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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
SPECIAL FINANCIAL REPORT
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER _____________
DELTA BEVERAGE GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 75-2048317
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
2221 DEMOCRAT ROAD, MEMPHIS, TENNESSEE 38132
(Address of Principal Executive Offices, including Zip Code)
(901) 344-7100
(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.
PURSUANT TO RULE 15d-2 OF THE SECURITIES EXCHANGE ACT OF 1934, THIS SPECIAL
FINANCIAL REPORT CONTAINS FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1996.
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TABLE OF CONTENTS
Page
CAUTIONARY STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . 7
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . .12
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . .33
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CAUTIONARY STATEMENT
DELTA BEVERAGE GROUP, INC. (THE "COMPANY"), OR PERSONS ACTING ON BEHALF
OF THE COMPANY, OR OUTSIDE REVIEWERS RETAINED BY THE COMPANY MAKING
STATEMENTS ON BEHALF OF THE COMPANY, OR UNDERWRITERS OF THE COMPANY'S
SECURITIES, FROM TIME TO TIME, MAY MAKE, IN WRITING OR ORALLY,
"FORWARD-LOOKING STATEMENTS" AS DEFINED UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 (THE "LITIGATION REFORM ACT"). THIS CAUTIONARY
STATEMENT, WHEN USED IN CONJUNCTION WITH AN IDENTIFIED FORWARD-LOOKING
STATEMENT, IS FOR THE PURPOSE OF QUALIFYING FOR THE "SAFE HARBOR" PROVISIONS
OF THE LITIGATION REFORM ACT AND IS INTENDED TO BE A READILY AVAILABLE
WRITTEN DOCUMENT THAT CONTAINS FACTORS WHICH COULD CAUSE RESULTS TO DIFFER
MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS. THESE FACTORS ARE IN
ADDITION TO ANY OTHER CAUTIONARY STATEMENTS, WRITTEN OR ORAL, WHICH MAY BE
MADE, OR REFERRED TO, IN CONNECTION WITH ANY SUCH FORWARD-LOOKING STATEMENT.
THE FOLLOWING MATTERS, AMONG OTHERS, MAY HAVE A MATERIAL ADVERSE EFFECT
ON THE BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR
PROSPECTS, FINANCIAL OR OTHERWISE, OF THE COMPANY. REFERENCE TO THIS
CAUTIONARY STATEMENT IN THE CONTEXT OF A FORWARD-LOOKING STATEMENT OR
STATEMENTS SHALL BE DEEMED TO BE A STATEMENT THAT ANY ONE OR MORE OF THE
FOLLOWING FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN
SUCH FORWARD-LOOKING STATEMENT OR STATEMENTS.
SIGNIFICANT LEVERAGE AND DEBT SERVICE
Issuance of $120 million principal amount of 9-3/4% Senior Notes Due
2003 (the "Notes"), retirement of certain existing indebtedness of the
Company and the consummation of the transaction contemplated in the Credit
Agreement (the "Credit Agreement"), dated as of December 16, 1996, by and
among the Company, NationsBank, N.A. and other lending institutions, have
heightened the Company's highly leveraged status. At December 31, 1996, the
Company had total consolidated outstanding long term debt of approximately
$164.3 million, of which approximately $125.1 million was Senior Indebtedness
(as defined herein) and approximately $39.2 million was subordinated debt.
In addition, subject to the restrictions in the Credit Agreement and the
Indenture (the "Indenture"), dated as of December 17, 1996 between the
Company and Norwest Bank Minnesota, National Association, as trustee,
relating to the Notes, the Company may incur certain additional indebtedness
from time to time, which may include additional Notes to be issued by the
Company in the future under the Indenture. At December 31, 1996, the Company
had borrowing capacity of up to $30.0 million under the Credit Agreement,
including $10.0 million available thereunder for the issuance of letters of
credit, of which $7.1 million had been issued.
The level of the Company's indebtedness could have important
consequences to holders of the Notes, including: (i) a substantial portion of
the Company's cash flow from operations must be dedicated to debt service and
will not be available for other purposes; (ii) the Company's ability to
obtain additional debt financing in the future for other acquisitions,
working capital or capital expenditures may be limited; and (iii) the
Company's level of indebtedness could limit its flexibility in reacting to
changes in its industry or economic conditions generally.
The Company's ability to pay interest on the Notes and to satisfy its
other debt obligations will depend upon its future operating performance,
which will be affected by prevailing economic conditions and financial,
business and other factors, certain of which are beyond its control, as well
as the availability of borrowings under the Credit Agreement or any successor
credit facilities. The Company will require substantial amounts of cash to
fund scheduled payments of principal and interest on its outstanding
indebtedness as well as future capital expenditures and any increased working
capital requirements. If the Company is unable to meet its cash requirements
out of cash flow from operations and its available borrowings, there can be
no assurance that it will be able to obtain alternative financing or that it
will be permitted to do so under the terms of the Indenture or the Credit
Agreement. In the absence of such financing, the Company's ability to
respond to changing business and economic conditions, to absorb adverse
operating results, to fund capital expenditures or to make future
acquisitions may be adversely affected. In addition, actions taken by the
lending banks under the Credit Agreement are not subject to approval by the
holders of the Notes. Moreover, the principal
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balance of the Company's 11% subordinated notes is due December 23, 2003 (the
"Subordinated Notes"). Finally, it is anticipated that in order to pay the
principal balance of the Notes due at maturity, the Company will be required
to obtain alternative financing. There can be no assurance, however, that
the Company will be able to refinance the Notes at maturity, and the
inability to refinance the Notes would likely have a material adverse effect
on the Company and on the market value and marketability of the Notes.
Borrowings under the Credit Agreement will bear interest at floating
rates. Increases in interest rates on such borrowings could adversely affect
the financial condition or results of operations of the Company. Increases
in interest rates could negatively impact the ability of the Company to meet
its debt service obligations, including its obligations under the Notes and
the Subordinated Notes.
UNSECURED STATUS OF THE NOTES
The Notes are not secured by any of the assets of the Company or its
subsidiaries. At December 31, 1996, the Company had borrowing capacity of up
to $30.0 million under the Credit Agreement, including $10.0 million
available thereunder for the issuance of letters of credit, of which $7.1
million had been issued. The indebtedness pursuant to the Credit Agreement is
secured by a first priority, perfected security interest in the Company's and
any future guarantor's accounts receivable and inventory. In addition, as of
December 31, 1996, the Company had approximately $0.6 million of other
secured indebtedness outstanding. Despite being senior indebtedness of the
Company, ranking PARI PASSU with all other unsubordinated, unsecured
indebtedness of the Company, the Notes are effectively subordinated to the
indebtedness incurred pursuant to the Credit Agreement and such other
indebtedness to the extent of such security interests. In the event of
bankruptcy, liquidation, reorganization or other winding up of the Company,
the assets of the Company will be available to pay the Company's obligations
under the Notes and its other unsecured debt only after all of the Company's
obligations under the Credit Agreement and its other secured indebtedness
have been paid in full.
EFFECTIVE SUBORDINATION TO CREDITORS OF THE COMPANY'S NON-GUARANTOR
SUBSIDIARIES
The creditors of the Company (including the holders of the Notes)
effectively rank, or will rank, junior to all creditors (including unsecured
creditors) of the Company's subsidiaries (other than any subsidiary that
guarantees the Notes (a "Guaranteeing Subsidiary")) with respect to the
assets of such subsidiaries notwithstanding that the Notes are senior
obligations of the Company. At December 31, 1996, there are no Guaranteeing
Subsidiaries with respect to the Notes. Any right of the Company or a
Guaranteeing Subsidiary to receive the assets of any of its respective
subsidiaries which are not Guaranteeing Subsidiaries upon liquidation or
reorganization of such subsidiary (and the consequent right of the holders of
the Notes to participate in those assets) will be effectively subordinated to
the claims of that subsidiary's creditors (including trade creditors), except
to the extent that the Company or such Guaranteeing Subsidiary is itself
recognized as a creditor of such subsidiary, in which case the claims of the
Company or such Guaranteeing Subsidiary would still be subordinated to any
security interests in the assets of such subsidiary in favor of another
creditor and subordinated to any indebtedness of such subsidiary senior to
that held by the Company or such Guaranteeing Subsidiary. As of December 31,
1996, the aggregate amount of indebtedness of the Company's subsidiaries to
which the holders of the Notes were effectively subordinated was
approximately $3.4 million.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture restricts, among other things, the ability of the Company
to incur additional indebtedness, pay dividends, make certain other
restricted payments, incur liens to secure PARI PASSU or subordinated
indebtedness, apply net proceeds from certain asset sales, merge or
consolidate with any other person, sell, assign, transfer, lease, convey or
otherwise dispose of substantially all of the assets of the Company, enter
into certain transactions with affiliates or enter into sale and leaseback
transactions. In addition, the Credit Agreement contains other and more
restrictive covenants. As a result of these covenants, the ability of the
Company to respond to changing business and economic conditions and to secure
additional
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financing, if needed, may be significantly restricted, and the Company may be
prevented from engaging in transactions that might otherwise be considered
beneficial to the Company.
The Credit Agreement contains more extensive and restrictive covenants
and restrictions than the Indenture and also requires the Company to maintain
specified financial ratios and satisfy certain financial condition tests.
The Company's ability to meet those financial ratios and tests can be
affected by events beyond its control, and there can be no assurance that the
Company will meet those tests. A breach of any of these covenants could
result in a default under the Credit Agreement. Upon the occurrence of an
event of default under the Credit Agreement, the lenders thereunder could
elect to declare all amounts outstanding under the Credit Agreement,
including accrued interest or other obligations, to be immediately due and
payable. If the Company were unable to repay those amounts, such lenders
could proceed against the collateral granted to them to secure that
indebtedness. If any indebtedness senior in right of payment to all existing
and future subordinated indebtedness of the Company and PARI PASSU in right
of payment to all existing and future unsubordinated indebtedness of the
Company ("Senior Indebtedness") were to be accelerated, there can be no
assurance that the assets of the Company would be sufficient to repay in full
the Senior Indebtedness and the other indebtedness of the Company, including
the Notes.
DEPENDENCE ON FRANCHISES AND DISTRIBUTOR AGREEMENTS
The Company operates under franchise agreements with a number of soft
drink concentrate and syrup producers. The franchise agreements contain
comprehensive provisions regarding the manufacturing, bottling, canning,
distribution and sale of the franchisors' products and impose substantial
obligations on the Company. Violation of the provisions of any franchise
agreement could result in the termination of such franchise, resulting in the
Company's loss of the right to bottle and sell the products covered by such
franchise. No assurance can be given that the Company will be able to
maintain its existing franchises indefinitely.
Beer distribution operations are conducted by the Company pursuant to
distributor agreements which contain comprehensive provisions regarding the
distribution and sale of beer and impose substantial obligations on the
Company. Violation of the provisions of any distributor agreement could
result in the termination of such agreement, resulting in the Company's loss
of the right to distribute and sell the products covered by the distributor
agreement. No assurance can be given that the Company will be able to
maintain its existing distributorships indefinitely.
DEPENDENCE ON PEPSICO PRODUCTS
For the year ended December 31, 1996, approximately 81.4% of the
Company's soft drink sales were derived from the sale of PepsiCo, Inc.
("PepsiCo") products pursuant to franchise agreements with PepsiCo. If
adverse events affect the popularity of PepsiCo products in the Company's
territory, the Company's business would be adversely affected.
DEPENDENCE ON MANAGEMENT AGREEMENT
The services of the Company's Chief Executive Officer, Robert C. Pohlad,
and Chief Financial Officer, John F. Bierbaum, are provided pursuant to a
Management Agreement between the Company and the Pohlad Companies (the
"Management Agreement"). The Management Agreement may be terminated when the
Pohlad Companies or its affiliates cease to hold any common stock in the
Company or when the Pohlad Companies is no longer controlled by members of
the Pohlad family. Termination of the Management Agreement and the loss of
services provided by Mr. Pohlad and Mr. Bierbaum could have an adverse impact
on the Company's operations.
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DEPENDENCE ON KEY PERSONNEL
The Company believes that its continued success will depend to a
significant extent upon the efforts and abilities of its senior management
team, including Kenneth E. Keiser, the President and Chief Operating Officer
of the Company. The Company has an employment agreement in effect with Mr.
Keiser which is renewable annually each February 1, subject to the agreement
of Mr. Keiser and the Company. The Company has no employment agreements in
effect with any of its other executive officers. Failure of the Company to
renew Mr. Keiser's employment agreement, to retain its other executive
officers or to attract and retain additional qualified personnel could
adversely affect the Company's operations.
GOVERNMENT REGULATION
The production, distribution and sale of many of the Company's products
are subject to federal and state statutes regulating the franchising,
production, sale, safety, advertising, labeling and ingredients of such
products. The Company is subject to regulations governing the installation,
maintenance and use of, and the clean-up of any releases from underground
storage tanks and the generation, treatment, storage and disposal of
hazardous materials. Of the states in which the Company conducts business,
Arkansas, Tennessee and Louisiana all impose specific soft drink taxes. In
addition, the alcoholic beverage industry is subject to extensive regulation
by state and federal agencies of such matters as licensing requirements,
trade and pricing practices, permitted and required labeling, advertising and
relations with wholesalers and retailers. The federal government requires
warning labels on packaging of beer. New or revised taxes, increased
licensing fees or additional regulatory requirements, environmental or
otherwise, could have a material adverse effect on the Company's financial
condition and its results of operations.
COMPETITION
The soft drink and beer businesses are highly competitive. The
Company's products are sold in competition with all liquid refreshments.
Sales of beverages occur in a variety of locations, including supermarkets,
retail and convenience stores, restaurants and vending machines.
SOFT DRINKS
Competitors in the soft drink industry include bottlers and distributors
of nationally advertised and marketed products, such as Coca-Cola products,
as well as chain store and private label soft drinks. The primary methods of
competition include brand recognition, price and price promotion, retail
space management, service to the retail trade, new product introductions,
packaging changes, distribution methods and advertising. The Company's
primary competitor in its territory is Coca-Cola Enterprises ("CCE"). CCE
enjoys substantial financial and other support from the Coca-Cola Company
("Coca-Cola"), which has a substantial ownership interest in CCE, and has
greater financial resources than the Company. Coca-Cola products currently
outsell the Company's PepsiCo products by a ratio of approximately three to
one in the Company's territories. This ratio has remained relatively constant
since 1990.
BEER
Competitors in the beer industry include distributors of nationally
advertised and marketed products, such as Anheuser-Busch Companies, Inc.
("Anheuser-Busch") products, as well as regional and local products. Some of
the Company's beer competitors have greater financial resources than the
Company. The primary methods of competition include quality, taste and
freshness of the products, price, packaging, brand recognition, retail space
management and advertising.
The Company's principal competitors are distributors of Anheuser-Busch
products. In 1995, Anheuser-Busch products accounted for 46.1% of total U.S.
beer sales, while sales of Miller Brewing Company products, the Company's
primary brewer, accounted for 22.6% of total U.S. beer sales.
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DEPENDENCE ON RAW MATERIALS
Raw materials for the Company's soft drink products include concentrates
and syrups obtained from its franchisors, water, carbon dioxide, fructose,
polyethylene terephthalate ("PET") bottles, aluminum cans, closures, premix
containers and other packaging materials. The price of concentrates and
syrups is determined by the franchisors and may be changed at any time.
Prices for the remaining raw materials are determined by the market, and may
change at any time. Increases in prices for any of these raw materials could
have a material adverse impact on the Company's financial position.
A substantial portion of the Company's raw materials, including its
aluminum cans, closures, other packaging materials and fructose, are
purchased through the Consolidated Purchasing Group, Inc. ("CPG"). The
Company and other franchisees or affiliates of franchisees of PepsiCo are
members of CPG. The Company and other CPG members submit their raw material
requirements to CPG which then negotiates with suppliers and makes purchases
based on the combined requirements of all CPG members. There can be no
assurance that price increases for packaging, ingredients and other raw
materials will not occur. Other than its purchasing agreement with CPG, the
Company has taken no steps to alleviate or provide for price fluctuations of
its raw materials.
EXPIRATION OF LABOR CONTRACTS
At December 31, 1996, the Company had approximately 1,680 full-time
employees and 70 part-time employees. Approximately 200 of the Company's
employees at its Collierville, Tennessee facility are represented by the
International Brotherhood of Teamsters Local Union No. 1196 pursuant to two
labor contracts. The first contract expires on September 30, 1998 and
automatically extends for one-year terms thereafter unless written notice is
provided by either party to the other at least 60 days prior to expiration of
the contract. The second contract expires on December 2, 1999.
Approximately 140 of the Company's employees at its Harahan, Louisiana
facility are represented by the International Brotherhood of Teamsters,
AFL-CIO, General Truck Drivers, Chauffeurs, Warehousemen and Helpers Local
270 pursuant to two labor contracts. The first contract expires on December
31, 1999. The second contract expires in November 1999. If any labor
contract is not renewed or if there is a labor dispute, the Company's
financial position could be adversely affected.
CERTAIN FACTORS AFFECTING SALES
The Company's sales are seasonal. Based on fiscal year 1996,
approximately 54.2% of the Company's sales by volume occurred from April to
September and approximately 45.8% occurred from October to March. As a
result, the Company's working capital requirements and cash flow vary
substantially throughout the year. Consumer demand for the Company's
products is affected by weather conditions. Cool, wet spring or summer
weather could result in decreased sales of the Company's products and could
have an adverse effect on the Company's financial position. In addition,
sales of the Company's products are dependent on the condition of the local
economies in the Company's territories. A depressed local economy could have
an adverse effect on the Company's sales and results of operations.
INABILITY TO FUND A CHANGE OF CONTROL OFFER
Upon a Change of Control (as defined in the Indenture), the Company will
be required to offer to repurchase all outstanding Notes at 101% of the
principal amount thereof plus accrued and unpaid interest to the date of
repurchase and liquidated damages. However, there can be no assurance (i)
that sufficient funds will be available at the time of any Change of Control
to make any required repurchases of Notes tendered or (ii) that restrictions
in the Credit Agreement will allow the Company to make such required
repurchases. Notwithstanding these provisions, the Company could enter into
certain transactions, including certain recapitalizations, that would not
constitute a Change of Control but would increase the amount of debt
outstanding at such time.
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VOIDING OR SUBORDINATION OF THE NOTES UNDER FRAUDULENT CONVEYANCE STATUTES
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, among other things, the
Company, at the time it incurred the indebtedness evidenced by the Notes,
(i)(a) was insolvent or rendered insolvent by reason of such occurrence or
(b) was engaged in a business or transaction for which the assets remaining
with the Company constituted unreasonably small capital or (c) intended to
incur, or believed that it would incur, debts beyond its ability to pay such
debts as they mature, and (ii) received less than reasonably equivalent value
or consideration for the incurrence of such indebtedness, the Notes could be
voided, or claims in respect of the Notes could be subordinated to all other
debts of the Company. The voiding or subordination of any such indebtedness
could result in an Event of Default (as defined in the Indenture) with
respect to such indebtedness, which could result in acceleration thereof. In
addition, the payment of interest and principal by the Company pursuant to
the Notes could be voided and required to be returned to the person making
such payment or to a fund for the benefit of the creditors of the Company.
The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to
the foregoing. Generally, however, the Company would be considered insolvent
if (i) the sum of its debts, including contingent liabilities, were greater
than the fair saleable value of all of its assets at a fair valuation or if
the present fair saleable value of its assets were less than the amount that
would be required to pay its probable liability on its existing debts,
including contingent liabilities, as they become absolute and mature or (ii)
it could not pay its debts as they become due. There can be no assurance,
however, as to what standard a court would apply in making such
determinations.
NO ASSURANCE AS TO LIQUIDITY
There can be no assurance as to the liquidity of any markets that may
develop for the Notes, the ability of holders of the Notes to sell their
Notes, or the prices at which holders would be able to sell their Notes.
Future trading prices of the Notes will depend on many factors, including,
among other things, prevailing interest rates, the Company's operating
results and the market for similar securities. NationsBanc Capital Markets,
Inc. ("NationsBanc") may make a market in the Notes; however, NationsBanc is
not obligated to do so and any market-making may be discontinued at any time
without notice. The Company does not intend to apply for listing of the
Notes on any securities exchange.
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PART II
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
PURSUANT TO THE TERMS OF THE INDENTURE, THIS SPECIAL FINANCIAL REPORT
CONTAINS DISCLOSURE REQUIRED BY ITEM 7 OF FORM 10-K IN ADDITION TO
FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996.
RESULTS OF OPERATIONS
GENERAL
Delta Beverage Group, Inc., a Delaware corporation, was acquired by its
current owners in March 1988 in a highly leveraged transaction which was
premised on a turnaround of operations and expansion of business
opportunities. The results of operations started to reflect a significant
turnaround in 1990 when the current senior management group took office. The
Company has accomplished a number of business combinations since 1988, the
most significant of which have been (i) combining in 1992 its PepsiCo based
sales operation in southern Louisiana with a Seven-Up based sales operation
in the same territory through a joint venture in which the Company is
majority owner and managing venturer and (ii) acquiring in April 1995 the
distribution rights for Miller products in a significant portion of the joint
venture territory.
In September 1993, the Company issued the 1993 Senior Notes (the "1993
Senior Notes"), the Subordinated Notes and other equity to refinance the debt
incurred in 1988. As a result the Company's interest expense burden was
substantially reduced. However, effective in May 1996, the interest rate on
the 1993 Senior Notes was adjusted as part of obtaining covenant waivers
necessitated by the down-turn in operating results in 1995. The Company
fully repaid the 1993 Senior Notes in December 1996.
As is typical of acquisitions in the beverage industry, the Company's
balance sheet reflects significant allocation of purchase price to the cost
of franchise rights in excess of net assets acquired ($116.8 million and
$116.4 million, each net of accumulated amortization, at December 31, 1995
and December 31, 1996, respectively). Amortization of the cost of (i)
franchises, (ii) obtaining financing and (iii) non-compete agreements from
former owners constitutes a significant non-cash charge to operations.
The Company accumulated significant tax-basis net operating loss
carryforwards (NOL's) during the turnaround period prior to the 1993
recapitalization. Management believes the NOL's will be utilized before
their expiration to offset future income otherwise taxable. A deferred
income tax asset representing the income tax benefit to be realized through
future utilization of the NOL's was recorded on the Company's balance sheet
in 1993 following the recapitalization. Provision for income taxes related
to the results of operations for years subsequent to and including 1993 are
offset against the deferred income tax asset and thus are effectively a
non-cash charge to the results of operations.
The Company's primary measurement of unit volume is franchise case sales
which are case-sized quantities of the various packages in which products are
produced. Franchise case sales refers to physical cases of beverages sold.
The Company also sells premix or draft products (ready-to-serve beverages
which are sold in tanks or kegs) and postmix products (fountain syrups to
which carbonated water must be added). Premix and postmix products, while
effectively containing the identical beverages as packaged product, are not
included in case sales measurements as they are not the primary focus of the
Company's selling efforts.
The Company's primary source of revenue is franchise case sales which
are sales of the Company's branded products directly to retailers whether of
package, premix or postmix configuration. Another source of revenue is
contract sales which are sales, primarily of products in cans, to
unaffiliated companies that hold soft drink franchises. Contract sales,
which historically represent approximately 10.0% of total net sales, may
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fluctuate from year to year, and are made at relatively low prices and gross
profit margins due to the competition for such sales, and are not a primary
focus of management in determining the Company's business strategy. As a
result, management believes that changes in franchise case sales more
accurately measure growth than changes in total net sales.
THIS DISCUSSION AND ANALYSIS CONTAINS CERTAIN FORWARD-LOOKING
TERMINOLOGY SUCH AS "BELIEVES," "ANTICIPATES," "EXPECTS," AND "INTENDS," OR
COMPARABLE TERMINOLOGY. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED. HOLDERS AND POTENTIAL PURCHASERS OF THE COMPANY'S SECURITIES ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS
WHICH ARE QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONS AND RISKS DESCRIBED
HEREIN.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales, excluding contract net sales, for the year ended December 31,
1996 increased by 11.4% to $287.4 million compared to $258.1 million for the
same period in 1995. The increase was due in part to a 5.8% increase in
franchise case sales, of which (i) 3.1% was attributable to increased sales
of the Company's beer products due to the acquisition of additional
territories and products in April and July 1995 and April and May 1996 and
(ii) 2.7% was attributable to increased sales of the Company's soft drink
products. The increase in soft drink sales was accompanied by an increase in
unit selling prices of approximately 4.3% as consumers increasingly accepted
higher selling prices instituted in 1995. Contract net sales for the year
ended December 31, 1996 decreased 5.0% compared to the same period in 1995.
As a result of the foregoing, net sales for the year ended December 31, 1996
increased 9.7% to $312.3 million compared to $284.7 million for the same
period in 1995.
Cost of sales for the year ended December 31, 1996 increased to $215.1
million compared to $198.8 million for the same period in 1995. The increase
was due primarily to an increase in franchise case sales offset by a decrease
in the unit prices paid by the Company for certain soft drink raw materials,
primarily packaging materials and sweetener. As a percentage of net sales,
cost of sales for the year ended December 31, 1996 decreased to 68.9%
compared to 69.8% for the same period in 1995. The improved margin and
increased franchise case sales resulted in gross profit for the year ended
December 31, 1996 of $97.2 million or 13.2% greater than the gross profit of
$85.9 million for the same period in 1995.
Selling, general and administrative expenses for the year ended December
31, 1996 increased to $76.9 million compared to $71.8 million for the same
period in 1995. This increase was primarily due to variable costs associated
with the increase in franchise case sales. The remainder of the increase was
due to general increases in the cost of goods and services of 2.3% which was
2.0% less than the increase in unit selling prices.
As a result of the above factors, income from operations for the year
ended December 31, 1996 increased to $16.7 million, or 5.3% of net sales,
compared to $10.6 million, or 3.7% of net sales, for the same period in 1995.
Interest expense for the year ended December 31, 1996 increased to $15.1
million from $13.3 million for the same period in 1995. The increase was due
primarily to additional debt related to the acquisition of additional beer
territories and products and the imposition of higher interest rates on the
1993 Senior Notes related to certain covenant waivers in respect of those
notes, partially offset by the scheduled repayment in September 1995 of $6.0
million of the 1993 Senior Notes.
As a result of the above factors, the Company generated income before
income taxes, minority interest and an extraordinary item of $0.9 million for
the year ended December 31, 1996 compared to a loss before income taxes and
minority interest of $2.8 million for the same period in 1995.
8
<PAGE>
On December 17, 1996, the Company retired existing senior debt with
proceeds from the issuance of the Notes. Financing costs related to the
retired debt of $1.5 million after consideration of income tax benefits were
written off as an extraordinary charge.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net sales, excluding contract net sales, for the year ended December 31,
1995 increased by 19.5% to $258.1 million compared to $215.9 million for
1994. The increase was primarily due to a 6.9% increase in franchise case
sales, which was entirely attributable to the acquisition of beer
distribution rights in April and July 1995. Further, unit selling prices of
franchised soft drink products increased approximately 5.2% in reaction to
increases in the cost of raw materials; nonetheless, the Company was able to
maintain franchise case sales of soft drinks while increasing unit selling
prices to counteract higher costs of raw materials. Contract net sales for
the year ended December 31, 1995 decreased by 10.3% compared to 1994. As a
result of the foregoing, net sales for the year ended December 31, 1995
increased 16.0% to $284.7 million compared to $245.5 million in 1994.
Cost of sales for the year ended December 31, 1995 increased to $198.8
million compared to $162.7 million in 1994. This increase was primarily due
to increases in the unit prices paid by the Company for soft drink packaging
materials and fructose and to a lesser degree to the increase in franchise
case sales. The raw materials increases were contrary to the trend in recent
years of annual decreases in the prices of the same purchases. As a
percentage of net sales, cost of sales for the year ended December 31, 1995
increased to approximately 69.8% as compared to 66.3% in 1994. The increase
in case volume, offset by the decreased margins, resulted in gross profit of
$85.9 million, a 3.7% increase over the Company's $82.8 million gross profit
in 1994.
Selling, general and administrative expenses for the year ended December
31, 1995 increased to $71.8 million compared to $62.7 million in 1994,
primarily due to an increase of approximately $5.0 million related to the
acquisition of beer distribution rights in April and July 1995 in a portion
of the Company's territory. Operating costs in the existing soft drink
business increased $4.0 million primarily due to increases in salaries and
wages and insurance costs.
As a result of the above factors, income from operations for the year
ended December 31, 1995 decreased to $10.6 million, or 3.7% of net sales,
compared to $16.5 million, or 6.7% of net sales, for 1994.
Interest expense for the year ended December 31, 1995 increased to $13.3
million in 1995 from $12.2 million in 1994, due to increased debt which
financed the acquisition of the beer distribution rights, the effect of which
was partially offset by an interest expense reduction related to the
scheduled repayment in September 1995 and in September 1994 of $6.0 million
and $4.0 million, respectively, of the 1993 Senior Notes.
As a result of the above factors, the Company generated a loss before
income taxes of $2.8 million for the year ended December 31, 1995 compared to
income before income taxes of $4.4 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company remains highly leveraged following the issuance of the
Notes, retirement of certain existing indebtedness of the Company and the
consummation of the transaction contemplated in the Credit Agreement. The
Company's principal use of funds in the future will be the payment of
principal and interest under the Credit Agreement and Notes, investment in
capital assets and strategic acquisitions.
9
<PAGE>
It is expected that the Company's primary sources of financing for its
future business activities will be funds from operations. While the Company
does not currently anticipate utilizing the funds available under the Credit
Agreement other than for seasonal working capital requirements, such funds
may be used to augment operating cash flow. Pursuant to the Credit
Agreement, at December 31, 1996, the Company had borrowing capacity of up to
$30.0 million, including $10.0 million available thereunder for the issuance
of letters of credit, of which $7.1 million had been issued. The such credit
facility will mature in 2001.
Because the obligations under the Credit Agreement will bear interest at
floating rates, the Company will be sensitive to changes in prevailing
interest rates.
The Company had working capital of $24.0 million at December 31, 1996,
compared to working capital of $27.5 million at December 31, 1995. Working
capital represents current assets (excluding cash and cash equivalents) less
current liabilities (excluding current maturities of long-term debt and other
long-term liabilities).
Based on the Company's anticipated operating results, management
believes that the Company's future operating activities will generate
sufficient cash flows to repay borrowings under the Credit Agreement as they
become due and payable. However, based on such anticipated operating results,
management does not expect that the Company's future operating activities
will generate sufficient cash flows to repay the Notes at their maturity.
Accordingly, the Company expects it will be required to refinance all or
substantially all of the Notes at their maturity or sell equity or assets to
fund the repayment of all or substantially all of the Notes at their
maturity, or effect a combination of the foregoing. While management
believes that the Company will be able to refinance the Notes at or prior to
their maturity, or raise sufficient funds through equity or asset sales to
repay such indebtedness, or effect a combination of the foregoing, there can
be no assurance that it will be able to do so.
The Subordinated Notes mature on December 23, 2003. However the
maturity of the Subordinated Notes can be extended to December 23, 2004 and
then to December 23, 2005 if any debt incurred to refinance the 1993 Senior
Notes is then outstanding. The Subordinated Notes have an interest rate of
11.0% which can be paid under certain conditions with additional Subordinated
Notes ("PIK Notes"). Management expects those conditions will exist at least
until December 1998 and that it will make payments of interest in PIK Notes
to conserve cash. Management does not expect that the Company's future
operating activities will generate sufficient cash flows to repay the
Subordinated Notes at their maturity. Accordingly, the Company expects it
will be required to refinance all or substantially all of the Subordinated
Notes, including any PIK Notes, at their maturity or sell equity or assets to
fund the repayment of all or substantially all of the Subordinated Notes,
including any PIK Notes, at their maturity, or effect a combination of the
foregoing. While management believes that the Company will be able to
refinance the Subordinated Notes, including any PIK Notes, at or prior to
their maturity, or raise sufficient funds through equity or asset sales to
repay such indebtedness, or effect a combination of the foregoing, there can
be no assurance that it will be able to do so.
The Credit Agreement contains numerous financial and operating covenants
and prohibitions that impose limitations on the liquidity of the Company,
including requirements that the Company satisfy certain financial ratios and
maintain certain specified levels of net worth, and limitations on the
incurrence of additional indebtedness. The Indenture also contains covenants
that impose limitations on the liquidity of the Company including a
limitation on the incurrence of additional indebtedness. The ability of the
Company to meet its debt service requirements and to comply with such
covenants will be dependent upon future operating performance and financial
results of the Company, which will be subject to financial, economic,
competitive and other factors affecting the Company, many of which are beyond
its control.
10
<PAGE>
Management believes that the Company's production facilities will be
sufficient to meet anticipated unit growth for the next several years.
Accordingly, management anticipates that capital expenditures in respect of
such facilities will consist of expenditures to maintain operating
efficiency. Capital expenditures will be required primarily for the Company's
automobile and truck fleet, vending machines, and routine plant, bottling,
and canning equipment additions or maintenance. During 1995 and 1996,
capital expenditures totaled $11.0 million and $9.2 million respectively.
The Company anticipates that capital expenditures will total approximately
$10.0 million to $12.0 million for each of the years 1997 and 1998.
INFLATION
There was no significant impact on the Company's operations as a result
of inflation during the fiscal year ended December 31, 1996 or during the
fiscal years ended December 31, 1995 or 1994.
IMPACT OF CHANGES IN ACCOUNTING STANDARDS
In 1996, the Company implemented the provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This
statement addresses the timing of recognition and the measurement of (i)
long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used and (ii) long-lived assets and certain
identifiable intangibles to be disposed of. This statement requires that
such assets be reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable, and
that such assets be reported at the lower of carrying amount or fair value.
The adoption of this statement did not have a material impact on the
Company's consolidated financial position or results of operations.
11
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PURSUANT TO RULE 15d-2 OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
SPECIAL FINANCIAL REPORT CONTAINS FINANCIAL STATEMENTS FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1996, AS THE CERTIFIED FINANCIAL
REPORTS FOR THE YEAR ENDED DECEMBER 31, 1996 WERE NOT AVAILABLE WHEN
THE REGISTRATION STATEMENT ON FORM S-4 (REGISTRATION NO. 333-19233)
WAS DECLARED EFFECTIVE ON FEBRUARY 12, 1997.
12
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Delta Beverage Group, Inc.:
We have audited the accompanying consolidated balance sheets of DELTA
BEVERAGE GROUP, INC. (a Delaware corporation) and subsidiary as of December
31, 1995 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Delta Beverage Group, Inc.
and subsidiary as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years ended December
31,1996 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Memphis, Tennessee,
February 28, 1997.
13
<PAGE>
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
(Dollars in thousands, except share data)
1995 1996
--------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,933 $ 12,171
Receivables, net of allowance for
doubtful accounts of $433 and $500
Trade 19,047 16,657
Marketing and advertising 6,472 5,853
Other 2,013 1,842
Inventories, at cost (Note 4) 13,517 14,372
Bottles, cases and pallets, at deposit value 5,511 5,669
Prepaid expenses and other 1,027 827
Deferred income taxes (Note 6) 2,324 4,131
-------- --------
Total current assets 57,844 61,522
-------- --------
PROPERTY AND EQUIPMENT:
Land 4,639 4,639
Buildings and improvements 15,614 15,706
Machinery and equipment 72,216 80,527
-------- --------
92,469 100,872
Less accumulated depreciation and amortization (46,556) (52,648)
-------- --------
45,913 48,224
-------- --------
OTHER ASSETS:
Cost of franchises in excess of net
assets acquired, net of accumulated
amortization of $43,382 and $47,007 116,839 116,336
Deferred income taxes (Note 6) 24,931 22,767
Deferred financing costs and other 2,910 6,478
-------- --------
144,680 145,581
-------- --------
$248,437 $255,327
-------- --------
-------- --------
The accompanying notes are an integral part of these balance sheets.
14
<PAGE>
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Continued)
AS OF DECEMBER 31
(Dollars in thousands, except share data)
1995 1996
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt
and other liabilities $ 7,643 $ 529
Accounts payable 7,250 9,038
Accrued liabilities (Note 5) 15,114 16,261
-------- --------
Total current liabilities 30,007 25,828
-------- --------
LONG-TERM DEBT AND OTHER LIABILITIES (Note 7) 150,507 163,747
MINORITY INTEREST 5,205 5,303
COMMITMENTS AND CONTINGENCIES (Notes 9 and 12)
STOCKHOLDERS' EQUITY (Note 8):
Preferred stock
Series AA, $5,000 stated value, 30,000
shares authorized, 5,151.18 and
5,467.27 shares issued and outstanding 25,756 27,336
Common Stock
Voting, $.01 par value, 60,000
shares authorized, 20,301.87
shares issued and outstanding -- --
Nonvoting, $.01 par value, 35,000
shares authorized, 32,949.93
shares issued and outstanding -- --
Additional paid-in capital 115,765 115,765
Accumulated deficit (78,781) (82,639)
Deferred compensation (Note 11) (22) (13)
-------- --------
62,718 60,449
-------- --------
$248,437 $255,327
-------- --------
-------- --------
The accompanying notes are an integral part of these balance sheets
15
<PAGE>
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATIONS:
Net sales $245,472 $284,709 $312,284
Cost of sales 162,667 198,777 215,085
-------- -------- --------
Gross profit 82,805 85,932 97,199
Selling, general and administrative
expenses 62,710 71,802 76,883
Amortization of franchise costs and
other intangibles 3,631 3,576 3,664
-------- -------- --------
Operating income 16,464 10,554 16,652
-------- -------- --------
OTHER EXPENSES:
Interest 12,152 13,254 15,094
Other, net (45) 75 620
-------- -------- --------
12,107 13,329 15,714
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES,
MINORITY INTEREST AND EXTRAORDINARY
ITEM 4,357 (2,775) 938
Income tax provision (3,262) (1,641) (1,745)
Minority interest, net
of taxes -- 464 48
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 1,095 (3,952) (759)
Extraordinary item - loss on
extinguishment of debt, net of
income tax benefit of $953 (Note 7) -- -- (1,519)
-------- -------- --------
NET INCOME (LOSS) $ 1,095 $ (3,952) $ (2,278)
-------- -------- --------
-------- -------- --------
EARNINGS PER COMMON SHARE (Note 2):
Loss before extraordinary item $ (5.83) $(102.18) $ (43.93)
Extraordinary item -- -- (28.52)
-------- -------- --------
Net loss $ (5.83) $(102.18) $ (72.45)
-------- -------- --------
-------- -------- --------
</TABLE>
The accompany notes are an integral part of these statements.
16
<PAGE>
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------ ---------------------------------------
SERIES AA VOTING NONVOTING
------------------ ------------------ ------------------ ADDITIONAL
NUMBER NUMBER NUMBER PAID-IN ACCUMULATED
OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL DEFICIT
--------- ------ --------- ------ --------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 4,572.76 $22,864 19,769.36 $ -- 32,949.93 $ -- $115,717 $(73,032)
Preferred stock dividends 280.59 1,403 -- -- -- -- -- (1,403)
Sale of common stock -- -- 532.51 -- -- -- 48 --
Recognition of expense under
deferred compensation plan -- -- -- -- -- -- -- --
Net income -- -- -- -- -- -- -- 1,095
-------- ------ --------- ---- --------- --- -------- --------
BALANCE AT DECEMBER 31, 1994 4,853.35 24,267 20,301.87 -- 32,949.93 -- 115,765 (73,340)
Preferred stock dividends 297.83 1,489 -- -- -- -- -- (1,489)
Recognition of expense under
deferred compensation plan -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- (3,952)
-------- ------ --------- ---- --------- --- -------- --------
BALANCE AT DECEMBER 31, 1995 5,151.18 25,756 20,301.87 -- 32,949.93 -- 115,765 (78,781)
Preferred stock dividends 316.09 1,580 -- -- -- -- -- (1,580)
Recognition of expense under
deferred compensation plan -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- (2,278)
-------- ------ --------- ---- --------- --- -------- --------
BALANCE AT DECEMBER 31, 1996 5,467.27 $27,336 20,301.87 $ -- 32,949.93 $ -- $115,765 $(82,639)
-------- ------ --------- ---- --------- --- -------- --------
-------- ------ --------- ---- --------- --- -------- --------
</TABLE>
<TABLE>
<CAPTION>
DEFERRED
COMPENSATION TOTAL
------------ --------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1993 $(46) $65,503
Preferred stock dividends -- --
Sale of common stock -- 48
Recognition of expense under
deferred compensation plan 14 14
Net income -- 1,095
--- -------
BALANCE AT DECEMBER 31, 1994 (32) 66,660
Preferred stock dividends -- --
Recognition of expense under
deferred compensation plan 10 10
Net loss -- (3,952)
--- -------
BALANCE AT DECEMBER 31, 1995 (22) 62,718
Preferred stock dividends -- --
Recognition of expense under
deferred compensation plan 9 9
Net loss -- (2,278)
--- -------
BALANCE AT DECEMBER 31, 1996 $(13) $60,449
--- -------
--- -------
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE>
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(Dollars in thousands)
<TABLE>
<CAPTION>
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,095 $ (3,952) $ (2,278)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 9,085 9,687 10,314
Noncash interest on long-term debt 2,101 4,048 4,891
Write-off of deferred financing fees -- -- 2,472
Change in deferred income taxes 2,765 1,622 357
Loss on dispositions of property and equipment 22 -- --
Minority interest, before taxes -- (564) 98
Net expense (payments) under deferred compensation
plans 24 (956) (3)
Changes in current assets and liabilities:
Receivables (8,059) 4,875 3,426
Inventories (6,854) 6,150 (692)
Bottles, cases and pallets, at deposit value (730) (1,091) (147)
Prepaid expenses and other (161) (590) 312
Accounts payable and accrued liabilities 10,341 (6,044) 2,606
Redemption of investments 157 15 --
------- -------- --------
Net cash provided by operating activities 9,786 13,200 21,356
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7,104) (11,028) (9,205)
Acquisitions of businesses (Note 3) -- (13,549) (1,130)
Purchase of franchise rights (Note 3) (23) -- (1,994)
Proceeds from sales of property and equipment 119 -- --
Collections on note receivable 96 163 110
------- -------- --------
Net cash used in investing activities (6,912) (24,414) (12,219)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt -- -- 120,000
Borrowings under revolving line of credit 8,000 35,250 --
Payments on revolving line of credit (3,000) (18,000) --
Retirement of long-term debt -- -- (111,250)
Payment of deferred financing costs -- (237) (5,946)
Principal payments on long-term debt and other liabilities (4,814) (7,406) (7,703)
Cash distribution to minority interest holder (900) -- --
Sale of common stock 48 -- --
------- -------- --------
Net cash provided by (used in) financing activities (666) 9,607 (4,899)
------- -------- --------
CHANGE IN CASH AND CASH EQUIVALENTS 2,208 (1,607) 4,238
CASH AND CASH EQUIVALENTS, beginning of year 7,332 9,540 7,933
------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $ 9,540 $ 7,933 $ 12,171
------- -------- --------
------- -------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE>
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS:
Delta Beverage Group, Inc. ("Delta") and the partnership described below
(collectively, the "Company") are licensed bottlers and distributors of
beverage products, principally Pepsi-Cola and Seven-Up products, in the
mid-southern United States. The franchise territories cover portions of
Arkansas, Louisiana, Mississippi, Tennessee and Texas. The partnership also
distributes Miller Brewing Company alcoholic beverages in southern Louisiana.
On September 3, 1992, Delta Beverage of Louisiana, Inc. ("DBL"), a then
wholly-owned subsidiary of Delta, and Poydras Street Investors, L.L.C.
("Poydras," formerly The Seven-Up/Royal Crown Bottling Company of Louisiana,
Inc.) formed The Pepsi-Cola/Seven-Up Beverage Group of Louisiana (the "Joint
Venture"). Effective December 31, 1994, DBL merged into Delta. In April 1995,
the partnership agreement was amended to, among other things, change the
percentage ownerships from 50% for both Delta and Poydras to 62% for Delta
and 38% for Poydras. Beginning January 1, 2000, Delta can purchase the
percentage interest of Poydras at fair market value (as defined).
The Joint Venture's operations and net assets are consolidated with
those of Delta in the accompanying financial statements. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Poydras' share of the Joint Venture's income (loss) and net assets is
reflected as a minority interest in the accompanying consolidated financial
statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES:
USE OF ACCOUNTING 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. The more
significant estimates with regard to these financial statements are disclosed
in Note 12.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include temporary investments in short-term
securities with original maturities of three months or less.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property and equipment
renewals and betterments are capitalized, while maintenance and repair
expenditures are charged to operations currently. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of purchased property and equipment, or the shorter of the lease
terms or the estimated useful lives of assets acquired under capital lease
arrangements. Those lives are as follows:
Years
-----
Buildings and improvements 20-40
Machinery and equipment 3-10
19
<PAGE>
INTANGIBLES AND OTHER ASSETS
The cost of franchises in excess of net assets acquired is being
amortized evenly over 35 to 40 years. The Company, at least annually,
evaluates whether events or circumstances have occurred that may impact the
recoverability of franchise costs. Upon the occurrence of any such event or
circumstance, the Company remeasures the realizable portion of franchise
costs and records such intangible asset at the lesser of its carrying value
or fair value.
Costs incurred to obtain long-term financing are deferred and amortized
as adjustments of interest using the effective interest method over the terms
of the related debt.
INCOME TAXES
The Company uses the liability method of accounting for deferred income
taxes. Accordingly, deferred income taxes reflect both the estimated future
tax consequences attributable to operating loss and tax credit carryforwards,
and temporary differences between the Company's assets and liabilities for
financial reporting and income tax purposes, using income tax rates currently
in effect.
EARNINGS PER COMMON SHARE
Earnings per common share were computed by dividing net income (loss),
less dividends on preferred stock, by the weighted average number of shares
of common stock. Share awards issuable under the equivalent share award plan
(see Note 11) were not considered in the computation of fully diluted
earnings per common share as their effect was anti-dilutive.
The weighted average number of shares used in computing earnings per
common share were 52,824 for 1994 and 53,252 for 1995 and 1996.
SUPPLEMENTAL CASH FLOW INFORMATION
During 1994, the Company acquired equipment under capital lease
obligations totaling approximately $493,000. During 1994, 1995 and 1996, the
Company issued additional preferred shares as payment-in-kind dividends on
preferred stock of approximately $1,403,000, $1,489,000 and $1,580,000,
respectively (see Note 8).
Interest paid in cash during 1994, 1995 and 1996 was approximately
$9,992,000, $8,836,000 and $12,369,000, respectively. Income taxes of
approximately $286,000, $316,000 and $177,000 were paid in 1994, 1995 and
1996, respectively.
CONCENTRATION OF CREDIT RISK
The Company's business activities are concentrated within the
mid-southern United States. However, management believes that there are no
significant concentrations of credit risk with any individual party or groups
of parties.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments, except
for fixed rate long-term debt, approximate their carrying amounts. For fixed
rate long-term debt, fair value was estimated based on the current rates
offered for similar obligations and maturities. Estimated fair value of total
long-term debt and other liabilities was approximately $168 million at
December 31, 1996 ($151 million at December 31, 1995) compared to recorded
value of approximately $164 million ($158 million at December 31, 1995).
20
<PAGE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In 1996, the Company implemented the provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This
statement addresses the timing of recognition and the measurement of
impairment of (a) long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used, and (b) long-lived
assets and certain identifiable intangibles to be disposed of. This statement
requires that such assets be reviewed for impairment whenever events or
changes in circumstances indicate that their carrying amount may not be
recoverable, and that such assets be reported at the lower of carrying amount
or fair value. The adoption of this statement did not have a material impact
on the Company's consolidated financial position or results of operations.
3. ACQUISITIONS:
In April 1996, the Joint Venture acquired substantially all of the
assets of Delta Distributing Company, a wholesale distributor of Miller
Brewing Company alcoholic beverages in Raceland, Louisiana. The aggregate
purchase price, consisting primarily of inventories and distribution rights,
included approximately $1,000,000 cash and a marketing support obligation
described below. In May 1996, the Joint Venture acquired for approximately
$2,000,000 the franchise rights from Heineken USA to distribute Heineken beer
products in the greater New Orleans area. The Joint Venture also acquired
approximately $1,000,000 of Heineken beer inventory.
In April 1995, the Joint Venture acquired substantially all of the
assets of Miller Brands of Greater New Orleans, Inc. In July 1995, the Joint
Venture acquired certain assets of Svoboda Distributing Company, Inc. Both
businesses acquired were engaged in the wholesale distribution of alcoholic
beverages, primarily Miller Brewing Company products, in the greater New
Orleans, Louisiana area. The aggregate purchase price for the assets of both
acquisitions, consisting primarily of inventories; land, buildings and
equipment; and distribution rights, included approximately $13,550,000 cash,
a $900,000 deferred obligation payable upon the Miller business in New
Orleans achieving an annual $8,000,000 gross profit, and a marketing support
obligation described below. Management expects to pay the $900,000 deferred
obligation in 1998.
In connection with the 1996 acquisition of Delta Distributing Company
and the 1995 acquisitions described above, the Joint Venture entered into
marketing support agreements with Miller Brewing Company's advertising agency
for the general promotion of Miller products in the greater New Orleans area.
The marketing support obligations have been capitalized and are being
amortized.
The acquisitions described above were accounted for as purchases, and
the Company's consolidated results of operations include the results of the
acquisitions since their respective purchase dates. Costs of the franchises
in excess of net assets acquired of approximately $2,980,000 in 1996, and
approximately $5,400,000 in 1995, are being amortized evenly over 40 years.
The consolidated financial statements as of December 31, 1996 include
preliminary purchase price allocations for the 1996 acquisitions.
The impact of the 1996 acquisitions on the Company's consolidated
results of operations was not material. The following unaudited pro forma
financial information reflects the combined results of operations of the
Company and the 1995 acquisitions discussed above as if the transactions
occurred as of the beginning of 1995. The pro forma adjustments are based on
available information, preliminary purchase price allocations and certain
assumptions that the Company believes are reasonable. The pro forma
information does not purport to represent the actual results of operations if
the transactions described above had occurred at the beginning of the year
presented. In addition, the information may not be indicative of future
results.
21
<PAGE>
In thousands of dollars, except per share amounts, for the year ended
December 31 (unaudited):
1995
---------
Net sales $295,700
Net loss (4,306)
Earnings per common share $(108.82)
4. INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out method) or
market and included the
following at December 31 (in thousands of dollars):
1995 1996
-------- --------
Raw materials $ 2,796 $ 2,736
Finished goods 10,721 11,636
------- -------
$13,517 $14,372
------- -------
------- -------
5. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following at December 31 (in thousands
of dollars):
1995 1996
-------- --------
Payroll and related benefits $ 1,213 $ 2,134
Taxes other than income 2,178 2,897
Insurance and related costs 4,279 4,520
Interest 3,307 1,576
Marketing and advertising costs 3,949 4,771
Other 188 363
------- -------
$15,114 $16,261
------- -------
------- -------
6. INCOME TAXES:
At December 31, 1996, the Company had federal income tax net operating
loss carryforwards of approximately $27,074,000 which had been incurred since
the predecessor business was acquired in March 1988. These net operating loss
carryforwards expire through 2007. In addition, as of December 31, 1996, the
Company had similar net operating loss and tax credit carryforwards of
approximately $19,400,000 and $1,187,000, respectively, which were incurred
prior to March 1988. Effective at that date, the predecessor business was
acquired in a transaction accounted for as a purchase. The Internal Revenue
Code limits the Company's utilization of the acquired net operating loss and
tax credit carryforwards to approximately $3,000,000 per year. These net
operating loss and tax credit carryforwards may be used through 2003.
The Company has recognized deferred income tax assets for the estimated
future income tax benefits of the pre- and post-acquisition net operating
loss and tax credit carryforwards that are expected to be realized through
the reduction of future taxable income from operations within the
carryforward periods.
22
<PAGE>
Deferred income taxes were composed of the following at December 31 (in
thousands of dollars):
1995 1996
------- -------
Current deferred income tax assets $ 2,324 $ 4,131
Noncurrent deferred income tax
assets, net of $1,645 valuation
allowance at December 31, 1995 29,289 27,828
------- -------
31,613 31,959
Noncurrent deferred income tax
liabilities (4,358) (5,061)
------- -------
$27,255 $26,898
------- -------
------- -------
The tax effects of significant temporary differences representing
deferred income tax assets and liabilities at December 31, 1995 and 1996 were
as follows (in thousands of dollars):
1995 1996
------- -------
Net operating loss and tax credit carryforwards $19,372 $17,590
Basis difference in preferred stock and common stock 8,022 8,154
Difference in book and tax basis of property
and equipment, deferred financing costs
and other assets (3,640) (4,841)
Deferred interest on subordinated debt,
deferred compensation and reserves not currently
deductible for income tax purposes 3,501 5,995
------- -------
$27,255 $26,898
------- -------
------- -------
Income tax provision recorded in the consolidated statements of operations,
net of taxes applicable to minority interest and extraordinary item, was as
follows (in thousands of dollars):
1994 1995 1996
-------- -------- --------
Current $ (233) $ -- $ (289)
Deferred (3,029) (1,641) (1,456)
------- ------- -------
$(3,262) $(1,641) $(1,745)
------- ------- -------
------- ------- -------
Included in the 1995 income tax provision was a valuation allowance of
$1,645,000 for deferred income tax assets relating to various state tax net
operating loss carryforwards that have or are expected to expire before the
carryforwards can be realized. These deferred income tax assets were
originally recorded in 1993 as part of the adoption of Statement of Financial
Accounting Standards No. 109. In 1996, the valuation allowance was eliminated
against the related deferred income tax assets as the state tax net operating
loss carryforwards have fully expired.
23
<PAGE>
A reconciliation of the provision for income taxes to the amount
computed by applying the federal statutory tax rate to income or loss before
income taxes is as follows:
1994 1995 1996
------- ------- -------
Statutory federal income tax rate (34.0)% 34.0% (34.0)%
State income taxes, net of federal
benefit (4.0) 4.0 (4.6)
Franchise cost amortization (30.4) (46.4) (128.0)
Valuation allowance - (59.3) -
Minority interest - 3.6 (15.6)
Other, net (6.5) 5.0 (3.8)
------- ------- --------
(74.9)% (59.1)% (186.0)%
------- ------- --------
------- ------- --------
7. LONG-TERM DEBT AND OTHER LIABILITIES:
Long-term debt and other liabilities consisted of the following at December
31 (in thousands of dollars):
<TABLE>
<CAPTION>
1995 1996
------- --------
<S> <C> <C>
Senior notes payable, 9.75%, due December 15, 2003 $ - $120,000
Subordinated notes payable, 11% due December 23, 2003 35,227 39,209
Retired December 17, 1996 -
Senior notes payable, 7.36% through December 31, 1995 95,000 --
Revolving line of credit, interest at the prime rate
(8.5% at December 31, 1995) 22,250 --
Note payable to Poydras, interest at the prime rate
plus 1% (9.50% and 9.25% at December 31, 1995 and
1996, respectively), due December 31, 2007 1,839 1,839
Other long-term debt (due to previous owners of acquired
beverage companies under noncompete agreements and notes
payable, equipment purchase contracts and mortgage notes
payable), 6% to 15%, payable through 1997, net of
unamortized discount of $36 at December 31, 1995 1,446 227
Capital lease obligations, 10.89% to 14.18%, due in
monthly installments through May 1998 758 412
Marketing support obligation, imputed interest at 8.25%,
payments due quarterly through June 30, 2000 487 693
Other long-term liabilities, including a $900 deferred
purchase obligation (see Note 3) 1,143 1,896
-------- --------
158,150 164,276
Less current maturities (7,643) (529)
-------- --------
$150,507 $163,747
-------- --------
-------- --------
</TABLE>
24
<PAGE>
In December 1996, the Company placed $120 million of new senior notes
and executed a new $30 million bank revolving line of credit. The net
proceeds of the debt offering were used primarily to retire the prior senior
notes and the amounts outstanding under the prior revolving line of credit.
In a registration statement filed with the Securities and Exchange
Commission under the Securities Act of 1933 and declared effective on
February 12, 1997, the Company offered to exchange the $120 million senior
notes for new $120 million senior notes. The new senior notes will retain the
same interest rate, maturity date and ranking as the original senior notes.
The Company will not receive any cash proceeds from this transaction.
The senior notes are general unsecured obligations of the Company and
are senior to all existing and future subordinated indebtedness of the
Company. Interest on the senior notes is payable semi-annually on June 15 and
December 15.
The new bank revolving line of credit matures on December 16, 2001 and
bears interest, at Delta's option, at LIBOR or the higher of (1) the bank's
prime rate or (2) the federal funds rate plus .5% and a defined margin.
Borrowings are limited to the sum of approximately 80% of Delta's eligible
receivables and approximately 50% of Delta's eligible inventory. The line of
credit includes a $10 million limit for the issuance of letters of credit;
the letter of credit facility fee is based on the Eurodollar applicable
margin less .125%. The agreement also provides for a fee on the unused
commitment ranging from .25% to .50%. Borrowings under the line of credit are
secured by Delta's accounts receivable and inventory. Interest and commitment
fees are payable quarterly. There were no borrowings under the new bank
revolving line of credit during 1996.
In connection with the debt placement described above, the Company
incurred financing fees of approximately $4,807,000. These fees have been
capitalized and are being amortized over the terms of the related debt
agreements. Deferred financing costs relating to debt retired in 1996 of
approximately $2,472,000 were written off. This write-off, less a related
income tax benefit of approximately $953,000, is reported as an extraordinary
item in the 1996 consolidated statement of operations.
Prior to the debt refinancing, Delta maintained a credit agreement with
two banks which, as amended in 1995 and 1996, provided for a total commitment
of $30 million, including up to $10 million for letters of credit. Interest
on borrowings accrued at a floating rate, based upon either the lender's
prime rate plus a defined margin or the Eurodollar base rate plus a defined
margin, as selected by Delta. Effective September 20, 1996, the applicable
margin was increased by .5%. The letter of credit facility fee was based on
the above Eurodollar applicable margin. The agreement also provided for a fee
of .5% on the unused commitment. Interest and commitment fees were payable
quarterly.
The senior notes retired in December 1996 were governed by a note
agreement and were senior to the subordinated notes. Interest on the senior
notes was payable semi-annually on March 23 and September 23. The senior
notes accrued interest at 7.36% through March 31, 1996, then 8.72% for the
period April 1, 1996 to September 19, 1996. Effective at that date, the
interest rate increased to 9.72%.
Interest on the subordinated notes is due semi-annually on April 1 and
October 1, and may be paid in cash or, at the option of the Company, by the
issuance of additional subordinated notes ("PIK Notes"). The PIK Notes bear
interest at 11% or 15% depending upon whether the terms of the note agreement
would have permitted the Company to pay any portion of the interest in cash.
The Company issued additional subordinated notes of approximately $3,577,000
and $3,982,000 under this provision in 1995 and 1996, respectively. These
additional notes bear interest at 11% and are included with subordinated
notes payable in the preceding table.
25
<PAGE>
Certain of the subordinated debt holders are also preferred and
non-voting common stockholders of the Company.
The Company's long-term debt agreements require, among other things, the
maintenance of certain minimum financial ratios and financial requirements,
and limit additional indebtedness, sales of assets, investments and capital
expenditures. The agreements also restrict the payment of dividends and limit
capital stock transactions.
Certain obligations to former owners of acquired beverage companies and
former key employees, including obligations under noncompete agreements, have
been discounted using the Company's incremental borrowing rate at the date of
acquisition. These discounts are being amortized over the terms of the
related obligations.
Scheduled maturities of long-term debt and other liabilities during the
four years subsequent to 1997 are as follows (in thousands of dollars):
Year Amount
---- ------
1998 $1,162
1999 304
2000 138
2001 41
8. STOCKHOLDERS' EQUITY:
PREFERRED STOCK
Authorized preferred stock consists of 30,000 designated Series AA
preferred shares. The Series AA preferred stock does not contain voting
rights. Series AA preferred stockholders receive cumulative dividends at an
annual rate of 6% based on the $5,000 stated value per share. The rate will
increase 2% annually beginning October 1, 2004, but is limited to a
cumulative increase of 8%. Dividends are payable quarterly in cash or in
additional shares of Series AA preferred stock. The Company is obligated to
pay the dividends in cash once the senior notes are retired. The preferred
stock dividends for 1995 and 1996 were paid with additional preferred shares
and are included in stockholders' equity at December 31, 1995 and 1996. So
long as the Series AA preferred stock is outstanding, the Company cannot
declare or pay dividends on its common stock.
In the event of a liquidation, Series AA preferred stockholders have a
$5,000 per share liquidation preference.
VOTING COMMON STOCK
Voting common stock consists of 60,000 authorized shares.
NON-VOTING COMMON STOCK
Non-voting common stock consists of 35,000 authorized shares. Should the
Company register its shares in a public offering, the non-voting common stock
may be converted, at the holder's option, into voting common stock. The
conversion rate is one share of non-voting common stock for one share of
voting common stock. The conversion rate is subject to adjustment in certain
instances as defined in the Certificate of Incorporation.
26
<PAGE>
The transfer and sale of shares by and among the stockholders and the
Company are restricted by a Shareholders' Agreement.
9. LEASES:
The Company leases certain buildings and other facilities, vehicles and
equipment under agreements expiring through 2009. Future minimum rental
payments under all noncancellable operating leases with initial or remaining
lease terms of one year or more were as follows at December 31, 1996 (in
thousands of dollars):
1997 $2,355
1998 1,947
1999 1,525
2000 667
2001 222
Thereafter 695
------
$7,411
------
------
Total rent expense for all operating leases during 1994, 1995 and 1996
was approximately $2,564,000, $3,158,000 and $3,587,000, respectively.
10. RELATED PARTY TRANSACTIONS:
The Company has entered into a management agreement with a company
controlled by three individuals who own shares of the Company's common stock.
For services performed pursuant to the management agreement, the Company pays
that company a management fee and a transaction fee. Management fees of
approximately $505,000, $520,000 and $533,000 were paid to that company
during 1994, 1995 and 1996, respectively. The transaction fee is payable upon
the acquisition of additional franchises and is equal to 1.5% of the
acquisition cost of such franchises. Affiliates of the management company
also own common stock of the Company.
11. EMPLOYEE BENEFITS:
The Company sponsors a defined contribution employee benefit plan (the
"Plan") which covers all eligible full-time employees. Employees who
participate in the Plan may defer up to 10% of their salaries and wages and
receive matching payments by the Company of 50% of those deferrals, limited
to annual employer contributions of $500 per employee. The Company's
contributions were approximately $201,000 for 1994, $231,000 for 1995 and
$257,000 for 1996.
The Company also maintains a nonqualified deferred compensation plan
which is available for certain executives of the Company, as selected by the
Company's board of directors. Executives who participate in the plan may
elect to defer a percentage of their compensation (as defined), subject to
limitations imposed by the Internal Revenue Service and the Company, and are
eligible to receive discretionary contributions from the Company. Employee
deferrals and employer discretionary contributions are held in a trust
restricted from the general assets of the Company. Restricted assets held in
trust, included in other assets in the accompanying consolidated balance
sheet, totaled approximately $756,000 at December 31, 1996.
The Company has a restricted stock bonus plan under which executives and
key employees may be awarded shares of the Company's common stock. All shares
granted contain restrictions on sale or transfer; these restrictions lapse
over an eleven-year period. A maximum of 250 shares of common stock may be
awarded under this plan. At December 31, 1995 and 1996, 22 restricted shares
were outstanding, all of which were held by an officer.
27
<PAGE>
The Company previously granted stock appreciation rights to an officer
by which this officer could receive amounts based upon changes in the quoted
market value of PepsiCo, Inc. common stock since February 1, 1990. These
stock appreciation rights were exercised in 1994 and 1995. The amount of
compensation expense (credit) in 1994 and 1995 was approximately $(163,000)
and $316,000, respectively.
Effective January 1,1994, the board of directors adopted an equivalent
share award plan for certain key members of management. This plan allows
eligible employees to participate in the continued success of the Company
based upon the annual appreciation in the equity value of the Company, as
defined. The board granted the equivalent of 38,200 shares effective January
1, 1994. Each share equivalent award vests over a three-year period, and is
payable in cash or shares of the Company's common stock upon the earlier of
the participant's death, disability, termination or retirement. Each
participant is subject to a noncompete and nonsolicitation restriction in
consideration of the share equivalent grant. All grants contain restrictions
on assignment or transfer. There was no appreciation in the equity value of
the Company, as defined, in 1994, 1995 or 1996.
Effective April 7,1995, the Joint Venture assumed sponsorship of the
Miller Brands of Greater New Orleans, Inc. Pension Plan. The plan was a
non-contributory defined benefit plan and covered all eligible hourly workers
of the acquired Miller business in New Orleans, Louisiana (see Note 3).
Monthly pension plan benefits were based on a stipulated amount per year of
credited service. During 1996, the Joint Venture terminated this plan. The
net pension liability recognized upon termination was not material.
The following table sets forth the actuarial present value of the
benefit obligation and the funded status for the plan as of December 31, 1995
(in thousands of dollars):
Accumulated benefit obligation, fully vested $(464)
-----
Projected benefit obligation $(464)
Plan assets at fair value 635
-----
Plan assets in excess of projected benefit obligation 171
Unrecognized net actuarial gain (34)
Unrecognized net transition amount (102)
Unrecognized prior service cost 25
-----
Net prepaid pension asset $60
-----
-----
Assumptions used in developing the net prepaid pension asset as of
December 31, 1995 were as follows:
Discount rate 7.5%
Rate of increase in compensation levels 0.0%
Rate of return on plan assets 9.0%
Net periodic pension income in 1995 for this plan was not material.
12. CERTAIN SIGNIFICANT ESTIMATES:
SELF INSURANCE
The Company maintains self insurance reserves for estimated workers'
compensation and product, automobile and general liability claims. These
estimates are based on historical information along with certain assumptions
about future events. Changes in assumptions for things such as medical costs,
environmental hazards and legal actions, as well as changes in actual
experience, could cause these estimates to change in the near term.
28
<PAGE>
As of December 31, 1995 and 1996, the Company had $7,715,068 and
$7,123,994 in outstanding letters of credit to secure the obligations to
insurance companies for workers' compensation and product, automobile and
general liability claims.
LOSS CONTINGENCIES
The Company is subject to various litigation, claims and assessments
arising in the normal course of business. Management believes that the
ultimate resolution of these matters, either individually or in the
aggregate, will not have a materially adverse effect on the Company's
consolidated financial position or results of operations.
DEFERRED INCOME TAX ASSETS
The Company has recorded deferred income tax assets reflecting the
expected future benefits of operating loss and tax credit carryforwards which
expire in varying amounts through 2007 (see Note 6). Realization is dependent
on generating sufficient taxable income prior to expiration of these
carryforwards. Although realization is not assured, management believes that
it is more likely than not that all of the deferred income tax assets will be
realized. The amount of the deferred income tax assets considered realizable,
however, could be reduced in the near term if estimates of future taxable
income during the carryforward periods are reduced.
29
<PAGE>
FINANCIAL STATEMENT SCHEDULE
30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To Delta Beverage Group, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Delta Beverage Group, Inc. and its
subsidiary included in this Form 10-K and have issued our report thereon
dated February 28, 1997. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule
listed in the accompanying index is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Memphis, Tennessee,
February 28, 1997.
31
<PAGE>
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END OF
OF PERIOD ADDITIONS DEDUCTIONS PERIOD
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
for the year ended December 31, 1994 $497 $ 87 $(123)(a) $461
---- ---- ------ ----
---- ---- ------ ----
Allowance for doubtful accounts
for the year ended December 31, 1995 $461 $271 $(299)(a) $433
---- ---- ------ ----
---- ---- ------ ----
Allowance for doubtful accounts
for the year ended December 31, 1996 $433 $320(b) $(253)(a) $500
---- ---- ------ ----
---- ---- ------ ----
</TABLE>
(a) Represents primarily trade accounts receivable written off.
(b) Includes $230 in recoveries of bad debts.
32
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements.
Report of Independent Public Accountants
Consolidated Financial Statements
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule.
Report of Independent Public Accountants on Financial
Statement Schedule
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits.
12 Statement of Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K.
None
33
<PAGE>
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, thereunto duly authorized on
April 30, 1997.
DELTA BEVERAGE GROUP, INC.
By: /s/ ROBERT C. POHLAD
----------------------------------
Robert C. Pohlad
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ ROBERT C. POHLAD Chief Executive Officer and
- ------------------------ Director (Principal Executive
Robert C. Pohlad Officer) April 30, 1997
/s/ JOHN F. BIERBAUM Chief Financial Officer and
- ------------------------ Director (Principal Accounting
John F. Bierbaum Officer and Principal Financial
Officer) April 30, 1997
/s/ DONALD E. BENSON
- ------------------------ Chairman of the Board April 30, 1997
Donald E. Benson
- ------------------------ Director
John H. Agee
- ------------------------ Director
Brenda C. Barnes
- ------------------------ Director
Christopher E. Clouser
- ------------------------ Director
Philip N. Hughes
/s/ GERALD A. SCHWALBACH
- ------------------------ Director April 30, 1997
Gerald A. Schwalbach
/s/ JOHN F. WOODHEAD
- ------------------------ Director April 30, 1997
John F. Woodhead
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
12 Statement of Computation of Per Share Earnings
27 Financial Data Schedule
<PAGE>
EXHIBIT 12
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED DECEMBER 31
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) $ 1,095 $ (3,952) $ (2,278)
Less preferred stock dividends (1,403) (1,489) (1,580)
---------- ---------- ----------
Net loss available for common shareholders $ (308) $ (5,441) $ (3,858)
---------- ---------- ----------
Weighted average common shares outstanding 52,824.33 53,251.80 53,251.80
---------- ---------- ----------
---------- ---------- ----------
Earnings per common share $ (5.83) $ (102.18) $ (72.45)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Note: Share awards issuable under the phantom stock plan were not considered
in the computation of fully diluted earnings per common share as their
effect was anti-dilutive
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,171
<SECURITIES> 0
<RECEIVABLES> 24,852
<ALLOWANCES> 500
<INVENTORY> 14,372
<CURRENT-ASSETS> 61,522
<PP&E> 100,872
<DEPRECIATION> 52,648
<TOTAL-ASSETS> 255,327
<CURRENT-LIABILITIES> 25,828
<BONDS> 164,276
0
27,336
<COMMON> 0
<OTHER-SE> 33,113
<TOTAL-LIABILITY-AND-EQUITY> 255,327
<SALES> 312,284
<TOTAL-REVENUES> 312,284
<CGS> 215,085
<TOTAL-COSTS> 215,085
<OTHER-EXPENSES> 80,547
<LOSS-PROVISION> 91
<INTEREST-EXPENSE> 15,094
<INCOME-PRETAX> 938
<INCOME-TAX> 1,745
<INCOME-CONTINUING> (759)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,519
<CHANGES> 0
<NET-INCOME> (2,278)
<EPS-PRIMARY> (72.45)
<EPS-DILUTED> (72.45)
</TABLE>
