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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
Commission file number: 333-49289
SOUTHERN FOODS GROUP, L.P.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2571364
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3114 SOUTH HASKELL, DALLAS, TEXAS 75223
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(214) 824-8163
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(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
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No voting interest in the partnership was held by non-affiliates as of March 15,
2000.
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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 sells
its products under a variety of proprietary brand names including SCHEPPS(R),
OAK FARMS(R), MEADOW GOLD(R), MOUNTAIN HIGH(R), VIVA(R), BARBE'S(R) and BROWN'S
VELVET DAIRY(R). The Partnership also sells products under licensed or partner
brands including BORDEN(R), FLAV-O-RICH(R) AND FOREMOST(R). 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.
Borden/Meadow Gold Contribution
In September 1997, Dairy Farmers of America, Inc. ("DFA"), a former 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 Meadow Gold operations, 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, Inc. (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 in the Meadow Gold operations (the "Meadow
Gold Trademarks") from an affiliate of DFA for $50 million. The results of the
Meadow Gold operations are included in the Partnership's financial statements
from September 4, 1997, the date of contribution.
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(R), ELSIE(R) 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.
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Suiza Transaction
Effective January 1, 2000, DFA entered into a joint venture with Suiza
Foods Corporation ("Suiza") in which they combined certain of their domestic
fluid dairy operations into a newly formed venture, Suiza Dairy Group, L.P. DFA
received a 33.8% ownership interest in Suiza Dairy Group, L.P. in exchange for
the contribution of the operations of SFG and for the contribution of its
investments in other joint ventures with Suiza. Suiza received a 66.2% ownership
interest in Suiza Dairy Group, L.P. in exchange for the contribution of all of
its domestic fluid dairy operations (other than in Puerto Rico). In connection
with the Suiza transaction, Suiza Dairy Group, L.P. also acquired the management
owner's entire ownership interest in the Partnership. This transaction will be
accounted for as an acquisition of the Partnership using the purchase method of
accounting. Accordingly, the assets and liabilities of the Partnership will be
revalued as of the date of the acquisition.
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.
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, 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 primarily through its own sales force.
Independent distributors are also utilized mostly in rural areas. SFG processes
its products in 30 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 1999, 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.
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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 $52 million at December 31, 1999. 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.
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
competitive 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 significant consolidation is underway in the grocery
industry.
Employees
As of March 15, 2000, the Partnership employed approximately 5,700 people,
of whom approximately 10% are supervisory level employees. Approximately 29% 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.
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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 competitive position.
U.S. Milk Industry Regulation.
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.
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.
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ITEM 2. PROPERTIES.
The Partnership operates a total of 30 processing facilities in 12 states.
All of these plants produce fluid milk except for the facilities in McKinney,
Orem and Perry, which only produce ice cream. The following table provides
additional information regarding the Partnership's processing facilities:
<TABLE>
<CAPTION>
OWNED/
LEASED
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<S> <C>
Dallas, TX (Schepps Dairy)................... Owned
Houston, TX.................................. Owned
Dallas, TX (Oak Farms Dairy)................. Owned
McKinney, TX................................. Owned
Corpus Christi, TX........................... Owned
Salt Lake City, UT........................... Leased
San Antonio, TX.............................. Owned
Boise, ID.................................... Owned
Shreveport, LA............................... Owned
Englewood, CO................................ Owned
Denver, CO................................... Leased
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
Honolulu, HI (Fluid)......................... Owned
Honolulu, HI (Ice Cream)..................... Owned
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.
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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 five years
in the period ended December 31, 1999 are derived from the Partnership's audited
historical financial statements. 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>
Year Ended December 31,
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1999 1998 1997(a) 1996 1995
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF
INCOME DATA:
Net sales............ $ 1,300.9 $ 1,158.3 $ 741.0 $ 551.6 $ 475.2
Gross profit......... 320.2 279.2 193.8 126.6 115.6
Selling, distribution
and general and
administrative..... 237.4 209.0 140.4 100.2 89.7
Interest expense..... 27.8 31.4 16.5 7.6 9.1
Net income........... 42.3 25.4 26.1 11.5 10.1
BALANCE SHEET DATA:
Total assets......... $ 669.5 $ 661.4 $ 646.3 $ 182.5 $ 177.7
Total indebtedness... 295.0 314.2 346.7 96.0 103.2
</TABLE>
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(a) Results for the year ended December 31, 1997 are not necessarily comparable
to prior periods as Meadow Gold's operations are included in the
consolidated results from September 4, 1997, the date of the Meadow Gold
contribution.
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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.
In December 1999, the Partnership acquired the dairy operations of Hygeia
Dairy Company in Texas. These operations consist of one fluid milk processing
facility and one ice cream facility. In January 1999, the Partnership acquired
the dairy operations of Haleakala Dairy and in July 1998, the Partnership
acquired the dairy and juice processing operations of Excelsior Dairy, both of
which were located in Hawaii. The Haleakala and Excelsior Dairy operations were
consolidated into existing processing operations. 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. The Huntsville, Alabama plant is now operated under the Meadow
Gold brand. The results of these operations are included in the Partnership's
financial statements from the date of acquisition. The purchase price of these
acquisitions has been allocated to the assets acquired based on their estimated
fair values.
Effective January 1, 2000, DFA entered into a joint venture with Suiza in
which they combined certain of their domestic fluid dairy operations into a
newly formed venture, Suiza Dairy Group, L.P. DFA received a 33.8% ownership
interest in Suiza Dairy Group, L.P. in exchange for the contribution of the
operations of SFG and for the contribution of its investments in other joint
ventures with Suiza. Suiza received a 66.2% ownership interest in Suiza Dairy
Group, L.P. in exchange for the contribution of certain of its domestic fluid
dairy operations.
HISTORICAL RESULTS OF OPERATIONS
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
The comparability of the results of operations for the three years in the
period ended December 31, 1999 is significantly impacted by the acquisitions of
the Excelsior Dairy and Meadow Gold Huntsville operations in 1998, and the
contribution of the Meadow Gold operations to the Partnership by DFA in
September 1997. 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.
The Partnership's net sales were $1.3 billion for the year ended December
31, 1999, an increase of $142.6 million, or 12%, over the prior year. This
increase is due primarily to additional sales volumes from the acquired
businesses and growth in the Partnership's existing and new customer base.
The Partnership's gross profit was $320.2 million for the year ended
December 31, 1999, an increase of $41.0 million, or 15%, over the prior year.
This increase is primarily attributable to the increase in sales volume.
The Partnership's selling, general and administrative expense of $237.4
million for the year ended December 31, 1999 were $28.4 million higher than in
the prior year, due primarily to the acquired businesses and the general
increase in selling activity.
The Partnership's interest expense was $27.8 million for the year ended
December 31, 1999, a decrease of $3.6 million from the prior year. The decrease
is primarily due to lower average interest rates and a decline in average debt
outstanding.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The Partnership's net sales were $1.2 billion 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.
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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.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $66.3 million for the year ended
December 31, 1999 compared to $66.8 million for the year ended December 31,
1998. The slight decrease was due to changes in the components of working
capital compared to the prior year, which is primarily a result of timing
differences in receivables and payables. Cash and cash equivalents on hand at
December 31, 1999 were $6.9 million compared to $8.8 million at December 31,
1998.
Cash used in investing activities during 1999 consists of $14.3 million for
the acquisitions of the operations of Hygeia Dairy and Haleakala Dairy, combined
with $28.4 million for additions to property, plant and equipment.
In 1999, the Partnership repaid $57.4 million in long-term debt, including
the repurchase of $17.0 million of Notes. The Partnership also made tax payment
distributions of $1.4 million and cash distributions for return on preferred
interests of $4.3 million in 1999. Balances outstanding under the Partnership's
revolving credit facility increased by $37.9 million in 1999.
SFG's total debt at December 31, 1999 was $295.0 million, compared to
$314.2 million at December 31, 1998. Simultaneous with the closing of the Suiza
transaction, Suiza Dairy Group entered into a new senior credit facility with a
group of lenders which expires in January 2005 (the "New Senior Facility").
Under this credit facility, the Partnership has a term loan of $180 million and
a $60 million revolving credit facility. The proceeds from the term loan were
used to repay the amounts outstanding under the terminated Senior Bank
Facilities. The New Senior Facility bears interest at a rate equal to one of the
following rates, at the Partnership's option: (i) a base rate equal to the
higher of the Federal Funds rate plus 50 basis points or the prime rate, plus a
margin that varies from 25 to 125 basis points, depending on certain financial
ratios, or (ii) the LIBOR rate plus a margin that varies from 125 to 225 basis
points, depending on certain financial ratios. The New Senior Facility is
secured by substantially all of the Partnership's assets. The $113.8 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. As a result
of the Suiza transaction, the Partnership is required to offer to repurchase its
senior subordinated notes at 101% of face value plus accrued and unpaid
interest. This offer to repurchase was made in January 2000 and closes March 20,
2000. The payment for any Notes tendered will be funded through availability
under the new revolving credit facility and/or through funding from the Suiza
Dairy Group.
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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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. In January 1998, the Partnership
entered into various interest rate swap agreements. The fixed LIBOR rate under
these agreements ranged between 5.565% and 5.63%. The interest rate swaps were
terminated during 1999, with no significant amounts owed to or from the
counterparties. At December 31, 1999, only the interest rate collar remains
outstanding.
Interest payments on the Notes and on the New Senior Facility represent
significant liquidity requirements for SFG. If the Notes are not repurchased by
the Partnership pursuant to the offer to repurchase, SFG anticipates that the
Notes will require annual interest payments of approximately $11.2 million and
the New Senior Facility will require substantial interest payments based on the
unamortized loan balance and variable interest rates in effect (approximately
$14.1 million annually based on the initial funding 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 New Senior Facility, should be sufficient to fund its debt service
requirements, working capital needs, anticipated capital expenditures and other
operating expenses.
The New Senior Facility 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 New Senior Facility
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.
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 problem. The Year 2000
problem arises from the way dates are recorded and computed in most
applications, operating systems, hardware and embedded chips. If the problem had
not been corrected, systems that use a date in its prescribed function could
have failed or produced erroneous results before, on and after the year 2000.
All Year 2000 remediation efforts for the Partnership were completed on time and
without any material adverse impact on operations. The cost to complete these
efforts was not material to the Partnership.
10
<PAGE> 11
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
collar and exposures described above. As of December 31, 1999, the analysis
indicated that such interest rate movement would not have a material effect on
the Partnership's financial position, results of operations or cash flows.
However, actual gains and losses in the future may differ materially from that
analysis based on changes in the timing and amount of interest rate movements
and the Partnership's actual exposure and hedges.
11
<PAGE> 12
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........................................................ 13
Consolidated Balance Sheets as of December 31, 1999 and 1998............................. 14
Consolidated Statements of Income for the three years in the period ended
December 31, 1999...................................................................... 15
Consolidated Statements of Partners' Equity for the three years in the period ended
December 31, 1999...................................................................... 16
Consolidated Statements of Cash Flows for the three years in the period ended
December 31, 1999...................................................................... 17
Notes to the Consolidated Financial Statements........................................... 18
Financial Statement Schedule:
Schedule II Valuation and Qualifying Accounts........................................... 31
</TABLE>
12
<PAGE> 13
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, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 auditing standards generally
accepted in the United States, 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 14, 2000
13
<PAGE> 14
SOUTHERN FOODS GROUP, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash .......................................................... $ 6,910 $ 8,827
Accounts receivable, net ...................................... 97,933 92,209
Inventories ................................................... 34,059 34,205
Prepaid expenses and other assets ............................. 6,803 4,846
------------ ------------
Total current assets .................................. 145,705 140,087
------------ ------------
Property, plant and equipment, at cost:
Land .......................................................... 33,171 29,774
Buildings and improvements .................................... 61,514 45,426
Machinery and equipment ....................................... 137,507 129,441
Vehicles ...................................................... 10,504 8,956
------------ ------------
242,696 213,597
Less: Accumulated depreciation and amortization ............... (54,642) (37,312)
------------ ------------
188,054 176,285
------------ ------------
Goodwill, net ................................................... 221,619 229,512
Trademarks and licenses, net .................................... 99,227 101,529
Deferred financing costs, net ................................... 10,760 11,929
Other assets .................................................... 4,106 2,066
------------ ------------
Total assets .......................................... $ 669,471 $ 661,408
============ ============
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 34,290 $ 46,464
Raw milk accrual .............................................. 30,516 32,035
Accrued expenses .............................................. 51,115 47,845
Current portion of long-term debt ............................. 814 600
------------ ------------
Total current liabilities ....................................... 116,735 126,944
------------ ------------
Long-term debt .................................................. 294,215 313,608
Other long-term liabilities ..................................... 12,787 10,784
Commitments and contingencies (Note 9)
Partners' equity:
Limited partner preferred, stated amount of $288,115
and $264,024, respectively ................................... 225,605 201,514
Limited partner common ........................................ 19,562 8,139
General partner common ........................................ 567 419
------------ ------------
245,734 210,072
------------ ------------
Total liabilities and partners' equity .............. $ 669,471 $ 661,408
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE> 15
SOUTHERN FOODS GROUP, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR EACH OF THE YEARS ENDED
DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales ......................... $ 1,300,897 $ 1,158,256 $ 740,983
Cost of sales ..................... 980,678 879,041 547,182
------------ ------------ ------------
320,219 279,215 193,801
------------ ------------ ------------
Selling, distribution and general
and administrative expenses ..... 237,404 209,003 140,429
Amortization of goodwill and
other intangible assets ......... 14,143 14,942 11,950
------------ ------------ ------------
Income from operations ............ 68,672 55,270 41,422
Interest expense ................ 27,816 31,446 16,500
Other income, net ............... (1,469) (1,565) (1,174)
------------ ------------ ------------
Net income ........................ $ 42,325 $ 25,389 $ 26,096
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE> 16
SOUTHERN FOODS GROUP, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR EACH OF THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
-------------------------------------------------------------
Preferred Common
------------ -----------------------------
Limited General Limited
Partner Partner Partner Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Partners' equity, January 1, 1997 .... $ -- $ 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
Conversion of common
equity to preferred ............... 1,415 (1,415) --
Partner distributions ............... (4,286) (6) (2,371) (6,663)
Net income .......................... 26,962 154 15,209 42,325
------------ ------------ ------------ ------------
Partners' equity, December 31, 1999 .. $ 225,605 $ 567 $ 19,562 $ 245,734
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE> 17
SOUTHERN FOODS GROUP, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR EACH OF THE YEARS ENDED
DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................................ $ 42,325 $ 25,389 $ 26,096
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ............................................................. 19,896 18,614 9,769
Amortization ............................................................. 15,546 16,456 12,829
Change in assets and liabilities, net of effects
of business acquisitions:
(Increase) decrease in accounts receivable ............................. (5,724) (14,222) (3,682)
(Increase) decrease in inventories ..................................... 3,558 (3,656) (869)
(Increase) decrease in prepaid expenses and
other assets ......................................................... 1,635 (896) 313
Increase (decrease) in accounts payable and
accrued expenses ..................................................... (10,906) 25,123 (708)
------------ ------------ ------------
Net cash provided by operating activities ........................... 66,330 66,808 43,748
------------ ------------ ------------
Cash flows from investing activities:
Purchase of trademarks ..................................................... (105,000)
Business acquisitions, net of cash acquired ................................ (14,325) (6,161) (8,851)
Additions to property, plant and equipment ................................. (28,396) (17,977) (12,123)
Decrease in other assets ................................................... 487 568 894
------------ ------------ ------------
Net cash used in investing activities ............................... (42,234) (23,570) (125,080)
------------ ------------ ------------
Cash flows from financing activities:
Borrowings on long-term debt ............................................... 255,000
Repayments on long-term debt ............................................... (40,410) (21,294) (149,706)
Repurchase of Subordinated Notes ........................................... (17,000) (19,230)
Borrowings on related party notes payable .................................. 20,490
Repayments on related party notes payable .................................. (54,914)
Net borrowings - revolving credit facility ................................. 37,945 7,700 4,100
Borrowings - short-term debt ............................................... 954 575
Repayments - short-term debt ............................................... (669) (234)
Payment of deferred financing costs ........................................ (170) (979) (12,141)
Partner contributions - preferred equity ................................... 45,000
Partner distributions - preferred equity ................................... (4,286) (2,386)
Partner contributions - common equity ...................................... 6,208
Partner distributions - common equity ....................................... (2,377) (3,310) (29,953)
------------ ------------ ------------
Net cash provided by (used in) financing activities .................. (26,013) (39,158) 84,084
------------ ------------ ------------
Net change in cash ........................................................... (1,917) 4,080 2,752
Cash at beginning of period .................................................. 8,827 4,747 1,995
------------ ------------ ------------
Cash at end of period ........................................................ $ 6,910 $ 8,827 $ 4,747
============ ============ ============
Supplemental information:
Interest paid ................................................................ $ 25,825 $ 30,818 $ 10,248
============ ============ ============
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.
17
<PAGE> 18
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") operates 30
facilities which process and distribute fluid milk products, cultured products,
ice cream products, fruit juices and drinks and other dairy related products.
SFG sells its products under a variety of proprietary brand names including
Schepps(R), Oak Farms(R), Meadow Gold(R), Mountain High(R), Viva(R), Barbe's(R)
and Brown's Velvet Dairy(R). The Partnership also sells products under licensed
or partner brands including Borden(R), Flav-O-Rich(R) and Foremost(R). 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. SFG also sells cultured products,
such as sour cream, cottage cheese and yogurt, ice cream, fruit juices and
drinks and other dairy related products such as cheese, eggs, butter and
non-dairy creamers.
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
former 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.
SUIZA TRANSACTION
Effective January 1, 2000, DFA entered into a joint venture with Suiza Foods
Corporation ("Suiza") in which they combined certain of their domestic fluid
dairy operations into a newly formed venture, Suiza Dairy Group, L.P. DFA
received a 33.8% ownership interest in Suiza Dairy Group, L.P. in exchange for
the contribution of the operations of SFG and for the contribution of its
investments in other joint ventures with Suiza. Suiza received a 66.2% ownership
interest in Suiza Dairy Group, L.P. in exchange for the contribution of all of
its domestic fluid dairy operations (other than in Puerto Rico). In connection
with the Suiza transaction, Suiza Dairy Group, L.P. also acquired the management
owner's entire ownership interest in the Partnership. This transaction will be
accounted for as an acquisition of the Partnership using the purchase method of
accounting. Accordingly, the assets and liabilities of the Partnership will be
revalued as of the date of the acquisition.
Upon the closing of the Suiza transaction, Suiza Dairy Group, L.P. entered
into a new credit facility. A portion of the borrowings under this new facility
was used to repay amounts outstanding under SFG's existing Senior Bank
Facilities. Also, as a result of this transaction, the Partnership is required
to offer to repurchase its senior subordinated notes at 101% of face value (see
Note 6).
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.
18
<PAGE> 19
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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 $52 million and
$41 million at December 31, 1999 and 1998, respectively.
Other Intangible Assets
Trademarks and licenses 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 $5.9 million and $3.3 million at December 31, 1999,
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 $52.0 million at December 31, 1999. The terms of the license
agreement require the Partnership to maintain standards of appearance and
quality of the Borden Trademarks and the related products.
19
<PAGE> 20
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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, 1999 and 1998,
the financial accounting basis of the net assets of the Partnership exceeded its
tax basis by approximately $263 million and $252 million, respectively. These
differences are related primarily to goodwill, fixed assets and accrued
liabilities.
Fair Value of Financial Instruments
The fair value of the $113.8 million and $130.8 million of senior
subordinated notes (See Note 2) that remain outstanding was approximately $115
million and $137 million at December 31, 1999 and 1998, respectively, based on
market prices. 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.
20
<PAGE> 21
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, as amended, is effective
for fiscal years beginning after June 15, 2000 (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; however, management does not believe the
impact of such adoption will be material to the Partnership's financial
statements.
2. ACQUISITIONS
In December 1999, the Partnership acquired the dairy operations of Hygeia
Dairy Company in Texas. These operations consist of one fluid milk processing
facility and one ice cream facility. In January 1999, the Partnership acquired
the dairy operations of Haleakala Dairy and in July 1998, the Partnership
acquired the dairy and juice processing operations of Excelsior Dairy, both
which were located in Hawaii. The Haleakala and Excelsior Dairy operations were
consolidated into existing processing operations. 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. The Huntsville, Alabama plant is now operated under the Meadow
Gold brand. The results of these operations are included in the Partnership's
financial statements from the date of acquisition. The purchase price of these
acquisitions has been allocated to the assets acquired based on their estimated
fair values.
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 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
Meadow Gold operations, 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 in the Meadow Gold operations (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 the Meadow Gold
operations are included in the accompanying financial statements from September
4, 1997, the date of contribution.
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 (R), Elsie (R) 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.
21
<PAGE> 22
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following unaudited pro forma summary results of operations assume that
the Meadow Gold contribution and the related transactions occurred on January 1,
1997 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997
-------------
<S> <C>
Net sales............... $ 1,054,335
Net income.............. $ 18,409
</TABLE>
The unaudited pro forma summary results of operations are not necessarily
indicative of results of operations that would have occurred had the
transactions taken place on January 1, 1997, or of future results of operations
of the combined businesses.
In March 1997, the Partnership purchased certain assets of Land-O-Pines
Dairy. 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,
and the related assets and liabilities were recorded on the Partnership's books
at DFA's historical cost.
The results of Land-O-Pines Dairy and Barbe's Dairy are included in the
accompanying financial statements from the date of acquisition/contribution.
3. ACCOUNTS RECEIVABLE
A summary of accounts receivable is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Trade.................................... $ 95,088 $ 89,281
Other.................................... 9,855 7,393
----------- -----------
104,943 96,674
Less allowance for doubtful accounts..... (7,010) (4,465)
----------- -----------
$ 97,933 $ 92,209
=========== ===========
</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 11% to sales in 1999 and
1998, respectively, contributed over 10% to SFG's total sales.
4. INVENTORIES
A summary of inventories is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Raw materials and supplies............... $ 17,691 $ 17,655
Finished goods........................... 16,368 16,550
----------- -----------
$ 34,059 $ 34,205
=========== ===========
</TABLE>
22
<PAGE> 23
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Accrued insurance expense................ $ 10,152 $ 14,051
Accrued payroll and related benefits..... 10,495 11,737
Accrued interest expense................. 3,938 4,790
Accrued expenses - other................. 26,530 17,267
----------- -----------
$ 51,115 $ 47,845
=========== ===========
</TABLE>
6. LONG-TERM DEBT
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Term loans............................... $ 120,500 $ 160,500
Senior Notes............................. 113,770 130,770
Revolving loan........................... 59,945 22,700
Other notes.............................. 814 938
----------- -----------
$ 295,029 $ 314,208
=========== ===========
</TABLE>
Terminated Senior Bank Facility - 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 bore 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
ranged between 50 basis points and 125 basis points for Alternate Base Rate
loans, and between 175 basis points and 250 basis points for LIBOR loans, based
on earnings levels. For Tranche B loans, the margin was 175 basis points for
Alternate Base Rate loans, and 300 basis points for LIBOR loans. These weighted
average rates were 8.25% and 9.5% for Tranche A and Tranche B at December 31,
1999, 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 8.87% at
December 31, 1999. There were no amounts available for borrowing under the
revolving credit facility at December 31, 1999. The Senior Bank Facilities were
secured by substantially all of the Partnership's assets.
New Senior Bank Facility - Simultaneous with the closing of the Suiza
transaction discussed in Note 1, Suiza Dairy Group entered into a new senior
credit facility with a group of lenders which expires in January 2005 (the "New
Senior Facility"). Under this credit facility, the Partnership has a term loan
of $180 million and a $60 million revolving credit facility. The proceeds from
the term loan were used to repay the amounts outstanding under the terminated
Senior Bank Facilities. The New Senior Facility bears interest at a rate equal
to one of the following rates, at the Partnership's option: (i) a base rate
equal to the higher of the Federal Funds rate plus 50 basis points or the prime
rate, plus a margin that varies from 25 to 125 basis points, depending on
certain financial ratios, or (ii) the LIBOR rate plus a margin that varies from
125 to 225 basis points, depending on certain financial ratios.
23
<PAGE> 24
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Interest Rate Agreements - 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. In
January 1998, the Partnership entered into various interest rate swap
agreements. The fixed LIBOR rate under these agreements ranged between 5.565%
and 5.63%. The interest rate swaps were terminated during 1999, with no
significant amounts owed to or from the counterparties. At December 31, 1999,
only the interest rate collar remains outstanding. The amount that would have
been required to settle the collar at December 31, 1999 would not have been
material to the Partnership.
Senior Subordinated Notes - 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>
REDEMPTION
PERIOD 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.
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. As the Suiza transaction discussed in Note 1 qualifies as a change in
control, the Partnership offered to repurchase the Notes under the requirements
of the indenture in January 2000. This offer closes March 20, 2000. The payment
for any Notes tendered will be funded through availability under the new
revolving credit facility and/or through funding from the Suiza Dairy Group.
The Partnership repurchased $17.0 million of Notes during December 1999 from
DFA (See Note 7), and $19.2 million of Notes during September 1998 through
market channels. Approximately $113.8 million of Notes remain outstanding at
December 31, 1999.
Both the New Senior Facility 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.
24
<PAGE> 25
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At December 31, 1999, future maturities of the Partnership's debt were as
follows:
<TABLE>
<CAPTION>
SCHEDULED
YEAR ENDING DECEMBER 31, DEBT PAYMENTS
------------------------ -----------------
(in thousands)
<S> <C>
2000.......................... $ 814
2001.......................... 2,700
2002.......................... 15,000
2003.......................... 17,500
2004.......................... 20,000
Thereafter.................... 239,015
-----------------
Total......................... $ 295,029
=================
</TABLE>
7. RELATED PARTY TRANSACTIONS
In December 1999, the Partnership repurchased $17 million of Notes from DFA
at a price of 101%, plus accrued and unpaid interest. In January, 2000, the
Partnership offered to repurchase all outstanding Notes at 101% plus accrued and
unpaid interest as discussed in Note 6.
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 identical 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 $2.5 million
for the year ended December 31, 1999, $1.9 million for the year ended December
31, 1998, and $2.1 million for the year ended December 31, 1997.
25
<PAGE> 26
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
The Partnership also sponsors a 401(k) plan for certain union employees of
Meadow Gold. The Partnership matches 50% of the participants' basic
contributions, as defined. Participants vest in the Partnership's contributions
over five years. Employer contributions to this plan were approximately $0.1
million for the each of the three years in the period ended December 31, 1999
Retirement plans -- Defined Benefit Plans
Effective October 1, 1996, the Partnership adopted the SERP. The SERP was
available to certain specified executives of the Partnership and was to provide
annual benefits based on a percentage of the executives' salaries. Benefits were
to be payable upon retirement at specified retirement ages, or upon disability
or involuntary termination. In connection with the Suiza transaction, the SERP
was terminated in January 2000. As a result, the Partnership recorded a
curtailment of this plan in December 1999.
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.
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 $3.2 million to these trusts during 1999, $2.9
million during 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>
1999 1998
---------- ----------
<S> <C> <C>
Benefit obligation at beginning of year............ $ 22,686 $ 22,418
Service cost....................................... 81 582
Interest cost...................................... 1,407 1,511
Curtailment gain................................... (92) --
Amendments......................................... (856)
Net actuarial loss/(gain).......................... (688) 1,108
Benefits paid...................................... (2,412) (2,077)
---------- ----------
Benefit obligation at end of year.................. $ 20,982 $ 22,686
========== ==========
</TABLE>
26
<PAGE> 27
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Fair value of plan assets at beginning of year.... $ 19,209 $ 19,664
Actual return on plan assets...................... 1,847 1,622
Benefits paid..................................... (2,412) (2,077)
---------- ----------
Fair value of plan assets at end of year.......... $ 18,644 $ 19,209
========== ==========
</TABLE>
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Funded status..................................... $ (2,337) $ (3,477)
Unrecognized actuarial loss/(gain)................ (783) 988
Unrecognized prior service cost................... (162) 431
---------- ----------
Net amount recognized............................. $ (3,282) $ (2,058)
========== ==========
</TABLE>
Pension expense includes the following components (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Service cost for benefits earned during the year.. $ 81 $ 582
Interest cost on projected benefit obligation..... 1,407 1,511
Curtailment loss.................................. 1,258 -
Expected return on plan assets.................... (1,530) (1,578)
Net amortization and deferral..................... 8 80
---------- ----------
Net periodic benefit cost......................... $ 1,224 $ 595
========== ==========
</TABLE>
The actuarial assumptions used were as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Discount rate..................................... 7.5% 6.5%
Expected long-term rate of return on assets....... 8.5% 8.5%
Rate of increase in compensation levels........... 4.5% 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>
1999 1998
---------- ----------
<S> <C> <C>
Benefit obligation at beginning of year........... $ 1,067 $ 8,007
Service cost...................................... 29
Interest cost..................................... 52 540
Amendments........................................ 560 (9,012)
Actuarial loss/(gain)............................. 58 2,210
Benefits paid..................................... (627) (707)
---------- ----------
Benefit obligation at end of year................. $ 1,110 $ 1,067
========== ==========
</TABLE>
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Fair value of plan assets at beginning of year.... $ -- $ --
Employer contribution............................. 627 707
Benefits paid..................................... (627) (707)
---------- ----------
Fair value of plan assets at end of year.......... $ -- $ --
========== ==========
</TABLE>
27
<PAGE> 28
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Funded status...................................... $ (1,110) $ (1,067)
Unrecognized actuarial loss/(gain)................. 2,346 2,485
Unrecognized prior service cost.................... (7,707) (9,012)
---------- ----------
Net amount recognized.............................. $ (6,471) $ (7,594)
========== ==========
</TABLE>
The discount rate used in determining the accumulated benefit obligation was
7.75% at December 31, 1999, 6.5% at December 31, 1998, and 7.0% at December 31,
1997. The per capita cost of covered health care benefits is assumed to have
increased at an annual rate of 8.7% for 1999, 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 $55,000 and $53,000
at December 31, 1999 and 1998, respectively.
The components of net periodic postretirement benefit cost were as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Service cost....................................... $ -- $ 29
Interest cost...................................... 52 540
Amortization of prior service cost................. (745) --
Recognized actuarial loss.......................... 196 --
---------- ----------
Net periodic postretirement benefit cost........... $ (497) $ 569
==========- ==========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
A summary of future minimum lease payments under noncancelable operating
leases as of December 31, 1999 for buildings, vehicles and equipment is as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, (IN THOUSANDS)
------------ --------------
<S> <C>
2000.................................... $ 11,192
2001.................................... 8,564
2002.................................... 7,092
2003.................................... 5,360
2004.................................... 2,971
</TABLE>
Rental expense of $17.0 million was incurred for the year ended December 31,
1999, $14.5 million for the year ended December 31, 1998 and $9.4 million for
the year ended December 31, 1997.
The Partnership is party to certain litigation in the normal course of
business. Management does not believe the outcome of any of these proceedings
will materially affect the Partnership's financial position or results of
operations.
10. EQUITY TRANSACTIONS
At December 31, 1996, the Partnership had only common equity interests
outstanding. The general partner interest of 1% was owned by SFG Management
Limited Liability Company ("SFG Management"), which was owned 80% by DFA and 10%
by each of two management owners. The 99% limited partner interest was owned by
an affiliate of DFA.
28
<PAGE> 29
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 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%. Tax distributions were made to management owners in
accordance with the partnership agreement totaling $4 million in 1997, $3.3
million in 1998, and $1.4 million in 1999. In each of these years, equal amounts
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. 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, 1999:
<TABLE>
<CAPTION>
SERIES RETURN STATED VALUE BOOK VALUE
--------- --------- ------------ -----------
<S> <C> <C> <C>
(in thousands)
A 10% $ 113,496 $ 50,986
B 10% 112,962 112,962
C 10% 18,827 18,827
D 9.5% 30,000 30,000
E 10% 12,830 12,830
----------- -----------
$ 288,115 $ 225,605
=========== ===========
</TABLE>
29
<PAGE> 30
SOUTHERN FOODS GROUP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
30
<PAGE> 31
SOUTHERN FOODS GROUP, L.P.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS (a)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(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, 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
December 31, 1999:
Allowance for doubtful accounts....... $4,465 5,314 (2,769) $ 7,010
</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.
(c) Represents additions due to the Meadow Gold contribution and the Barbe's
Dairy contribution.
31
<PAGE> 32
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 current executive officers of the and the
sole manager of SFG Management Limited Liability Company, the general partner of
the Partnership.
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------------- ---- -----------------------------
<S> <C> <C>
Gregg L. Engles.............. 42 Chief Executive Officer
Pete Schenkel................ 64 President
Rick Beaman.................. 43 Chief Operating Officer
Barry A. Fromberg............ 44 Vice President
Mike Hogan................... 40 Vice President
Michelle P. Goolsby.......... 42 Vice President, Sole Manager
</TABLE>
Each of the above officers have held such office since the effective date
of the Suiza transaction in January 2000. Each of these officers are also
officers of Suiza as described below.
Gregg L. Engles has served as Chairman of the Suiza Board of Directors and
as Suiza's Chief Executive Officer since October 1994. Prior to the formation
of Suiza, he served as Chairman of the Board and Chief Executive Officer of
certain predecessors to Suiza. He currently serves on the Board of Directors of
Evercom, Inc., an independent provider of inmate telecommunication services, and
Texas Capital Bankshares. His term will expire in 2001.
Pete Schenkel joined Suiza in January 2000 as Vice Chairman of the Board
of Directors of Suiza and President of Suiza Dairy Group, L.P. Mr. Schenkel
served as President of the Partnership since 1987, became the Chief Executive
Officer in 1994 and served on the Representative Committee of SFG Management
Limited Liability Company from its formation in 1994 until the closing of the
Suiza transaction.
Rick Beaman has served as Chief Operating Officer of the Partnership since
January 2000. Mr. Beaman is also the Chief Operating Officer of the Southwest
region of Suiza since January 2000. Prior to becoming a part of Suiza, he
worked in several positions at SFG, including Executive Vice President during
1999, Vice President in 1997 and 1998, and general manager of SFG's Oak Farms
Dairy from 1991 to 1997. Prior to joining SFG, he worked in various capacities
at Borden, Inc. for 17 years.
Barry A. Fromberg joined Suiza in June 1998 as Executive Vice President
and Chief Financial Officer. Prior to Suiza, he served as Chairman and Chief
Executive Officer of a subsidiary of Paging Network, Inc. from 1995 to 1998.
He was Senior Vice President and Chief Financial Officer of Paging Network,
Inc. from 1993 to 1995. He served as Executive Vice President and Chief
Financial Officer of Simmons Communications, Inc., a cable television operator
from 1987 to 1993. From 1980 to 1987 he was Manager of Corporate Development
for Comcast Corporation. Mr. Fromberg was a Senior Accountant with Coopers and
Lybrand from 1977 to 1980.
Mike Hogan joined Suiza in August 1998 as Senior Vice President and Chief
Marketing Officer. Before joining Suiza, he spent 13 years in various sales,
finance and marketing positions at Frito Lay Corporation. From January 1997 to
August 1998, he served as Vice President, International Marketing, and from
December 1994 to January 1997, he served Vice President, U.S. Marketing, for
Frito Lay. Prior to joining Frito Lay, he worked in financial planning at
Texas Instruments.
Michelle P. Goolsby joined Suiza in July 1998 as Executive Vice President,
General Counsel and Corporate Secretary. In August 1999, she assumed the
additional role of Chief Administrative Officer. From September 1988 until
July 1998, Ms. Goolsby held various positions with the law firm of Winstead,
Sechrest & Minick, most recently as a partner, chair of the Business section
and a member of the Compensation Committee. Prior to joining Winstead
Sechrest & Minick, she held various positions with the Trammel Crow Company.
Ms. Goolsby also serves on the Board of Directors of Horizon Organic Holding
Company, of which Suiza owns a minority interest.
32
<PAGE> 33
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 in office during 1999 for the fiscal years shown.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(a)
-----------------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND COMPENSATION COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(4) ($)(5)
------------------ ------- --------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Pete Schenkel(1) 1999 $ 369,642 $ 1,423,008 $ 1,416,814 $ 108,018
Chief Executive 1998 369,435 602,818 3,303,097 48,668
Officer............... 1997 358,651 455,888 2,000,000 740,263(6)
1999 $ 339,877 $ 273,281 $ 14,175
Tony Ward(2) 1998 336,000 240,187 23,287
Vice Chairman......... 1997(7) 110,200 119,301 6,612
Patrick Ford(3)
Chief Financial 1999 $ 129,578 $ 108,774 $ 169,362
Officer............... 1998 127,890 40,000 61,837
</TABLE>
- ---------
(1) Mr. Schenkel resigned from his position as Chief Executive Officer of the
general partner of the Partnership effective January 1, 2000 in connection
with the Suiza transaction. He is now president of Suiza Dairy Group, L.P.,
Suiza's joint venture with DFA. In that position, he also serves as
president of the subsidiaries of the joint ventures, including SFG's general
partner. See Item 10-Directors and Executive Offices of the Registrant.
(2) Mr. Ward resigned from his position as Vice Chairman effective January 1,
2000 in connection with the Suiza transaction. He now serves as Senior Vice
President of Suiza Dairy Group, L.P.
(3) Mr. Ford resigned from his position as Chief Financial Officer of the
general partner of the Partnership effective February 1, 2000 in connection
with the Suiza transaction. He is now Senior Vice President - Finance of
Suiza Dairy Group, L.P.
(4) 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.
Represent 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.
(5) Represents amounts contributed by the Partnership under retirement plans,
less the amounts set forth in footnote (d) below, where applicable.
(6) Includes special distributions made to Mr. Schenkel ($700,000), as a partner
in the Partnership, in connection with the Meadow Gold transactions.
(7) 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.
EXECUTIVE EMPLOYMENT AGREEMENTS
In September 1997, the Partnership entered into executive employment
agreements with Pete Schenkel and Anthony R. Ward. The employment agreements
provided for the payment of an annual salary of not 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
was 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. Mr. Schenkel's agreement was
amended and restated effective September 19,1999. The amended and restated
agreement was virtually identical to the original agreement except that it
guaranteed a minimum annual bonus. Mr. Schenkel's agreement terminated effective
January 1, 2000 in connection with the Suiza transaction.
During 1999, the Partnership entered into a retention agreement with Patrick
Ford, which provides for certain benefits upon a change in control of the
Partnership. These benefits include base salary and bonus compensation at a
level no less than the compensation being received prior to the change in
control. The agreement also includes a severance benefit equal to two years base
salary and bonus in the event of a termination without cause during the term of
the agreement. The term is for an initial period of two years, with one year
renewal periods thereafter.
33
<PAGE> 34
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%
Suiza Dairy Group Limited Partner 99%
</TABLE>
SFG Management Limited Liability Company is owned 5% by Suiza Management
Corporation and 95% by Suiza Dairy Group.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
AFFILIATION WITH DFA
As a result of the Suiza transaction, DFA owns a 33.8% limited partnership
interest in Suiza Dairy Group. As of December 31, 1999, DFA owned $239 million
in net stated amount of Preferred Interests, including unpaid preferred returns,
and Mid-Am Capital, L.L.C. owned an additional $49 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.
Prior to the Suzia transaction, the Partnership employed Mr. Jerry Bos, the
CFO of DFA as a consultant on financial services. The Partnership paid Mr. Bos
consulting fees of $125,000 in both 1999 and 1998.
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.
34
<PAGE> 35
CERTAIN RELATED PARTY PAYMENTS
In 1999, the Partnership made distributions to Mr. Schenkel of $1.4 million
as a distribution of Partnership Tax Amounts (as defined) in respect of certain
tax liabilities and to DFA of $1.4 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 1999, they received compensation from the Partnership of approximately
$84,000 and $131,000 respectively.
TRANSACTIONS WITH MR. WARD
During 1999, the Partnership entered into an agreement with Tony Ward
pursuant to which Mr. Ward became 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 was subject to certain adjustments and offsets and 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 also entered 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 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 have been entitled to payment under the Change in
Control agreement, with any payments already received under this agreement to be
deducted therefrom. The Suiza transaction in January 2000 resulted in a Change
in Control as defined under these agreements.
35
<PAGE> 36
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.
September 30, 1999 and January 18, 2000
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.
36
<PAGE> 37
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/ Barry A. Fromberg
- -------------------------------
Barry Fromberg
Vice President
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>
/s/ Michelle P. Goolsby Sole Manager and Vice President March 16, 2000
- ---------------------------
Michelle Goolsby
</TABLE>
37
<PAGE> 38
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -------------------------------------------------------------------
<S> <C>
3.1 -- Third Amended and Restated Limited Partnership Agreement of
the Company (incorporated by reference to the Registrant's Form
8-K filed on January 18, 2000)
3.2 -- Certificate of Formation of SFG Management Limited Liability
Company ("SFG Management") dated December 16, 1994 (incorporated
by reference to the Registrant's Registration Statement on Form
S-4 (No. 333-49289))
3.3 -- Second Amended and Restated Agreement of Limited Partnership
of SFG dated as of September 3, 1997 (incorporated by reference
to the Registrant's Registration Statement on Form S-4 (No.
333-49289))
3.4 -- First Amendment to Second Amended and Restated Agreement of
Limited Partnership of SFG dated as of March 31, 1998
(incorporated by reference to the Registrant's Registration
Statement on Form S-4 (No. 333-49289))
3.5 -- Second Amended and Restated Limited Liability Company
Agreement of SFG Management dated as of September 3, 1997
(incorporated by reference to the Registrant's Registration
Statement on Form S-4 (No. 333-49289))
3.6 -- First Amendment to Second Amended and Restated Limited
Liability Company Agreement of SFG Management dated as of March
31, 1998 (incorporated by reference to the Registrant's
Registration Statement on Form S-4 (No. 333-49289))
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 (incorporated by reference to
the Registrant's Registration Statement on Form S-4 (No.
333-49289))
4.2 -- Specimen Global Note Certificate (incorporated by reference to
the Registrant's Registration Statement on Form S-4 (No.
333-49289))
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") (incorporated by reference to the
Registrant's Registration Statement on Form S-4 (No. 333-49289))
10.2 -- Assignment and Assumption Agreement Relating to Stock Purchase
and Merger Agreement, dated September 4, 1997, between DFA and
SFG (incorporated by reference to the Registrant's Registration
Statement on Form S-4 (No. 333-49289))
10.3 -- 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 (incorporated by
reference to the Registrant's Registration Statement on Form S-4
(No. 333-49289))
10.4 -- Trademark License Agreement, dated as of September 4, 1997,
among Borden, Inc., BDH Two, Inc. and SFG (incorporated by
reference to the Registrant's Registration Statement on Form S-4
(No. 333-49289))
10.5 -- Trademark License Agreement (Meadow Gold), dated as of
September 4, 1997, between SFG and Borden Foods Corporation
(incorporated by reference to the Registrant's Registration
Statement on Form S-4 (No. 333-49289))
</TABLE>
38
<PAGE> 39
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -------------------------------------------------------------------
<S> <C>
10.6 -- Trademark Sublicense Agreement (Eagle), dated as of September
4, 1997, between SFG and Borden Foods Corporation (incorporated
by reference to the Registrant's Registration Statement on Form
S-4 (No. 333-49289))
10.7 -- Copyright Assignment, dated as of September 4, 1997, from
Borden, Inc. to SFG (incorporated by reference to the
Registrant's Registration Statement on Form S-4 (No. 333-49289))
10.8 -- Patent Assignment, dated as of September 4, 1997, from
Borden/Meadow Gold Dairies, Inc. ("BMGD") to SFG (incorporated by
reference to the Registrant's Registration Statement on Form S-4
(No. 333-49289))
10.9 -- Asset Purchase and Sale Agreement, dated as of September 4,
1997, Between Borden/Meadow Gold Dairies Investments, Inc.
("Investments"), DFA, and SFG (incorporated by reference to the
Registrant's Registration Statement on Form S-4 (No. 333-49289))
10.10 -- Trademark Assignment dated as of September 4, 1997, between
SFG and Milk Products LLC ("Milk Products") (incorporated by
reference to the Registrant's Registration Statement on Form S-4
(No. 333-49289))
10.11 -- Milk Products Sublicense Agreement, dated as of September 4,
1997, between SFG and Milk Products (incorporated by reference to
the Registrant's Registration Statement on Form S-4 (No.
333-49289))
10.12 -- Milk Products Trademark License Agreement, dated as of
September 4, 1997, between SFG and Milk Products (incorporated by
reference to the Registrant's Registration Statement on Form S-4
(No. 333-49289))
10.13 -- Patent License Agreement, dated as of September 4, 1997,
between SFG and Milk Products (incorporated by reference to the
Registrant's Registration Statement on Form S-4 (No. 333-49289))
10.14 -- Copyright License Agreement dated as of September 4, 1997,
between SFG and Milk Products (incorporated by reference to the
Registrant's Registration Statement on Form S-4 (No. 333-49289))
10.15 -- License Assignment and Assumption Agreement dated as of
September 4, 1997, between SFG and BMGD (incorporated by
reference to the Registrant's Registration Statement on Form S-4
(No. 333-49289))
10.16 -- Trademark License Agreement between Flav-O-Rich, Inc. and SFG
dated as of February 28, 1995 (incorporated by reference to the
Registrant's Registration Statement on Form S-4 (No. 333-49289))
10.17 -- Trademark License Agreement effective as of September 1, 1995,
between Foremost Farms U.S.A. and SFG (incorporated by reference
to the Registrant's Registration Statement on Form S-4 (No.
333-49289))
10.18 -- Administrative Agreement between SFG, Inc. and the Defense
Logistics Agency executed on October 24, 1994 (incorporated by
reference to the Registrant's Registration Statement on Form S-4
(No. 333-49289))
10.19 -- Promissory Note payable by Barbe's Dairy, Inc. to Walker
Resources, Inc. in the original principal amount of $1,250,000
assumed by SFG (incorporated by reference to the Registrant's
Registration Statement on Form S-4 (No. 333-49289))
</TABLE>
39
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -------------------------------------------------------------------
<S> <C>
10.20 -- $600,000 Real Estate Note dated July 25, 1994, payable by
Southern Foods Group, Inc. to Lloyd Smoot, Jr. (incorporated by
reference to the Registrant's Registration Statement on Form S-4
(No. 333-49289))
10.21 -- Executive Employment Agreement, dated as of September 4, 1997,
between SFG and Pete Schenkel (incorporated by reference to the
Registrant's Registration Statement on Form S-4 (No. 333-49289))
10.22 -- Executive Employment Agreement, dated as of September 4, 1997,
between SFG and Anthony R. Ward (incorporated by reference to the
Registrant's Registration Statement on Form S-4 (No. 333-49289))
10.23 -- Southern Foods Group, L.P. Supplemental Executive Retirement
Plan effective October 1, 1996 (incorporated by reference to the
Registrant's Registration Statement on Form S-4 (No. 333-49289))
10.24 -- Borden, Inc. Executives Supplemental Pension Plan, Amended and
Restated as of December 9, 1993 (incorporated by reference to the
Registrant's Registration Statement on Form S-4 (No. 333-49289))
10.25 -- Borden, Inc. Executives Excess Benefits Plan, Amended and
Restated as of January 1, 1988 (incorporated by reference to the
Registrant's Registration Statement on Form S-4 (No. 333-49289))
10.26 -- Borden, Inc. Executive Family Survivor Protection Plan,
Amended as of January 1, 1987 (incorporated by reference to the
Registrant's Registration Statement on Form S-4 (No. 333-49289))
10.27 -- Milk Supply Agreement dated February 17, 1998, between DFA and
SFG (incorporated by reference to the Registrant's Registration
Statement on Form S-4 (No. 333-49289))
10.28 -- Lease and Agreement between BF Properties Company and Beatrice
Foods Co. dated as of February 15, 1972 (incorporated by
reference to the Registrant's Registration Statement on Form S-4
(No. 333-49289))
10.29 -- Lease Agreement between LPD Salt Lake Assoc. and Safeway
Stores, Inc. dated as of March 15, 1978 (incorporated by
reference to the Registrant's Registration Statement on Form S-4
(No. 333-49289))
10.30 -- Lease Agreement between SFG and Flav-O-Rich, Inc. dated
February 28, 1995 (incorporated by reference to the Registrant's
Registration Statement on Form S-4 (No. 333-49289))
10.31 -- Retention Agreement effective September 19, 1999 between the
Partnership and Pat Ford (incorporated by reference to the
Registrant's Current Report on Form 8-K dated September 30, 1999,
No. 333-49289)
10.32 -- Credit Agreement dated January 4, 2000 among Suiza Dairy
Group and the Registrant, as borrowers and certain lenders
(incorporated by reference to the Registrant's Current Report on
Form 8-K dated January 18, 2000, File No. 333-49289)
10.33 -- Release of Claims, Confidentiality and Non-Competition Agreement
between the Registrant and Mr. Ward (incorporated by reference
to the Registrant's Quarterly Report on Form 10-Q for the period
ended March 31, 1999)
10.34 -- Change in Control Agreement between the Registrant and Mr. Ward
(incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the period ended March 31, 1999)
10.35 -- Executive Medical Agreement between the Registrant and Mr.
Schenkel (incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the period ended March 31,
1999)
21.1 -- Subsidiaries of Registrant (filed herewith)
27.1 -- Southern Foods Group, L.P. Financial Data Schedule (filed
herewith)
</TABLE>
40
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
SFG Capital Corporation
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,910
<SECURITIES> 0
<RECEIVABLES> 104,943
<ALLOWANCES> 7,010
<INVENTORY> 34,059
<CURRENT-ASSETS> 145,705
<PP&E> 242,696
<DEPRECIATION> 54,642
<TOTAL-ASSETS> 669,471
<CURRENT-LIABILITIES> 116,735
<BONDS> 295,029
0
225,605
<COMMON> 20,129
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 669,471
<SALES> 1,300,897
<TOTAL-REVENUES> 1,300,897
<CGS> 980,678
<TOTAL-COSTS> 980,678
<OTHER-EXPENSES> (1,469)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,816
<INCOME-PRETAX> 42,325
<INCOME-TAX> 0
<INCOME-CONTINUING> 42,325
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,325
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
