bos, the CFO of DFA and a Representative
on the Committee, as a consultant on financial services. The Partnership paid
Mr. Bos consulting fees of $125,000 and $100,000 for 1998 and 1997,
respectively.

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
Partnership, pursuant to a Lease Agreement between the Partnership and
Flav-O-Rich dated February 28, 1995. The lease initially was for a one year term
and, so long as the Partnership 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 Partnership 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 Partnership 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 were exercised in May 1998 to $820,000 if the option is exercised in
February 2000. In addition, the Partnership 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.

36
<PAGE> 37

CERTAIN RELATED PARTY PAYMENTS

In 1998, the Partnership made distributions to Mr. Schenkel of $3.3 million
as a distribution of Partnership Tax Amounts (as defined) in respect of certain
tax liabilities and to DFA of $3.3 million of Series E Preferred Interests.

Mr. Schenkel's son is employed by the Partnership as a sales manager and Mr.
Schenkel's son-in-law is employed as the general manager of the Dallas Oak Farms
plant. In 1998, they received compensation from the Partnership in the amounts
of $75,207 and $116,245, respectively.

PUT AND CALL RELATING TO MR. SCHENKEL'S INTEREST IN THE PARTNERSHIP AND SFG
MANAGEMENT

At any time on or after January 1, 2003, Mr. Schenkel may require the
Partnership or DFA to purchase all of his partnership interest. In the event of
Mr. Schenkel'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 Mr. Schenkel'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 Mr. Schenkel'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. Any exercise of a put
or call 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 Partnership 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 Partnership's last three
fiscal years' earnings before interest, income taxes and depreciation and
amortization less the aggregate amount of all the Partnership's outstanding
interest bearing debt and the amount of outstanding Preferred Interests and
unpaid Preferred Return, multiplied by the quotient of the Common Partner
Interests owned by Mr. Schenkel divided by the total outstanding Common Partner
Interests.

PROPOSED TRANSACTIONS WITH MR. WARD

The Partnership has proposed to enter into an agreement with Tony Ward
pursuant to which Mr. Ward would be entitled, upon the occurrence of (i) the
redemption by the Partnership or the transfer or sale to DFA of Schenkel's
Common Partner Interests in the Partnership, (ii) the transfer or sale to an
outside party of either Schenkel's or all of the Common Partner Interests in the
Partnership, (iii) the merger or other combination of the Partnership with an
outside party, in which the Partnership is not the surviving entity or (iv) the
sale of substantially all the assets of the Partnership to an outside party (a
"Change in Control"), to receive consideration of the type and amount that Mr.
Ward would be entitled to receive in such Change in Control as if he was the
holder of a deemed 2% Common Partner Interest in the Partnership, less $1
million. Such consideration would be subject to certain adjustments and offsets
and would be increased by a cash gross-up payment in an amount such that after
payment by Mr. Ward of all applicable taxes on the consideration and gross-up
payment, Mr. Ward would be in substantially the same position as if the
consideration were treated as long-term capital gain recognized on the sale by
Mr. Ward of a Common Partner Interest in the Partnership.

The Partnership is also proposing to enter into a related agreement with
Mr. Ward pursuant to which, upon the termination of Mr. Ward's employment with
the Partnership for any reason and in exchange for his release of claims, his
agreement to maintain the confidentiality of certain information about the
Partnership and covenant not to compete, he would be entitled to receive a cash
payment from the Partnership in an amount equal to the formula put price
applicable to Mr. Schenkel discussed above, except that in such formula Mr. Ward
would be deemed to own a 2% Common Partner Interest in the Partnership and the
resulting amount would be reduced by $1 million. Such consideration would be
subject to certain adjustments, restrictions and offsets and would be increased
by a cash gross-up payment substantially the same as described above for the
Change in Control agreement. In the event that a Change in Control occurs within
one year following Mr. Ward's termination of employment with the Partnership, it
is contemplated that he would be entitled to payment under the Change in Control
agreement, with any payments already received under this agreement to be
deducted therefrom.

The Partnership 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.

37
<PAGE> 38

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS AND FORM 8-K.

(a) The following financial statements, schedules and exhibits are filed as
part of this report or are incorporated herein as indicated.

1. Financial Statements and Schedule

See accompanying index to financial statements included in
Item 8 herein.

2. Exhibits

See Exhibit Index

(b) Reports on Form 8-K.

None.

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.

None.

38
<PAGE> 39

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, therunto duly authorized.

SOUTHERN FOODS GROUP, L.P.

By: SFG Management Limited Liability Company, its General Partner

By: /s/ PATRICK K. FORD
- --------------------------------------
Patrick K. Ford
Chief Financial Officer, Secretary and
Treasurer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
President and Chief Executive Officer of March 30, 1999
/s/ PETE SCHENKEL the Partnership, and President, Chief
- ------------------------------------ Executive Officer and Member of the
Pete Schenkel Representative Management Committee of SFG
Management (Principal Executive Officer)

/s/ PATRICK K. FORD Chief Financial Officer, Secretary and March 30, 1999
- ------------------------------------ Treasurer of the Company, and Chief
Patrick K. Ford Financial Officer, Secretary, and Treasurer
of SFG Management (Principal Financial
Officer)

/s/ GARY E. HANMAN Member of the Representative Committee of March 30, 1999
- ------------------------------------ SFG Management
Gary E. Hanman

/s/ GERALD L. BOS Member of the Representative Committee of March 30, 1999
- ------------------------------------ SFG Management
Gerald L. Bos

/s/ JERRY W. FRIE Member of the Representative Committee of March 30, 1999
- ------------------------------------ SFG Management
Jerry W. Frie
</TABLE>

<PAGE> 40
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1* -- Certificate of Limited Partnership for Southern
Foods Group, L.P. ("SFG") dated December 19, 1994

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

3.7* -- 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

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

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
</TABLE>

<PAGE> 41

<TABLE>
<S> <C>
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

10.32* -- 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

10.35* -- 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

10.39** -- Amendment No. 2 dated as of September 9, 1998 to
the Credit Agreement dated as of September 4,
1997, among Southern Foods Group, L.P., certain
lenders and The Chase Manhattan Bank as
Administrative Agent.
</TABLE>

<PAGE> 42

<TABLE>
<S> <C>
10.40*** -- Amendment No. 1 dated as of December 22, 1997 to
the Credit Agreement dated as of September 4,
1997, among Southern Foods Group, L.P., certain
lenders and The Chase Manhattan Bank as
Administrative Agent.

10.41*** -- Amendment No. 3 dated as of December 7, 1998 to
the Credit Agreement dated as of September 4,
1997, among Southern Foods Group, L.P., certain
lenders and The Chase Manhattan Bank as
Administrative Agent.

21.1*** -- Subsidiaries of Registrant

27.1*** -- Southern Foods Group, L.P. Financial Data Schedule
</TABLE>

* Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (No. 333-49289).

** Incorporated by reference to the Registrant's September 30, 1998 Form 10-Q.

*** Filed herewith.

<PAGE> 1
EXHIBIT 10.40

CONFORMED COPY

WAIVER AND AMENDMENT dated as of
December 22, 1997 (this "Waiver and
Amendment"), to the Credit Agreement dated
as of September 4, 1997 (the "Credit
Agreement"), among MID-AMERICA DAIRYMEN,
INC., a Kansas corporation, SOUTHERN FOODS
GROUP, L.P., a limited partnership organized
under the laws of the State of Delaware (the
"Borrower"), the several banks and financial
institutions party to the Credit Agreement
(the "Lenders") and THE CHASE MANHATTAN
BANK, as Administrative Agent.

A. Pursuant to the Credit Agreement, the Lenders and the Issuing Bank
have extended, and have agreed to extend, credit to the Borrower.

B. Section 5.15 of the Credit Agreement requires, inter alia, the
Borrower to arrange, within 90 days after the Effective Date, with a financial
institution that is a Lender one or more accounts to be used by the Borrower and
the Subsidiaries as their principal concentration and disbursement accounts.

C. The Borrower has requested that the Required Lenders and the
Administrative Agent grant a limited waiver of compliance by the Borrower with
the provisions of, and consent to certain amendments to, Section 5.15 of the
Credit Agreement, and the Administrative Agent and the Required Lenders are
willing to grant such limited waiver and consent to such amendments, on the
terms and subject to the conditions set forth herein.

D. Capitalized terms used but not defined herein shall have the
meanings assigned to them in the Credit Agreement.

Accordingly, in consideration of the mutual agreements herein contained
and other good and valuable consideration, the sufficiency and receipt of which
are hereby acknowledged, the parties hereto agree as follows:

SECTION 1. Waiver. The Administrative Agent and the Required Lenders
hereby waive any Default or Event of Default that has occurred or may occur or
be occurring at any time prior to the date that is 120 days after the Effective
Date as a result of the failure by the Borrower to arrange, within 90 days of
the Effective Date, with a financial institution that is a Lender one or more
accounts to be used by the Borrower and the Subsidiaries as their principal
concentration and disbursement accounts.

<PAGE> 2

SECTION 2. Amendment to Section 5.15. Section 5.15 of the Credit
Agreement is hereby amended by (a) deleting the number "90" in such Section and
substituting therefor the number "150" and (b) inserting the following sentence
immediately after the last sentence of such Section:

"The Borrower and each of the Subsidiaries shall pay, or cause to be
paid, at or prior to the end of each Business Day, to a Lender for
deposit in a concentration and disbursement account established as
required by this Section 5.15 all cash of the Borrower or any
Subsidiary (including all proceeds of collateral in which the Borrower
or any Subsidiary is granting a security interest under the Security
Documents) in excess of $250,000 in the aggregate for the Borrower and
all the Subsidiaries. Notwithstanding the foregoing, the Borrower and
the Subsidiaries shall be permitted to maintain, with one or more
financial institutions that are not Lenders, any deposit accounts used
exclusively for the payment of payroll of the Borrower or any
Subsidiary provided that the aggregate balance of all such accounts
does not exceed $750,000 at any time."

SECTION 3. Representations and Warranties. To induce the other parties
hereto to enter into this Waiver and Amendment, the Borrower represents and
warrants to each of the Lenders and the Administrative Agent that, after giving
effect to this Waiver and Amendment, (a) the representations and warranties set
forth in Article III of the Credit Agreement are true and correct in all
material respects on and as of the date hereof with the same effect as though
made on and as of the date hereof, except to the extent such representations and
warranties expressly relate to an earlier date, and (b) no Default or Event of
Default has occurred and is continuing.

SECTION 4. Conditions to Effectiveness. This Waiver and Amendment shall
become effective on the date on which the Administrative Agent shall have
received counterparts of this Waiver and Amendment that, when taken together,
bear the signatures of the Borrower, the Administrative Agent and the Required
Lenders.

SECTION 5. Effect of Waiver and Amendment. Except as expressly set
forth herein, this Waiver and Amendment shall not by implication or otherwise
limit, impair, constitute a waiver of, or otherwise affect the rights and
remedies of the Lenders, the Administrative Agent or the Borrower under the
Credit Agreement or any other Loan Document, and shall not alter, modify, amend
or in any way affect any of the terms, conditions, obligations, covenants or
agreements contained in the Credit Agreement or any other Loan Document, all of
which are ratified and affirmed in all respects and shall continue in full force
and effect. Nothing herein shall be deemed to entitle the Borrower to a consent
to, or a waiver, amendment, modification or other change of, any of the terms,
conditions, obligations, covenants or agreements contained in the Credit
Agreement or any

<PAGE> 3

other Loan Document in similar or different circumstances. After the date
hereof, any reference to the Credit Agreement shall mean the Credit Agreement as
modified hereby. This Waiver and Amendment shall constitute a "Loan Document"
for all purposes of the Credit Agreement and the other Loan Documents.

SECTION 6. Counterparts. This Waiver and Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument. Delivery of any executed counterpart of a signature page of
this Waiver and Amendment by facsimile transmission shall be effective as
delivery of a manually executed counterpart hereof.

SECTION 7. APPLICABLE LAW. THIS WAIVER AND AMENDMENT SHALL
BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF NEW YORK.

SECTION 8. Notices. All notices hereunder shall be given in accordance
with the provisions of Section 9.01 of the Credit Agreement.

SECTION 9. Headings. The headings of this Waiver and Amendment are for
purposes of reference only and shall not limit or otherwise affect the meaning
hereof.

IN WITNESS WHEREOF, the parties hereto have caused this Waiver and
Amendment to be duly executed by their duly authorized officers, all as of the
date and year first above written.

SOUTHERN FOODS GROUP, L.P.,

by SFG Management Limited
Liability Company, its sole
General Partner,

by
/s/ Patrick K. Ford
---------------------------------
Name: Patrick K. Ford
Title: Assistant Secretary

THE CHASE MANHATTAN BANK

by
/s/ GARY L. SPEVACK
---------------------------------
Name: Gary L. Spevack
Title: Vice President

<PAGE> 1

EXHIBIT 10.41

AMENDMENT AGREEMENT dated as of December 7,
1998 (this "Amendment"), to the Credit Agreement
dated as of September 4, 1997, as amended through
September 9, 1998 (the "Credit Agreement"), among
Southern Foods Group, L.P., a Delaware limited
partnership (the "Borrower"), Dairy Farmers of
America, Inc. (formerly known as Mid-America
Dairymen, Inc.) ("DFA"), the lenders party thereto
and The Chase Manhattan Bank, as Administrative
Agent.

A. The Borrower has requested that the Required Lenders agree
to amend certain provisions of the Credit Agreement as provided herein.

B. The Required Lenders are willing to so amend the Credit
Agreement pursuant to the terms and subject to the conditions set forth herein.

C. Capitalized terms used and not otherwise defined herein
shall have the meanings assigned to them in the Credit Agreement.

Accordingly, in consideration of the mutual agreements herein
contained and other good and valuable consideration, the sufficiency and receipt
of which are hereby acknowledged, the parties hereto agree as follows:

SECTION 1. Amendment to Section 1.01 of the Credit Agreement.
Section 1.01 of the Credit Agreement is hereby amended as follows:

(a) by deleting the figure "50%" from clause (a) of the
definition of the term "Change in Control" and substituting therefor
the figure "40%";

(b) by deleting the figure "50%" from clause (b)(i) of the
definition of the term "Change in Control" and substituting therefor
the figure "40%";

(c) by deleting the figure "50.1%" from clause (b)(ii) of the
definition of the term "Change in Control" and substituting therefor
the figure "40%"; and

<PAGE> 2

(d) by deleting the word "or" immediately before clause (d) of
the definition of the term "Change in Control" and adding the following
new clause (e) to such definition immediately before the phrase
"provided, however":

or (e) the Initial Borrower and Mr. Pete Schenkel, in the
aggregate, shall cease to own or control, directly or
indirectly, beneficially or of record, at least 80% of the
aggregate economic or voting equity ownership of the Borrower
or the General Partner, free and clear of all Liens

SECTION 2. Amendment to Article III of the Credit Agreement.
Article III of the Credit Agreement is hereby amended by adding the following
new Section 3.22:

SECTION 3.22 Year 2000. The Borrower is undertaking procedures
necessary to permit the proper functioning, in and beyond the year
2000, of (a) the Borrower's and the Subsidiaries' computer systems and
(b) equipment containing embedded microchips (including systems and
equipment supplied by others). All such procedures (and all testing
necessary to confirm that such procedures will permit such proper
functioning) will be completed by September 30, 1999, except to the
extent that the failure to complete such procedures and testing could
not reasonably be expected to result in a Default or have a Material
Adverse Effect. The cost to the Borrower and the Subsidiaries of such
reprogramming and testing and of the reasonably foreseeable
consequences of year 2000 to the Borrower and the Subsidiaries
(including, without limitation, reprogramming errors and the failure of
others' systems or equipment) is not reasonably likely to result in a
Default or have a Material Adverse Effect. Except for such of the
reprogramming referred to in the preceding sentences as may be
necessary, the computer and management information systems of the
Borrower and the Subsidiaries are, and, with ordinary course upgrading
and maintenance, will continue for the term of this Agreement to be,
sufficient to permit the Borrower and the Subsidiaries to conduct their
business without a Default or Material Adverse Effect.

<PAGE> 3

SECTION 3. Representations and Warranties. The
Borrower represents and warrants to each of the other
parties hereto that:

(a) Before and after giving effect to this Amendment, the
representations and warranties set forth in Article III of the Credit
Agreement are true and correct in all material respects with the same
effect as if made on the date hereof, except to the extent such
representations and warranties expressly relate to an earlier date.

(b) Before and after giving effect to this Amendment, no Event
of Default or Default has occurred and is continuing.

SECTION 4. Conditions to Effectiveness. This Amendment shall
become effective on the date on which the Administrative Agent shall have
received counterparts of this Amendment that, when taken together, bear the
signatures of the Borrower and the Required Lenders.

SECTION 5. Credit Agreement; Loan Document. Except as
specifically amended hereby, the Credit Agreement shall continue in full force
and effect in accordance with the provisions thereof as in existence on the date
hereof. After the date hereof, any reference to the Credit Agreement shall mean
the Credit Agreement as amended hereby. This Amendment shall be a Loan Document
for all purposes.

SECTION 6. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

SECTION 7. Counterparts. This Amendment may be executed in
counterparts (and by different parties hereto on different counterparts), each
of which shall constitute an original but all of which when taken together shall
constitute a single contract. Delivery of an executed signature page to this
Amendment by facsimile transmission shall be effective as delivery of a manually
signed counterpart of this Amendment.

<PAGE> 4

IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed by their respective authorized officers as of the
day and year first written above.

SOUTHERN FOODS GROUP, L.P.,

by /s/
----------------------------------
Name:
Title:

THE CHASE MANHATTAN BANK,
individually and as Administrative
Agent and Collateral Agent,

by /s/
----------------------------------
Name:
Title:

<PAGE> 1
EXHIBIT 21.1

SUBSIDIARIES OF REGISTRANT

SFG Capital Corporation

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,827
<SECURITIES> 0
<RECEIVABLES> 96,674
<ALLOWANCES> 4,465
<INVENTORY> 34,205
<CURRENT-ASSETS> 140,087
<PP&E> 213,597
<DEPRECIATION> 37,312
<TOTAL-ASSETS> 661,408
<CURRENT-LIABILITIES> 126,944
<BONDS> 314,208
0
201,514
<COMMON> 8,558
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 661,408
<SALES> 1,158,256
<TOTAL-REVENUES> 1,158,256
<CGS> 879,041
<TOTAL-COSTS> 879,041
<OTHER-EXPENSES> (1,565)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,446
<INCOME-PRETAX> 25,389
<INCOME-TAX> 0
<INCOME-CONTINUING> 25,389
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,389
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>