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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________________
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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.
As of March 30, 1998, the Registrant had outstanding: (i) 5,802.77
shares of Series AA Preferred Stock, $5,000 stated value, (ii) 20,301.87
shares of voting Common Stock, $0.01 par value, and (iii) 32,949.93 shares of
nonvoting Common Stock.
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TABLE OF CONTENTS
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Page
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CAUTIONARY STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ITEM 1 BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . 7
ITEM 2 PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 3 LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . 18
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . 18
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . 19
ITEM 6 SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . 20
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . 21
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 26
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . 27
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . 46
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . 47
ITEM 11 EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . 50
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . 54
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . 55
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . . . . 58
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
INDEX TO EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
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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 $120.0 million principal amount (the "Debt Offering") 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 December
16, 1996, by and among the Company, NationsBank, N.A. and other lending
institutions (collectively, the "Financing Transactions"), have heightened
the Company's highly leveraged status. At December 31, 1997, the Company had
total consolidated outstanding long term debt of approximately $170.4
million, of which approximately $126.8 million was Senior Indebtedness (as
defined herein) and approximately $43.6 million was subordinated debt. In
addition, subject to the restrictions in the Credit Agreement and the
Indenture (the "Indenture"), dated 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, 1997, 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
$9.1 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 balance of the Company's 11%
subordinated notes is due in December 2003 (the "Subordinated Notes").
Finally, it is anticipated
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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 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, 1997, 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 $9.1
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, 1997, the Company had approximately $300,000 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, 1997, 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,
1997, the aggregate amount of indebtedness of the Company's subsidiaries to
which the holders of the Notes were effectively subordinated was
approximately $3.2 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 financing, if needed, may be significantly
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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 AND MILLER PRODUCTS
For the year ended December 31, 1997, approximately 78% of the Company's
soft drink sales were derived from the sale of PepsiCo, Inc. ("PepsiCo")
products pursuant to franchise agreements with PepsiCo and approximately 90%
of the Company's beer sales were derived from the sale of Miller Brewing
Company ("Miller") products pursuant to a distributor agreement with Miller.
If adverse events affect the popularity of PepsiCo or Miller products in the
Company's territories, 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, par value
$0.01 per share (the "Common Stock") of 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
Messrs. Pohlad and 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 (the "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 the 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 and Tennessee both 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 Company
("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
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 may 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.
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The Company's principal competitors are distributors of Anheuser-Busch
products. In 1997, Anheuser-Busch products accounted for 43% of total U.S.
beer sales, while sales of Miller products, the Company's
primary brewer, accounted for 22% of total U.S. beer sales.
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, 1997, the Company had approximately 1,720 full-time
employees and 40 part-time employees. Approximately 196 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 in September 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 in December 1999. Approximately
145 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 in December 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. In a typical year, approximately 54%
of the Company's sales by volume occur from April to September and
approximately 46% occur 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
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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.
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. The Company does not intend
to apply for listing of the Notes on any securities exchange.
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PART I
ITEM 1 BUSINESS
GENERAL
The Company is one of the largest soft drink manufacturers and
distributors in the U.S., selling over 26.3 million hard cases of PepsiCo
products and 7.3 million hard cases of other soft drinks in 1997. The
Company is the fifth largest independent PepsiCo bottler in the U.S. PepsiCo
is the second leading soft drink franchisor in the U.S., capturing
approximately 30.9% of all soft drink sales in 1997. In 1997, net sales for
the Company totaled $323.2 million and EBITDA was $30.9 million.
The Company's exclusive franchise territories cover portions of Arkansas,
Louisiana, Mississippi, Tennessee and Texas and include the cities of New
Orleans, Memphis, Little Rock, Shreveport, Baton Rouge and Tupelo. In the
aggregate, there are approximately seven million people in the Company's
territories. The Company has the exclusive right within its territories to
manufacture and/or distribute the following families of products: PEPSI-COLA
(cola), MOUNTAIN DEW (heavy citrus), SEVEN-UP (lemon-lime), SLICE (orange),
OCEAN SPRAY (juices), LIPTON (iced teas), SQUIRT (heavy citrus), COUNTRY TIME
(lemonade), CANADA DRY (ginger ale), CRUSH (fruit), HAWAIIAN PUNCH (fruit),
MUG (root beer), ALL SPORT (sport drink), YOO-HOO (chocolate), CRYSTAL LIGHT
(diet) and various other product offerings. In addition, the Company is the
largest distributor of Miller products in the state of Louisiana and has the
exclusive right to distribute Miller and Heineken USA Incorporated
("Heineken") products in greater New Orleans, Louisiana.
The Company believes its success as an independent bottler is due
primarily to its ability to produce efficiently and to market and distribute
effectively its national brands. The Company's products include highly
recognizable trademarks, most of which are supported by considerable national
advertising expenditures made by the franchisors. In 1997, for example,
PepsiCo spent approximately $163 million in national advertising to advertise
PepsiCo products. Furthermore, all of the Company's territories are located
in the southern region of the U.S. that historically has posted above average
per capita consumption of soft drinks.
The Company operates two soft drink production facilities, one in
Collierville, Tennessee, and the other in Reserve, Louisiana, with a total
annual production capacity of 74.3 million cases. The Company distributes
approximately 97% of its soft drink products to retail outlets through its
computerized direct store delivery ("DSD") system. The Company's DSD system
utilizes hand-held computer technology to receive orders from and process
deliveries to the Company's customers. Through its DSD system and its 24
warehouse distribution facilities strategically located throughout its
territories, the Company services and distributes products to over 32,000
retail outlets in five states. Retail customers in the Company's territories
include The Kroger Company, Wal-Mart Stores, Inc., Winn-Dixie Stores, Inc.
and Circle K Convenience Stores, Inc. The Company tracks its product sales
daily and uses this information to plan its production, which is subject to
seasonal swings in demand, and to interpret and react to changes in consumer
buying patterns. This allows the Company to provide efficient and effective
service to its retail customers.
Since it was acquired by its current owners in 1988, the Company has
broadened its product offerings through the establishment of the Joint
Venture (as defined herein) as well as the acquisition of additional
franchises, improved its production facilities and implemented efficient
delivery systems. Moreover, the Company has better managed product
discounting and driven sales mix toward higher margin products. As a result
of these initiatives, for the period from 1990 to 1997, the Company's case
volume and operating profit grew at compound annual rates of 106% and 113%,
respectively.
The Company used approximately $117.2 million of the proceeds from its
Debt Offering to retire certain existing indebtedness of the Company and
$2.8 million for working capital purposes. In connection with the Debt
Offering, the Company also entered into the Credit Agreement pursuant to
which the Company has borrowing
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capacity of up to $30.0 million, including $10.0 million available for the
issuance of letters of credit, of which $9.1 million had been issued at
December 31, 1997. The Company believes that the consummation of the
Financing Transactions has provided it with (i) increased operating
flexibility by extending the repayment of its debt obligations and (ii)
additional cash flow for use in capital expenditures to implement the
Company's strategic objectives.
STRATEGIC OBJECTIVES
The Company's business strategy is to continue to manufacture, distribute
and market a broad array of national brands in all beverage categories.
Specifically, the Company's long-term strategic objectives are to (i)
increase growth in volume and market share in its existing territories
through coordinating its franchisors' national advertising and marketing
campaigns with the Company's regional and local marketing efforts, (ii)
improve operating margins by shifting package mix to higher margin packages
and controlling the level of retail discounts, (iii) pursue acquisitions that
leverage the Company's existing structure and managerial expertise, (iv)
strengthen the Company's corporate culture to better leverage human resources
and (v) maximize operating efficiencies by utilizing emerging technologies to
improve customer service and communications and increase the efficiency of
logistics and distribution operations.
INCREASE GROWTH IN VOLUME AND MARKET SHARE
The Company intends to increase its growth in volume and market share by
increasing consumer preference for its high volume products. The Company
believes it can achieve this objective by maintaining a wide variety of
national brands supported by the franchisors' national advertising and major
marketing campaigns, and coordinating its own regional and local
merchandising and promotion activities to take advantage of such national
advertising and marketing campaigns. Current national advertising and
marketing campaigns supporting the Company's products include PepsiCo's POP
CULTURE and Cadbury's HIT THE ROAD. After successful test marketing in the
Company's New Orleans territory, all of the companies territories adopted the
PEPSI BLUE marketing initiative late in 1997. Under the PEPSI BLUE
initiative, all Pepsi-Cola trademark graphics on packaging, point-of-sales,
cold storage equipment and delivery trucks are coordinated with PEPSI BLUE
advertising. The Company believes these advertising and marketing campaigns
will help build consumer awareness of its product offerings. The Company
believes its own regional and local merchandising and promotion activities,
designed to take advantage of such increased consumer awareness, will
ultimately increase consumer preference and sales volume for its products.
To this end, the Company intends to (i) conduct consumer research to identify
those brands, packaging configurations and retail channels which appeal to
consumers in the Company's territories and tailor regional and local
marketing efforts accordingly, (ii) increase its share of local print
advertising, conducted primarily by high volume supermarkets and mass
merchandisers, through shared product advertisements which benefit both the
retailer, by increasing the total volume and profitability, and the Company,
through higher volume due to increased advertising frequency and (iii)
continue to develop marketing initiatives such as EVERY CAP'S A WINNER, an
under the cap promotion that rewards consumers with free products and
merchandise.
IMPROVE OPERATING MARGINS
The Company intends to improve its operating margins by shifting package
mix to higher margin packages and controlling the level of discounts.
Single-serve 20-ounce packages and one-liter bottles sold through cold
storage equipment (i.e., "visi-coolers" and express lane merchandise units)
for immediate consumption are less price sensitive than other
non-refrigerated packages. Therefore, sales of single serve cold drink
packages generate above average margins for both the Company and retailers.
The Company intends to increase the presence and sales of these single serve
packages by increasing its capital investment in cold storage equipment in
convenience stores, supermarkets and other single serve outlets throughout
its territories. By investing in these assets, the Company hopes to drive
volume and profitability of its major soft drink brands while providing
additional refrigerated space to merchandise more effectively the Company's
other less visible products such as bottled
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waters, teas, juices and sports drinks. The Company typically receives a
full return on its investment in these assets in approximately two years.
Twenty-ounce vending machine products represent another high margin package,
and the Company intends to capitalize on the 20-ounce vending market by
investing in additional 20-ounce vending machines.
The Company also intends to continue to control the level of product
discounting for its more price sensitive packages such as cans and two-liter
bottles. The Company manages its product discounts by a variety of methods,
including (i) using its information system capabilities to analyze
volume/price relationships by package and customer detail, (ii) utilizing
retail scan information to analyze volume and retail price sensitivities,
(iii) developing retail audits to monitor the effectiveness of merchandising
and discount offerings, including the introduction of new promotional
strategies to shift consumer preference to less price sensitive packages and
(iv) providing innovative and unique account specific promotions to provide
additional value to consumers.
ACQUISITION STRATEGY
The Company's acquisition strategy includes identifying and pursuing
potential franchise opportunities (i) contiguous to the Company's existing
territories and (ii) that would permit the Company to extend its existing
operations while leveraging its existing structure and managerial expertise.
The acquisition of the Miller distributorships illustrates the Company's
acquisition philosophy. The Company consolidated soft drinks and beer
operations into a single facility and incorporated both products into its
existing organization, thereby extending its operations while leveraging its
structure and managerial expertise.
STRENGTHEN CORPORATE CULTURE
The Company intends to strengthen its corporate culture by rewarding
employees for achieving common goals and operating improvements, empowering
employees with flexibility to make decisions, providing an opportunity for
personal growth and encouraging open communications and teamwork by
developing common goals.
MAXIMIZE OPERATING EFFICIENCIES
The Company believes it can further enhance its operating efficiency by
utilizing emerging technologies to improve customer service and
communications and increase the efficiency of logistics and distribution
operations. In addition, the Company intends to continue to invest in its
manufacturing operations to improve production efficiencies and flexibility.
Over the past five years, the Company has invested approximately $5.7
million to upgrade its computer hardware and networking systems and acquire
hand-held computer technology in order to automate its selling, ordering and
delivery processes. See " -- Sales and Distribution." In addition, the
Company acquired and developed new software to automate its forecasting,
production scheduling, inventory controls, transportation of goods and back
hauling of raw materials.
The Company intends to expand its existing technology systems to create
additional operating efficiencies. The Company intends to utilize Electronic
Data Interchange (EDI) to create paperless transactions with customers and
suppliers by permitting electronic transmission of transactions. In
addition, the Company has built an intranet with an internet access point to
enable direct electronic communications with its customers. The Company is
creating a data warehouse which will enable the Company to use advanced tool
sets to analyze realtime information which will aid management in its
decision-making processes. Finally, the Company intends to continue the
expansion of its automated routing and truck loading programs to maximize
delivery efficiencies.
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JOINT VENTURE
Pursuant to a Joint Venture Agreement dated September 3, 1992, as amended
and restated (the "Joint Venture Agreement"), the Company and Poydras Street
Investors LLC, a Louisiana limited liability company ("Poydras"), formed the
Pepsi Cola/Seven-Up Beverage Group of Louisiana, a Louisiana general
partnership (the "Joint Venture"). The Joint Venture distributes soft drinks
in New Orleans and Baton Rouge, Louisiana, pursuant to franchise agreements
entered into or assumed by the Joint Venture. The soft drink products
distributed by the Joint Venture are supplied by the Company. The Joint
Venture distributes beer in greater New Orleans, pursuant to distributor
agreements entered into by the Joint Venture. See " -- Products" and
"Certain Relationships and Related Transactions -- Joint Venture."
The day to day operations of the Joint Venture are managed by the Company
in its role as Managing Venturer. As Managing Venturer, the Company has the
authority to make capital expenditures to maintain and replace facilities to
meet the anticipated needs of the Joint Venture. The business and affairs of
the Joint Venture are subject to the governance of a four member Management
Committee, of which two members are designated by the Company and two members
are designated by Poydras. The Company has a 62.0% interest in the Joint
Venture. Poydras has the remaining 38.0% interest. Profits and losses of
the Joint Venture are distributed based on the parties' interests in the
Joint Venture.
Under the terms of the Joint Venture Agreement, the Company may elect, as
of December 31, 1999, to purchase Poydras' ownership interest at a price
equal to 38.0% of the fair market value of the Joint Venture. Poydras may
elect to defer the closing of any such purchase to January 2001. No similar
feature exists for purchase of the Company's ownership interest by Poydras.
PRODUCTS
SOFT DRINKS
The following table sets forth products of PepsiCo, Cadbury and other
franchisors produced and/or distributed by the Company. The Company packages
and distributes its soft drink products in one, two, three-liter and 20-ounce
PET bottles, aluminum cans in six packs, 12-packs, 20-packs and 24-packs and
five gallon containers.
PEPSICO PRODUCTS CADBURY PRODUCTS
PEPSI SEVEN-UP
CAFFEINE FREE PEPSI DIET 7UP
DIET PEPSI CHERRY 7UP
CAFFEINE FREE DIET PEPSI CANADA DRY
WILD CHERRY PEPSI COUNTRY TIME
MOUNTAIN DEW CRYSTAL LIGHT
DIET MOUNTAIN DEW CRUSH
SLICE
MUG ROOT BEER OTHER PRODUCTS
LIPTON ICE TEA
OCEAN SPRAY HAWAIIAN PUNCH
ALL SPORT SUNNY DELIGHT
AQUAFINA NUGRAPE
FRAPPUCCINO YOO-HOO
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BEER
The following table sets forth products of Miller and Heineken
distributed by the Company. The Company distributes its beer products in
glass bottles, aluminum cans in six packs, 12-packs and 24-packs and a variety
of bulk draft containers.
MILLER PRODUCTS HEINEKEN PRODUCTS
MILLER BEER HEINEKEN
MILLER LITE AMSTEL LIGHT
MILLER GENUINE DRAFT
MILLER HIGH LIFE OTHER PRODUCTS
LOWENBRAU SPECIAL
LOWENBRAU DARK DIXIE BEER
LOWENBRAU MALT LIQUOR PETE'S WICKED ALE
MAGNUM SHINER BOCK
MILWAUKEE'S BEST
MILWAUKEE'S BEST LIGHT
SHARP'S
ICEHOUSE
LITE ICE
RED DOG
MOLSON GOLDEN
MOLSON ICE
FOSTER'S LAGER
SOFT DRINK FRANCHISES
Under franchise agreements with PepsiCo, Cadbury and several other
beverage companies, the Company produces and/or distributes soft drinks and
engages in certain other marketing activities. Under the terms of the
franchise agreements, the Company has the exclusive right to produce and
distribute certain products of the franchisors in prescribed geographic
areas. The Company believes that it is currently in compliance with all of
the terms of its franchise agreements.
The Company's franchisors are the sole owners of the secret formulae
under which the primary component (concentrate or syrup) of various soft
drink products bearing the franchisors' trademarks are manufactured. Each
concentrate, when mixed with water and sweetener, produces syrup which, when
mixed with carbonated water, produces soft drinks. Except to the extent
reflected in the price of concentrate or syrup, no royalty or other
compensation is paid under the franchise agreements to the franchisors for
the right of the Company to use the franchisors' trade names and trademarks
in its territories and the associated patents, copyrights, designs and
labels, all of which are owned by the franchisors.
Under the terms of its franchise agreements with PepsiCo, the Company is
required to purchase either concentrate or syrup manufactured only by
PepsiCo, at prices established by PepsiCo, for PepsiCo trademarked products.
Historically, prices established by PepsiCo for its concentrates and syrups
have been adjusted annually in accordance with changes in the Consumer Price
Index ("CPI"). The PepsiCo franchise agreements further provide that
suppliers of bottles and crowns for PepsiCo products must be approved by
PepsiCo. The franchise agreements require the Company to promote vigorously
the sale of PepsiCo products in its territory, to ensure it has adequate
capacity to meet demand for PepsiCo products and to advertise and promote
actively PepsiCo products in its territory at its own cost. The PepsiCo
franchise agreements prohibit the Company from bottling, distributing or
selling any other beverage which could be confused with Pepsi-Cola. The
franchise agreements remain in effect for an indefinite period of time,
subject to termination with due notice by PepsiCo upon (i) the
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violation of any of the prescribed terms thereof, (ii) the insolvency of the
Company, an assignment by the Company for the benefit of its creditors, or
the failure of the Company to vacate the appointment of a receiver within 60
days thereof, or (iii) the sale, disposition, change in control or transfer
of the Company's rights pursuant to the franchise agreement without the
written consent of PepsiCo.
The franchise agreements relating to soft drink products from other
significant soft drink franchisors are substantially similar to the franchise
agreements with PepsiCo. The territories covered by the franchise agreements
for products of other franchisors generally correspond with the territories
covered by the franchise agreements with PepsiCo.
BEER DISTRIBUTORSHIPS
The Company distributes Miller products and Heineken products pursuant to
distributor agreements entered into with Miller and Heineken (the "Miller
Agreement" and the "Heineken Agreement," respectively). Each of the
distributor agreements gives the Company exclusive rights to distribute
products in its territory. The Company began distribution of Miller products
pursuant to the Miller Agreement in 1995 and began distribution of Heineken
products pursuant to the Heineken Agreement in 1996. The Company also
distributes a small volume of beer produced by other brewers. The
distributor agreements relating to these beer products are substantially
similar to the Miller and Heineken Agreements. Distribution of such beer
products is not material to the Company's results of operations.
Many of the terms of the Miller and Heineken Agreements are similar.
Under these agreements, product prices to the Company are determined by the
brewer or importer. Historically, product prices have been adjusted annually
in accordance with changes in the CPI. The individual who manages the
distribution of the products must be approved by the brewer or importer. Any
sale, disposition, change in control or transfer of the Company's rights
pursuant to the distributor agreement must receive prior approval of the
brewer or importer. Each of the distributor agreements remains in effect for
an indefinite period of time, however, the Company may terminate its
distribution agreement with either Miller or Heineken upon 90 days' prior
written notice. Moreover, Miller or Heineken may terminate the Company's
distribution rights in the event: (i) the Company fails to comply with any of
its commitments or obligations pursuant to the distribution agreement; (ii)
the Company or any of its owners is convicted of a felony; (iii) the Company
engages in fraudulent conduct or substantial misrepresentation in its
dealings concerning the brewer's or importer's products; (iv) the Company's
federal, state or local licenses or permits for its distribution operations
are revoked or suspended for more than 31 days; (v) the Company becomes
insolvent, fails to pay monies due the brewer or importer, makes an
assignment or attempts to make an assignment for the benefit of creditors,
institutes or has instituted against it bankruptcy proceedings, dissolves or
liquidates; or (vi) the Company fails to undertake a good faith effort to
cure any such noncompliance. Miller reserves the right to terminate the
Miller Agreement upon 30 days' notice, provided it gives notice
contemporaneously to all of the other Miller distributors in the U.S.
Heineken reserves the right to terminate the Heineken Agreement upon 30 days'
notice, provided it gives notice contemporaneously to all of the other
Heineken distributors in Louisiana.
SALES AND DISTRIBUTION
The Company's products are generally sold in advance by a salesperson and
then delivered within 24 hours from one of the Company's distribution
facilities to the customer. The Company recently invested in hand-held
computer technology and other hardware and software to improve customer
service and delivery effectiveness. Hand-held computers allow the advance
salesperson to download all order information for each customer into the
Company's main computer system. The orders are electronically processed for
truck loading, route dispatching and customer invoicing. Customer files are
controlled with the correct wholesale price and discount for each store
keeping unit. The product is delivered by a Company employee using a
hand-held delivery computer. The delivery is verified by both the customer
and Company employee, and a computerized invoice is printed and presented to
the customer. Upon completing delivery of all orders, the driver performs a
self settlement at the
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Company's distribution facility. The customer data is
then transferred from the hand-held computer into the Company's route
settlement process for verification.
The Company operates a 1,300 vehicle fleet to support its sales and
distribution operations. Maintenance and service of the fleet are provided
by the Company.
SOFT DRINKS
In 1997, approximately 53% of the Company's soft drink products were sold
to supermarkets, 25% to convenience stores, gas stations and small grocery
stores, 8% to drug stores and mass merchants, 7% to third party operators and
full service vending accounts and 7% to other miscellaneous accounts.
Soft drink sales oriented towards high-volume customers such as large
retail chains result in economies of scale in selling and distribution
expenses. Bulk deliveries for high-volume customers are made from the
Company's distribution facilities to the customer's outlets via transport
vehicles and are unloaded into the outlets in full pallet quantities. Some
soft drink deliveries are made directly from the manufacturing plant to
retail outlets, thereby bypassing the Company's warehouse operations. Soft
drink sales are also made to smaller independent retail outlets where
consumers prefer to purchase cold beverages in single packages or at fountain
outlets. Conventional route trucks are used to make soft drink deliveries to
the Company's smaller customers.
The Company also makes cold soft drinks available to consumers through
vending machines, fountain equipment and visi-coolers. Substantially all
vending machines utilized by the Company are Company-owned and provided at no
cost to retail outlets or third-party operators. Company-owned vending
machines are maintained and stocked by the Company. Vending machines
provided to retail outlets or third-party operators are maintained by the
Company and stocked by the party operating the vending machine. Fountain
equipment dispenses products in convenience stores, gas stations,
restaurants, bars, theaters and other similar locations. The Company sells
either premix, a ready-to-use product, or postmix, a syrup product, to
retailers in stainless steel or disposable containers for use in fountain
equipment. Visi-coolers are generally loaned by the Company to large retail
outlets and convenience stores. The Company has an installed base of
approximately 8,400 visi-coolers and 12,900 vending machines.
BEER
In 1997, approximately 40% of the Company's beer products were sold to
supermarkets, 19% to on-premise channels such as restaurants and bars, 22% to
convenience stores, 8% to drug stores and mass merchants and 11% to other
miscellaneous accounts.
The sales and distribution process for the Company's beer business is
essentially the same as for soft drinks. To maximize distribution
efficiency, beer and soft drinks are loaded and delivered on the same vehicle
for distribution and merchandising to large bulk customers. Kegs of beer for
delivery to on-premise customers are stored in a climate-controlled
refrigerated section of the Company's facilities and delivered on
refrigerated route vehicles.
MARKETING
The Company's marketing efforts are directed towards brand management,
key account management, promotional activities and merchandising. The
Company believes that its marketing program allows it to compete effectively
in its territories.
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SOFT DRINKS
Marketing programs for each of the Company's soft drink products are
coordinated with the franchisor. Advertising campaigns are developed by the
franchisors on the national level and by both the Company and the franchisor
on the local level. A significant portion of the Company's promotional
effort focuses on price discounting and allowances, newspaper advertising and
coupons. The goal of these activities is to position the Company's brands to
compete effectively in the marketplace and to obtain "feature" retail
advertisements and end-aisle displays in high volume retail outlets.
End-aisle and secondary displays are generally limited to special promotions
and advertisements designed to stimulate sales and encourage impulse
purchases. As a service to customers and to better merchandise its products,
the Company builds displays in conjunction with promotional programs and for
restocking products in grocery stores, mass merchandise outlets and
convenience stores.
The Company pays retail stores under annual marketing agreements for the
right to be included in the retailer's advertising programs. Retail
promotional programs are the Company's most significant marketing
expenditures and are supported through cost-sharing arrangements with the
franchisors. Other marketing expenditures are also typically supported by
the franchisors. National media advertising is funded primarily by the
franchisors, while local media advertising is funded through cost-sharing
arrangements. See " -- General."
BEER
Marketing programs, national advertising and all television and radio
advertising for the Company's beer products are provided by the brewer or
importer. Marketing efforts by the Company to secure large accounts such as
supermarkets and convenience stores in its territories and discount pricing
of beer products are also generally supported by the brewer or importer.
Promotional efforts focus on price discounting and allowances to obtain
newspaper advertising that features value pricing to consumers supported with
secondary displays. Cold merchandising availability is also important as
over 63% of beer in supermarkets is sold cold. On-premise sales are
aggressively supported by both the brewer or importer and the distributor
since this channel represents significant sampling and trial of beer products.
MANUFACTURING PROCESS
The Company produced 38.9 million cases of soft drinks in 1997 at its two
manufacturing facilities in Collierville, Tennessee, and Reserve, Louisiana.
The Collierville and Reserve facilities have annual production capacity of
41.0 million and 33.3 million cases of beverages, respectively. During the
peak volume months of May through August, the plants typically operate at
approximately 80% of capacity.
The manufacturing process consists of receiving, batching, filling and
packaging product. Containers are received in bulk and are moved from the
supplier's trailers to "de-palletizing" equipment which then automatically
places the containers on conveyers that feed them to the filling equipment.
Treated water, extract and additives are combined in large stainless steel
tanks and mixed, or "batched," into syrup with a motorized impeller. The
syrup is then mixed with additional purified water and carbonated. Finished
product is then sent to the filling equipment. At the same time, containers
arrive by conveyor and are rinsed using ionized air and vacuums to remove
dust particles. The filling equipment fills the cleaned containers with
finished products. The filled cans and bottles are then automatically
scanned to test levels and cap or top placement. Cans are either placed in
corrugated trays and fastened with plastic rings or placed in multipack
cartons. Bottles are usually placed in boxes for stability. Each case is
then automatically transported to a "palletizer" where it is stacked on a
wooden pallet and shrink-wrapped to be stored before distribution.
The Company's can lines have been modified for additional capacity as
well as the capability to produce six pack cans and multi-pack cans
simultaneously. The bottle lines which produce 20-ounce, one-liter and
two-liter
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bottles have on-line labeling capabilities that reduce packaging
inventories. Moreover, the filling equipment on the Company's bottle lines
has been upgraded with quick change parts to reduce down time for flavor
changeovers. One-liter, two-liter, three-liter and 20-ounce PET bottle
products have been converted to standardized deposit shells, which eliminate
packaging costs and provide intraplant flexibility to cross ship products
regardless of plant location.
The Company receives all beer products from brewer or importer
manufacturing facilities and does not itself manufacture beer products.
COMPETITION
The beverage industry is 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 as well as chain store and
private label soft drinks. The principal 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 CCE. The Company believes that its flexibility and
innovation in developing and implementing new methods of marketing,
merchandising and distributing its products permit it to compete effectively
against CCE. See " -- Strategic Objectives."
BEER
Competitors in the distribution of beer include distributors of
nationally advertised and marketed products as well as regional and local
products. 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 in its beer
distribution operations are distributors of Anheuser-Busch products, whose
products accounted for 43% of total U.S. beer sales in 1997. Sales of Miller
products in the same time period represented 22% of total U.S. beer sales.
The Company believes it competes effectively by executing its marketing
campaigns and product introductions effectively, maintaining price
competitiveness and increasing presence and maximizing availability of its
products in selected distribution channels.
RAW MATERIALS
In addition to concentrates and syrups obtained from its franchisors, the
Company also purchases water, carbon dioxide, fructose, 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; however, historically these prices have been adjusted
annually in accordance with changes in the CPI. Prices for the remaining raw
materials are determined by the market.
A substantial portion of the Company's raw materials, including its
aluminum cans, closures, other packaging materials and fructose, are made
through 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.
In 1997, CPG purchased 4.5 billion or 4.5% of all aluminum cans used in the
U.S. beverage industry, and 6.0% of all fructose used in the U.S. soft drink
industry. The Company believes the magnitude of CPG's purchases gives the
Company greater influence with suppliers than the Company could achieve on a
stand alone basis.
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GOVERNMENT REGULATION
The production, distribution and sale of many of the Company's products
are subject to the Federal Food, Drug and Cosmetic Act, the Occupational
Safety and Health Act and various federal and state statutes regulating the
franchising, production, sale, safety, advertising, labeling and ingredients
of such products. Two ingredients in its soft drink products, saccharin and
aspartame, are regulated by the U.S. Food and Drug Administration.
Bills are considered from time to time in various state legislatures and
in Congress which would prohibit the sale of beverages unless a deposit is
made for the containers. Proposals have been introduced in certain states
and localities that would impose a special tax on beverages sold in
nonreturnable containers as a means of encouraging the use of returnable
containers. No such legislation is currently in effect and, to the knowledge
of management of the Company, none is currently under consideration in any
territories served by the Company.
Specific soft drink taxes have been imposed in some states for several
years. Of the states in which the Company conducts business, Arkansas and
Tennessee both impose specific soft drink taxes. The Company
believes it is in compliance with all tax regulations pertaining to its
operations.
The Company's beer distribution operations are subject to extensive
regulations by state and federal agencies of such matters as licensing
requirements, trade and pricing practices, permitted and required labeling,
advertising and relations with retailers. The federal government also
requires warning labels on packaging of beer. The distribution and sale of
beer is subject to excise taxes at both the state and federal level. The
Company believes it is in compliance with all such regulations pertaining to
its beer distribution operations.
The Company's business is also subject to federal and state environmental
laws, rules and regulations. See " -- Environmental."
ENVIRONMENTAL
The Company is subject to a variety of federal and state environmental
laws, rules and regulations, as are other companies in the same or similar
business. In particular, 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. The Company believes it is in substantial compliance
with such laws, rules and regulations; however, these laws, rules and
regulations change from time to time, and such changes may affect the ongoing
business and operations of the Company. From time to time, the Company has
received, and in the future may receive, requests from environmental
regulatory authorities to provide information or to conduct investigative or
remediation activities with respect to its facilities. None of these requests
is expected by management to have a material adverse effect on the Company's
business.
In connection with the maintenance and service of its 1,300 vehicle
fleet, the Company generates hazardous wastes, which are either transported
off-site by licensed haulers to permitted disposal facilities or recycled by
vendors as mandated by federal and state law. Some of the Company's
facilities have underground storage tanks which meet U.S. Environmental
Protection Agency and state standards. Other facilities have above-ground
storage tanks which are owned and maintained by petroleum vendors.
EMPLOYEES AND EMPLOYEE BENEFITS
At December 31, 1997, the Company had approximately 1,720 full-time
employees and 40 part-time employees. Approximately 196 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 in September 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
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expires in December 1999. Approximately 145 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 in December 1999. The second contract expires in November
1999. The Company has not experienced any labor disputes and believes
relations with its employees are satisfactory.
The Company makes a variety of benefits available to its employees. In
particular, the Company sponsors a tax-qualified 401(k) plan that permits
eligible employees to defer a portion of their salary on a tax-deferred basis
and receive a 50% Company matching contribution that is capped at $1,000 per
employee. In addition, the Company sponsors welfare benefits programs that
provide health, dental, life and accidental death and dismemberment insurance
coverage to substantially all employees. The Company does not presently
maintain, or contribute to, any defined benefit pension plans or
multiemployer pension plans. The Company also provides additional benefits
to its executive employees. These plans provide bonus, incentive and
deferred compensation to eligible executive employees. See "Executive
Compensation."
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ITEM 2 PROPERTIES
The Company currently bottles and cans soft drink products in two
production facilities, a 110,000 square foot production facility adjacent to
an 89,000 square foot warehouse facility in Collierville, Tennessee (located
outside Memphis, Tennessee), and a 120,000 square foot production facility in
Reserve, Louisiana (located outside New Orleans, Louisiana). The Company
believes that its production facilities will be sufficient to meet
anticipated production needs for the foreseeable future.
The Company's headquarters are located in Memphis, Tennessee. The
headquarters facilities are leased. The Company also operates 24 warehouse
distribution facilities from which it conducts its sales, delivery and
vending operations. The Company owns 15 of the warehouse distribution
facilities and leases the remaining 9 facilities. The locations of the
warehouse distribution facilities are as follows:
Owned Facilities Leased Facilities
------------------------ ------------------------
Batesville, Arkansas Forrest City, Arkansas
Camden, Arkansas Alexandria, Louisiana
Hot Springs, Arkansas Baton Rouge, Louisiana
Jonesboro, Arkansas Shreveport, Louisiana
Little Rock, Arkansas Columbus, Mississippi
Monticello, Arkansas Kosciusko, Mississippi
Harahan, Louisiana Jackson, Tennessee
Leesville, Louisiana Covington, Louisiana
Monroe, Louisiana Corinth, Mississippi
Shriever, Louisiana (1)
Batesville, Mississippi
Greenville, Mississippi
Tupelo, Mississippi
Collierville, Tennessee
Texarkana, Texas
------------------------
(1) This facility is owned by the Company and leased to the Joint Venture.
ITEM 3 LEGAL PROCEEDINGS
In August, 1993, the Company was named in a suit filed in the District
Court of Morris County, Texas by a number of bottlers in parts of the
Company's territories. Additional defendants named in the suit include
PepsiCo, Inc., Pepsi-Cola Company, Coca-Cola, CCE and others. The suit
alleges that the defendants engaged in unfair trade practices and conspired
to monopolize the soft drink industry in eastern Texas, Louisiana and
Arkansas. The Company intends to defend itself fully in this action.
From time to time, the Company is involved in various other legal
proceedings arising in the ordinary course of business. The Company believes
ultimate resolution of such litigation will not have a material adverse
effect on the Company's business, financial condition or results of
operations.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the Company's
most recently completed fiscal year.
18
<PAGE>
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Company's Common
Stock. The Company's Common Stock is not registered under Section 12(b) or
Section 12(g) of the Securities Exchange Act of 1934, as amended.
19
<PAGE>
ITEM 6 SELECTED FINANCIAL DATA
The following table presents selected financial data of the Company and
consolidated Joint Venture as of and for each of the five years ended
December 31, 1993, 1994, 1995, 1996 and 1997. The information presented for
each of the five years ended December 31 has been derived from the
consolidated financial statements of the Company, which statements have been
audited by Arthur Andersen LLP, independent public accountants. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of the Company and notes thereto
included elsewhere in this Annual Report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales. . . . . . . . . . . . . . $225,173 $245,472 $284,709 $312,284 $323,221
Cost of sales. . . . . . . . . . . . 147,573 162,667 198,777 215,085 216,560
-------- -------- -------- ------- --------
Gross profit . . . . . . . . . . . . 77,600 82,805 85,932 97,199 106,661
Selling, general and
administrative expenses. . . . . . . 60,164 62,710 71,802 76,883 83,344
Amortization of franchise costs
and other intangibles(1). . . . 4,246 3,631 3,576 3,664 3,648
-------- -------- -------- ------- --------
Income from operations . . . . . . . 13,190 16,464 10,554 16,652 19,669
Interest expense . . . . . . . . . . 18,433 12,152 13,254 15,094 17,865
Other expenses (income). . . . . . . 65 (45) 75 620 (32)
-------- -------- -------- ------- --------
Income (loss) before income taxes. . (5,308) 4,357 (2,775) 938 1,836
Income tax benefit (expense)(2). . . 189 (3,262) (1,641) (1,745) (2,040)
Minority interest in Joint Venture(3) (11) -- 464 48 65
-------- -------- -------- ------- --------
Income (loss) before
non-recurring items . . . . . . (5,130) 1,095 (3,952) (759) (139)
Non-recurring items(4) . . . . . . . 15,409 -- -- (1,519) --
-------- -------- -------- ------- --------
Net income (loss). . . . . . . . . . $10,279 $1,095 $(3,952) $(2,278) $(139)
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital(5) . . . . . . . . . $23,880 $30,421 $27,547 $23,698 $35,404
Total assets . . . . . . . . . . . . 231,717 244,705 248,437 255,327 260,914
Long-term debt(6):
Senior debt . . . . . . . . . . 105,000 106,000 117,250 120,000 120,000
Subordinated notes payable. . . 30,000 31,650 35,227 39,209 43,640
Other . . . . . . . . . . . . . 6,839 6,579 5,673 5,067 6,764
Stockholders' equity . . . . . . . . 65,504 66,660 62,718 60,449 60,317
OTHER DATA:
EBITDA(7). . . . . . . . . . . . . . $23,610 $25,594 $20,730 $26,248 $30,855
Depreciation and amortization. . . . 10,626 9,085 9,687 10,314 11,441
Capital expenditures(8). . . . . . . 6,116 7,104 10,726 8,964 14,988
</TABLE>
- -------------------
(1) Amortization of franchise costs and other intangibles for the year ended
December 31, 1993 includes amortization of the costs of certain noncompete
agreements entered into in 1988 upon the Company's acquisition.
(2) The effective income tax rate is significantly impacted by the non-tax
deductibility of amortization of franchise costs.
(3) Represents minority interest in the net income (loss) of the Joint Venture
which is consolidated with the Company.
(4) For the year ended December 31, 1993, includes an extraordinary item, (loss
on extinguishment of debt) of $1,015, net of income tax benefit of $600,
and the cumulative effect of a change in the method of accounting
20
<PAGE>
for income taxes of $15,824. For the year ended December 31, 1996,
includes an extraordinary item, (loss on extinguishment of debt) of
$2,472, net of income tax benefit of $953.
(5) 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).
(6) Includes current maturities of long-term debt.
(7) EBITDA consists of net income (loss) before income taxes, interest,
depreciation and amortization. EBITDA also excludes extraordinary items
and accounting changes. EBITDA has also been adjusted for Poydras'
interest in the Joint Venture. EBITDA is included herein to provide
additional information about the Company's ability to service its debt.
EBITDA should not be considered as an alternative measure of the Company's
net income, operating income, cash flow from operating activities or
liquidity.
(8) Includes capital improvements in 1995 of approximately $1,500 related and
subsequent to the acquisition of the beer distributorships to consolidate
the beer operations with those of the Company.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 with proceeds received from the
issuance of the new Senior Notes (the "Notes").
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 ($116.4 million and $112.6
million, each net of accumulated amortization, at December 31, 1996 and
December 31, 1997, 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
substantially offset against the deferred income tax asset and thus are
effectively a non-cash charge to 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
21
<PAGE>
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
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, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales, excluding contract net sales, for the year ended December 31,
1997 increased by 3.0% to $296.1 million compared to $287.4 million for the
same period in 1996. The increase was due primarily to a 2.6% increase in
franchise case sales, of which (i) 2.5% was attributable to increased sales
of the Company's soft drink products accompanied by an increase in average
unit selling price of 0.2% and (ii) 0.1% was attributable to increased sales
of the Company's beer products accompanied by a 2.0% increase in average unit
selling prices. The majority of the increase in soft drink franchise case
sales came in single-serve packages, although unit volume of take home soft
drink and beer packages also increased. Pricing for soft drink packages
overall was relatively consistent with the same period of the prior year
although the pricing effect of a greater proportion of sales of single-serve
packages was offset by moderate decreases in pricing of take-home packages.
Beer pricing increased, reflecting industry trends and an increase in the
proportion of premium beer sales to total beer sales. Contract net sales for
the year ended December 31, 1997 increased 8.9% compared to the same period
in 1996. As a result of the foregoing, net sales for the year ended
December 31, 1997 increased 3.5% to $323.2 million compared to $312.3 million
for the same period in 1996.
Cost of sales for the year ended December 31, 1997 increased to $216.6
million compared to $215.1 million for the same period in 1996. 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. In addition, the significant
increase in the contract packaging business had the effect of reducing
average unit cost of sales by spreading fixed manufacturing costs over a
greater volume. As a percentage of net sales, cost of sales for the year
ended December 31, 1997 decreased to 67.0% compared to 68.9% for the same
period in 1996. The improved margin associated with single-serve packages of
soft drinks and premium beer brands and increased franchise case sales
resulted in gross profit for the year ended December 31, 1997 of $106.7
million or 9.7% greater than the gross profit of $97.2 million for the same
period in 1996.
Selling, general and administrative expenses for the year ended December
31, 1997 increased to $83.3 million compared to $76.9 million for the same
period in 1996. Selling, general and administrative expenses are comprised
of selling, distribution and warehousing expenses ("S&D"), advertising and
marketing expenses ("A&M"), and general and administrative expenses ("G&A").
All categories grew at a rate consistent with sales growth, reflecting the
effect of leveraging fixed costs against higher unit volumes, partially
offset by increases in S&D due to expenses related to and placement of
equipment dedicated to single-serve packages of soft drinks.
22
<PAGE>
In addition, the increase reflected increases in G&A due to provisions for
incentive compensation plans based on the attainment of targeted performance.
The level of expenditure for such incentives in 1997 exceeded comparable
expenditures during 1996 by approximately $2.3 million.
As a result of the above factors, income from operations for the year
ended December 31, 1997 increased to $19.7 million, or 6.1% of net sales,
compared to $16.7 million, or 5.3% of net sales, for the same period in 1996.
Interest expense for the year ended December 31, 1997 increased to $17.9
million from $15.1 million for the same period in 1996. The increase was due
to the higher interest rates associated with the December 1996 refinancing of
the Company's senior debt and the effect of payment in kind of interest on
the subordinated debt. The total debt service requirements of the Company
have been reduced through elimination of current principal payments on senior
indebtedness.
The Company's effective income tax rate differs from statutory rates
primarily due to the non-tax-deductibility of franchise cost amortization
and, in interim periods of a fiscal year due to the application of a
projected annual effective income tax rate.
As a result of the above factors, the Company generated income before
income taxes and minority interest of $1.8 million for the year ended
December 31, 1997 compared to $900,000 for the same period in 1996.
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
23
<PAGE>
million of the 1993 Senior Notes.
The Company's effective income tax rate differs from statutory rates
primarily due to the non-tax deductibility of franchise cost amortization
and, in interim periods of a fiscal year due to the application of a
projected annual effective income tax rate.
As a result of the above factors, the Company generated income before
income taxes, minority interest and an extraordinary item of $900,000 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.
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.
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 sources of funds for its future activities will be 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 December 31, 1997, letters of credit of $9.1 million have been
issued and the Credit Agreement had not been drawn upon. The Credit Facility
will mature in 2001.
The Company had cash of $4.7 million and working capital of $35.4 million
at December 31, 1997, compared to cash of $12.2 million and working capital
of $23.7 million at December 31, 1996. Working capital represents current
assets (excluding cash and cash equivalents) less current liabilities
(excluding advances under the Credit Agreement and current maturities of
long-term debt and other liabilities).
The $7.5 million decrease in cash from December 31, 1996 to December 31,
1997 resulted from net cash provided by operations of $10.2 million less cash
used in investing activities of $16.2 million and less cash used in financing
activities of $1.5 million during the year. The cash provided by operations
was net of a $10.2 million increase in working capital. During 1996, working
capital was reduced by $5.8 million, as the Company was able to accelerate
receipt of certain reimbursements from franchisors that are classified as
receivables and held inventory build-up to a minimum. Such actions were
taken in 1996 to respond to an inadequate credit line that existed before the
1996 refinancing and to provide for payment of accrued interest that was due
in the period. The increase in working capital in 1997 reflects a resumption
of more typical reimbursements patterns. Inventory levels increased in 1997
as the result of maintaining levels necessary to service the increases in
contract sales.
Cash used in investing activities of $16.2 million in the year ended
December 31, 1997 was a $3.6 million increase over the cash used during 1996,
which included $3.1 million used for acquisitions of businesses and franchise
rights during 1996. Cash used in investing activities included capital
expenditures of $15.0 million in the year ended December 31, 1997, a
$6.0 million increase over capital expenditures in 1996. The increase in
capital expenditures was primarily related to marketing equipment for
single-serve packages of soft drinks.
Financing activities in the year ended December 31, 1997 required $1.5
million in net cash which represented a $3.4 million decrease from the $4.9
million in net cash used in 1996. The reduction in cash used was the result
of relief from principal reductions and expenses related to senior debt.
24
<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 the 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 the years ended
December 31, 1997 and 1996, capital expenditures totaled $15.0 million and
$9.0 million respectively. The Company anticipates that capital expenditures
will approximate $15.0 million for 1998.
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 in their entirety its $120.0 million of Notes
payable at their maturity on December 15, 2003. 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 assets 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 $43.6
million at December 31, 1997 and 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 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 April 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. 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.
YEAR 2000 COMPLIANCE
The Company is currently in the process of evaluating its information
technology infrastructure for Year 2000 compliance. PepsiCo has distributed
to its franchisees its Year 2000 compliance plan, which the Company intends
to use as a framework for the development and implementation of its own Year
2000 compliance plan in 1998. The Company does not expect the cost to modify
its information technology infrastructure to be Year 2000 compliant to be
material to its consolidated financial condition or results of operations.
This assessment is in part due to recent significant upgrades to the
Company's data communication network and key data processing hardware, all of
which are Year 2000 compliant. Additionally, the Company uses outside
vendors to supply its most significant data processing software. These
vendors have indicated their products are Year 2000 compliant or will be Year
2000 compliant in the near future. The Company does not currently have any
information concerning the Year 2000 compliance status of its key suppliers
and customers. In the event that any of the Company's key suppliers or
customers do not successfully and timely achieve Year 2000 compliance, the
Company's business or operations could be adversely affected. The Company's
Year 2000 compliance plan will address the Year 2000 compliance status of key
suppliers, customers and other third parties.
INFLATION
There was no significant impact on the Company's operations as a result
of inflation during the fiscal year ended December 31, 1997, or during the
fiscal years ended December 31, 1996 or 1995.
25
<PAGE>
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.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
26
<PAGE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY Page
----------------------------------------- ----
AUDITED FINANCIAL STATEMENTS
Report of Independent Public Accountants............................. 28
Consolidated Balance Sheets as of December 31, 1996 and 1997......... 29
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997..................................... 31
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1995, 1996 and 1997............................... 32
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997..................................... 33
Notes to Consolidated Financial Statements........................... 34
27
<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, 1996 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years ended
December 31, 1997. 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, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years ended December
31, 1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Memphis, Tennessee,
March 2, 1998.
28
<PAGE>
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS 1996 1997
------ --------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 12,171 $ 4,680
Receivables, net of allowance for doubtful accounts of $500 and $562
Trade 16,657 19,644
Marketing and advertising 5,853 7,228
Other 1,842 2,924
Inventories, at cost (Note 4) 14,372 18,153
Shells, tanks and pallets, at deposit value 5,669 6,340
Prepaid expenses and other 474 986
Deferred income taxes (Note 6) 4,131 5,747
--------- ---------
Total current assets 61,169 65,702
--------- ---------
PROPERTY AND EQUIPMENT:
Land 4,639 4,639
Buildings and improvements 15,706 16,286
Machinery and equipment 80,286 90,211
--------- ---------
100,631 111,136
Less accumulated depreciation and amortization (52,407) (55,880)
--------- ---------
48,224 55,256
--------- ---------
OTHER ASSETS:
Cost of franchises in excess of net assets acquired,
net of accumulated amortization of $47,007 and $50,652 116,336 112,634
Deferred income taxes (Note 6) 22,767 19,481
Deferred financing costs and other 6,831 7,841
--------- ---------
145,934 139,956
--------- ---------
$255,327 $260,914
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
29
<PAGE>
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF DECEMBER 31
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997
------------------------------------ ------ ------
<C> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt and other liabilities $ 529 $ 215
Accounts payable 9,038 9,530
Accrued liabilities (Note 5) 16,261 16,088
-------- --------
Total current liabilities 25,828 25,833
-------- --------
LONG-TERM DEBT AND OTHER LIABILITIES (Note 7) 163,747 170,189
MINORITY INTEREST 5,303 4,575
COMMITMENTS AND CONTINGENCIES (Notes 9 and 12)
STOCKHOLDERS' EQUITY (Note 8):
Preferred stock-
Series AA, $5,000 stated value, 30,000 shares authorized,
5,467.27 and 5,802.77 shares issued and
outstanding 27,336 29,014
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 (82,639) (84,456)
Deferred compensation (Note 11) (13) (6)
-------- --------
60,449 60,317
-------- --------
$255,327 $260,914
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
30
<PAGE>
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATIONS:
Net sales $284,709 $312,284 $323,221
Cost of sales 198,777 215,085 216,560
-------- -------- --------
Gross profit 85,932 97,199 106,661
Selling, general and administrative expenses 71,802 76,883 83,344
Amortization of franchise costs and other intangibles 3,576 3,664 3,648
-------- -------- --------
Operating income 10,554 16,652 19,669
-------- -------- --------
OTHER EXPENSES (INCOME):
Interest 13,254 15,094 17,865
Other, net 75 620 (32)
-------- -------- --------
13,329 15,714 17,833
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES,
MINORITY INTEREST AND EXTRAORDINARY ITEM (2,775) 938 1,836
Income tax provision (1,641) (1,745) (2,040)
Minority interest, net of taxes 464 48 65
-------- -------- --------
LOSS BEFORE EXTRAORDINARY ITEM (3,952) (759) (139)
Extraordinary item - loss on extinguishment
of debt, net of income tax benefit of $953 (Note 7) -- (1,519) --
-------- -------- --------
NET LOSS $ (3,952) $ (2,278) $ (139)
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
31
<PAGE>
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------------- ---------------------------------------------------------
SERIES AA VOTING NONVOTING
---------------------- -------------------------- --------------------------
NUMBER NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT
--------- ------ ---------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 4,853.35 $24,267 20,301.87 $ -- 32,949.93 $ --
Preferred stock dividends 297.83 1,489 -- -- -- --
Recognition of expense under
deferred compensation plan -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- ------ ---------- ------ --------- ------
BALANCE AT DECEMBER 31, 1995 5,151.18 25,756 20,301.87 -- 32,949.93 --
Preferred stock dividends 316.09 1,580 -- -- -- --
Recognition of expense under
deferred compensation plan -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- ------ ---------- ------ --------- ------
BALANCE AT DECEMBER 31, 1996 5,467.27 27,336 20,301.87 -- 32,949.93 --
Preferred stock dividends 335.50 1,678 -- -- -- --
Recognition of expense under
deferred compensation plan -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- ------ ---------- ------ --------- ------
BALANCE AT DECEMBER 31, 1997 5,802.77 $29,014 20,301.87 $ -- 32,949.93 $ --
--------- ------ ---------- ------ --------- ------
--------- ------ ---------- ------ --------- ------
The accompanying notes are an integral part of these statements.
ADDITIONAL
PAID-IN ACCUMULATED DEFERRED
CAPITAL DEFICIT COMPENSATION TOTAL
-------- --------- ------------ ---------
BALANCE AT DECEMBER 31, 1994 $115,765 $(73,340) $(32) $66,660
Preferred stock dividends -- (1,489) -- --
Recognition of expense under
deferred compensation plan -- -- 10 10
Net loss -- (3,952) -- (3,952)
-------- --------- ------------ ---------
BALANCE AT DECEMBER 31, 1995 115,765 (78,781) (22) 62,718
Preferred stock dividends -- (1,580) - --
Recognition of expense under
deferred compensation plan -- - 9 9
Net loss -- (2,278) -- (2,278)
-------- --------- ------------ ---------
BALANCE AT DECEMBER 31, 1996 115,765 (82,639) (13) 60,449
Preferred stock dividends -- (1,678) - --
Recognition of expense under
deferred compensation plan -- -- 7 7
Net loss -- (139) -- (139)
-------- --------- ------------ ---------
BALANCE AT DECEMBER 31, 1997 $115,765 $(84,456) $ (6) $60,317
-------- --------- ------------ ---------
-------- --------- ------------ ---------
</TABLE>
The accompanying notes are an integral part of these statements.
32
<PAGE>
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1996 1997
--------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,952) $ (2,278) $ (139)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 9,687 10,314 11,441
Noncash interest on long-term debt 4,048 4,891 5,514
Write-off of deferred financing fees -- 2,472 --
Change in deferred income taxes 1,622 357 1,670
Minority interest expense (income), before taxes (564) 98 70
Net expense (payments) under deferred
compensation plans (956) (3) 1,812
Changes in current assets and liabilities:
Receivables 4,875 3,426 (5,444)
Inventories 6,150 (692) (3,781)
Shells, tanks and pallets, at deposit value (1,091) (147) (671)
Prepaid expenses and other 27 665 (512)
Accounts payable and accrued liabilities (6,044) 2,606 198
Redemption of investments 15 -- --
-------- -------- -------
Net cash provided by operating activities 13,817 21,709 10,158
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (10,726) (8,964) (14,988)
Purchases of other assets (919) (594) (1,625)
Acquisitions of businesses (Note 3) (13,549) (1,130) --
Purchase of franchise rights (Note 3) -- (1,994) --
Proceeds from sales of property and equipment -- -- 388
Collections on note receivable 163 110 --
Other -- -- 37
-------- -------- -------
Net cash used in investing activities (25,031) (12,572) (16,188)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt -- 120,000 --
Borrowings under revolving line of credit 35,250 -- 12,000
Payments on revolving line of credit (18,000) -- (12,000)
Retirement of long-term debt -- (111,250) --
Payment of deferred financing costs (237) (5,946) (78)
Principal payments on long-term debt and other
liabilities (7,406) (7,703) (585)
Cash distribution to minority interest holder -- -- (798)
-------- -------- -------
Net cash provided by (used in) financing
activities 9,607 (4,899) (1,461)
-------- -------- -------
CHANGE IN CASH AND CASH EQUIVALENTS (1,607) 4,238 (7,491)
CASH AND CASH EQUIVALENTS, beginning of year 9,540 7,933 12,171
-------- -------- -------
CASH AND CASH EQUIVALENTS, end of year $ 7,933 $ 12,171 $ 4,680
-------- -------- -------
-------- -------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
33
<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 alcoholic
malt beverages in southern Louisiana.
The Pepsi-Cola/Seven-Up Beverage Group of Louisiana (the "Joint Venture") is a
partnership between Delta and Poydras Street Investors, L.L.C. ("Poydras").
Delta's percentage ownership is 62% and Poydras' percentage ownership is 38%.
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 POLICIES:
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:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and improvements 20-40
Machinery and equipment 3-10
</TABLE>
34
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
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.
SUPPLEMENTAL CASH FLOW INFORMATION-
During 1995, 1996 and 1997, the Company issued additional preferred shares as
payment-in-kind dividends on preferred stock of approximately $1,489,000,
$1,580,000 and $1,678,000, respectively (see Note 8).
Interest paid in cash during 1995, 1996 and 1997 was approximately $8,900,000,
$12,363,000 and $12,281,000, respectively. Income taxes of approximately
$316,000, $177,000 and $247,000 were paid in 1995, 1996 and 1997, 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. The estimated fair value of total long-term
debt and other liabilities was approximately $178 million at December 31, 1997
and $168 million at December 31, 1996, compared to a recorded value of
approximately $170 million at December 31, 1997 and $164 million at December 31,
1996.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT-
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." This statement established
new standards for computing and presenting earnings per common share. The
adoption of this statement eliminated the Company's requirement to present
earnings per share data.
RECLASSIFICATIONS -
Certain prior year balances have been reclassified to conform to the current
year presentation.
35
<PAGE>
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. The $900,000 deferred obligation is expected to be paid in 1999.
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 $2,929,000 in 1996, and
approximately $5,400,000 in 1995, are being amortized evenly over 40 years.
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, 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.
In thousands of dollars, for the year ended December 31, 1995 (unaudited):
<TABLE>
<CAPTION>
<S> <C>
Net sales $295,700
Net loss (4,306)
</TABLE>
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):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Raw materials $ 2,736 $ 4,988
Finished goods 11,636 13,165
------- -------
$14,372 $18,153
------- -------
------- -------
</TABLE>
36
<PAGE>
5. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following at December 31 (in thousands of
dollars):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Payroll and related benefits $ 2,134 $ 2,841
Income and other taxes 2,897 2,689
Insurance and related costs 4,520 4,203
Interest 1,576 1,768
Marketing and advertising costs 4,771 4,180
Other 363 407
------- -------
$16,261 $16,088
------- -------
------- -------
</TABLE>
6. INCOME TAXES:
At December 31, 1997, 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, 1997, the
Company had similar net operating loss and tax credit carryforwards of
approximately $9,927,000 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.
Deferred income taxes were composed of the following at December 31 (in
thousands of dollars):
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Current deferred income tax assets $ 4,131 $ 5,747
Noncurrent deferred income tax assets 27,828 25,109
------- -------
31,959 30,856
------- -------
Noncurrent deferred income tax
liabilities (5,061) (5,628)
------- -------
$26,898 $25,228
------- -------
------- -------
</TABLE>
37
<PAGE>
6. INCOME TAXES (Continued):
The tax effects of significant temporary differences representing deferred
income tax assets and liabilities at December 31, 1996 and 1997 were as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Net operating loss and tax credit carryforwards $17,590 $14,213
Basis difference in preferred stock and
common stock 8,154 8,120
Difference in book and tax basis of property
and equipment, deferred financing costs
and other assets (4,841) (4,590)
Deferred interest on subordinated debt,
deferred compensation and reserves
not currently deductible for income
tax purposes 5,995 7,485
------- -------
$26,898 $25,228
------- -------
------- -------
</TABLE>
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):
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Current $ -- $ (289) $ (235)
Deferred (1,641) (1,456) (1,805)
------- ------- -------
$(1,641) $(1,745) $(2,040)
------- ------- -------
------- ------- -------
</TABLE>
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 had or were expected to expire before the
carryforwards could be realized. In 1996, the valuation allowance was
eliminated against the related deferred income tax assets as the state tax
net operating loss carryforwards fully expired.
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:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% (34.0)% (34.0)%
State income taxes, net of federal benefit 4.0 (4.6) (4.5)
Franchise cost amortization (46.4) (138.0) (70.4)
Meals and entertainment disallowance -- (8.4) (4.9)
State tax credits -- -- 5.2
Valuation allowance (59.3) -- --
Other, net 8.6 (1.0) (2.5)
----- ------ ------
(59.1) (186.0)% (111.1)%
----- ------ ------
----- ------ ------
</TABLE>
38
<PAGE>
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>
1996 1997
------ ------
<S> <C> <C>
Senior notes payable, 9.75%, due
December 16, 2003 $120,000 $120,000
Subordinated notes payable, 11%, due
December 23, 2003 39,209 43,640
Note payable to Poydras, interest at the
prime rate plus 1% (9.25% and 9.50% at
December 31, 1996 and 1997, 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 1998 227 58
Capital lease obligations, 10.89%, due
in monthly installments through May 1999 412 202
Marketing support obligation, imputed interest
at 8.25% to 8.75%, payments due quarterly through
June 30, 2000 693 489
Obligations under deferred compensation plans 996 3,276
Deferred purchase obligation (see Note 3) 900 900
-------- --------
164,276 170,404
Less current maturities (529) (215)
-------- --------
$163,747 $170,189
-------- --------
-------- --------
</TABLE>
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 Company's prior senior
notes and the amounts outstanding under the Company's 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 exchanged the $120 million senior notes for new $120 million
senior notes. The new senior notes retained the same interest rate, maturity
date and ranking as the original senior notes. The Company did 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.
39
<PAGE>
7. LONG-TERM DEBT AND OTHER LIABILITIES (Continued):
The new bank revolving line of credit matures on December 16, 2001 and bears
interest, at Delta'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 .5%. 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 outstanding under the revolving line of credit as of
December 31, 1996 and 1997.
In connection with the debt placement described above, the Company incurred
financing fees of approximately $4,885,000. 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 $3,982,000
and $4,431,000 under this provision in 1996 and 1997, respectively. These
additional notes bear interest at 11% and are included with subordinated
notes payable in the preceding table.
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.
40
<PAGE>
7. LONG-TERM DEBT AND OTHER LIABILITIES (Continued):
Scheduled maturities of long-term debt and other liabilities during the four
years subsequent to 1998 are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1999 $1,188
2000 154
2001 34
2002 --
</TABLE>
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, 1996 and 1997 were paid with additional preferred
shares and are included in stockholders' equity at December 31, 1995, 1996
and 1997. 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.
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, 1997 (in
thousands of dollars):
41
<PAGE>
9. LEASES (Continued):
<TABLE>
<S> <C>
1998 $ 3,406
1999 2,673
2000 1,531
2001 1,002
2002 501
Thereafter 1,333
-------
$10,446
-------
-------
</TABLE>
Total rent expense during 1995, 1996 and 1997 was approximately $3,158,000,
$3,587,000 and $4,252,000, 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 $520,000, $533,000 and $551,000 were paid to that company
during 1995, 1996 and 1997, 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. Prior to April 1,
1997, employees who participated in the plan could 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. Effective April 1, 1997, the Plan was amended to increase the
maximum employee deferral percentage to 15% and maximum annual employer
contributions to $1,000 per employee. The Company's contributions were
approximately $231,000 for 1995, $257,000 for 1996 and $581,000 for 1997.
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 and $1,225,000 at December 31, 1996 and 1997,
respectively.
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, 1996 and 1997, 22 restricted shares
were outstanding, all of which were held by an officer.
The Company maintains a phantom stock plan available to certain key members
of management. This plan allows eligible executives to participate in the
continued success of the Company based upon the annual appreciation in the
equity value of the Company, as defined. The equivalent of 38,200 shares
have been granted under this plan. Each phantom stock 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
42
<PAGE>
11. EMPLOYEE BENEFITS (Continued):
defined, in 1995 or 1996. Effective December 31, 1997, the phantom stock
plan was amended to redefine the beginning equity value upon which
appreciation in the equity value of the Company is determined. As a result,
in 1997 the Company recorded approximately $1,900,000 of expense attributable
to benefits earned under the amended plan.
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 items 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.
As of December 31, 1996 and 1997, the Company had $7,123,994 and $9,123,994
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.
43
<PAGE>
FINANCIAL STATEMENT SCHEDULE
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
March 2, 1998. 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,
March 2, 1998
44
<PAGE>
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(In thousands)
<TABLE>
<CAPTION>
BALANCE AT DEDUCTIONS BALANCE AT
BEGINNING (ADDITIONS) WRITE- END OF
OF PERIOD TO EARNINGS RECOVERIES OFFS PERIOD
---------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
for the year ended December 31, 1995 $ 461 $ 271 $ 321 $(620) $ 433
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Allowance for doubtful accounts
for the year ended December 31, 1996 $ 433 $ 90 $ 539 $(562) $ 500
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Allowance for doubtful accounts
for the year ended December 31, 1997 $ 500 $(439) $ 596 $ (95) $ 562
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
45
<PAGE>
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
46
<PAGE>
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company as of March 30, 1998. All
directors of the Company hold office until the next annual meeting of
shareholders or until their successors have been elected and qualified.
Executive officers are elected by the board of directors to hold office until
their successors are elected and qualified.
<TABLE>
<CAPTION>
Name Age Position(s) With Company
---- --- ------------------------
<S> <C> <C>
Robert C. Pohlad 43 Chief Executive Officer and Director
John F. Bierbaum 53 Chief Financial Officer, Vice President and Director
Kenneth E. Keiser 46 President and Chief Operating Officer
Bradley J. Braun 43 Vice President, Finance and Assistant Secretary
Jay S. Hulbert 44 Vice President, Operations
Michael G. Naylor 37 Vice President, General Manager
Charles M. Pullias 48 Vice President, General Manager
Raymond R. Stitle 43 Vice President, Human Resources
Donald E. Benson 67 Chairman of the Board
John H. Agee 49 Director
Christopher E. Clouser 45 Director
Philip N. Hughes 62 Director
Philip A. Marineau 51 Director
Gerald A. Schwalbach 53 Director
John F. Woodhead 58 Director
</TABLE>
ROBERT C. POHLAD. Mr. Pohlad has served as director and Chief Executive
Officer of the Company since 1988. Since 1987, Mr. Pohlad has also served as
President of the Pohlad Companies, a holding and management services company,
which has an ownership interest in and provides management services to the
Company. Prior to 1987, Mr. Pohlad was Northwest Area Vice President of the
Pepsi-Cola Bottling Group. Mr. Pohlad also currently serves as a director for
Mesaba Holdings, Inc. and Grow Biz International, Inc., and Airtran Holdings,
Inc. See "Certain Relationships and Related Transactions -- Management
Agreement."
JOHN F. BIERBAUM. Mr. Bierbaum has served as director of the Company
since 1993, and as Chief Financial Officer of the Company since 1988. Mr.
Bierbaum is also Chief Financial Officer of the Pohlad Companies, a holding
and management services company, which has an ownership interest in and
provides management services to the Company. Mr. Bierbaum has been
associated with the Pohlad Companies from 1975 to the present in a variety of
capacities, including his current position. From 1986 to 1988, Mr. Bierbaum
served as Vice President of the Pepsi-Cola Bottling Company of Tampa. See
"Certain Relationships and Related
47
<PAGE>
Transactions -- Management Agreement."
KENNETH E. KEISER. Mr. Keiser joined the Company in his present position in
1990. From 1976 to 1990, he was employed by the Pepsi-Cola Bottling Group in
various capacities, including Division Vice President of the Central Division
from 1989 to 1990, Vice President of the Minneapolis Area from 1986 to 1989,
Director of Corporate Trade Development from 1985 to 1986, Area Vice President
of Philadelphia from 1982 to 1985, and various other capacities from 1976 to
1985. See "Certain Relationships and Related Transactions -- Employment
Agreement."
BRADLEY J. BRAUN. Mr. Braun became Vice President of Finance and Assistant
Secretary for the Company in 1991. Prior to joining the Company, Mr. Braun
served as Controller of the Dakota Beverage Company, Inc., a PepsiCo franchise
bottler which is a wholly owned subsidiary of the Pohlad Companies.
JAY S. HULBERT. Mr. Hulbert joined the Company in 1988 as Director of
Operations, and in January 1991 was promoted to his current position of Vice
President, Operations. Prior to joining the Company, Mr. Hulbert spent seven
years working for the Pepsi-Cola Bottling Group in a variety of capacities.
MICHAEL G. NAYLOR. Mr. Naylor joined the Company in 1984. In January 1991,
Mr. Naylor was promoted to his present position of Vice President, General
Manager. From 1984 to 1990 Mr. Naylor served the Company in a variety of
capacities, including Regional Sales Manager.
CHARLES M. PULLIAS. Mr. Pullias joined the Company in 1991 as Vice
President of Sales for the Southern Region. In January 1991, Mr. Pullias was
promoted to his current position of Vice President, General Manager. Prior
to 1991, Mr. Pullias spent ten years working for the Pepsi-Cola Company in
Texas in various sales and marketing positions.
RAYMOND R. STITLE. Mr. Stitle joined the Company in 1988 as Director of
Human Resources, and was promoted to his current position of Vice President,
Human Resources in January 1991. Prior to joining the Company, Mr. Stitle was
employed by Pepsi-Cola USA.
DONALD E. BENSON. Mr. Benson has been a director of the Company since 1988.
Mr. Benson also currently serves as director for Mass Mutual Corporate
Investors, Mass Mutual Participation Investors, Mesaba Holdings Inc., National
Mercantile Bancorp, Mercantile National Bank. Since 1995, Mr. Benson has also
been employed by the Pohlad Companies, a holding and management services
company, which has an ownership interest in and provides management services to
the Company, and another of its affiliates, CRP Holdings, Inc., a management
services company. Mr. Benson has served as Executive Vice President of
Marquette Bancshares, Inc., a bank holding company and an affiliate of the
Pohlad Companies, since 1993 and with its predecessor organizations since 1968.
From 1986 to 1994, Mr. Benson was President and director of MEI Diversified
Inc., a holding company with interests in various operating entities. In
February 1993, MEI Diversified Inc. filed for Chapter 11 bankruptcy protection.
A Plan of Reorganization for MEI Diversified Inc. was confirmed in October 1994,
pursuant to which its assets and liabilities were liquidated.
JOHN H. AGEE. Mr. Agee has been a director of the Company since 1988.
Since 1986, Mr. Agee has also been President of ADLER MANAGEMENT CORP., a
financial consulting and management services company. Mr. Agee was nominated
by Arbeit & Co. and elected to his position by the shareholders of the
Company pursuant to a Shareholders' Agreement, dated as of September 23,
1993, as amended and restated (the "Shareholders' Agreement"), among all of
the shareholders of the Company, which provides that Arbeit & Co. may
nominate one director to the Company's board of directors and that the
shareholders will vote for such nominee. See "Certain Relationships and
Related Transactions -- Shareholders' Agreement."
CHRISTOPHER E. CLOUSER. Mr. Clouser has been a director of the Company
since 1995. Mr. Clouser is Senior Vice President-Administration of Northwest
Airlines, Inc., the world's fourth largest airline, with
48
<PAGE>
responsibility for worldwide human resources, corporate communications,
advertising, audit and security functions. Prior to joining Northwest
Airlines, Mr. Clouser held officer positions with Bell Atlantic Corp., US
Sprint Communications Company, and Hallmark Cards, Inc. He currently serves
on the board of directors of the Greater Minneapolis Chamber of Commerce,
Piper Jaffray Inc., Mesaba Holdings, Inc., Marquette Bancshares, Inc. and the
Epilepsy Foundation of America.
PHILIP N. HUGHES. Mr. Hughes has been a director of the Company since 1988.
Mr. Hughes is also owner of Miller Printing, Inc., a commercial printer, Rocket
Lube, Inc., a chain of quick-service vehicle lube operations. From 1982 to
1986, Mr. Hughes was a director of MEI Corporation, and from 1983 to 1986 served
as Senior Vice President of MEI Corporation. From May 1986 to December 1986,
Mr. Hughes was President, MEI Division, Pepsi-Cola Bottling Group, a division of
PepsiCo Inc. From 1986 to 1993, Mr. Hughes served as a director of MEI
Diversified, Inc. In February 1993, MEI Diversified Inc. filed for Chapter 11
bankruptcy protection. A Plan of Reorganization for MEI Diversified Inc. was
confirmed in October 1994, pursuant to which its assets and liabilities were
liquidated.
PHILIP A. MARINEAU. Mr. Marineau was appointed to the board of directors
in March 1998 to fill the seat vacated by Brenda C. Barnes. Since 1997, Mr.
Marineau has been the President and Chief Executive Officer of Pepsi-Cola
North America. Prior to joining Pepsi-Cola, Mr. Marineau held positions as
the President of Quaker Oats Company and the President and Chief Operating
Officer at Dean Foods. Mr. Marineau is also a member of the board of
directors of the Arthur J. Gallagher Co., Inc., Evanston Northwestern
Healthcare, Loyola University of Chicago, Georgetown University Board of
Regents and the advisory board of the Kellogg Graduate School of Management.
In addition, Mr. Marineau is the Chairman of the Board of Pete's Brewing
Company. Mr. Marineau was nominated by PepsiCo, pursuant to the
Shareholder's Agreement, which provides that PepsiCo, Inc. may nominate one
director to the Company's board of directors and that the shareholders will
vote for such nominee. See "Certain Relationships and Related Transactions
- --Shareholders' Agreement."
GERALD A. SCHWALBACH. Mr. Schwalbach has served as a director of the
Company since 1988. Since July 1996, Mr. Schwalbach has been a member of
Superior Storage, LLC., an owner and operator of mini-storage facilities.
From 1985 to June 1996, Mr. Schwalbach served as Executive Vice President of
Jacobs Management, Inc. From 1988 to June 1996, Mr. Schwalbach served
concurrently as Vice President of an affiliate of Jacobs Management, I.J.
Holdings, Inc. From 1990 to June 1996, Mr. Schwalbach served concurrently as
Executive Vice President and Executive Vice President and Treasurer of two
other affiliates of Jacobs Management, Jacobs Investors, Inc. and IMR
General, Inc., respectively. Mr. Schwalbach joined the board of directors of
CH Robinson Worldwide, Inc. in 1997.
JOHN F. WOODHEAD. Mr. Woodhead has been a director of the Company since
1994. Since 1971, Mr. Woodhead has provided management consulting services
to Dakota Beverage Company, Inc., a PepsiCo franchise bottler which is a
wholly-owned subsidiary of the Pohlad Companies. Mr. Woodhead is also
currently owner and President of JFW Inc., a management services company, and
Woodhead Properties, a real estate investment firm. Since 1992, Mr. Woodhead
has also served as President and Chairman of Park National Bank. From 1982
to 1995, Mr. Woodhead was owner and Chairman of Allstate Medical Products.
Mr. Woodhead is currently a director of WisPak, Inc. having served in this
capacity since December 1997.
BOARD OF DIRECTORS COMMITTEES AND COMPENSATION
The Company has an Executive Committee whose members include Robert C.
Pohlad, John H. Agee and Donald E. Benson. The Executive Committee is
authorized by the board of directors to have and exercise the authority of
the board of directors in the management of the business of the Company,
including determining compensation levels for the Company's executives and
officers. The Company also has an Audit Committee whose members include John
H. Agree, Donald E. Benson and Philip N. Hughes. The Audit Committee is
responsible for recommending independent public accountants, reviewing with
the independent public accountants the scope and results of the audit
engagement, establishing and monitoring the Company's financial policies and
control
49
<PAGE>
procedures, reviewing and monitoring the provision of non-audit services by
the Company's independent public accountants and reviewing all potential
conflict of interest situations. In addition, the Company has a Compensation
Committee whose members include Christopher E. Clouser, Gerald A. Schwalbach
and John F. Woodhead. The Compensation Committee is responsible for
approving executive compensation and incentive programs.
Outside directors are paid $500 for each board meeting attended, plus
reasonable travel expenses. No payment is made to employee-directors or
directors with an equity interest in the Company.
ITEM 11 EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid by the
Company to its most highly paid executive officers for the fiscal years ended
December 31, 1995, 1996 and 1997. Neither Robert C. Pohlad, the Company's
Chief Executive Officer, nor John F. Bierbaum, the Company's Chief Financial
Officer, receive any compensation from the Company, except that Mr. Bierbaum
participates in the Company's Superior Performance Incentive Bonus Plan and
the Company's Phantom Stock Plan. See " -- Employee Benefit Plans." The
services of Messrs. Pohlad and Bierbaum are provided to the Company pursuant
to a Management Agreement between the Company and the Pohlad Companies. See
"Certain Relationships and Related Transactions -- Management Agreement."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------
OTHER
ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) COMPENSATION($)
- --------------------------------------------- ---- --------- ----------- ---------------
<S> <C> <C> <C> <C>
Kenneth E. Keiser 1997 260,000 143,000 --
President and Chief Operating Officer 1996 250,000 140,250 --
1995 215,000 24,750 819,868(2)
Charles M. Pullias 1997 144,900 43,500 73,333(3)
Vice President, General Manager 1996 139,300 55,600 60,000(3)
1995 129,000 5,160 50,000(3)
Jay S. Hulbert 1997 118,900 47,600 83,333(3)
Vice President, Operations 1996 114,300 34,200 73,333(3)
1995 111,000 4,440 60,000(3)
Michael G. Naylor 1997 116,600 46,640 83,333(3)
Vice President, General Manager 1996 106,000 37,100 73,333(3)
1995 106,000 4,240 60,000(3)
Bradley J. Braun 1997 110,500 44,200 73,333(3)
Vice President, Finance 1996 104,000 41,600 60,000(3)
1995 101,000 4,040 50,000(3)
</TABLE>
- -------------------
(1) Reflects bonuses awarded pursuant to the Company's 1995 bonus plan for
certain employees of the Company based in part on the financial
performance of the Company.
50
<PAGE>
(2) Reflects compensation paid to Mr. Keiser pursuant to an agreement
entered into by the Company and Mr. Keiser dated February 1, 1990 (the
"Keiser Agreement"), whereby Mr. Keiser received phantom stock
appreciation rights in common stock of PepsiCo, Inc which vested fully
on February 1, 1994. The purpose of the Keiser Agreement was for the
Company to replace the value of stock options which Mr. Keiser then held
with his former employer, PepsiCo. Pursuant to the Keiser Agreement,
Mr. Keiser exercised the remainder of his stock appreciation rights in
1995. The compensation paid to Mr. Keiser upon such exercise as
reported above is equivalent to the difference in the base value of the
PepsiCo, Inc. common stock (as defined in the Keiser Agreement) and the
fair market value of such stock on the date of exercise.
(3) Reflects payments awarded pursuant to the Company's Superior
Performance Incentive Bonus Agreement based on operating income
performance of the Company.
LONG-TERM INCENTIVE PLANS -- AWARDS VESTING
IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Estimated Future Payouts Under
Number of Performance or Non-Stock-Price-Based Plans
Shares, Units Other Period Until ------------------------------
Name or Other Rights(1) Maturation or Payout Threshold($)(3) Target ($)(4)
- ------ ------------------ --------------------- --------------- --------------
<S> <C> <C> <C> <C>
Kenneth E. Keiser 20,000 (2) 0 596,800
Charles M. Pullias 2,900 (2) 0 86,500
Jay S. Hulbert 2,900 (2) 0 86,500
Michael G. Naylor 2,900 (2) 0 86,500
Bradley J. Braun 2,900 (2) 0 86,500
</TABLE>
(1) Reflects phantom shares granted pursuant to the Company's Phantom Stock
Plan in 1994, which fully vested in 1997. As of March 30, 1998, 38,200
phantom shares had been granted. See "--Employee Benefit Plans."
(2) Generally, payout is permitted upon a participant's death, disability,
involuntary termination by the Company without cause, voluntary termination
or retirement at or after the age of 65.
(3) Since the value of each phantom share is dependent upon the Company's
operating cash flow, future payments may be without value.
(4) As of March 30, 1998, the Company had accrued $1,140,000 for payouts
pursuant to the Phantom Stock Plan. In general, the maximum award may
not exceed 40 times a participant's annual compensation, adjusted to
recognize length of service.
EMPLOYMENT AGREEMENT
The Company has entered into an Employment Agreement with its Chief
Operating Officer, Kenneth E. Keiser. Under the terms of the Employment
Agreement, Mr. Keiser receives a base salary as determined by the Company's
board of directors, with any increases in such base salary subject to the
unanimous approval of the board of directors. Pursuant to the Employment
Agreement, Mr. Keiser is also eligible to participate in Company incentive
plans and receive an incentive bonus and fringe benefits available to other
employees of the Company.
The Employment Agreement is renewable for one year terms each February 1.
In the event Mr. Keiser's employment is terminated for any reason prior to
the expiration of a term, Mr. Keiser is prohibited, through such term, from
(i) providing services, directly or indirectly, to any person or organization
which is in the same or similar business as or is in competition with the
Company, (ii) advising any Company employee or anyone in the
51
<PAGE>
service of the Company to compete with the Company or (iii) advising any
competitor of the Company to engage the services of any Company employee or
anyone in the service of the Company.
EMPLOYEE BENEFIT PLANS
GENERAL. The Company makes a variety of benefits available to its
employees. The Company sponsors welfare benefits programs that provide
health, dental, life and accidental death and dismemberment insurance
coverage to substantially all employees. The Company does not presently
maintain or contribute to any defined benefit pension plans or multiemployer
pension plans.
INCENTIVE PLANS. The Company adopted a Superior Performance Incentive
Bonus Agreement for certain executives and officers of the Company in 1991.
The incentive plan provides for payments to participants upon meeting or
exceeding certain operating income goals. Awards under this plan are fully
vested and paid three years following the date of grant in the event the
Company meets certain operating income goals during each year of the vesting
period. In the event the Company fails to meet the operating income goals
for a particular year during the vesting period, the amount payable may be
reduced by one-third.
PHANTOM STOCK PLAN. Effective January 1994, the Company's board of
directors approved a Phantom Stock Plan (the "Phantom Stock Plan") which
provides for the issuance of phantom stock awards to select officers and
other key employees of the Company. A total of 1,000,000 phantom shares are
deemed outstanding pursuant to the Phantom Stock Plan, and are adjusted to
reflect any additional shareholder capital contributions. The Company's
board of directors, or a committee authorized by the Company's board of
directors, has authority to administer the Phantom Stock Plan, select those
officers and key employees eligible to participate in the Phantom Stock Plan,
determine whether and to what extent phantom stock will be granted, determine
the terms and conditions of any phantom stock granted under the Phantom Stock
Plan, determine whether participants may enter into deemed purchases of
phantom stock with deferred bonuses, and interpret, prescribe, amend or
rescind the regulations relating to the Phantom Stock Plan. The Phantom
Stock Plan will remain in effect until terminated by the board of directors
of the Company. Effective December 31, 1997, the Phantom Stock Plan was
amended (i) to redefine the beginning equity value upon which appreciation in
the equity value of the Company is determined, (ii) to institute a cap on the
amount of distributions to which participants are entitled and (iii) to allow
participants to obtain distributions of up to 30% of their interests prior to
the termination of employment.
The value of each phantom share award will be at the date of the grant of
the award, (i) the average of the Company's operating cash flow for the prior
three years multiplied by a factor established from time to time by the
Company's board of directors, or a committee authorized by the Company's
board of directors, to reflect the value of the Company, plus any excess cash
less any debt and preferred stock outstanding, divided by (ii) the number of
deemed shares outstanding. Participants are entitled to payment in the
amount of the increase in value of the phantom share from the date of grant
to the date of an event of distribution. Each phantom share award, other
than deemed purchases of phantom shares, will be 100% vested at the earlier
of the third anniversary of the date of the grant of the phantom award, the
participant's death, disability, involuntary termination or retirement at age
65, or the sale of all or substantially all of the assets of the Company or a
change of stock ownership of greater than 50%, excluding purchases by the
Pohlad Companies, its shareholders or their family members or its affiliates.
During employment with the Company and for a period of three years following
an event of distribution, participants are subject to a non-compete and
non-solicitation restriction in consideration for phantom share awards. The
Company made no payouts pursuant to the Phantom Stock Plan during fiscal
years 1995, 1996 or 1997.
401(K) PLAN. The Company sponsors a 401(k) retirement savings plan for
substantially all employees of the Company who are at least 21 years of age
and have been employed by the Company for one year. An employee may
contribute, on a pre-tax basis, up to 15% of the employee's covered
compensation, not to exceed contribution amounts established under the
Internal Revenue Code. Contributions are allocated to each employee's
individual account and are, at the employee's election, invested in various
investment alternatives offered by the plan trustee. Employee contributions
are fully vested and nonforfeitable. The Company matches 50% of employee
52
<PAGE>
contributions up to $1,000.
BOARD OF DIRECTOR COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Executive Committee, which determines compensation levels for
the Company's executives and officers, includes Robert C. Pohlad, the
Company's Chief Executive Officer. Mr. Pohlad's services to the Company are
provided pursuant to a Management Agreement between the Company and the
Pohlad Companies, and Mr. Pohlad receives no compensation from the Company.
See "Certain Relationships and Related Transactions -- Management Agreement."
Other than Mr. Pohlad, none of the members of the Company's Executive
Committee is an officer or employee or former officer or employee of the
Company. None of the Company's executive officers serves on the board of any
entity of which any committee member is an executive officer or director or
on the compensation committee of the board of any entity, one of whose
executive officers serves as a director of the Company.
53
<PAGE>
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of the close of business on March 30, 1998, the Company had outstanding
53,251.80 shares of Common Stock and 5,802.77 shares of non-convertible
series AA preferred stock, $0.01 par value per share ("Preferred Stock").
The Common Stock consists of 20,301.87 shares of voting Common Stock and
32,949.93 shares of non-voting Common Stock.
The following table contains certain information as of March 30, 1998 as to
the number of shares of voting Common Stock beneficially owned by (i) each
person known by the Company to own beneficially more than five percent (5%)
of the Company's stock, (ii) each person who is a director of the Company,
(iii) each executive officer named in the Summary Compensation Table and (iv)
all persons who are directors and officers of the Company as a group, and as
to the percentage of the outstanding shares held by them on such date.
Unless otherwise noted, each person identified below possesses sole voting
and investment power with respect to such shares.
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------
NUMBER OF SHARES
NAME OF BENEFICIAL OWNER OR GROUP BENEFICIALLY OWNED PERCENT OF CLASS
- ------------------------------------------------ ------------------ ----------------
<S> <C> <C>
Pohlad Companies . . . . . . . . . . . . . . . 12,037.87 59.3%
Dain Bosworth Plaza
Suite 3880
Minneapolis, MN 55402
Arbeit & Co. . . . . . . . . . . . . . . . . . 4,187.92 20.6
c/o ADLER MANAGEMENT CORP.
601 Second Avenue South
Suite 4950
Minneapolis, MN 55402
Equity Beverage, Inc.. . . . . . . . . . . . . 3,221.57 15.9
1 Pepsi Way
Mail Drop 812, Floor 8N
Somers, NY 10589
Robert C. Pohlad(1). . . . . . . . . . . . . . 12,137.87 59.8
John H. Agee (2) . . . . . . . . . . . . . . . 4,187.92 20.6
Donald E. Benson . . . . . . . . . . . . . . . -- --
John F. Bierbaum . . . . . . . . . . . . . . . 22.00 *
Christopher E. Clouser . . . . . . . . . . . . -- --
Philip N. Hughes . . . . . . . . . . . . . . . -- --
Philip A. Marineau . . . . . . . . . . . . . . -- --
Gerald A. Schwalbach . . . . . . . . . . . . . -- --
John F. Woodhead . . . . . . . . . . . . . . . -- --
Kenneth E. Keiser. . . . . . . . . . . . . . . 532.51 2.6
Charles M. Pullias . . . . . . . . . . . . . . --- --
Jay S. Hulbert . . . . . . . . . . . . . . . . --- --
Raymond R. Stitle. . . . . . . . . . . . . . . --- --
Bradley J. Braun . . . . . . . . . . . . . . . --- --
All directors and executive officers as a
group (16 persons)(3) . . . . . . . . . . . 16,880.30 83.1%
</TABLE>
- -------------------
* Less than 1%
(1) Includes 12,037.87 shares owned by the Pohlad Companies. Robert C.
Pohlad is a one-third owner of the Pohlad Companies and exercises shared
investment and voting power over such shares with the remaining owners
of the Pohlad Companies.
(2) Includes 4,187.92 shares owned by Arbeit & Co. John H. Agee has power
of attorney and
54
<PAGE>
exercises sole investment and voting power over such shares.
(3) Includes 12,037.87 shares owned by the Pohlad Companies, of which Robert
C. Pohlad is a one-third owner, and 4,187.92 shares owned by Arbeit &
Co., over which John H. Agee has power of attorney.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AGREEMENT
The services of the Company's Chief Executive Officer, Robert C. Pohlad,
and Chief Financial Officer, John F. Bierbaum, are provided to the Company
pursuant to a Management Agreement between the Company and the Pohlad
Companies. The Pohlad Companies owns 59.3% of the Company's voting Common
Stock. Robert C. Pohlad owns one-third of the Pohlad Companies. The Pohlad
Companies is a holding and management services company which has interests in
several entities, including Dakota Beverage Corp., Inc. and the Company.
Neither Robert C. Pohlad nor John F. Bierbaum receives any compensation from
the Company, except that John F. Bierbaum participates in the Company's
Superior Performance Incentive Bonus Plan and the Company's Phantom Stock
Plan.
Subject to any limitations imposed by the Company's Amended and Restated
Certificate of Incorporation, the Amended and Restated Bylaws, the
Shareholders' Agreement, or the board of directors, the Pohlad Companies has
the authority under the Management Agreement to: (i) administer, manage and
direct the Company and its business and properties; (ii) monitor the day to
day operations of the Company and make recommendations with respect thereto;
(iii) investigate and make recommendations with respect to the selection and
conduct of relations with the Company's consultants and technical advisors;
and (iv) conduct all negotiations with franchisors. Subject to the
limitations imposed by the Company's Amended and Restated Certificate of
Incorporation, the Amended and Restated Bylaws or the Shareholders'
Agreement, the Management Agreement and any other contractual limitations
imposed on or obligating the Company, the Pohlad Companies also has the
authority to: (i) cause the Company to expend its funds to further its
business; (ii) sell, hypothecate, exchange, trade or otherwise dispose of the
Company's properties or its interests therein; (iii) cause the Company to
borrow money; (iv) refer to arbitration, settle, prosecute or defend any
legal matter, proceeding or claim involving the Company; (v) mortgage,
pledge, grant security interests in or otherwise encumber Company assets; and
(vi) retain or employ and coordinate the services of all employees necessary
to further the Company's business.
The Management Agreement provides that the Pohlad Companies may devote as
much time to the management of the Company as the Pohlad Companies deems
necessary and that the Pohlad Companies may engage in any other businesses,
including the bottling and distribution of soft drinks.
For services performed pursuant to the Management Agreement, the Company
pays the Pohlad Companies a management fee and a transaction fee. The
management fee is paid monthly in advance at an annual rate equivalent to the
greater of $500,000 or $400,000 multiplied by the ratio of the CPI as of the
year preceding the date of computation to the CPI as of 1987. The transaction
fee is payable upon the acquisition of additional franchises and is
equivalent to 1.5% of the Company's acquisition cost of such franchises.
During 1996 and 1997, the Company paid the Pohlad Companies $533,000 and
$551,000, respectively, in management fees pursuant to the Management
Agreement.
The Management Agreement may be terminated by either the Company or the
Pohlad Companies when the Pohlad Companies or its affiliates cease to hold
Common Stock or when the Pohlad Companies is no longer controlled by members
of the Pohlad family. For purposes of the Management Agreement, an
"affiliate" of the Pohlad Companies means any person or entity controlling or
controlled by or under common control with the Pohlad Companies, and
"control" means the power to direct the management and policies of the Pohlad
Companies, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise. For purposes of the Management
Agreement, members of the Pohlad family means Carl R. Pohlad and his spouse,
55
<PAGE>
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. Robert C. Pohlad and his
brothers, James O. Pohlad and William M. Pohlad, are all sons of Carl R.
Pohlad, and the owners of all the equity interest of the Pohlad Companies.
JOINT VENTURE
All of the Joint Venture's bottling and canning requirements are provided
by the Company. The Company charges the Joint Venture for such requirements
at its net cost, which includes the actual cost of such requirements plus a
proportionate charge for depreciation, amortization and cost of capital. See
"Business -- Joint Venture."
The profits (or losses) of the Joint Venture include an allocation of the
profits (or losses) of the Company's manufacturing facilities in Reserve,
Louisiana, and Collierville, Tennessee. The Joint Venture's allocation is
equal to the total profits (or losses) of such facilities multiplied by a
fraction, the numerator being the Joint Venture's bottling and canning
requirements and the denominator being the Joint Venture's bottling and
canning requirements plus all other requirements of such facilities by the
Company's other distribution facilities.
The Company in its role as Managing Venturer of the Joint Venture may cause
the Joint Venture to borrow funds to support the operations of the Joint
Venture. To the extent the Joint Venture is unable to borrow such funds, the
Managing Venturer may call upon Poydras and the Company to make loans to the
Joint Venture ("Mandatory Loans") in proportion to their respective ownership
interests, in such amounts and payable at such times, in such manner and on
such terms as may reasonably be determined by the Managing Venturer;
provided, however, that unless and until determined otherwise by the
Management Committee, Mandatory Loans will bear interest, payable quarterly,
at a rate per annum equal to 1.0% over the prime or reference rate announced
from time to time by Citibank, N.A. In the event either Poydras or the
Company fails to make a Mandatory Loan (a "Refusing Venturer"), the party
which has made the Mandatory Loan may (i) pursue any and all legal remedies
against the Refusing Venturer and recover costs and expenses from the
Refusing Venturer in connection with the pursuit of such remedies or (ii)
make a loan to the Refusing Venturer in the amount of the Refusing Venturer's
Mandatory Loan, which loan will bear interest, payable monthly, at a rate per
annum equal to 5.0% over the prime or reference rate announced from time to
time by Citibank, N.A. The Company had loaned approximately $26.1 million to
the Joint Venture as of December 31, 1997, of which $3.0 million was a
Mandatory Loan. Poydras had loaned approximately $1.8 million to the Joint
Venture as of December 31, 1997, all of which was a Mandatory Loan.
Personnel employed by the Joint Venture who also provide services to the
Company or any entity directly or indirectly controlling, controlled by or
under common control with the Company, any officer, director, employee or
partner of the Company or any entity for which an officer, director or
partner of the Company acts in any capacity or any affiliate of the foregoing
will be paid by the Company or its affiliate proportionately. All personnel
employed by the Company or its affiliate who also provide services to the
Joint Venture will be paid by the Joint Venture proportionately.
To the extent that the Company provides management and support functions to
the Joint Venture from its office in Memphis, Tennessee, the Joint Venture
will reimburse the Company for such services, including a proportionate share
of (i) the reasonable overhead and administrative costs associated with the
Company's Memphis office and (ii) the management fee, exclusive of travel and
other expenses, paid by the Company pursuant to the Management Agreement.
See " -- Management Agreement." The Joint Venture's obligation to pay such
costs and fees is subject to the following limitations: (i) the management
fee shall not exceed $500,000, as adjusted annually for changes in the CPI,
as provided in the Management Agreement; (ii) the Memphis office costs and
the management fee described above shall be allocated to the Joint Venture
according to the proportion that the number of cases distributed by the Joint
Venture bears to the total number of cases distributed by the Joint
56
<PAGE>
Venture, the Company, its affiliates and others provided management and/or
support services by the Memphis office; and (iii) only costs attributable to
services being provided to the Joint Venture shall be allocated to the Joint
Venture. Except for the proportionate share of overhead and administrative
costs associated with such management and support functions, the Joint
Venture will not reimburse the Company or Poydras for items generally
constituting direct overhead or administrative expenses of the business.
CERTAIN BUSINESS RELATIONSHIPS
Philip A. Marineau, one of the Company's directors, is President and Chief
Executive Officer of Pepsi-Cola North America, the domestic soft drink
division of PepsiCo, Inc. PepsiCo is the Company's primary franchisor.
SHAREHOLDERS' AGREEMENT
The Company and its shareholders have entered into a Shareholders'
Agreement which restricts the sale or transfer of (i) any Common Stock of the
Company or the beneficial ownership thereof or (ii) any franchise rights
relating to PepsiCo (the "Franchise Rights"), except for those sales or
transfers to any affiliate of the Pohlad Companies or to any affiliate of the
owner of the Common Stock or Franchise Rights. The Shareholders' Agreement
further provides that a holder of Common Stock or Franchise Rights desiring
to sell such Common Stock or Franchise Rights will first grant to Equity
Beverage, Inc. ("Equity Beverage") the right to purchase any Common Stock or
Franchise Rights at a purchase price equal to the higher of (i) the price
negotiated between the holder of Common Stock or Franchise Rights and Equity
Beverage or (ii) the price determined by two nationally recognized
independent investment or merchant banks, one selected by Equity Beverage and
the other selected by the holder of Common Stock or Franchise Rights. See
"Securities Ownership of Certain Beneficial Owners and Management."
The Shareholders' Agreement provides that, for a period of ten years
following the date of the Shareholders' Agreement, each of PepsiCo, Inc. and
Arbeit & Co. may nominate one director, and the holders of at least 60.0% of
the Company's non-voting Common Stock may nominate two directors to the
Company's board of directors. Under the Shareholders' Agreement, the holders
of the Company's Common Stock agree to elect such nominees to the Company's
board of directors.
The Shareholders' Agreement also requires the Pohlad Companies to offer to
the Company, for a period of ten years following the date of the Shareholders'
Agreement, any business opportunities available to the Pohlad Companies in
the Company's existing territories or in certain states surrounding the
Company's existing territories to bottle or distribute brand name soft drinks
or carbonated water pursuant to franchise or similar agreements.
The Pohlad Companies and certain members of the Pohlad family and their
affiliates may elect to purchase shares of the Company's Preferred Stock from
the holders thereof for a purchase price of $5,000 per share, plus accrued
and unpaid dividends. Such election is valid through September 15, 2013.
57
<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.
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to the Company's Registration
Statement on Form S-4 (File No. 333-19233) filed on January 3,
1997).
3.2 Amended and Restated Bylaws of the Company (incorporated by
reference to the Company's Registration Statement on Form S-4
(File No. 333-19233) filed on January 3, 1997).
4.1 Indenture, dated as of December 17, 1996, between the Company and
Norwest Bank Minnesota, National Association, as Trustee,
relating to $120,000,000 principal amount of 9 3/4 Senior Notes
Due 2003, including form of Initial Global Note (incorporated by
reference to the Company's Registration Statement on Form S-4
(File No. 333-19233) filed on January 3, 1997).
4.2 Credit Agreement, dated as of December 16, 1996, by and among the
Company, NationsBank, N.A. and other lending institutions
(incorporated by reference to the Company's Registration
Statement on Form S-4 (File No. 333-19233) filed on January 3,
1997).
4.3 Security Agreement, dated as of December 16, 1996, by and among
the Company, NationsBank, N.A. and other lending institutions
(incorporated by reference to the Company's Registration
Statement on Form S-4 (File No. 333-19233) filed on January 3,
1997).
4.4 Registration Rights Agreement, dated as of December 17, 1996, by
and between the Company and NationsBanc Capital Markets, Inc., as
Initial Purchaser (incorporated by reference to the Company's
Registration Statement on Form S-4 (File No. 333-19233) filed on
January 3, 1997).
4.5 Amended and Restated Shareholders' Agreement, dated as of
September 23, 1993 (incorporated by reference to the Company's
Registration Statement on Form S-4 (File No. 333-19233) filed on
January 3, 1997).
10.1 Amended and Restated Delta Beverage Group, Inc. and Subsidiaries
Phantom Plan.
10.2 Management Agreement, dated as of March 8, 1988, by and between
The Bellfonte Company and Mid-South Acquisition Corporation
(incorporated by reference to the Company's Registration Statement
on Form S-4 (File No. 333-19233) filed on January 3, 1997).
58
<PAGE>
10.3 Employment Agreement, dated as of February 1, 1990, by and
between the Company and Kenneth Keiser (incorporated by reference
to the Company's Registration Statement on Form S-4 (File No.
333-19233) filed on January 3, 1997).
10.4 Form of 1991 Superior Performance Incentive Bonus Agreement
(incorporated by reference to the Company's Registration
Statement on Form S-4 (File No. 333-19233) filed on January 3,
1997).
10.5 Form of Franchise Agreement (incorporated by reference to the
Company's Registration Statement on Form S-4 (File No. 333-19233)
filed on January 3, 1997).
10.6 Miller Brewing Company Distributor Agreement (incorporated by
reference to the Company's Registration Statement on Form S-4
(File No. 333-19233) filed on January 3, 1997).
10.7 Amended and Restated Joint Venture Agreement, effective as of
September 3, 1992, by and between the Company and Poydras Street
Investors L.L.C. (incorporated by reference to the Company's
Registration Statement on Form S-4 (File No. 333-19233) filed on
January 3, 1997).
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None
59
<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 March 31, 1998.
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.
<TABLE>
<S> <C> <C>
/s/ Robert C. Pohlad Chief Executive Officer and Director March 31, 1998
- ----------------------------- (Principal Executive Officer)
Robert C. Pohlad
/s/ John F. Bierbaum Chief Financial Officer and Director March 31, 1998
- ----------------------------- (Principal Accounting Officer and
John F. Bierbaum Principal Financial Officer)
/s/ Donald E. Benson Chairman of the Board March 31, 1998
- -----------------------------
Donald E. Benson
/s/ John H. Agee Director March 31, 1998
- -----------------------------
John H. Agee
/c/ Christopher E. Clouser Director March 31, 1998
- -----------------------------
Christopher E. Clouser
/s/ Philip N. Hughes Director March 31, 1998
- -----------------------------
Philip N. Hughes
/s/ Philip A. Marineau Director March 31, 1998
- -----------------------------
Philip A. Marineau
/s/ Gerald A. Schwalbach Director March 31, 1998
- -----------------------------
Gerald A. Schwalbach
/s/ John F. Woodhead Director March 31, 1998
- -----------------------------
John F. Woodhead
</TABLE>
60
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to the Company's Registration Statement on
Form S-4 (File No. 333-19233) filed on January 3, 1997).
3.2 Amended and Restated Bylaws of the Company (incorporated by reference
to the Company's Registration Statement on Form S-4 (File No. 333-19233)
filed on January 3, 1997).
4.1 Indenture, dated as of December 17, 1996, between the Company and
Norwest Bank Minnesota, National Association, as Trustee, relating to
$120,000,000 principal amount of 9 3/4 Senior Notes Due 2003,
including form of Initial Global Note (incorporated by reference to
the Company's Registration Statement on Form S-4 (File No. 333-19233)
filed on January 3, 1997).
4.2 Credit Agreement, dated as of December 16, 1996, by and among the
Company, NationsBank, N.A. and other lending institutions
(incorporated by reference to the Company's Registration Statement on
Form S-4 (File No. 333-19233) filed on January 3, 1997).
4.3 Security Agreement, dated as of December 16, 1996, by and among the
Company, NationsBank, N.A. and other lending institutions
(incorporated by reference to the Company's Registration Statement on
Form S-4 (File No. 333-19233) filed on January 3, 1997).
4.4 Registration Rights Agreement, dated as of December 17, 1996, by and
between the Company and NationsBanc Capital Markets, Inc., as Initial
Purchaser (incorporated by reference to the Company's Registration
Statement on Form S-4 (File No. 333-19233) filed on January 3, 1997).
4.5 Amended and Restated Shareholders' Agreement, dated as of September
23, 1993 (incorporated by reference to the Company's Registration
Statement on Form S-4 (File No. 333-19233) filed on January 3, 1997).
10.1 Amended and Restated Delta Beverage Group, Inc. and Subsidiaries
Phantom Plan.
10.2 Management Agreement, dated as of March 8, 1988, by and between The
Bellfonte Company and Mid-South Acquisition Corporation (incorporated
by reference to the Company's Registration Statement on Form S-4 (File
No. 333-19233) filed on January 3, 1997).
10.3 Employment Agreement, dated as of February 1, 1990, by and between the
Company and Kenneth Keiser (incorporated by reference to the Company's
Registration Statement on Form S-4 (File No. 333-19233) filed on
January 3, 1997).
10.4 Form of 1991 Superior Performance Incentive Bonus Agreement
(incorporated by reference to the Company's Registration Statement on
Form S-4 (File No. 333-19233) filed on January 3, 1997).
10.5 Form of Franchise Agreement (incorporated by reference to the
Company's Registration Statement on Form S-4 (File No. 333-19233)
filed on January 3, 1997).
10.6 Miller Brewing Company Distributor Agreement (incorporated by
reference to the Company's Registration Statement on Form S-4 (File
No. 333-19233) filed on January 3, 1997).
10.7 Amended and Restated Joint Venture Agreement, effective as of
September 3, 1992, by and between the Company and Poydras Street
Investors L.L.C. (incorporated by reference to the Company's
Registration Statement on Form S-4 (File No. 333-19233) filed on
January 3, 1997).
27.1 Financial Data Schedule.
</TABLE>
61
<PAGE>
EXHIBIT 10.1
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARIES
AMENDED AND RESTATED PHANTOM PLAN
Dated: December 31, 1997
1. PURPOSE OF THE PLAN. The purpose of the Delta Beverage Group, Inc.
and Subsidiaries Phantom Plan (the "Plan") is to enable Delta Beverage Group,
Inc. and its subsidiaries (the "Company") to provide an incentive to eligible
employees whose present and potential contributions are important to the
continued success of the Company and to enable the Company to enlist and retain
in its employ the best available talent for the successful conduct of its
business. It is intended that this purpose will be effected through the
granting of phantom shares.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ACCOUNT" means the bookkeeping account established for a
Participant on the Company's general ledger to record a Participant's
benefit under this Plan.
(b) "AVERAGE OPERATING CASH FLOW" means the average of the three
most recent fiscal year's Operating Cash Flow. In the event of an
acquisition of a new operating business, Average Operating Cash Flow
shall be adjusted for the year of acquisition and the next following
year. The adjustment to the Average Operating Cash Flow for the
fiscal year in which the acquisition occurred shall be equal to the
Operating Cash Flow of the new business, on a pro forma basis, for the
12-month period ending on the last day of the fiscal year for the
Company in which the acquisition occurred ("Year One"). The
adjustment to the Average Operating Cash Flow for the fiscal year
following the year of the acquisition shall be equal to the average of
the Operating Cash Flow of the new business for that year and Year
One.
(c) "BASE VALUE" means the Equity Value as of the beginning of
the fiscal year during which the Board granted the Phantom Shares or
when Deemed Purchases are made by eligible employees.
(d) "BOARD" means the Board of Directors of the Company.
(e) "CODE" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor thereto.
(f) "COMMITTEE" means the Committee referred to in Section 4 of
the Plan.
(g) "COMMON STOCK" means the Common Stock of Delta Beverage
Group, Inc.
(h) "COMPANY" means Delta Beverage Group, Inc., a corporation
organized under the laws of the State of Delaware and its subsidiary
corporations.
(i) "DEEMED PURCHASES" means those Phantom Shares purchased by
Participants with deferred bonuses as permitted by the Board in its
sole discretion.
<PAGE>
(j) "DEEMED SHARES OUTSTANDING" means as of December 31, 1993,
one million (1,000,000) shares. Because shareholders may invest
additional capital or withdraw capital through a redemption, merger or
similar transaction (but not dividends), it will be necessary to
adjust the number of Deemed Shares Outstanding. Therefore, the Board
will increase annually the Deemed Shares Outstanding as of the
beginning of the fiscal year to reflect any shareholder capital
contributions during the fiscal year and decrease annually the Deemed
Shares Outstanding as of the beginning of the fiscal year to reflect
any shareholder capital withdrawals during the fiscal year. The
adjustments to the number of Deemed Shares Outstanding shall be
reflected by considering the value of the shareholder capital
contribution or withdrawal as a percent of the Equity Value of the
Company immediately before the capital contribution. If in the
Board's sole discretion, it determines that a similar shareholders'
equity transaction has occurred for which this paragraph does not
explicitly address, it can cause an increase or decrease in Deemed
Shares Outstanding.
(k) "DETERMINATION DATE" means the last day of the Company's
fiscal year preceding the Event of Distribution. The first
Determination Date shall be December 31, 1993.
(l) "DIRECTOR" means a member of the Board.
(m) "DISABILITY" means disability as determined under procedures
established by the Board for purposes of this Plan.
(n) "DISTRIBUTION PER SHARE" means the aggregate dividends
declared and distributed during the fiscal year by the Company for the
fiscal year, divided by the Deemed Shares Outstanding as of the
beginning of the fiscal year.
(o) "EQUITY VALUE" means the Average Operating Cash Flow of the
Company multiplied by the Multiplier plus any Excess Cash less any
liability represented by debt (other than debt reflected on the
financial statements of the Company to reflect payments due under the
Plan) and Preferred Stock outstanding for the fiscal year ending on a
Determination Date. To the extent the entire Operating Cash Flow of
the New Orleans joint venture is included in determining Operating
Cash Flow, an adjustment will be made to remove the value of the
minority interest in the joint venture pursuant to the partnership
agreement from Equity Value. The same methodology which is used for
determining the Equity Value shall be used in determining the value of
the minority interest in the joint venture, as applied by the Board in
its sole discretion; PROVIDED, HOWEVER, that the value of the minority
interest in the joint venture shall not be less than the value at
which such interest is carried in the audited financial statements of
the Company for the relevant year. For purposes of determining Base
Value, Equity Value shall be determined using the Average Operating
Cash Flow for the three years ending immediately before the year of
the grant of the Phantom Share Awards.
(p) "EQUITY VALUE PER SHARE" means the Equity Value divided by
Deemed Shares Outstanding.
(q) "EVENT OF DISTRIBUTION" means the occurrence of the earlier
of one of the following events which will cause a participant's
Account to be distributed:
i) Death;
ii) Disability;
<PAGE>
iii) Involuntary Termination by the Company without cause;
iv) Voluntary Termination;
v) Retirement at or after age 65; or
vi) Inservice Distribution pursuant to the provisions of
paragraph 7 hereof.
(r) "EXCESS CASH" means the cash accumulated by the Company in
excess of the amount determined necessary by the Board (in its sole
discretion) for current operating needs and/or as required under the
Company's debt covenants.
(s) "MULTIPLIER" shall be the factor set by the Board from time
to time which, in its sole discretion, most appropriately reflects the
value of the Company. The Multiplier factor will initially be set at
7.
(t) "NET WORKING ASSETS" shall mean current assets less current
liabilities as these items are classified under generally accepted
accounting principles except as provided herein. Specifically excluded
from current assets are cash and cash equivalents, short-term
investments and deferred tax assets. Specifically excluded from
current liabilities is current maturities of long-term debt (including
long-term debt which reflects payments due under the Plan) and tax
liabilities.
(u) "OPERATING CASH FLOW" means Operating Earnings plus
depreciation, plus or minus the change in Net Working Assets for the
period ending on the Determination Date.
(v) "OPERATING EARNINGS" shall mean income from operations
before amortization, interest, income taxes, management fees and
nonrecurring expenses.
(w) "PARTICIPANT" means any officer or key employee of the
Company who has been selected by the Board to receive an award under
this Plan.
(x) "PHANTOM SHARE(S)" means the phantom share(s) awarded to
Participants under Section 6 below.
(y) "PLAN" means the Delta Beverage Group, Inc. and Subsidiaries
Phantom Plan, as hereinafter amended from time to time.
3. ELIGIBLE PARTICIPANTS. Any officer or other key employee of the
Company, a subsidiary of the Company or any entity which has entered into a
management agreement with the Company (each a "Participating Entity"), whom the
Board deems to have the potential to contribute to the future success of the
Company (an "Eligible Participant") shall be eligible to receive awards under
the Plan.
4. ADMINISTRATION.
(a) COMMITTEE. The Plan shall be administered by the Board or,
if established by the Board, by a committee appointed by the Board of
Directors (the "Committee"). If appointed, the Committee shall have
all of the rights and responsibilities of the Board under the Plan.
Committee members shall serve for such term as the Board may in each
case determine, and shall be subject to removal at any time by the
Board. Vacancies on the Committee, however caused,
<PAGE>
shall be filled by the Board. The Committee shall select one of its
members as chairman, and shall hold meetings at such times and places as
it may determine. A majority of the Committee shall constitute a quorum,
and acts of the Committee approved at a meeting at which a quorum is
present, or acts approved in writing by all of the members of the
Committee, shall be valid acts of the Committee. Awards to officers of the
Company shall be made upon approval by the Board or, if the Committee is
given general authority to do so by the Board, upon approval by the
Committee without review by the Board.
(b) AUTHORITY. Subject to the general purposes, terms and
conditions of the Plan, the Board shall have full power to implement
and carry out the Plan including, but not limited to, the following:
i) to select the individuals to whom Phantom Share Awards
may be granted hereunder from time to time;
ii) to determine whether and to what extent Phantom Share
Awards are granted hereunder;
iii) to determine if Participants may purchase Phantom
Shares with deferred bonuses;
iv) to approve forms of agreement for use under the Plan;
v) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder
(including, but not limited to, the price and any restriction or
limitation, or any vesting acceleration or waiver of forfeiture
restrictions regarding any Phantom Share Award based in each case
on such factors as the Board shall determine, in its sole
discretion);
vi) to determine whether and under what circumstances the
Board needs to exercise its discretion to implement action
granted it by Section 7 of this Plan; and
vii) to adjust the Multiplier applied to the Average
Operating Cash Flow in determining Equity Value in the event of a
change in the economic or other conditions affecting the
Company's value.
(c) To assist the Board in understanding how it is intended that
this Plan is to function, a hypothetical example titled "Schedule A:
Example" is attached. The method for calculating the Base Value as of
December 31, 1993 is included within Schedule A.
The Board shall have the sole authority to construe and interpret
the Plan, to prescribe, amend and rescind rules and regulations
relating to the Plan, and to make all other determinations necessary
or advisable for the administration of the Plan. All determinations
shall be binding and conclusive on all parties.
5. DURATION OF THE PLAN. The Plan shall remain in effect until
terminated in writing by the Board under the terms of the Plan.
6. PHANTOM SHARE AWARDS.
<PAGE>
(a) PROCEDURE. The Board, in its sole discretion, may grant
phantom share award(s) (the "Phantom Share Award(s)") to Eligible
Participants. The Board, in its sole discretion, may also permit
Participants to enter into Deemed Purchases of additional Phantom
Shares with deferred bonuses. When a Deemed Purchase occurs, the
Company will then become obligated for the Phantom Stock Award Base
Value for the number of Phantom Shares deemed to have been purchased
by the Participant and the obligation of the Company for deferred
bonuses will be reduced by the amount of the Deemed Purchase price of
the Phantom Shares.
Each Phantom Share Award shall be evidenced by a written Phantom
Share Award Certificate which shall be in such form and contain such
provisions as the Board shall from time to time deem appropriate. The
following terms and conditions shall apply to each Phantom Share
Award:
i) PHANTOM SHARE AWARD BASE VALUE. Each Phantom Share
Award shall have a fixed value on the date of the grant equal to
the Equity Value Per Share as of the Determination Date preceding
the date of the grant multiplied by the number of Phantom Shares
granted in the Award ("Phantom Share Award Base Value"). The
Participant shall not be entitled to payment of the Phantom Share
Award Base Value awarded to him or her. The Participant shall be
entitled only to have credited to his or her Account the increase
in the value of his or her Phantom Shares over the Phantom Share
Award Base Value until the occurrence of an Event of
Distribution.
ii) VESTING PERIOD. Each Phantom Share Award other than
Deemed Purchases under Section 6(a), shall be subject to a
vesting restriction. A Phantom Share Award shall be one hundred
percent (100%) vested on the earlier of the third anniversary of
the date of the grant of the Phantom Share Award, upon the
Participant's death, Disability, involuntary termination, or
retirement at age 65.
Notwithstanding the above, all Phantom Share Awards shall be
100% vested upon the sale of the stock or substantially all of
the assets of the Company or the occurrence of an event that
results in a change of stock ownership of greater than 50% from
the shareholder of records as of the Effective Date, excluding
purchases by the Pohlad Companies, its shareholders or their
family members, or its affiliates.
iii) PAYMENT AND FORM OF PAYMENT. A Participant's right to
payment of the amounts credited to his or her Phantom Share Award
Account shall occur upon an Event of Distribution. Payment of a
Participant's Phantom Share Award Account shall be made in five
(5) substantially equal installments after an Event of
Distribution. The first installment shall be made within sixty
(60) days after the occurrence of an Event of Distribution.
Interest shall be credited to a Participant's Account commencing
on the first anniversary of the date of the first installment
payment from the Participant's Account. Interest shall be
credited at the reference rate charged by Company's principal
lender in effect on each anniversary of the date of the first
installment payment from the Participant's Account. The Board
may, in its sole discretion, accelerate payment of the
Participant's Account subject to all federal laws and
regulations. If an Inservice Distribution was made to a
Participant within eighteen months
<PAGE>
prior to the Event of Distribution for which payments are to be made
under this paragraph 6(a)iii), then the Board may, in its sole
discretion, pay the Phantom Share Award in five (5) substantially
equal installments, with the first installment to be made one (1) year
after the occurrence of the Event of Distribution.
In no event, however, shall payment of a Phantom Share Award
Account exceed the "Maximum Award". The Maximum Award shall be
defined as 40 times a Participant's final annual compensation,
including base compensation and bonus, for the fiscal year
immediately prior to the year in which the payment is made (the
"Preliminary Maximum Award"). Final annual compensation shall
for this purpose include any amounts deferred by the Participant
into a qualified retirement plan, into a deferred compensation
plan or contributed to a cafeteria plan established under the
provisions of Section 125 of the Internal Revenue Code. The
Maximum Award shall be adjusted to recognize the length of
service of the Participants. The Maximum Award shall assume a
Participant has been employed for 10 years. The Maximum Award
shall be adjusted by a percentage determined as follows: the
numerator of the percentage shall be the number of 12 consecutive
month periods of employment with a Participating Entity and the
denominator shall be 10. The Preliminary Maximum Award shall be
multiplied by this fraction in order to determine the actual
Maximum Award applied hereunder.
iv) WITHHOLDING TAXES. In connection with each installment
pursuant to an Event of Distribution or Inservice Distribution,
the Company shall have the right to require the Participant to
remit the Company an amount sufficient to satisfy federal, state
and local withholding tax requirements. Alternatively, the
Company may, in its sole discretion, elect to make such
installment payments net of any amount sufficient to satisfy
federal, state and local withholding tax requirements.
v) DISTRIBUTION EQUIVALENT. The holder of a Phantom Share
Award shall be entitled to have his or her number of Phantom
Share Awards increased by a number equal to the product of
multiplying Distributions Per Share times the number of Phantom
Share Awards credited to such person's Account as of the
beginning of the fiscal year, then dividing this product by the
Equity Value Per Share as of the end of the fiscal year.
vi) TRANSFER/LEAVE OF ABSENCE. For Plan purposes, a
transfer of any Participant from the Company to another Pohlad
Companies' subsidiary or vice-versa, or a leave of absence duly
authorized by the Company shall not be deemed a termination of
employment or a break in the vesting period. In the event of a
transfer, the Participant's Phantom Share Awards shall be frozen
and shall be credited with interest at the rate set out in
paragraph 6(iii) from the date of transfer until the occurrence
of an Event of Distribution (in which case the name of the
subsidiary shall be substituted for the Company in Paragraph
2(p)(iii)). In the case of any Participant on an approved leave
of absence, the Board or its delegatee may make such provision
respecting continuance of the Phantom Share Award while on leave
from the employ of the Company as it may deem appropriate.
<PAGE>
vii) ISSUANCE OF SHARES. With respect to Phantom Share
Awards which the Board decides, in its sole discretion, to pay in
Common Stock, the Company shall, without transfer or issue tax to
the person entitled to receive the shares, deliver to such person
a certificate or certificates for a percentage of Common Stock
equal to the number of the Phantom Share Awards in the
Participant's Account (as of the last preceding Determination
Date) divided by the total Deemed Shares Outstanding on the last
preceding Determination Date. Contemporaneous with the delivery
of such certificates to the Participant, the Participating Entity
and the Participant shall enter into a buy/sell agreement related
to Participant's shares of Common Stock which agreement shall be
agreed to by Participant and the Participating Entity.
viii) COVENANT NOT TO COMPETE/NON-SOLICITATION. Each
Participant shall be subject to a non-compete and
non-solicitation restriction in consideration of the grant of a
Phantom Share Award. During the Participant's employment with
the Company and for a period of three (3) years after an Event of
Distribution, the Participant shall not directly or indirectly,
within any franchise territory of the Company in which the
Company distributes beverage products on the date of an Event of
Distribution, engage in any activities that compete with the
Company. An activity shall be considered competitive with the
Company if said activity directly or indirectly competes with
Company's business as it is conducted during the term of this
Agreement, including without limitation, the distribution of
beverage products.
During the course of Participant's employment with the
Company and for a period of three (3) years after an Event
of Distribution, Participant will not cause or attempt to
cause any existing or prospective customer, client or
account to divert, terminate, limit or in any manner modify
or fail to enter into any actual or potential business
relationship with the Company.
During the course of Participant's employment with the
Company and for a period of three (3) years after an Event of
Distribution, Participant will not directly or indirectly employ
or conspire with others to employ any of Company's salaried or
hourly employees that have been employed by Company during the
one (1) year period prior to Participant's Event of Distribution.
The term "employ" for purposes of this paragraph means to enter
into an arrangement for services as a full-time or part-time
employee, independent contractor, agent, or otherwise.
Participant shall inform any new employer or other person or
entity with whom Participant enters a business relationship
during the three (3) year period after an Event of Distribution,
before accepting employment or entering the business
relationship, of the existence of this Agreement and give such
employer, person or other entity a copy of this Section 6(viii).
ix) CLAIMS PROCEDURE. The Board shall establish a claims
and claims review procedure for Participants.
7. INSERVICE DISTRIBUTION. A Participant who remains actively employed
and who has not incurred any of the Events of Distribution set forth in
subparagraphs 2(q)i)-v) may elect to receive one or more Inservice
<PAGE>
Distribution(s) for an aggregate of not more than 30% of the Phantom Shares
which have been awarded to that Participant. In order to receive such a
distribution the Participant must deliver a written request to the Board setting
forth the desired date of distribution and the number of Phantom Shares the
Participant seeks to have distributed. Distributions will be in cash within
sixty (60) days after delivery of the written request. The value of each
Phantom Share being distributed shall be determined according to the increase in
the Equity Value Per Share over the Phantom Share Award Base Value per share
from the date of the grant until the Event of Distribution defined in paragraph
2(q)vi). A Participant shall only be entitled to exercise this right to the
extent he or she is vested in the Phantom Shares. Distribution of Phantom
Shares or their equivalent value under this provision shall extinguish all
rights and interest in those Phantom Shares distributed.
8. CONVERSION OR DEFERRAL PROVISIONS. The Board may convert a
Participant's Account to Common Stock or to defer any payment currently due to
such time that there are funds that exceed the current need for additional
capital of the Company and/or to repay any debt obligations resulting from a
requirement to add any capital to the Company. The number of shares of Common
Stock to be issued will be determined as set out in Section 6(vii). The Board,
in its sole discretion, may also determine whether and under what circumstances
Phantom Share Awards may be settled in cash or Common Stock or whether an award
payable under the Plan shall be deferred either automatically or upon the
discretion of the Board. Conversion and deferral rights shall not apply to
Events of Distribution set forth in subsection 2(q)vi).
9. ADJUSTMENTS. In order to simplify the administration of this Plan, it
is intended that adjustments for the acquisition of additional operating
businesses be made in a manner which in the Board's opinion, is representative
of a pro forma full year operation for the acquired business. This
simplification rule applies to but is not limited to Equity Value Per Share,
Deemed Shares Outstanding and Distributions Per Share.
10. WITHHOLDING TAXES. Whenever, under the Plan, shares of Common Stock
are to be issued in satisfaction of Phantom Share Awards granted thereunder, the
Company shall have the right to require the recipient to remit to the Company an
amount sufficient to satisfy Federal, state and local withholding tax
requirements prior to the delivery of any certificate or certificates for such
shares. The Company may, in its sole discretion, determine that a Participant
may elect to have his or her requirement under this Section satisfied by having
the Company withhold shares otherwise issuable pursuant to the Plan having a
fair market value equal to the tax liability. Whenever, under the Plan,
payments are to be made in cash, such payment shall be net of an amount
sufficient to satisfy Federal, state and local withholding tax requirements.
11. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the
Board, nor any provision of the Plan shall be construed as creating any
limitations on the power of the Board to adopt such additional compensation
arrangements as it may deem desirable and such arrangements may be either
generally applicable or applicable only in specific cases.
12. EMPLOYMENT RELATIONSHIP. Nothing in the Plan or any award made
thereunder shall interfere with or limit in any way the right of the Company to
terminate any Participant's employment at any time, with or without cause, nor
confer upon any Participant any right to continue in the employ of the Company.
13. RIGHTS AS A SHAREHOLDER. The holder of a Phantom Share Award shall
have no rights as a shareholder with respect to any Common Stock unless and
until the date of issuance of a stock certificate to him or her for such Common
Stock.
14. NONASSIGNABILITY OF AWARDS. No awards made hereunder shall be
assignable or transferable by the recipient except by will or by the laws of
descent and distribution and as otherwise consistent with the specific Plan
provisions relating thereto.
<PAGE>
15. AMENDMENT, SUSPENSION, OR TERMINATION OF THE PLAN. The Board may at
any time amend, alter, suspend, or discontinue the Plan by written action, but
no amendment, alteration, suspension, or discontinuation shall be made which
would impair the rights of any Participant under any grant theretofore made,
without his or her consent.
16. GOVERNING LAW. Except where superseded by federal law, this Plan
shall be construed, administered, and governed by the laws of the State of
Minnesota.
17. SEVERABILITY. If any portion or provision of this Plan shall be
deemed invalid or unenforceable, in whole or in part, than such provision or
portion shall be deemed to be modified or restricted to the extent and in the
manner necessary to render the same valid and enforceable, or shall be deemed
excised from this Plan, as the case may require, and this Plan shall be
construed and enforced to the intent permitted by federal and Minnesota law, as
if so modified or restricted, or as if such provision or portion had not been
originally incorporated herein, as the case may be.
18. EFFECTIVE DATE OF THE PLAN. The Plan shall become effective as of
January 1, 1994. The Plan was amended and restated as of December 31, 1997.
DELTA BEVERAGE CROUP, INC.
By: /s/ Robert C. Pohlad
------------------------------
Robert C. Pohlad
Its: Chief Executive Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,680
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<RECEIVABLES> 30,358
<ALLOWANCES> 562
<INVENTORY> 18,153
<CURRENT-ASSETS> 65,702
<PP&E> 111,136
<DEPRECIATION> 55,880
<TOTAL-ASSETS> 260,914
<CURRENT-LIABILITIES> 26,733
<BONDS> 170,404
0
29,014
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<TOTAL-LIABILITY-AND-EQUITY> 260,914
<SALES> 323,221
<TOTAL-REVENUES> 323,221
<CGS> 216,560
<TOTAL-COSTS> 216,560
<OTHER-EXPENSES> 86,960
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<INTEREST-EXPENSE> 17,865
<INCOME-PRETAX> 1,836
<INCOME-TAX> 2,040
<INCOME-CONTINUING> (139)
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<NET-INCOME> (139)
<EPS-PRIMARY> (34.12)
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