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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 JUNE 30, 1999
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER _________
DELTA BEVERAGE GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 75-2048317
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
2221 DEMOCRAT ROAD, MEMPHIS, TENNESSEE 38132
(Address of Principal Executive Offices, including Zip Code)
(901) 344-7100
(Registrant's Telephone Number, including Area Code)
As of August 13, 1999, the issuer had outstanding: (i) 6,344.99 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, $.01 par value.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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PART I..................................................................................... 2
ITEM 1. FINANCIAL STATEMENTS............................................ 2
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................. 8
PART II.................................................................................... 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 15
</TABLE>
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(Unaudited)
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,976 $ 3,818
Receivables, net of allowance for doubtful
accounts of $341 and $597
Trade 27,601 24,201
Marketing and advertising 3,862 7,407
Other 2,650 2,715
Inventories, at cost 19,701 16,149
Shells, tanks and pallets 6,216 6,378
Prepaid expenses and other 2,936 1,783
Deferred income taxes 4,628 4,186
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Total current assets 71,570 66,637
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PROPERTY AND EQUIPMENT:
Land 4,662 4,662
Buildings and improvements 19,562 18,732
Machinery and equipment 101,532 94,621
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125,756 118,015
Less accumulated depreciation (60,190) (56,476)
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65,566 61,539
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OTHER ASSETS:
Cost of franchises in excess of net assets
acquired, net of accumulated amortization
of $56,123 and $54,300 107,169 108,992
Deferred income taxes 21,169 21,071
Deferred financing costs and other 15,134 13,413
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143,472 143,476
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$280,608 $271,652
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</TABLE>
The accompanying notes are an integral part of these balance sheets.
2
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DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(Unaudited)
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LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt
and other liabilities $ 149 $ 240
Accounts payable 16,087 14,038
Accrued liabilities 17,433 16,274
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Total current liabilities 33,669 30,552
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LONG-TERM DEBT AND OTHER LIABILITIES 186,513 180,490
MINORITY INTEREST 3,563 3,600
SHAREHOLDERS' EQUITY:
Preferred stock:
Series AA, $5,000 stated value, 30,000 shares
authorized, 6,344.99 and 6,158.84 shares
issued and outstanding 31,725 30,794
Common stock:
Voting, $.01 par value, 60,000 shares authorized,
20,301.87 shares issued and outstanding --- ---
Nonvoting, $.01 par value, 35,000 shares authorized,
32,949.93 shares issued and outstanding --- ---
Additional paid-in capital 115,765 115,765
Accumulated deficit (90,626) (89,547)
Deferred compensation (1) (2)
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56,863 57,010
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$ 280,608 $ 271,652
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</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
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DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ---------------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
OPERATIONS:
Net sales $ 96,487 $ 96,045 $ 177,742 $ 171,778
Cost of sales 65,677 65,867 121,979 119,259
--------- --------- --------- ---------
Gross profits 30,810 30,178 55,763 52,519
Selling, general and administrative
expenses 22,739 22,369 44,595 43,368
Amortization of franchise costs and other
intangibles 912 912 1,824 1,824
--------- --------- --------- ---------
Operating income 7,159 6,897 9,344 7,327
--------- --------- --------- ---------
OTHER EXPENSES:
Interest 4,908 4,718 9,618 9,358
Other, net 61 3 74 57
--------- --------- --------- ---------
4,969 4,721 9,692 9,415
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INCOME (LOSS) BEFORE INCOME
TAXES AND MINORITY INTEREST 2,190 2,176 (348) (2,088)
Income tax (provision) benefit (4,152) (1,430) 129 1,264
Minority interest, net of taxes (117) (77) 71 214
--------- --------- --------- ---------
NET INCOME (LOSS) $ (2,079) $ 669 $ (148) $ (610)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
4
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DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30
Unaudited
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (148) $ (610)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 7,625 6,558
Non-cash interest on long-term debt 3,138 2,879
Change in deferred income taxes (540) (1,076)
Minority interest, before taxes (37) (258)
Net expense under deferred compensation plans 64 529
Changes in current assets and liabilities:
Receivables 210 (3,573)
Inventories (3,552) 41
Shells, tanks and pallets 162 (50)
Prepaid expenses and other (1,153) (2,058)
Accounts payable and accrued liabilities 3,067 5,992
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Net cash provided by operating activities 8,836 8,374
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,630) (10,928)
Payments for exclusive beverage pouring rights (3,182) (2,164)
Proceeds from sales of property and equipment 41 37
Other (26) (21)
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Net cash used in investing activities (11,797) (13,076)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit 13,800 10,000
Payments on revolving line of credit (10,500) (4,500)
Principal payments on long-term debt and other liabilities (181) (141)
Cash distribution to minority interest holder --- (342)
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Net cash provided by financing activities 3,119 5,017
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NET CHANGE IN CASH AND CASH EQUIVALENTS 158 315
CASH AND CASH EQUIVALENTS, beginning of period 3,818 4,680
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CASH AND CASH EQUIVALENTS, end of period $ 3,976 $ 4,995
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</TABLE>
The accompanying notes are an integral part of these statements.
5
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DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements of
Delta Beverage Group, Inc. ("Delta," a Delaware corporation) and subsidiary
(collectively, the "Company") 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 June 30,
1999, 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 Company's
audited consolidated financial statements and related notes thereto for the
year ended December 31, 1998. 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 shareholders 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 six months ended June 30, 1999, the Company
issued additional preferred shares as payment-in-kind dividends on preferred
stock of approximately $0.9 million. The additional preferred shares are
included in shareholders' equity as of June 30, 1999.
3. LONG-TERM DEBT AND OTHER LIABILITIES:
The Company maintains subordinated notes payable due in December
2003. 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.
During the six months ended June 30, 1999, the Company issued additional
subordinated notes of approximately $2.7 million. These additional notes bear
interest at 11% and are included in long-term debt and other liabilities in
the accompanying June 30, 1999 consolidated balance sheet.
The Company maintains a $30.0 million bank revolving line of credit
which matures on December 16, 2001. The line of credit includes a swing line
facility of up to $2.5 million. Swing line loans bear interest at either the
base rate (defined below) or an otherwise mutually agreed upon rate of
interest. Interest on remaining amounts outstanding under the line of credit
bear 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%
(the "base rate"). 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 also 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 $8.9 million as of June 30, 1999,
including $2.5 million under the swing line facility.
6
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4. INVENTORIES:
Inventories included the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
(UNAUDITED)
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Raw materials $ 4,291 $ 3,116
Finished goods 15,410 13,033
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$ 19,701 $ 16,149
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</TABLE>
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS DESCRIBES CERTAIN FACTORS
AFFECTING THE RESULTS OF OPERATIONS OF DELTA BEVERAGE GROUP, INC. (THE
"COMPANY") FOR THE FISCAL QUARTER AND SIX MONTHS ENDED JUNE 30, 1999 AND ITS
FINANCIAL CONDITION AS OF JUNE 30, 1999. 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, 1998.
CERTAIN OF THE STATEMENTS IN THE FOLLOWING DISCUSSION CONSTITUTE
FORWARD-LOOKING STATEMENTS WHICH ARE MADE PURSUANT TO THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. VARIOUS
FACTORS MAY CAUSE ACTUAL RESULTS OF OPERATIONS AND FINANCIAL CONDITION TO
VARY SIGNIFICANTLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENT MADE
HEREIN OR IN OTHER REPRESENTATIONS MADE BY THE COMPANY'S MANAGEMENT OR BY
OTHERS ON BEHALF OF THE COMPANY. PLEASE REFER TO THE COMPANY'S ANNUAL REPORT
ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 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.
During the second quarter of 1999, the Company announced an
agreement in principle to combine with two Pepsi-Cola bottlers, Pepsi-Cola
Puerto Rico Bottling Company ("PPR") and Dakota Beverage Company, Inc. The
three companies generated combined revenues in 1998 of approximately $530
million. PepsiCo, Inc. (NYSE: PEP) will hold a 24% equity interest in the
combined company. The combined company will be PepsiCo's third largest anchor
bottler. The Company filed a copy of the Exchange Agreement, pursuant to
which it will become a subsidiary of PPR, as an exhibit to its report on Form
8-K filed on July 14, 1999. All three companies have been under common
management since Pohlad Companies of Minneapolis, Minnesota purchased a
controlling interest in PPR in July 1998, through a joint venture with
PepsiCo. Completion of the transaction is subject to a number of conditions,
including the approval of PPR's shareholders and franchisor consents.
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. Contract sales 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.
8
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RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1999 COMPARED TO QUARTER ENDED JUNE 30, 1998
Net sales, excluding contract sales, for the three months ended June
30, 1999 increased by 1.2% to $85.7 million compared to $84.8 million for the
same period in 1998. The increase was due to a 4.9% increase in franchise
case sales volume, primarily of the Company's take-home packages of soft
drinks, offset by a decrease in average net sales pricing per franchise case
of approximately 4.3%. The decrease in average selling price was due to an
increase in the proportion of take-home packages as compared to total volume
and an increase in support given to retailers featuring those packages. In
addition, the average selling price of single serve packages of soft drinks
increased as the result of continued expanded placement of marketing
equipment. Contract net sales for the three months ended June 30, 1999
decreased 4.8% compared to the same period in 1998. The decrease was
primarily due to a shift in sales mix volume from two liter bottles to cans.
Contract net sales represented 11.1% of net sales for the three months ended
June 30, 1999, compared to 11.8% of net sales for the same period in 1998. As
a result of the foregoing, aggregate net sales for the three months ended
June 30, 1999 increased 0.5% to $96.5 million compared to $96.0 million for
the same period in 1998.
Cost of sales for the three months ended June 30, 1999 decreased to
$65.7 million compared to $65.9 million for the same period in 1998. The
decrease was primarily due to lower cost of packaging and the effect of
higher volume on manufacturing overhead. As a percentage of net sales, cost
of sales for the three months ended June 30, 1999 decreased to 68.1% compared
to 68.6% for the same period in 1998. The improved margin associated with the
single-serve packages of soft drinks and the increase in soft drink franchise
case sales resulted in gross profit for the three months ended June 30, 1999
of $30.8 million or 2.1% more than the gross profit of $30.2 million for the
same period in 1998.
Selling, general and administrative expenses for the three months
ended June 30, 1999 increased to $22.7 million compared to $22.4 million for
the same period in 1998. Selling, general and administrative expenses are
comprised of selling, distribution and warehousing expenses, advertising and
marketing expenses, and general and administrative expenses ("G&A"). G&A
increased by $0.2 million due primarily to increased personnel and insurance
costs. All expenses grew at a rate less than volume growth.
As a result of the above factors, income from operations for the
three months ended June 30, 1999 increased to $7.2 million, or 7.4% of net
sales, compared to $6.9 million, or 7.2% of net sales, for the same period in
1998.
Interest expense for the three months ended June 30, 1999 increased
to $4.9 million from $4.7 million for the same period in 1998. The increase
was due primarily to the additional interest associated with additional PIK
Notes issued by the Company to pay the interest on the Subordinated Notes.
The Company had income before income taxes and minority interest of
$2.2 million for the three months ended June 30, 1999 which was consistent
with the same period in 1998.
The Company's effective income tax rate differs from statutory rates
due to several factors. The most significant factors are the
non-tax-deductibility of franchise cost amortization and separate reporting
of the income tax effect of minority interest. For interim periods, income
tax expense and benefit are provided at the effective rate projected for a
full fiscal year.
As a result of the foregoing factors, the Company had a net loss of
$2.1 million for the three months ended June 30, 1999 compared to net income
of $0.7 million for the same period in 1998.
9
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SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net sales, excluding contract sales, for the six months ended June
30, 1999 increased by 3.5% to $157.2 million compared to $151.9 million for
the same period in 1998. The increase was due primarily to a 7.5% increase in
soft-drink franchise case sales. There was strong consumer demand for the
Company's soft drink products in single-serve packages which was the result
of expanded placement of single-serve marketing equipment. The effect of the
demand for single-serve packages was, however, partially offset by the effect
of competition on net pricing in the Company's take-home soft drink packages.
Contract net sales for the six months ended June 30, 1999 increased 2.9%
compared to the same period in 1998. As a result of the foregoing, aggregate
net sales for the six months ended June 30, 1999 increased 3.5% to $177.7
million compared to $171.8 million for the same period in 1998.
Cost of sales for the six months ended June 30, 1999 increased to
$122.0 million compared to $119.3 million for the same period in 1998. The
increase was due primarily to the 7.5% increase in franchise case sales as
well as the higher unit cost of purchasing beer from breweries. As a
percentage of net sales, cost of sales for the six months ended June 30, 1999
decreased to 68.6% compared to 69.4% for the same period in 1998. The
improved margin associated with single-serve packages of soft drinks and the
increase in soft drink franchise case sales resulted in gross profit for the
six months ended June 30, 1999 of $55.8 million or 6.2% greater than the
gross profit of $52.5 million for the same period in 1998.
Selling, general, and administrative expenses for the six months
ended June 30, 1999 increased to $44.6 million compared to $43.4 million for
the same period in 1998. Selling and distribution expenses increased by $0.4
million due to the placement of equipment dedicated to single-serve packages
of soft drinks. G&A increased by $0.8 million due primarily to increased
personnel and insurance costs.
As a result of the above factors, income from operations for the six
months ended June 30, 1999 increased to $9.3 million, or 5.3% of net sales,
from $7.3 million, or 4.3% of net sales, for the same period in 1998. 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 quarters of each fiscal year.
Interest expense for the six months ended June 30, 1999 increased to
$9.6 million from $9.4 million for the same period in 1998. The increase was
due primarily to the additional interest associated with additional PIK Notes
issued by the Company to pay the interest on the Subordinated Notes.
As a result of the above factors, the Company had a loss before
income taxes and minority interest of $0.3 million for the six months ended
June 30, 1999, compared to a loss before income taxes and minority interest
of $2.1 million for the same period in 1998.
The Company's effective income tax rate differs from statutory rates
due to several factors. The most significant factors are the
non-tax-deductibility of franchise cost amortization and separate reporting
of the income tax effect of minority interest. For interim periods, income
tax expense and benefit are provided at the effective rate projected for a
full fiscal year.
As a result of the foregoing factors, the Company had a net loss of
$0.1 million for the six months ended June 30, 1999, compared to a net loss
of $0.6 million for the same period in 1998.
10
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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 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 June 30, 1999, letters of credit of $8.5 million had
been issued and $8.9 million had been drawn on the line of credit for
seasonal working capital requirements. The credit facility will mature in
2001.
The Company had cash of $4.0 million and working capital of $34.1
million at June 30, 1999, compared to cash of $3.8 million and working
capital of $32.5 million at December 31, 1998. 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).
The $0.2 million increase in cash from December 31, 1998 to June 30,
1999 resulted from net cash provided by operations of $8.8 million, augmented
by $3.1 million provided by net financing activities, less cash used by
investing activities of $11.8 million. The cash provided by operations was
net of a $1.6 million increase in working capital. In the same period in
1998, cash increased by $0.3 million resulting from net cash provided by
operations of $8.4 million and from net financing activities of $5.0 million
less cash used by investing activities of $13.1 million.
Cash used in investing activities of $11.8 million in the six months
ended June 30, 1999 represented a $1.3 million decrease from cash used in the
same period of 1998. The higher amount in 1998 was primarily for marketing
equipment related to single-serve packages of soft drinks.
Financing activities in the six months ended June 30, 1999 provided
$3.1 million in net cash, which represented a $1.9 million decrease over the
$5.0 million in net cash provided in the same period of 1998. This decrease
in net cash provided resulted primarily from credit agreement advances of
approximately $7.0 million less credit agreement payments of approximately
$4.5 million. The lower level of capital expenditures required less reliance
on the credit agreement in 1999.
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 with respect to
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 six months ended
June 30, 1999 and 1998, capital expenditures totaled $8.6 million and $10.9
million, respectively. The Company anticipates that capital expenditures will
total approximately $12.5 million for fiscal year 1999.
Management believes that the Company's future operating activities
will generate sufficient cash flows to repay borrowings under the credit
agreement as they become due and payable. However, based on such anticipated
operating results, management does not expect that the Company's future
operating activities will generate sufficient cash flows to repay in their
entirety its Senior Notes payable (with a balance of $120.0 million at June
30, 1999) 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.
11
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The Company has Subordinated Notes payable with a balance of $51.2
million at June 30, 1999 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 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 PIK
Notes. Management expects those conditions will exist at least until December
1999 and that it will make payments of interest in PIK Notes to conserve
cash. Management does not expect that the Company's future operating
activities will generate sufficient cash flows to repay the Subordinated
Notes at their maturity. While management believes that the Company will be
able to refinance the Subordinated Notes, including any PIK Notes, at or
prior to their maturity, or raise sufficient funds through equity or asset
sales to repay such indebtedness, or effect a combination of the foregoing,
there can be no assurance that it will be able to do so.
YEAR 2000 READINESS DISCLOSURE
The term "Year 2000" is used to describe general problems that may
result from improper processing of dates and date-sensitive calculations by
computers or other machinery as the year 2000 is approached and reached. This
problem stems from the fact that many of the world's computer hardware and
software applications have historically used only the last two digits to
refer to a year. As a result, many of these computer programs do not or will
not properly recognize a year that begins with "20" instead of the familiar
"19." If not corrected, many computer applications could fail or create
erroneous results.
The risks from this date change are both internal and external and
can potentially affect the Company's production, distribution and
administrative systems and the Company's customers, suppliers of raw
materials, utilities and distribution services. Year 2000 related problems
could prevent customers from accepting deliveries from the Company or
processing payments for amounts due to the Company. Suppliers may be
prevented from producing and supplying goods or services essential to the
Company's business.
STATE OF READINESS
PepsiCo distributed to its franchisees its Year 2000 compliance
plan, which the Company used as a framework for the development and
implementation of its own Year 2000 compliance. The Company evaluated its
information technology ("IT") systems for Year 2000 compliance. The Company
also assessed its non-IT systems (i.e. embedded technology such as
microprocessors in manufacturing and other equipment). The Company completed
its assessment of the IT and non-IT systems, the only outstanding items are
HVAC, copiers and fax machines.
Currently, the Company is modifying both IT and non-IT systems to
make them Year 2000 compliant. In instances where modifications have been
completed or were not required, the Company is testing the systems to ensure
Year 2000 compliance.
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 by year end. The Company also relies on
third party suppliers for raw materials. The Company has contacted each of its
critical suppliers to assess their readiness and to determine the extent to
which the Company
12
<PAGE>
may be vulnerable to such parties' failure to resolve their own Year 2000
issues. Due to delays in receiving responses from suppliers, the Company now
expects this effort to be completed by September 30, 1999.
COSTS TO ADDRESS YEAR 2000 ISSUES
The Company does not expect the cost of becoming Year 2000 compliant
to be material to its consolidated financial condition or results of
operations. This is due, in part, to the Company's recent significant
upgrades to its data communication network and key data processing hardware,
all of which are Year 2000 compliant.
RISKS OF YEAR 2000 ISSUES
The Company recognizes that Year 2000 issues constitute a material
known uncertainty. The Company also recognizes the importance of ensuring
that Year 2000 issues will not adversely affect its operations. The Company
believes that the processes described above will be effective to manage the
risks associated with the problem. However, there can be no assurance that
the processes can be completed on the timetable described above or that
remediation will be fully effective. The failure to identify and remediate
Year 2000 issues, or the failure of key vendors, suppliers or other critical
third parties who do business with the Company to timely remediate their Year
2000 issues could cause an interruption in the business operations of the
Company. At this time, however, the Company does not possess information
necessary to estimate the overall potential financial impact of Year 2000
compliance issues.
The Company's worst case scenario would be the temporary inability
of suppliers to provide supplies of raw materials to the Company. The
inability of the Company's suppliers to be Year 2000 ready could result in
delays in product manufacturing and delivery, thereby adversely affecting the
business or operations of the Company. The Company believes, however, that in
a worst case scenario any disruption in supply materials can be minimized by
relying on inventories or shifting production to unaffected plants with some
increase in distribution costs.
CONTINGENCY PLANS
The Company recognizes the need for Year 2000 contingency plans in
the event that remediation is not fully successful or that the remediation
efforts of its vendors and suppliers are not timely completed. The Company
plans to address contingency planning during calendar 1999. Such plans will
include building inventories of raw materials and finished goods in advance
of January 1, 2000 to protect against supply and production disruptions. To
the extent that the Company's vendors and suppliers are unable to provide
sufficient evidence of Year 2000 readiness by September 30, 1999, the Company
will seek to arrange for their replacement. Additionally, the Company is
developing manual processes to replace electronic applications in the event
of their failure. Finally, the Company is working with its customers to build
customer inventory levels at year-end as a contingency against company or
customer Year 2000 failure.
13
<PAGE>
DISCLOSURES ABOUT MARKET RISK
The Company uses financial instruments, including fixed and variable
rate debt, to finance operations, for capital expenditures and for general
corporate purposes. The Company's exposure to market risk for changes in
interest rates relates primarily to short and long term debt obligations. The
Company does not use derivative financial instruments or engage in trading
activities. There have been no significant changes in the Company's exposure
to market risk for changes in interest rates during the six months ended June
30, 1999.
14
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS OR FORM 8-K
(a) Exhibit 27.1 - Financial Data Schedule
(b) The Company filed the following report on Form 8-K with the SEC
during the quarter for which this report is filed:
1. The Company's Current Report on Form 8-K, filed on June 28,
1999, relating to the agreement in principle to combine with
Pepsi-Cola Puerto Rico Bottling Company.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on August 13, 1999.
DELTA BEVERAGE GROUP, INC.
By: /S/ JOHN F. BIERBAUM
----------------------------
John F. Bierbaum
Chief Financial Officer
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,976
<SECURITIES> 0
<RECEIVABLES> 27,942
<ALLOWANCES> 341
<INVENTORY> 19,701
<CURRENT-ASSETS> 71,570
<PP&E> 125,756
<DEPRECIATION> 60,190
<TOTAL-ASSETS> 280,608
<CURRENT-LIABILITIES> 33,669
<BONDS> 186,662
0
31,725
<COMMON> 0
<OTHER-SE> 25,138
<TOTAL-LIABILITY-AND-EQUITY> 280,608
<SALES> 177,742
<TOTAL-REVENUES> 177,742
<CGS> 121,979
<TOTAL-COSTS> 168,398
<OTHER-EXPENSES> 9,692
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,618
<INCOME-PRETAX> (348)
<INCOME-TAX> 129
<INCOME-CONTINUING> (148)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (148)
<EPS-BASIC> (20.26)
<EPS-DILUTED> (20.26)
</TABLE>
