<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER
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DELTA BEVERAGE GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 75-2048317
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
2221 DEMOCRAT ROAD, MEMPHIS, TENNESSEE 38132
(Address of Principal Executive Offices, including Zip Code)
(901) 344-7100
(Registrant's Telephone Number, including Area Code)
As of May 14, 1998, the issuer had outstanding: (i) 5,889.81 shares of
Series AA Preferred Stock, $5,000 stated value, (ii) 20,301.87 shares of voting
Common Stock, $.01 par value, and (iii) 32,949.93 shares of nonvoting Common
Stock.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 1 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . 1
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . 6
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . 10
</TABLE>
<PAGE>
PART I
ITEM 1 FINANCIAL STATEMENTS
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
-----------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,680 $ 5,054
Receivables, net of allowance for doubtful
accounts of $562 and $548
Trade 19,644 20,787
Marketing and advertising 7,228 5,409
Other 2,924 2,001
Inventories, at cost 18,153 17,684
Shells, tanks and pallets, at deposit value 6,340 6,425
Prepaid expenses and other 986 2,260
Deferred income taxes 5,747 5,455
-------- --------
Total current assets 65,702 65,075
-------- --------
-------- --------
PROPERTY AND EQUIPMENT:
Land 4,639 4,639
Buildings and improvements 16,286 16,944
Machinery and equipment 90,211 96,581
-------- --------
111,136 118,164
Less accumulated depreciation and amortization (55,880) (57,908)
-------- --------
55,256 60,256
-------- --------
-------- --------
OTHER ASSETS:
Cost of franchises in excess of net assets
acquired, net of accumulated amortization
of $50,652 and $51,564 112,634 111,722
Deferred income taxes 19,481 21,945
Deferred financing costs and other 7,841 8,305
-------- --------
139,956 141,972
-------- --------
$ 260,914 $ 267,303
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
1
<PAGE>
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt and
other liabilities $215 $6,220
Accounts payable 9,530 11,013
Accrued liabilities 16,088 16,947
-------- --------
Total current liabilities 25,833 34,180
-------- --------
LONG-TERM DEBT AND OTHER LIABILITIES 170,189 169,935
MINORITY INTEREST 4,575 4,149
STOCKHOLDERS' EQUITY:
Preferred stock:
Series AA, $5,000 stated value,
30,000 shares authorized,
5,802.77 and 5,889.81 shares
issued and outstanding 29,014 29,449
Common stock:
Voting, $.01 par value, 60,000 shares
authorized, 20,301.87 shares issued
and outstanding -- --
Nonvoting, $.01 par value, 35,000
shares authorized,
32,949.93 shares issued and outstanding -- --
Additional paid-in capital 115,765 115,765
Accumulated deficit (84,456) (86,170)
Deferred compensation (6) (5)
-------- --------
60,317 59,039
-------- --------
$ 260,914 $ 267,303
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
2
<PAGE>
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1998
-----------------------
<S> <C> <C>
OPERATIONS:
Net sales $71,280 $75,733
Cost of sales 48,278 53,392
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Gross profit 23,002 22,341
Selling, general and administrative expenses 20,326 20,999
Amortization of franchise costs and other
intangibles 914 912
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Operating income 1,762 430
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OTHER EXPENSES:
Interest 4,391 4,640
Other, net 111 54
------- -------
4,502 4,694
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LOSS BEFORE INCOME TAXES AND
MINORITY INTEREST (2,740) (4,264)
Income tax benefit 924 2,694
Minority interest, net of taxes 178 291
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NET LOSS $ (1,638) $ (1,279)
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------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
3
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DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,638) $(1,279)
Adjustments to reconcile net loss to net cash
(used in)/provided by operating activities:
Depreciation and amortization 2,876 3,133
Non-cash interest on long-term debt 1,312 1,408
Change in deferred income taxes (859) (2,172)
Minority interest, before taxes (242) (426)
Net payments under deferred compensation plans (175) --
Changes in current assets and liabilities:
Receivables (2,848) 1,599
Inventories (3,788) 469
Shells, tanks and pallets 288 (85)
Prepaid expenses and other (701) (1,274)
Accounts payable and accrued liabilities 513 878
-------- --------
Net cash (used in)/provided by
operating activities (5,262) 2,251
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,545) (7,028)
Purchase of other assets (754) (779)
Other -- (9)
-------- --------
Net cash used in investing activities (7,299) (7,816)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit 4,000 6,000
Principal payments on long-term debt and other
liabilities (158) (61)
-------- --------
Net cash provided by financing activities 3,842 5,939
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (8,719) 374
CASH AND CASH EQUIVALENTS, beginning of period 12,171 4,680
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 3,452 $5,054
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
Unaudited
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements of Delta
Beverage Group, Inc. (the "Company," a Delaware corporation) and subsidiary
(collectively, the "Companies") have been prepared in accordance with
generally accepted accounting principles for interim financial information
and, in the opinion of management, include all adjustments (consisting of
normal and recurring adjustments) which are considered necessary for a fair
presentation of financial position, results of operations and cash flows as
of March 31, 1998, and for all interim periods presented. These condensed
interim financial statements do not include all of the financial information
and disclosures required by generally accepted accounting principles for
complete financial statements, and should be read in conjunction with the
Companies' audited consolidated financial statements and related notes
thereto for the year ended December 31, 1997. Also, the results of
operations for the interim periods presented may not be indicative of the
results for the entire year.
2. PREFERRED STOCK:
Authorized preferred stock consists of 30,000 designated Series AA preferred
shares. Series AA preferred stockholders receive cumulative dividends at an
annual rate of 6% based on the $5,000 stated value per share. Dividends are
paid quarterly in cash or in additional shares of Series AA preferred stock.
During the three months ended March 31, 1998, the Company issued additional
preferred shares as payment-in-kind dividends on preferred stock of
approximately $435,000. The additional preferred shares are included in
stockholders' equity as of March 31, 1998.
3. LONG-TERM DEBT AND OTHER LIABILITIES:
The Company maintains a $30.0 million bank revolving line of credit which
matures on December 16, 2001, and bears interest, at the Company's option, at
LIBOR or a defined margin over the higher of (1) the bank's prime rate or (2)
the federal funds rate plus 0.5%. Borrowings are limited to the sum of
approximately 80% of the Company's eligible receivables and approximately 50%
of the Company's eligible inventory. The line of credit includes a $10.0
million limit for the issuance of letters of credit. Borrowings under the
line are secured by the Company's accounts receivable and inventory.
Borrowings outstanding under the line of credit approximated $6.0 million as
of March 31, 1998.
5
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS DESCRIBES CERTAIN FACTORS
AFFECTING THE RESULTS OF OPERATIONS OF DELTA BEVERAGE GROUP, INC. ("THE
COMPANY") FOR THE FISCAL QUARTER ENDED MARCH 31, 1998, AND ITS FINANCIAL
CONDITION AS OF MARCH 31, 1998. THIS DISCUSSION AND ANALYSIS SHOULD BE READ
IN CONJUNCTION WITH THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1997.
CERTAIN OF THE STATEMENTS IN THE FOLLOWING DISCUSSION CONSTITUTE
FORWARD-LOOKING STATEMENTS WHICH ARE MADE PURSUANT TO THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. VARIOUS
FACTORS MAY CAUSE ACTUAL RESULTS OF OPERATIONS AND FINANCIAL CONDITION TO
VARY SIGNIFICANTLY FORM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENT MADE
HEREIN OR IN OTHER REPRESENTATIONS MADE BY THE COMPANY'S MANAGEMENT OR BY
OTHERS ON BEHALF OF THE COMPANY. PLEASE REFER TO THE COMPANY'S ANNUAL REPORT
ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997, FOR A DESCRIPTION
OF THE FACTORS KNOWN TO THE COMPANY THAT MAY CAUSE ACTUAL RESULTS TO VARY.
GENERAL BUSINESS OVERVIEW
Delta Beverage Group, Inc., a Delaware corporation, was acquired by its
current owners in March 1988. The Company has accomplished a number of
business combinations since 1988, the most significant of which have been (i)
combining in 1992 its PepsiCo based sales operation in southern Louisiana
with a Seven-Up based sales operation in the same territory through a joint
venture in which the Company is majority owner and managing venturer and (ii)
acquiring in April 1995 the distribution rights for Miller products in a
significant portion of the joint venture territory.
The Company's primary measurement of unit volume is franchise case
sales, which are case-sized quantities of the various packages in which
products are produced. Franchise case sales refers to physical cases of
beverages sold. The Company also sells premix or draft products
(ready-to-serve beverages which are sold in tanks or kegs) and postmix
products (fountain syrups to which carbonated water must be added). Premix
and postmix products, while effectively containing the identical beverages as
packaged product, are not included in case sales measurements as they are not
the primary focus of the Company's selling efforts.
The Company's primary source of revenue is franchise case sales, which
are sales of the Company's branded products directly to retailers whether of
package, premix, or postmix configuration. Another source of revenue is
contract sales, which are sales 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.
RESULTS OF OPERATIONS
Net sales, excluding contract sales, for the three months ended March
31, 1998, increased by 1.7% to $67.1 million compared to $66.0 million for
the same period in 1997. The increase resulted from strong consumer demand
for the Company's soft drink products in convenience packages, which was in
part the result of expanded placement of marketing equipment. The effect of
the demand for convenience packages was, however, partially offset by the
effect of competition from promotional activity, that negatively affected
volume and net pricing for the Company's take-home soft drink packages.
Contract sales for the three months ended March 31, 1998, increased 63.6%
compared to the same period in 1997 due to the addition of bottled product
requirements of an existing can product customer. Contract sales represented
11.4% of net sales for the three months ended March 31, 1998, as contrasted
to 7.5% of net sales for the same period in 1997. As a result of the
foregoing, aggregate net sales for the
6
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three months ended March 31, 1998, increased 6.2% to $75.7 million compared
to $71.3 million for the same period in 1997.
Cost of sales for the three months ended March 31, 1998, increased to
$53.4 million compared to $48.3 million for the same period in 1997. The
increase was due primarily to the increase in contract net sales (although at
thin margins) and an increase 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 three months
ended March 31, 1998, increased to 70.5% compared to 67.7% for the same
period in 1997. The increase in margin associated with the convenience
packages of soft drinks did not exceed the decrease associated with reduced
sales in take-home soft drink packages and resulted in gross profit for the
three months ended March 31, 1998, of $22.3 million or 3.0% less than the
gross profit of $23.0 million for the same period in 1997.
Selling, general, and administrative expenses for the three months ended
March 31, 1998, increased to $21.0 million compared to $20.3 million for the
same period in 1997. Selling, general and administrative expenses are
comprised of selling, distribution and warehousing expenses, advertising and
marketing expenses, general and administrative expenses. All categories grew
at a faster rate than sales volume. The increase in these expenses is due to
normal increases in wages, the effect of which has not been offset by volume
gains.
As a result of the above factors, income from operations for the three
months ended March 31, 1998, decreased to $0.4 million or 0.6% of net sales,
compared to $1.8 million, or 2.5% of net sales, for the same period in 1997.
The Company's operating results are affected by seasonal demand for its
products which generally results in higher sales and operating income in the
second and third three month periods of each fiscal year.
Interest expense for the three months ended March 31, 1998, increased to
$4.6 million from $4.4 million for the same period in 1997. This increase is
due to greater usage during the period of the Company's credit facility to
fund the placement of marketing equipment before the primary selling season.
Other expenses were reduced due to the non-recurrence of a loss of
$88,000 realized in liquidation of excess property in the three months ended
March 31, 1997.
As a result of the above factors, the Company had a loss before income
taxes and minority interest of $4.3 million for the three months ended March
31, 1998, compared to a loss of $2.7 million for the same period in 1997.
The Company's effective income tax rate differs from statutory rates due
to several factors. The most significant factors are the
non-tax-deductibility of franchise costs amortization and separate reporting
of the income tax effect of minority interest. The effective income tax rate
(benefit) for the three months ended March 31, 1998, is greater than for the
same period in 1997 because these factors are less significant to the
reported pre-tax results.
As a result of the foregoing factors, the Company had a net loss of $1.3
million for the three months ended March 31, 1998, compared to a net loss of
$1.6 million for the same period in 1997. As explained above, the Company
expects operating results to improve in the balance of the year due to
seasonal increases in demand for its products.
7
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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company is highly leveraged and 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 funds from operations.
While the Company does not currently anticipate utilizing the funds available
under its credit agreement for other than seasonal working capital
requirements, such funds may be used to augment operating cash flow.
Pursuant to the credit agreement, the Company has a borrowing capacity of up
to $30.0 million, including $10.0 million available for the issuance of
letters of credit. At March 31, 1998, letters of credit of $9.1 million had
been issued and $6.0 million had been drawn for seasonal working capital
requirements. Such credit facilities will mature in 2001.
The Company had cash of $5.1 million and working capital of $32.1
million at March 31, 1998, compared to cash of $4.7 million and working
capital of $35.4 million at December 31, 1997. Working capital represents
current assets (excluding cash and cash equivalents) less current liabilities
(excluding advances under the credit agreement, current maturities of
long-term debt and other long-term liabilities).
The $0.4 million increase in cash resulted from cash from operations of
$2.3 million and from net financing activities of $5.9 million less cash used
in investing activities of $7.8 million during the three months ended March 31,
1998.
Cash from operations included a $1.9 million decrease in working capital
including change in current deferred tax asset. In the same period in 1997,
working capital increased by $7.4 million as the Company resumed normal
reimbursement patterns from franchisors and normal inventory levels. The
Company has taken actions to conserve and accelerate receipt of cash in
response to an inadequate credit line that existed before the 1996
refinancing. In the first quarter of 1998, working capital reflected typical
reimbursement and inventory patterns of the Company in anticipation of the
prime selling season.
Cash used in investing activities of $7.8 million in the three months
ended March 31, 1998, is consistent with cash used in the same period of 1997
of $7.3 million. Capital expenditures for marketing equipment related to
convenience packages of soft drinks are typically concentrated in the first
part of the fiscal year. Capital expenditures of this type will be less
significant in the balance of fiscal 1998.
Financing activities in the three months ended March 31, 1998, provided
$5.9 million in cash, which represented a $2.1 million increase in
net cash provided over the $3.8 million in net cash provided in the same
period of 1997. This increase in net cash provided resulted from increased
advances pursuant to the credit agreement.
Management believes that the Company's production facilities will be
sufficient to meet anticipated unit growth for the next several years.
Accordingly, management anticipates that capital expenditures in respect of
such facilities will consist of expenditures to maintain operating
efficiency. Capital expenditures will be required primarily for the Company's
automobile and truck fleet, vending machines, and routine plant, bottling,
and canning equipment additions or maintenance. The Company currently
anticipates that capital expenditures will total approximately $15.0 million
for fiscal year 1998 and will be reduced significantly in fiscal year 1999.
8
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Management believes that the Company's future operating activities will
generate sufficient cash flows to repay borrowings under the credit agreement
as they become due and payable. However, based on such anticipated operating
results, management does not expect that the Company's future operating
activities will generate sufficient cash flows to repay in their entirety its
Senior Notes payable (with a balance of $120.0 million at March 31, 1998) at
their maturity on December 15, 2003. While management believes that the
Company will be able to refinance the Senior Notes at or prior to their
maturity, or raise sufficient funds through equity or asset sales to repay
such indebtedness, or effect a combination of the foregoing, there can be no
assurance that it will be able to do so.
The Company had Subordinated Notes payable with a balance of $43.6
million at March 31, 1998, which mature on December 23, 2003. However the
maturity of the Subordinated Notes can be extended to December 23, 2004, and
then to December 23, 2005, if any debt incurred to refinance the Company's
1993 Senior Notes is then outstanding. The Subordinated Notes have an
interest rate of 11.0% which can be paid under certain conditions with
additional Subordinated Notes ("PIK Notes"). Management expects those
conditions will exist at least until December 1998 and that it will make
payments of interest in PIK Notes to conserve cash. Management does not
expect that the Company's future operating activities will generate
sufficient cash flows to repay the Subordinated Notes at their maturity.
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.
9
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PART II
<TABLE>
<CAPTION>
ITEM 6 EXHIBITS AND REPORTS OR FORM 8-K
<S> <C>
(a) Exhibit 27.1 Financial Data Schedule
(b) Not applicable
</TABLE>
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on May 14, 1998.
DELTA BEVERAGE GROUP, INC.
By: /s/ John F. Bierbaum
--------------------------------
John F. Bierbaum
Chief Financial Officer
11
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
27.1 Financial Data Schedule
</TABLE>
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,054
<SECURITIES> 0
<RECEIVABLES> 28,745
<ALLOWANCES> 548
<INVENTORY> 17,684
<CURRENT-ASSETS> 65,075
<PP&E> 118,164
<DEPRECIATION> 57,908
<TOTAL-ASSETS> 267,303
<CURRENT-LIABILITIES> 34,180
<BONDS> 176,155
0
29,449
<COMMON> 0
<OTHER-SE> 29,590
<TOTAL-LIABILITY-AND-EQUITY> 267,303
<SALES> 75,733
<TOTAL-REVENUES> 75,733
<CGS> 53,392
<TOTAL-COSTS> 53,392
<OTHER-EXPENSES> 21,965
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,640
<INCOME-PRETAX> (4,264)
<INCOME-TAX> (2,694)
<INCOME-CONTINUING> (1,279)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,279)
<EPS-PRIMARY> (32.19)
<EPS-DILUTED> (32.19)
</TABLE>
