<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
March 22, 2000 (January 4, 2000)
Suiza Foods Corporation
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 1-12755 75-2559681
- ---------------------------- ------------------------ -------------------
(STATE OR OTHER JURISDICTION (COMMISSION FILE NUMBER) (IRS EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
2515 McKinney Avenue, LB 30, Suite 1200
Dallas, Texas 75201
----------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code:
(214) 303-3400
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
SOUTHERN FOODS GROUP, L.P.
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statement of Income for the three years in the period ended
December 31, 1999
Consolidated Statements of Partners' Equity for the three years in the period
ended December 31, 1999
Consolidated Statements of Cash Flows for the three years in the period ended
December 31, 1999
Notes to the Consolidated Financial Statements
(b) PRO FORMA FINANCIAL INFORMATION
The accompanying unaudited pro forma condensed consolidated balance sheet
and statement of income give effect to the acquisition by Suiza Foods
Corporation ("Suiza")of Southern Foods Group, L.P.("Southern Foods"), which has
been accounted for using the purchase method of accounting, and the new credit
facility. The unaudited pro forma condensed consolidated balance sheet gives
effect to the transactions as if they had occurred on December 31, 1999. The
unaudited pro forma condensed consolidated statement of income for the year
ended December 31, 1999 gives effect to the transactions as if they had occurred
on January 1, 1999.
The unaudited pro forma condensed consolidated financial statements are
provided for comparative purposes and have been prepared based upon the
historical financial statements of Suiza and Southern Foods. The pro
forma adjustments, which are described in the accompanying notes, reflect
Suiza's preliminary assumptions and estimates based upon available information.
The unaudited pro forma condensed consolidated financial statements do not
purport to be indicative of the results which would actually have been obtained
if the transactions had been effected on the date indicated nor are they
necessarily indicative of the results of operations that may be achieved in the
future. The unaudited pro forma condensed consolidated financial statements
should be read in conjunction with the historical financial statements and
related notes thereto of Suiza and Southern Foods.
(c) EXHIBITS
23.1 Consent of PricewaterhouseCoopers LLP
<PAGE> 3
SUIZA FOODS CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Historical
------------------------------
Southern Pro Forma
Suiza Foods Adjustments Pro Forma
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 4,481,999 $ 1,300,897 $ -- $ 5,782,896
Cost of sales 3,487,075 980,678 386 (a) 4,468,139
------------ ------------ ------------
Gross profit 994,924 320,219 1,314,757
Operating expenses:
Operating and administrative expenses 666,971 237,404 1,000 (c) 905,375
Amortization of intangibles 38,513 14,143 (1,277)(a) 51,379
Plant closing costs and other costs 12,566 -- 12,566
------------ ------------ ------------
Total operating expenses 718,050 251,547 969,320
------------ ------------ ------------
Operating income 276,874 68,672 345,437
Other (income) expense:
Interest expense and financing charges on
trust issued preferred securities 87,817 27,816 18,167 (a)(b) 133,800
Other (4,046) (1,469) (5,515)
------------ ------------ ------------
Total other 83,771 26,347 128,285
------------ ------------ ------------
Income from continuing operations before
income taxes 193,103 42,325 217,152
Income taxes 75,463 -- 8,576 (d) 84,039
Minority interest in earnings 8,813 -- 14,513 (e) 23,326
------------ ------------ ------------
Income from continuing operations $ 108,827 $ 42,325 $ 109,787
============ ============ ============
Income from continuing operations
for diluted shares $ 133,328 $ 131,098
============ ============
Earnings per share from continuing operations:
Basic $ 3.31 $ 3.34
============ ============
Diluted $ 3.11 $ 3.16
============ ============
Average common shares:
Basic 32,861,218 32,861,218
============ ============
Diluted 42,858,492 (1,428,571)(f) 41,429,921
============ ============
Supplemental diluted earnings per share from
continuing operations before plant
closing and restructuring costs (g) $ 3.37 $ 3.39
============ ============
</TABLE>
See notes to the unaudited pro forma condensed consolidated statement of income.
<PAGE> 4
Notes to Unaudited Pro Forma Condensed Consolidated Statement of Income
(In thousands, except share data)
(a) Pro forma adjustment to Southern Foods depreciation and amortization to
reflect the depreciation and amortization of the fair values of property
and equipment, identifiable intangibles and goodwill over their estimated
useful lives, as follows:
<TABLE>
<CAPTION>
Annual Depreciation and Amortization
----------------------------------------
Property Financing
Long-Term Asset Cost Life and Equipment Intangibles Costs Total
--------------- --------- -------- ------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Property and equipment $ 198,331 Various $ 20,282 $ $ $ 20,282
Trademarks and tradenames 99,227 40 years 2,481 -- 2,481
Deferred financing costs 11,360 5 years -- 2,272 2,272
Goodwill 415,404 40 years 10,385 -- 10,385
--------- --------- --------- ---------
Total 20,282 12,866 2,272 35,420
Less historical depreciation and
amortization (19,896) (14,143) (2,146) (36,185)
--------- --------- --------- ---------
Pro forma adjustment $ 386 $ (1,277) $ 126 $ (765)
========= ========= ========= =========
</TABLE>
(b) Pro forma adjustment to interest expense of both Suiza and Southern Foods
to reflect the interest expense on the new credit facility, partially
offset by the elimination of interest expense related to the debt repaid,
as follows:
<TABLE>
<S> <C>
Interest on borrowings of $1,057 million under the new credit facility at an
average interest rate of approximately 7.15%, an increase of
1.25% over Suiza's historical 1999 average interest rate $ 75,532
Less historical interest expense on the following debt repaid:
Suiza's credit facility (37,435)
Suiza's trust issued preferred securities (5,000)
Southern Foods credit facility (15,056)
----------
Pro forma adjustment $ 18,041
==========
</TABLE>
(c) Under the Suzia Fluid Dairy Group's (the "Venture") operating agreement,
the Venture is required to pay for administrative costs of the Venture
partners in the form of management fees, which is expected to result in an
incremental increase of $1 million in administrative expenses. As a result,
a pro forma adjustment is required to reflect these incremental
administrative costs.
(d) Prior to the acquisition, Southern Foods was organized as a partnership.
Accordingly, income taxes were the responsibility of their partners and
were not reflected in the historical financial statements. As a result, pro
forma income tax adjustments are required to (i) reflect the income tax
expense on the historical operating results of Southern Foods as if it were
subject to corporate income taxes and (ii) reflect adjustments to income
tax expense at an assumed average effective rate of 39% for pro forma
adjustments that affect taxable income. The following summarizes the pro
forma income tax adjustments:
<TABLE>
<S> <C>
Income tax expense on the historical operating results of
Southern Foods at actual tax rates $ 20,129
Adjustment to income tax expense for pro forma adjustments
that affect taxable income (11,553)
--------
Pro forma adjustment $ 8,576
========
</TABLE>
(e) Adjustment to pro forma minority interest of $14,513 to reflect Dairy
Farmers of America's ("DFA") 33.8% interest in the pro forma net income of
the Venture, net of DFA's historical minority interest recognized for
existing Suiza ventures.
(f) Pro forma elimination of 1,428,571 diluted shares representing the dilutive
effect of the 5% trust issued preferred securities that were repaid with
the proceeds of borrowings under the new credit facility.
(g) During 1999, Suiza incurred plant closing and other costs of $12,566
($8,095 net of income taxes), of which $8,664 ($5,580 net of income taxes)
were related to its Venture operations, along with restructuring and
non-recurring charges of $4,948 ($2,969 net of income taxes) related to its
investment in Consolidated Container Company LLC. These non-recurring
charges related to the Venture's operations reduced DFA's minority interest
share of the Venture's operations by $1,886. Had these plant closing and
restructuring and non-recurring charges not been incurred by Suiza,
historical and pro forma income from continuing operations would have been
$119,891 and $118,965, respectively.
<PAGE> 5
SUIZA FOODS CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Historical
----------------------------
Southern Pro Forma
Suiza Foods Adjustments Pro Forma
----------- ----------- ---------------------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash $ 25,155 $ 6,910 $ 18,440 (b) $ 50,505
Accounts receivable 379,070 97,933 477,003
Inventories 182,321 34,059 216,380
Prepaid expenses and other current assets 52,861 6,803 59,664
----------- ----------- -----------
Total current assets 639,407 145,705 803,552
Property and equipment 758,485 188,054 10,387 (a) 956,926
Intangibles and other assets 1,261,030 335,712 197,819 (a)(b)(c) 1,794,561
----------- ----------- -----------
Total $ 2,658,922 $ 669,471 $ 3,555,039
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accruals $ 441,792 $ 115,921 $ (4,715) (a)(b)(c) $ 552,998
Income taxes payable 14,654 14,654
Current portion of long-term debt 22,671 814 23,485
----------- ----------- -----------
Total current liabilities 479,117 116,735 591,137
Long-term debt 689,397 294,215 246,243 (a)(b) 1,229,855
Other long-term liabilities 34,858 12,787 47,645
Deferred income taxes 46,323 -- 520 (a)(c) 46,843
Mandatorily redeemable convertible trust issued
preferred securities 683,505 (100,000)(b) 583,505
Minority interest 141,750 325,606 (a) 467,356
Stockholders' equity:
Common stock 293 293
Partners' equity of Southern Foods 245,734 (245,734)(a) --
Additional paid-in capital 275,527 275,527
Retained earnings 314,590 4,726 (c) 319,316
Other comprehensive income (6,438) (6,438)
----------- ----------- -----------
Total stockholders' equity 583,972 245,734 588,698
----------- ----------- -----------
Total $ 2,658,922 $ 669,471 $ 3,555,039
=========== =========== ===========
</TABLE>
See notes to unaudited pro forma condensed consolidated balance sheet.
<PAGE> 6
Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet
(Columnar amounts in thousands)
(a) In connection with the acquisition of Southern Foods, Suiza issued Venture
interests to DFA and made a cash distribution to one of the Southern Foods'
partners. The following summarizes the total purchase price and the related
initial purchase price allocation to the net assets acquired:
<TABLE>
<S> <C>
Total purchase price:
Fair value of minority interests issued $ 325,606
New credit facility borrowings to fund cash paid
to Southern Foods' partners, along with estimated
acquisition fees and expenses of $10 million 110,000
---------
Total fair value purchase price $ 435,606
=========
Purchase price allocation:
Total fair value purchase price $ 435,606
Historical net assets acquired (245,734)
---------
Excess purchase price 189,872
Allocation to fair value of property and equipment (10,387)
Allocation to fair value of the senior notes assumed 5,347
Allocation to fair value of other assets 10,760
Allocation to fair value for acquisition and plant
closing liabilities 7,000
Allocation to fair value for employee benefit plan
liabilities (6,306)
Allocation to fair value for deferred tax assets (2,501)
---------
Excess purchase price allocated to goodwill $ 193,785
=========
</TABLE>
Suiza has not completed the final assessment of the fair value of Southern
Foods fixed assets and other identifiable assets and liabilities assumed
for purposes of allocating the purchase price. As a result, certain of the
above allocations are estimates and are subject to revision once the final
assessments are completed.
(b) In connection with the acquisition, Suiza entered into two new credit
facilities to pay the cash portion of the purchase price discussed in (a)
and to refinance existing indebtedness of both Suiza and Southern Foods.
The following table summarizes the sources and uses of the borrowings under
the new venture credit facility:
<TABLE>
<S> <C>
Proceeds from the new credit facility $ 1,056,841
Less cash used for:
Repayment of existing Southern Foods and Suiza
credit facilities, including the amounts funded
in connection with the acquisition discussed in (a) (925,945)
Redemption of 5% trust issued convertible preferred
securities of Suiza (100,000)
Payment of accrued interest on debt repaid (1,096)
Payment of debt issuance costs (11,360)
-----------
Net cash proceeds $ 18,440
===========
</TABLE>
(c) In connection with the refinancing of existing credit facilities discussed
in (b), Suiza will record an extraordinary gain from the extinguishment of
debt related to the write-off of unamortized deferred financing costs of
the old credit facility and the mark to market adjustment for previously
hedged interest rate swaps under the old credit facility. The following
table summarizes the asset and liability adjustments related to this
extraordinary gain:
<TABLE>
<S> <C>
Write-off of unamortized deferred financing costs $ (2,413)
Fair value of interest rate swap agreements 5,847
Elimination of existing interest rate swap reserves 4,313
Deferred income tax effect of extinguishment gain (3,021)
--------
Effect on retained earnings of extraordinary gain $ 4,726
========
</TABLE>
<PAGE> 7
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> 8
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> 9
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> 10
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> 11
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> 12
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> 13
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> 14
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> 15
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> 16
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> 17
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> 18
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> 19
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> 20
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> 21
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> 22
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> 23
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> 24
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> 25
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> 26
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> 27
******
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: March 22, 2000 SUIZA FOODS CORPORATION
By: /s/ LISA N. TYSON
-------------------------------
Lisa N. Tyson
Vice President and
Assistant General Counsel
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
23.1 Consent of PricewaterhouseCoopers LLP
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF PRICEWATERHOUSECOOPERS LLP
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Registration No. 333-68319), the Registration Statement
on Form S-3 (Registration No. 333-69627), the Registration Statement on Form
S-3, as amended by Post-Effective Amendment No. 1 (Registration No. 333-77813),
the Registration Statement on Form S-8 (Registration No. 333-80641), the
Registration Statement on Form S-4, as amended by Post-Effective Amendment No. 1
(Registration No. 333-29741), the Registration Statement on Form S-3, as amended
by Post-Effective Amendment No. 1 (Registration No. 333-13119), the Registration
Statement on Form S-3, as amended by Post-Effective Amendment No. 1
(Registration No. 333-29207), the Registration Statement on Form S-3
(Registration No. 333-34133), the Registration Statement on Form S-3, as amended
by Post-Effective Amendment No. 2 (Registration No. 333-45749), the Registration
Statement on Form S-3 (Registration No. 333-56613), the Registration Statement
on Form S-8 (Registration No. 333-11185), the Registration Statement on Form S-8
(Registration No. 333-28019), the Registration Statement on Form S-8
(Registration No. 333-28021), the Registration Statement on Form S-8
(Registration No. 333-41353), the Registration Statement on Form S-8,
(Registration No. 333-50013), the Registration Statement on Form S-8
(Registration No. 333-55969) and the Registration Statement on Form S-8
(Registration No. 333-30160), of our report dated March 14, 2000, with respect
to the consolidated financial statements of Southern Foods Group, L.P., included
in the Current Report on Form 8-K, as amended by Form 8-K/A, of Suiza Foods
Corporation dated March 20, 2000.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
March 20, 2000
