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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
/ / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
/ / 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)
As of November 15, 1998, the issuer had outstanding: (i) 6,067.83
shares of Series AA Preferred Stock, $5,000 stated value, (ii) 20,301.87
shares of voting Common Stock, $.01 par value, and (iii) 32,949.93 shares of
nonvoting Common Stock.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
<S> <C>
PART I............................................................................................ 1
ITEM 1. FINANCIAL STATEMENTS........................................................... 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................ 6
PART II........................................................................................... 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................... 13
</TABLE>
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,680 $ 4,843
Receivables, net of allowance for doubtful
accounts of $562 and $525
Trade 19,644 24,674
Marketing and advertising 7,228 6,415
Other 2,924 2,671
Inventories, at cost 18,153 18,175
Pallets, tanks and shells, at deposit value 6,340 6,513
Prepaid expenses and other 986 2,510
Deferred income taxes 5,747 5,576
---------- ---------
Total current assets 65,702 71,377
---------- ---------
PROPERTY AND EQUIPMENT:
Land 4,639 4,662
Buildings and improvements 16,286 18,190
Machinery and equipment 90,211 98,650
---------- ---------
111,136 121,502
Less accumulated depreciation and amortization (55,880) (59,523)
---------- ---------
55,256 61,979
---------- ---------
OTHER ASSETS:
Cost of franchises in excess of net assets
acquired, net of accumulated amortization
of $50,652 and $53,383 112,634 109,903
Deferred income taxes 19,481 19,881
Deferred financing costs and other 7,841 10,477
---------- ---------
139,956 140,261
---------- ---------
$ 260,914 $ 273,617
---------- ---------
---------- ---------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
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DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
Unaudited
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 215 $ 257
Accounts payable 9,530 13,334
Accrued liabilities 16,088 20,243
--------- ---------
Total current liabilities 25,833 33,834
--------- ---------
LONG-TERM DEBT AND OTHER LIABILITIES 170,189 176,248
MINORITY INTEREST 4,575 3,748
STOCKHOLDERS' EQUITY:
Preferred stock:
Series AA, $5,000 stated value, 30,000 shares
authorized, 5,802.77 and 6,067.83 shares
issued and outstanding 29,014 30,339
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 (84,456) (86,314)
Deferred compensation (6) (3)
---------- ---------
60,317 59,787
---------- ---------
$ 260,914 $ 273,617
---------- ---------
---------- ---------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
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DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -----------------------
1997 1998 1997 1998
-------- -------- ---------- ---------
<S> <C> <C> <C> <C>
OPERATIONS:
Net sales $ 89,370 $ 94,129 $ 246,517 $ 265,907
Cost of sales 60,040 65,300 165,755 184,559
-------- -------- ---------- ---------
Gross profit 29,330 28,829 80,762 81,348
Selling, general and administrative expenses 21,054 21,751 61,672 65,119
Amortization of franchise costs and other
intangibles 910 912 2,734 2,736
-------- -------- ---------- ---------
Operating income 7,366 6,166 16,356 13,493
-------- -------- ---------- ---------
OTHER (INCOME) EXPENSES:
Interest 4,510 4,715 13,416 14,073
Other, net (97) 69 20 126
-------- -------- ---------- ---------
4,413 4,784 13,436 14,199
-------- -------- ---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST 2,953 1,382 2,920 (706)
Income tax provision (4,037) (1,309) (3,473) (45)
Minority interest, net of taxes (154) 2 (173) 216
-------- -------- ---------- ---------
NET INCOME (LOSS) $ (1,238) $ 75 $ (726) $ (535)
-------- -------- ---------- ---------
-------- -------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
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DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1998
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (726) $ (535)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 8,418 10,130
Non-cash interest on long-term debt 4,098 4,348
Change in deferred income taxes 3,270 (229)
Minority interest, before taxes 375 (219)
Net expense under deferred compensation plans 403 482
Changes in current assets and liabilities:
Receivables (4,114) (3,964)
Inventories (3,393) (22)
Shells, tanks and pallets (329) (173)
Prepaid expenses and other (1,392) (1,524)
Accounts payable and accrued liabilities 4,072 6,366
--------- --------
Net cash provided by operating activities 10,682 14,660
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (10,550) (12,850)
Purchase of other assets (1,224) (4,527)
Proceeds from sales of property and equipment 31 196
Other (28) (6)
--------- --------
Net cash used in investing activities (11,771) (17,187)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit 12,000 12,000
Payments on revolving line of credit (12,000) (8,500)
Principal payments on long-term debt and other
liabilities (489) (202)
Cash distribution to minority interest holder (494) (608)
--------- --------
Net cash provided by (used by) financing activities (983) 2,690
--------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,072) 163
CASH AND CASH EQUIVALENTS, beginning of period 12,171 4,680
--------- --------
CASH AND CASH EQUIVALENTS, end of period $ 10,099 $ 4,843
--------- --------
--------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
4
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DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements of Delta Beverage
Group, Inc. (the "Company", a Delaware corporation) and subsidiary
(collectively, the "Companies") have been prepared in accordance with generally
accepted accounting principles for interim financial information and, in the
opinion of management, include all adjustments (consisting of normal and
recurring adjustments) which are considered necessary for a fair presentation of
financial position, results of operations and cash flows as of September 30,
1998, and for all interim periods presented. These condensed interim financial
statements do not include all of the financial information and disclosures
required by generally accepted accounting principles for complete financial
statements, and should be read in conjunction with the Companies' audited
consolidated financial statements and related notes thereto for the year ended
December 31, 1997. Also, the results of operations for the interim periods
presented may not be indicative of the results for the entire year.
2. RECLASSIFICATIONS:
Certain prior year balances have been reclassified to conform to the current
year presentation.
3. PREFERRED STOCK:
Authorized preferred stock consists of 30,000 designated Series AA preferred
shares. Series AA preferred stockholders receive cumulative dividends at an
annual rate of 6% based on the $5,000 stated value per share. Dividends are paid
quarterly in cash or in additional shares of Series AA preferred stock. During
the nine months ended September 30, 1998, the Company issued additional
preferred shares as payment-in-kind dividends on preferred stock of
approximately $1,325,000. The additional preferred shares are included in
stockholders' equity as of September 30, 1998.
4. LONG-TERM DEBT AND OTHER LIABILITIES:
The Company maintains a $30.0 million bank revolving line of credit which
matures on December 16, 2001, and bears interest, at the Company's option, at
LIBOR or a defined margin over the higher of (1) the bank's prime rate or (2)
the federal funds rate plus 0.5%. Borrowings are limited to the sum of
approximately 80% of the Company's eligible receivables and approximately 50% of
the Company's eligible inventory. The line of credit includes a $10.0 million
limit for the issuance of letters of credit. Borrowings under the line are
secured by the Company's accounts receivable and inventory. Borrowings
outstanding under the line of credit were $3.5 million as of September 30, 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS DESCRIBES CERTAIN FACTORS
AFFECTING THE RESULTS OF OPERATIONS OF DELTA BEVERAGE GROUP, INC. (THE
"COMPANY") FOR THE FISCAL QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
ITS FINANCIAL CONDITION AS OF SEPTEMBER 30, 1998. THIS DISCUSSION AND ANALYSIS
SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1997.
CERTAIN OF THE STATEMENTS IN THE FOLLOWING DISCUSSION CONSTITUTE
FORWARD-LOOKING STATEMENTS WHICH ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. VARIOUS FACTORS MAY
CAUSE ACTUAL RESULTS OF OPERATIONS AND FINANCIAL CONDITION TO VARY SIGNIFICANTLY
FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENT MADE HEREIN OR IN OTHER
REPRESENTATIONS MADE BY THE COMPANY'S MANAGEMENT OR BY OTHERS ON BEHALF OF THE
COMPANY. PLEASE REFER TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1997 FOR A DESCRIPTION OF THE FACTORS KNOWN TO THE
COMPANY THAT MAY CAUSE ACTUAL RESULTS TO VARY.
GENERAL BUSINESS OVERVIEW
Delta Beverage Group, Inc., a Delaware corporation, was acquired by its
current owners in March 1988. 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.
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 to unaffiliated companies that hold soft drink
franchises. Contract sales, which historically represent less than 10.0% of
total net sales, may fluctuate from year to year, and are made at relatively
low prices and gross profit margins due to the competition for such sales.
Contract sales 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.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1997
Net sales, excluding contract sales, for the three months ended
September 30, 1998 increased by 1.0% to $82.8 million compared to $82.0 million
for the same period in 1997. The increase was due in
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part to a 1.6% increase in franchise case sales. Take-home sales increased
1.6%, however, the contribution to gross margin was lower than 1997 due to
reduced pricing. This was offset by increased pricing in cold bottles even
though sales remained flat in the quarter. Contract net sales for the three
months ended September 30, 1998 increased 53.4% compared to the same period
in 1997 due to the addition of bottled product requirements for an existing
can product customer. Contract sales represented 12.1% of net sales for the
three months ended September 30, 1998, as contrasted to 8.3% of net sales for
the same period in 1997. As a result of the foregoing, aggregate net sales
for the three months ended September 30, 1998 increased 5.3% to $94.1 million
compared to $89.4 million for the same period in 1997.
Cost of sales for the three months ended September 30, 1998 increased
to $65.3 million compared to $60.0 million for the same period in 1997. The
increase was due primarily to the increase in contract net sales (although at
thin margins) and the 1.6% increase in franchise case sales. As a percentage of
net sales, cost of sales for the three months ended September 30, 1998 increased
to 69.4% compared to 67.2% for the same period in 1997 due primarily to the
effect of the substantial increase in contract net sales and to a lesser degree
to reduced per unit profitability of take-home soft drink packages resulting
from price competition. As a result of the foregoing, gross profit for the three
months ended September 30, 1998 was $28.8 million or 1.7% less than the gross
profit of $29.3 million for the same period in 1997.
Selling, general and administrative expenses for the three months ended
September 30, 1998 increased to $21.8 million compared to $21.1 million for the
same period in 1997. Selling, general and administrative expenses are comprised
of selling, distribution and warehousing expenses ("S&D"), advertising and
marketing expenses, and general and administrative expenses ("G&A"). S&D
increased by $0.7 million due to expenses related to the increased franchise
case sales and costs and depreciation related to the emphasis on the
placement of equipment dedicated to single-serve packages of soft drinks
As a result of the above factors, income from operations for the three
months ended September 30, 1998 decreased to $6.2 million, or 6.6% of net sales,
compared to $7.4 million, or 8.2% of net sales, for the same period in 1997.
Interest expense for the three months ended September 30, 1998
increased to $4.7 million from $4.5 million for the same period in 1997. The
increase is due to greater usage (as it relates to number of days used) of the
Company's credit facility to fund the expanded placement of marketing equipment.
Other expenses increased due to a loss realized in the liquidation
of excess property.
As a result of the above factors, the Company had income before income
taxes and minority interest of $1.4 million for the three months ended September
30, 1998 compared to $3.0 million for the same period in 1997.
The Company's effective income tax rate differs from statutory rates
due to several factors. The most significant factors are the
non-tax-deductibility of franchise cost amortization and separate reporting of
the income tax effect of minority interest. The effective income tax rate
provision for the three months ended September 30, 1998 is different than for
the same period in 1997 because these factors are more significant to the
reported pre-tax results.
As a result of the foregoing factors, the Company had net income of
$75,000 for the three months ended September 30, 1998 compared to net loss of
$1.2 million for the same period in 1997.
7
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NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Net sales, excluding contract sales, for the nine months ended
September 30, 1998 increased by 3.7% to $234.6 million compared to $226.2
million for the same period in 1997. The increase was due in part to a 2.9%
increase in soft-drink franchise case sales. There was strong consumer demand
for the Company's soft drink products in single-serve packages which was in part
the result of expanded placement of marketing equipment. The effect of the
demand for single-serve packages was partially offset by the effect of
competition on net pricing in the Company's take-home soft drink packages.
Contract net sales for the nine months ended September 30, 1998 increased 53.6%
compared to the same period in 1997. As a result of the foregoing, aggregate net
sales for the nine months ended September 30, 1998 increased 7.9% to $265.9
million compared to $246.5 million for the same period in 1997.
Cost of sales for the nine months ended September 30, 1998 increased to
$184.6 million compared to $165.8 million for the same period in 1997. The
increase was due primarily to an increase in the unit prices paid by the Company
for certain soft drink raw materials, principally packaging materials and
concentrate, as well as by the higher unit cost of purchasing beer from the
breweries (including the effect of the shift to premium brands) and by the 2.8%
increase in franchise case sales. As a percentage of net sales, cost of sales
for the nine months ended September 30, 1998 increased to 69.4% compared to
67.2% for the same period in 1997. The improved margin associated with the
premium brands of beer and single-serve packages of soft drinks and the increase
in soft drink franchise case sales resulted in gross profit for the nine months
ended September 30, 1998 of $81.3 million or 0.7% greater than the gross profit
of $80.8 million for the same period in 1997.
Selling, general and administrative expenses for the nine months ended
September 30, 1998 increased to $65.1 million compared to $61.7 million for the
same period in 1997. S&D increased by $2.0 million due to expenses related to
the increased franchise case sales and costs and depreciation related to the
emphasis on the placement of equipment dedicated to single-serve packages of
soft drinks. G&A increased by $2.0 million due to increased advertising costs
as well as claims related insurance costs.
As a result of the above factors, income from operations for the nine
months ended September 30, 1998 decreased to $13.5 million or 5.1% of net sales,
from $16.4 million or 6.6% of net sales for the same period in 1997.
Interest expense for the nine months ended September 30, 1998 increased
to $14.1 million from $13.4 million for the same period in 1997. The increase is
due in large part to the additional interest incurred from the additional "PIK
Notes" used to pay the interest on the Subordinated Notes. The increase is also
due to greater usage (as it relates to number of days used) of the Company's
credit facility to fund the expanded placement of marketing equipment.
Other expenses increased due to a loss realized in the liquidation
of excess property.
As a result of the above factors, the Company had a loss before income
taxes and minority interest of $0.7 million for the nine months ended September
30, 1998 compared to income before income taxes and minority interest of $2.9
million for the same period in 1997.
The Company's effective income tax rate differs from statutory rates
due to several factors. The most significant factors are the
non-tax-deductibility of franchise cost amortization and separate reporting
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of the income tax effect of minority interest. The effective income tax rate
provision for the nine months ended September 30, 1998 is different than for
the same period in 1997 because these factors are more significant to the
reported pre-tax results.
As a result of the foregoing factors, the Company had net loss of $0.5
million for the nine months ended September 30, 1998 compared to net loss of
$0.7 million for the same period in 1997.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company is highly leveraged, although there are no significant
reductions in debt scheduled before December 2003. The Company's principal use
of funds until 2003 will be the payment of interest and investment in capital
assets and strategic acquisitions. It is expected that the Company's primary
source of funds for its future activities will be funds from operations. While
the Company does not currently anticipate utilizing the funds available under
its credit agreement for other than seasonal working capital requirements, such
funds may be used to augment operating cash flow. Pursuant to the credit
agreement, the Company has a borrowing capacity of up to $30.0 million,
including $10.0 million available for the issuance of letters of credit. At
September 30, 1998, letters of credit of $8.5 million had been issued and $3.5
million had been drawn for seasonal working capital requirements. The credit
facility will mature in 2001.
The Company had cash of $4.8 million and working capital of $33.1
million at September 30, 1998, compared to cash of $4.7 million and working
capital of $35.4 million at December 31, 1997. Working capital represents
current assets (excluding cash and cash equivalents) less current liabilities
(excluding advances under the credit agreement, current maturities of
long-term debt and other long-term liabilities).
The $0.1 million increase in cash from December 31, 1997 to September
30, 1998 resulted from net cash provided by operations of $14.7 million,
augmented by $2.7 million provided by financing activities, less the cash used
in investing activities of $17.2 million during the nine months ended September
30, 1998. The cash provided by operations was net of a $2.4 million decrease in
working capital. In the same period in 1997, cash decreased by $2.1 million
resulting from net cash provided by operations of $10.7 million, minus $1.0
million of cash used in financing activities, and $11.8 million of cash used in
investing activities.
Cash used in investing activities of $17.2 million during the nine
months ended September 30, 1998 represented a $5.4 million increase over cash
used in the same period of 1997. The increase in cash used was primarily
related to capital expenditures for marketing equipment related to
single-serve packages of soft drinks and expenditures to secure long-term
marketing relationships. Capital expenditures of this type will be less
significant in the balance of fiscal year 1998.
Financing activities in the nine months ended September 30, 1998
provided $2.7 million in net cash which represented a $3.7 million increase over
the $1.0 million in net cash used in the same period of 1997. This increase in
net cash provided resulted primarily from credit agreement advances of
approximately $3.5 million.
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
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plant, bottling, and canning equipment additions. During the nine months
ended September 30, 1998 and 1997, capital expenditures totaled $12.9 million
and $10.6 million respectively. The Company anticipates that capital
expenditures will total approximately $15.0 million for fiscal year 1998 and
will be reduced significantly in fiscal year 1999.
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 in their entirety its
Senior Notes payable (with a balance of $120.0 million at September 30, 1998) at
their maturity on December 15, 2003. While management believes that the Company
will be able to refinance the Senior 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 Company has Subordinated Notes payable with a balance of $46.0
million at September 30, 1998, which 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
Company's 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 currently expects
those conditions will exist at least until mid-1999 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.
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.
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YEAR 2000
The Year 2000 ("Y2K") problem concerns the ability of information
systems and equipment controlled by computer chips and systems to properly
recognize and process date sensitive information on and beyond January 1,
2000. The risks from this date change are both internal and external. The
Company's production, distribution, and administrative systems are at risk
due to the change in date. The external risks, which are more difficult to
assess and manage, are from essential suppliers of raw materials, utilities,
and external distribution services. Customer non-payment from Y2K-related
problems also poses an element of risk.
The Company presently uses 18 different pieces of application
software that are important to its business processes. These systems rely on
a wide area frame relay network ("WAN") to conduct the Company's business.
The Company presently has a maintenance agreement for each of these systems
and the WAN components, which ensures availability of a Y2K compliant system
under the agreement at no additional cost. The hardware and network that the
Company uses was installed within the last 18 months and is largely Y2K
compliant. The completion of changes necessary to achieve Y2K compliance is
expected to be completed by March 31, 1999.
The Company relies on a supply chain to produce and distribute its
products from manufacturing facilities to distribution warehouses and, in
turn, our customers. The suppliers of raw materials (cans, PET bottles,
closures, etc.) directly determine our ability to produce products. Issues
with raw material availability or transportation disruptions could affect the
availability of products in specific flavors and package sizes. In case of a
critical shortage of multiple items, the Company's ability to produce
products could be at risk. The Company plans to monitor supplier readiness as
a part of its Y2K assessment and management plan in the first quarter of
1999. These risks have not been assessed at this point in time.
The production facilities use equipment that operates computer
control systems based upon programmed logic controllers (PLCs). The Reserve,
Louisiana, plant has reviewed its PLCs for Y2K compliance and found them
compliant. A similar evaluation will take place for the other DBG
facilities. The system that the plant relies upon for forecasting demand,
ordering raw materials, monitoring inventory levels, shipping products, and
recording shipments are all computer systems. The software that runs these
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processes is a combination of commercially available software and internally
developed applications. The Company believes commercially available software
installed and the internally developed software is compliant. In 1999,
testing will surface any items that were missed during our detection
assessment and remediation period.
The DBG's 25 distribution centers use a common enterprise-wide
supply chain management tool that has been assessed for Y2K readiness. The
Y2K compliant version is presently loaded on a test system in the corporate
office, and testing to ensure that it meets all of the Company's needs is
underway. This system is scheduled to be operating the end of March 1999. The
conversion is expected to have little risk of business disruption.
The Company's customers pay for products either upon receipt of
goods or within a pre-arranged time frame. The customer risk for DBG has not
been assessed. Assessment of the risk is planned for the first quarter of
1999 in our formal plan. No one customer of DBG represents enough of a risk
to put our allowances for bad debt at risk. A problem with the financial
systems in the banking and finance sector could create a substantial hardship
for the business in general, including DBG.
The Company has not incurred material incremental costs associated
with its Y2K plan. This is due in part to the Company's recent system
conversions that replaced virtually all applications and hardware in use
before 1993, with the bulk of these changes happening within the last 18
months. The Company's initial review of its production PLCs found most to be
compliant, not requiring upgrade. We believe the remaining costs associated
with addressing the Company's Y2K issues will not be material.
The Company will also develop manual methodologies to use in the
event of significant networking, utility or computer disruptions, because of
the Y2K problems. These methodologies will cause some timeliness and control
issues with reporting if they need to be enacted. They would also eliminate
some of the efficiencies that the Company has gained as a result of the
automation efforts.
12
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS OR FORM 8-K
(a) Exhibit 10.1 - Accounting Services Agreement by and
between Delta Beverage Group, Inc. and Pepsi-Cola
Puerto Rico Bottling Company effective July 20, 1998.
Exhibit 27.1 - Financial Data Schedule
(b) Not applicable
13
<PAGE>
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 on November 15, 1998.
DELTA BEVERAGE GROUP, INC.
By: /s/ John F. Bierbaum
-------------------------------
John F. Bierbaum
Chief Financial Officer
14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.1 Accounting Services Agreement by and between Delta Beverage
Group, Inc. and Pepsi-Cola Puerto Rico Bottling Company
effective July 20, 1998.
27.1 Financial Data Schedule
</TABLE>
15
<PAGE>
ACCOUNTING SERVICES AGREEMENT
THIS AGREEMENT (the "Agreement") is entered into as of this 16th day of
October, 1998 by and between Delta Beverage Group, Inc., a Delaware corporation
("Delta Beverage"), and Pepsi-Cola Puerto Rico Bottling Company, a Delaware
corporation (the "Corporation") and is effective as of the 20th of July, 1998.
WHEREAS, the Corporation and its subsidiaries are primarily engaged in the
business of manufacturing, bottling and distributing Pepsi-Cola products and
other beverages and manufacturing beverage containers related thereto; and
WHEREAS, Delta Beverage is primarily engaged in the manufacturing, bottling
and distribution of Pepsi-Cola products and other beverages; and
WHEREAS, Delta Beverage desires to enter into this Agreement for the
purposes of providing the services herein specified to the Corporation;
WHEREAS, the Corporation desires to retain Delta Beverage to perform the
services herein specified; and
WHEREAS, Pohlad Companies, which has entered into a Management Agreement
with the Corporation, owns a majority of the voting common stock of Delta
Beverage and has entered into a management agreement with Delta Beverage
pursuant to which it provides management services to Dakota Beverage.
NOW, THEREFORE, in consideration of the foregoing, of the mutual promises
of the parties hereto and of other good and valuable consideration, the receipt
and sufficiency of which hereby are acknowledged, the parties agree as follows:
1. APPOINTMENT. The Corporation hereby appoints Delta Beverage to render
services to the Corporation and to provide oversight to the Corporation during
the term of this Agreement as herein contemplated with regard to the following
matters (the "Support Services"):
(a) Accounting, including (without limitation) accounts payable,
processing of accounts receivable and preparation of financial statements.
(b) Management information systems ("MIS").
2. SCOPE OF AUTHORITY. The duties and responsibilities of Delta Beverage
shall be limited to those expressly set forth in this Agreement. Delta Beverage
may delegate the authority, duties and obligations conferred under this
Agreement to any individual(s) or entities of its choice, without restriction,
including but not limited to employees of the Corporation. Delta Beverage
shall
<PAGE>
perform Support Services in conformity with (i) such guidelines and
limitations as the Board of Directors of the Corporation may from time to time
impose and (ii) conformity with the provisions of the Articles of Incorporation
and Bylaws (the "Governing Documents") of the Corporation, during the term of
this Agreement.
3. CONFLICTS OF INTEREST. The Corporation acknowledges that Delta
Beverage shall devote as much time to providing services to the Corporation and
its businesses and properties under this Agreement as Delta Beverage may deem to
be necessary under the circumstances. The Corporation understands and agrees,
however, that Delta Beverage may engage in other businesses, including (without
limitation) acting as franchisee under franchise agreements providing for the
bottling and distribution of brand name soft drinks or otherwise owning or
operating other soft drink bottling businesses.
4. EXCULPATION. Delta Beverage shall be exculpated from liability in
connection with the acceptance, performance or nonperformance of its duties,
hereunder to the same extent that directors or officers of a corporation are
entitled to elimination of personal liability under Delaware law and the
Governing Documents other than for gross negligence or willful misconduct.
Delta Beverage shall incur no liability with respect to any action taken by it
in reliance upon any notice, direction, instruction, consent, statement or other
paper or document provided to it by the Corporation, or any of its authorized
representatives. In all matters or questions arising under this Agreement which
Delta Beverage, in its sole discretion and at its own expense, may seek and rely
on the advice of counsel, and such advice and reliance is made and taken in good
faith based on such advice, Delta Beverage shall not be liable to any party,
including the Corporation, or its successors and assigns, for its actions so
taken, whether or not such actions may constitute gross negligence or willful
misconduct.
5. INDEMNIFICATION OF DELTA BEVERAGE.
(a) The Corporation agrees to indemnify and hold harmless Delta
Beverage against and in respect of any and all claims, suits, actions
proceedings (formal or informal), investigations, judgments, deficiencies,
damages, settlements, liabilities, and legal and other expenses (including legal
fees and expenses of counsel chosen by Delta Beverage) as and when incurred
arising out of, in connection with or based upon any act or omission or alleged
act or alleged omission by Delta Beverage in connection with the acceptance of,
or the performance or nonperformance by Delta Beverage of any of its duties
under this Agreement.
(b) Delta Beverage shall give the Corporation prompt notice of any
claim asserted or threatened against Delta Beverage on the basis of which Delta
Beverage intends to seek indemnification from the Corporation as herein
permitted; however, the obligations of the Corporation under this Section 5
shall not be conditioned upon receipt of such notice.
(c) Expenses incurred by Delta Beverage in connection with any
action, suit, proceeding, or appeal thereof, described in Section 5(a) above,
shall be paid by the Corporation in advance of the final disposition of such
action, suit or proceeding within 20 days following receipt of a notice from
Delta Beverage specifying the amount of such expenses actually incurred by Delta
Beverage in connection with such action, suit, or proceeding.
2
<PAGE>
(d) The indemnification agreement provided for in this Section 5
shall survive the termination of this Agreement.
(e) Notwithstanding any other provision of this Section 5 to the
contrary, the Corporation shall not be liable to indemnify Delta Beverage in
connection with any claim against Delta Beverage (i) if a court of competent
jurisdiction has rendered a final decision that indemnification relating to the
claim would be unlawful; (ii) if a final decision by a court of competent
jurisdiction shall adjudge the conduct of Delta Beverage to have been taken not
in good faith or not in a manner reasonably believed to be in or not opposed to
the best interests of the Corporation; and (iii) if the claim is based upon
Delta Beverage deriving an unlawful benefit and a court of competent
jurisdiction adjudges that such benefit was unlawful in a final decision.
6. FEES. For services to be performed under this Agreement, the
Corporation shall pay to Delta Beverage the following:
(a) A services fee, payable quarterly in arrears, in an amount equal
to the aggregate accounting and MIS costs and expenses for each applicable
quarter incurred by Delta Beverage (the "Services Fee"), and allocated by Delta
Beverage in its reasonable discretion to such functions, multiplied by a
fraction, the numerator of which shall be the total case volume of bottle and
can units distributed by the Corporation for the relevant quarter and the
denominator of which shall be the total case volume of bottle and can units
distributed by the Corporation, Delta Beverage and other entities provided
support services by Delta Beverage similar to the Support Services. Such fees
shall be payable by the Corporation upon receipt of a statement for such fees
from Delta Beverage.
(b) The Corporation shall reimburse Delta Beverage for all reasonable
out-of-pocket expenses paid or incurred by Delta Beverage for the account of the
Corporation in performing its duties under this Agreement (including, without
limitation, the fees and expenses of attorneys, accountants, and other
consultants and employees of Delta Beverage), and the costs of equipment,
supplies and other materials, but excluding general overhead expenses and
compensation of officers, directors and employees of Delta Beverage except to
the extent included in the Services Fee.
7. SOURCE OF PAYMENT. The Services Fee set forth in Section 6 of this
Agreement shall be payable to Delta Beverage from the general funds of the
Corporation.
8. STATUS OF PARTIES. In the performance of its services under this
Agreement, Delta Beverage shall be and is an independent contractor; provided,
however, in the event that Delta Beverage acts on behalf of the Corporation with
respect to other parties, Delta Beverage shall be deemed to do so as an agent of
the Corporation. Based on the foregoing, Delta Beverage shall not and will not
incur contractual or other liability solely because or as a result of its status
as a party hereto. The relationship between Delta Beverage and the Corporation
is and shall solely be contractual.
3
<PAGE>
9. NON-DISCLOSURE. Delta Beverage hereby covenants and agrees not to
disclose, at any time during or after the term of this Agreement, directly or
indirectly, to any person, firm, corporation, partnership, association or any
other entity, or otherwise directly or indirectly misuse any confidential
information concerning the business affairs or properties of the Corporation,
except that the provisions hereof shall not apply to disclosures made to
employees or directors of the Corporation, or which are made to others for valid
business purposes of the Corporation.
10. TERM. This Agreement may be terminated by either party at any time
after (i) Pohlad Companies, any of its affiliates, or any of its subsidiaries
(wholly-owned or otherwise) cease to hold, directly or indirectly, any common
stock of the Corporation, or their respective successors, or (ii) Pohlad
Companies ceases to be controlled by the Pohlad Group. For purposes of this
Agreement, "affiliate of Pohlad Companies" means any person controlling or
controlled by or under common control with Pohlad Companies, and "control," when
used with respect to Pohlad Companies, means the power to direct the management
and policies of Pohlad Companies, directly or indirectly, whether through the
ownership of voting securities, by contract, or otherwise. For purposes of this
Agreement, "Pohlad Group" means Robert C. Pohlad and his parents, brothers, and
any of their spouses, children, grandchildren, sons-in-law, daughters-in-law,
any corporation or partnership controlled by or affiliated with any of the
foregoing and any employees of such corporations or partnerships, and any trust
or foundation in which any of the foregoing has a substantial beneficial
interest or serves as a trustee or in any similar capacity and retains voting
powers of securities held in the trust or foundation.
In addition, this Agreement may be terminated by either party at the end of
ten years from the date hereof or at any time thereafter upon not less than one
year's prior notice.
11. SUCCESSORS AND ASSIGNS. This Agreement shall be binding on the
parties hereto, their successors and assigns; provided, however, that this
Agreement may not be assigned by either party without the consent of Board of
Directors of the Corporation.
12. NO PARTNERSHIP, ETC. Nothing contained in this Agreement shall
constitute or be construed to be or create a partnership or joint venture
between the Corporation and Delta Beverage.
13. WAIVER. No waiver by any party to this Agreement of a breach of any
term or condition hereof shall be construed to operate as a waiver of any other
or subsequent breach of the same or of any other term or condition hereof,
unless otherwise expressly provided.
14. SOLE AGREEMENT. This Agreement states the entire agreement of the
parties with respect to the subject matter hereof and merges all prior
negotiations, agreements and
4
<PAGE>
understandings, if any. The parties agree that in dealing with third parties
no contrary representations will be made.
15. AMENDMENT. This Agreement may be modified or amended only by an
instrument in writing, duly signed and delivered by the parties hereto.
16. COUNTERPARTS. Any number of counterparts of this Agreement may be
executed and each such executed counterpart shall be deemed an original.
17. GOVERNING LAW. All questions concerning the validity, operation,
interpretation, and construction of this Agreement shall be governed by and
determined in accordance with the internal laws of the State of Minnesota, and
all actions or claims under this Agreement shall be property venued only in the
County of Hennepin, State of Minnesota.
18. SEVERABILITY. If any provision of this Agreement, or the application
of such provision to any person or circumstance, shall be held invalid, the
remainder of this Agreement, or the application of each provision to persons or
circumstances, other than those to which it is held invalid, shall not be
affected thereby.
19. HEADINGS. All headings contained in this Agreement are intended for
convenience of reference only, and shall not be used to interpret any of the
terms and provisions of this Agreement.
5
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Services Agreement to be
duly executed as of the date first written above.
PEPSI-COLA PUERTO RICO BOTTLING COMPANY
By: /s/ John F. Bierbaum
--------------------------------
Its: Vice President
--------------------------------
DELTA BEVERAGE GROUP, INC.
By: /s/ Brad Braun
--------------------------------
Its: Vice President
--------------------------------
***Services Agreement dated as of October 16, 1998***
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,843
<SECURITIES> 0
<RECEIVABLES> 34,285
<ALLOWANCES> 525
<INVENTORY> 18,175
<CURRENT-ASSETS> 71,377
<PP&E> 121,502
<DEPRECIATION> 59,523
<TOTAL-ASSETS> 273,617
<CURRENT-LIABILITIES> 33,834
<BONDS> 176,248
0
30,339
<COMMON> 0
<OTHER-SE> 29,448
<TOTAL-LIABILITY-AND-EQUITY> 273,617
<SALES> 265,907
<TOTAL-REVENUES> 265,907
<CGS> 184,559
<TOTAL-COSTS> 184,559
<OTHER-EXPENSES> 67,981
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,073
<INCOME-PRETAX> (706)
<INCOME-TAX> (45)
<INCOME-CONTINUING> (535)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (535)
<EPS-PRIMARY> (34.92)
<EPS-DILUTED> (34.92)
</TABLE>
