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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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, 1998
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER _______
DELTA BEVERAGE GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 75-2048317
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
2221 DEMOCRAT ROAD, MEMPHIS, TENNESSEE 38132
(Address of Principal Executive Offices, including Zip Code)
(901) 344-7100
(Registrant's Telephone Number, including Area Code)
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 15, 1999, the Registrant had outstanding: (i) 6,158.84
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, $0.01 par value.
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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............27
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................28
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........................................................53
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................54
PART IV...............................................................................57
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......57
SIGNATURES............................................................................59
INDEX TO EXHIBITS.....................................................................60
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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, 1998, the Company had
total consolidated outstanding long term debt of approximately $180.7
million, of which approximately $132.1 million was Senior Indebtedness (as
defined herein) and approximately $48.6 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, 1998, 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
$5.6 million was drawn upon and $8.5 million had been issued, respectively.
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 interest on its outstanding indebtedness as well
as for 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
that in order to pay the principal balance of
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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, 1998, 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 $5.6
million was drawn upon and $8.5 million had been issued, respectively. 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, 1998, the
Company had approximately $155,000 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, 1998, 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,
1998, the aggregate amount of indebtedness of the Company's subsidiary to
which the holders of the Notes were effectively subordinated was
approximately $3.1 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, 1998, approximately 79% 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 81%
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 1998, Anheuser- Busch products accounted for 46% of total U.S.
beer sales, while sales of Miller products, the Company's primary brewer,
accounted for 21% 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, 1998, the Company had approximately 1,760 full-time
employees and 50 part-time employees. Approximately 145 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 2000 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 160
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 March 1999. The second
contract expires in December 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 55%
of the Company's sales by volume occur from April to September and
approximately 45% 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
THE FOLLOWING DESCRIPTION OF THE COMPANY'S BUSINESS 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.
GENERAL
The Company is one of the largest soft drink manufacturers and
distributors in the U.S., selling over 27.9 million hard cases of PepsiCo
products and 7.3 million hard cases of other soft drinks in 1998. 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
31.4% of all soft drink sales in 1998. In 1998, net sales for the Company
totaled $352.1 million and EBITDA was $29.9 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 1998, for example,
PepsiCo spent in excess of $165 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 1998, the Company's case
volume and operating profit grew at compound annual rates of 106% and 108%,
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 $5.6 million was drawn upon and $8.5
million had been issued, respectively, at December 31, 1998. 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,
andthe 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 six years, the Company has invested approximately $6.4
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
PEPSI ONE DIET 7UP
CAFFEINE FREE PEPSI CHERRY 7UP
DIET PEPSI CANADA DRY
CAFFEINE FREE DIET PEPSI COUNTRY TIME
WILD CHERRY PEPSI CRYSTAL LIGHT
MOUNTAIN DEW CRUSH
DIET MOUNTAIN DEW
SLICE OTHER PRODUCTS
MUG ROOT BEER
LIPTON ICE TEA HAWAIIAN PUNCH
OCEAN SPRAY SUNNY DELIGHT
ALL SPORT NUGRAPE
AQUAFINA YOO-HOO
FRAPPUCCINO
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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 1998, approximately 53% of the Company's soft drink products were
sold to supermarkets, 25% to convenience stores, gas stations and small
grocery stores, 9% to drug stores and mass merchants, 4% to third party
operators and full service vending accounts and 9% 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 1998, approximately 40% of the Company's beer products were sold to
supermarkets, 23% to on- premise channels such as restaurants and bars, 22% to
convenience stores, 8% to drug stores and mass merchants
and 7% 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 42.1 million cases of soft drinks in 1998 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 63% 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 46% of total U.S. beer sales in 1998. Sales of Miller
products in the same time period represented 21% 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. 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, 1998, the Company had approximately 1,760 full-time
employees and 50 part-time employees. Approximately 145 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 2000 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 160
of the Company's employees at its Harahan, Louisiana, facility
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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 March 1999.
The second contract expires in December 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. As of December 31, 1998, the Company also
operated 24 warehouse distribution facilities from which it conducts its
sales, delivery and vending operations. The Company owned 15 of the warehouse
distribution facilities and leased 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, 1994, 1995, 1996, 1997 and 1998. 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
---------------------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................... $ 245,472 $ 284,709 $ 312,284 $ 323,221 $ 352,085
Cost of sales..................... 162,667 198,777 215,085 216,560 245,683
------- ------- ------- ------- -------
Gross profit...................... 82,805 85,932 97,199 106,661 106,402
Selling, general and
administrative expenses........ 62,710 71,802 76,883 83,344 87,019
Amortization of franchise costs
and other intangibles.......... 3,631 3,576 3,664 3,648 3,648
------- ------- ------- ------- -------
Income from operations............ 16,464 10,554 16,652 19,669 15,735
Interest expense ................. 12,152 13,254 15,094 17,865 18,770
Other expenses (income)........... (45) 75 620 (32) 175
------- ------- ------- ------- -------
Income (loss) before income taxes. 4,357 (2,775) 938 1,836 (3,210)
Income tax expense(1)............. (3,262) (1,641) (1,745) (2,040) (436)
Minority interest in Joint Venture(2) - 464 48 65 335
----------- -------- --------- -- ---
Income (loss) before
non-recurring items............ 1,095 (3,952) (759) (139) (3,311)
Non-recurring items(3)............ - - (1,519) - -
- - ------ - -
------- ------- ------- ------- -------
Net income (loss)................. $ 1,095 $ (3,952) $ (2,278) $ (139) $ (3,311)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital(4)................ $ 30,421 $ 27,547 $ 23,698 $ 35,404 $ 32,507
Total assets...................... 244,705 248,437 255,327 260,914 271,652
Long-term debt(5):
Senior debt.................... 106,000 117,250 120,000 120,000 125,600
Subordinated notes payable..... 31,650 35,227 39,209 43,640 48,573
Other.......................... 6,579 5,673 5,067 6,764 6,557
Stockholders' equity.............. 66,660 62,718 60,449 60,317 57,010
OTHER DATA:
EBITDA(6)......................... $ 25,594 $ 20,730 $ 26,248 $ 30,855 $ 29,870
Depreciation and amortization..... 9,085 9,687 10,314 11,441 13,938
Capital expenditures.............. 7,104 10,726 8,964 14,988 14,885
</TABLE>
- --------------
(1) The effective income tax rate is significantly impacted by the non-tax
deductibility of amortization of franchise
costs.
(2) Represents minority interest in the net income (loss) of the Joint
Venture which is consolidated with the Company.
(3) 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.
(4) 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).
(5) Includes current maturities of long-term debt.
20
<PAGE>
(6) 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.
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 ($112.6 million and
$109.0 million, each net of accumulated amortization, at December 31, 1997
and December 31, 1998, 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 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
21
<PAGE>
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, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net sales, excluding contract net sales, for the year ended December 31,
1998 increased by 3.7% to $307.2 million compared to $296.1 million for the
same period in 1997. The increase was due primarily to a 4.5% increase in
franchise case sales, of which (i) 4.0% was attributable to increased sales
of the Company's soft drink products including an increase in average unit
selling price of 0.7% and (ii) 0.5% was attributable to increased sales of
the Company's beer products including a 1.2% increase in average unit selling
prices. The majority of the increase in soft drink franchise case sales came
in single-serve packages and also in take home soft drinks. Pricing for soft
drink packages overall in 1998 was relatively consistent with 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, 1998 increased 55.5% compared to the same period
in 1997 due to the addition of bottled product requirements for an existing
can product customer. As a result of the foregoing, net sales for the year
ended December 31, 1998 increased 8.9% to $352.1 million compared to $323.2
million for the same period in 1997.
Cost of sales for the year ended December 31, 1998 increased to $245.7
million compared to $216.6 million for the same period in 1997. 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, 1998 increased to 69.8% compared to 67.0% for the same
period in 1997 due primarily to the effect of the substantial increase in
contract net sales. As a result of the foregoing, gross profit for the year
ended December 31, 1998 was $106.4 million compared to $106.7 million for the
same period in 1997.
Selling, general and administrative expenses for the year ended December
31, 1998 increased to $87.0 million compared to $83.3 million for the same
period in 1997. Selling, general and administrative expenses are comprised of
selling, distribution and warehousing expenses ("S&D"), advertising and
marketing expenses ("A&M"), and general and administrative expenses ("G&A").
All categories grew at a rate consistent with franchise case sales growth.
Thus, the effect of leveraging fixed costs against higher unit volumes was
partially offset by increases in S&D due to expenses related to and the
placement of equipment dedicated to single-serve packages of soft drinks.
As a result of the above factors, income from operations for the year
ended December 31, 1998 decreased to $15.7 million, or 4.5% of net sales,
compared to $19.7 million, or 6.1% of net sales, for the same period in 1997.
Interest expense for the year ended December 31, 1998 increased to
$18.8 million from $17.9 million for
22
<PAGE>
the same period in 1997. The increase was due primarily to higher utilization
of the Company's credit facility and the effect of payment in kind of
interest on the subordinated debt.
As a result of the above factors, the Company realized a loss before
income taxes and minority interest of ($3.2) million for the year ended
December 31, 1998 compared to income of $1.8 million for the same period in
1997.
The Company's effective income tax rate differs from statutory rates
primarily due to the non-tax deductibility of franchise cost amortization.
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 9.8% 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. 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. 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.
23
<PAGE>
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 $0.9 million for the same period in 1996.
The Company's effective income tax rate differs from statutory rates
primarily due to the non-tax deductibility of franchise cost amortization.
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, 1998, letters of credit of $8.5 million had been issued and
$5.6 million had been drawn on the Credit Agreement. The credit facility will
mature in 2001.
The Company had cash of $3.8 million and working capital of $32.5
million at December 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 and current maturities of
long-term debt and other liabilities).
The $0.9 million decrease in cash from December 31, 1997 to December 31,
1998 resulted from net cash provided by operations of $17.0 million less cash
used in investing activities of $22.6 million plus cash provided by financing
activities of $4.7 million during the year. The cash provided by operations
in 1998 was $6.9 million greater than provided in 1997 due principally to a
reversal in the growth of working capital. In 1997, working capital grew
$10.2 million and in 1998 decreased by $0.6 million primarily due to changes
in inventory and current liabilities.
Cash used in investing activities of $22.6 million in the year ended
December 31, 1998 was a $6.4 million increase over the cash used during 1997.
Cash used in investing activities included capital expenditures of $14.9
million in the year ended December 31, 1998, a $0.1 million decrease from
1997, and included $7.5 million used for expenditures to secure long-term
marketing relationships.
Financing activities in the year ended December 31, 1998 provided $4.7
million in net cash which represented a $6.2 million increase over the $1.5
million in net cash used in the same period in 1997. This increase in net
cash provided resulted primarily from net credit agreement advances of
approximately $5.6 million.
Management believes that the Company's production facilities will be
sufficient to meet anticipated unit growth for the next several years.
Accordingly, management anticipates 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, 1998 and 1997, capital expenditures totaled $14.9 million and
$15.0 million, respectively. The Company anticipates that capital expenditures
will be reduced in fiscal year 1999.
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
24
<PAGE>
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 $48.6
million at December 31, 1998 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 June 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
The Company is currently in the process of evaluating its information
technology ("IT") systems for Year 2000 compliance. PepsiCo has distributed
to its franchisees its Year 2000 compliance plan, which the Company has used
as a framework for the development and implementation of its own Year 2000
compliance. The Company is also in the process of assessing its non-IT
systems (i.e. embedded technology such as microprocessors in manufacturing
and other equipment). The Company plans to complete its assessment by April
15, 1999 and will then determine the best approach for remedying any
non-compliant system.
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
also relies on third party suppliers for raw materials. The Company is in the
process of contacting each of its critical suppliers to assess the readiness
of such suppliers and to determine the extent to which the Company may be
vulnerable to such parties' failure to resolve their own Year 2000 issues.
This effort is expected to be completed by June 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.
25
<PAGE>
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 most likely potential risk with regard to Year 2000 issues
is 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.
INFLATION
There was no significant impact on the Company's operations as a result
of inflation during the fiscal year ended December 31, 1998, or during the
years ended December 31, 1997 or 1996.
26
<PAGE>
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
The table below summarizes the principal cash flows of the Company's
financial instruments outstanding at December 31, 1998, categorized by the
type of instrument and year of maturity.
(Dollars in thousands)
<TABLE>
<CAPTION> There- Fair
1999 2000 2001 2002 2003 after Total Value
----- ---- ---- ---- ---- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents-
Deposit and money market
accounts $ 3,818 $ - $ - $ - $ - $ - $ 3,818 $ 3,818
Long term debt-
Senior notes payable (interest
at 9.75%) -- -- -- -- 120,000 -- 120,000 123,501
Subordinated notes payable
(interest at 11%) -- -- - -- 48,573 -- 48,573 51,702
Revolving line of credit-
Swing line facility (7%
average interest rate) -- -- 2,500 -- -- -- 2,500 2,500
All other (10.8% average
interest rate) -- -- 3,100 -- -- -- 3,100 3,100
Other current and long term debt 240 154 34 -- -- 6,129 6,557 6,557
</TABLE>
27
<PAGE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY PAGE
- ----------------------------------------- ----
<S> <C>
AUDITED FINANCIAL STATEMENTS
Report of Independent Public Accountants................................... 29
Consolidated Balance Sheets as of December 31, 1997 AND 1998............... 30
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 AND 1998........................................... 32
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1997 AND 1998........................................... 33
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 AND 1998........................................... 34
Notes to Consolidated Financial Statements................................. 35
</TABLE>
28
<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, 1997 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three year
period ended December 31, 1998. 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, 1997 and 1998, and the results of their
operations and their cash flows for each of the years in the three year
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/S/ ARTHUR ANDERSEN LLP
Memphis, Tennessee,
March 2, 1999.
29
<PAGE>
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS 1997 1998
------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,680 $ 3,818
Receivables, net of allowance for doubtful
accounts of $562 and $597
Trade 19,644 24,201
Marketing and advertising 7,228 7,407
Other 2,924 2,715
Inventories, at cost 18,153 16,149
Shells, tanks and pallets 6,340 6,378
Prepaid expenses and other 986 1,783
Deferred income taxes 5,747 4,186
------ ------
Total current assets 65,702 66,637
------ ------
PROPERTY AND EQUIPMENT:
Land 4,639 4,662
Buildings and improvements 16,286 18,732
Machinery and equipment 90,211 94,621
------ -------
111,136 118,015
Less accumulated depreciation and amortization (55,880) (56,476)
------- -------
55,256 61,539
------- -------
OTHER ASSETS:
Cost of franchises in excess of net assets
acquired, net of accumulated amortization
of $50,652 and $54,300 112,634 108,992
Deferred income taxes 19,481 21,071
Deferred financing costs and other 7,841 13,413
------- -------
139,956 143,476
------- -------
$260,914 $ 271,652
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
30
<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 1997 1998
------------------------------------ ----------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt and other liabilities $ 215 $ 240
Accounts payable 9,530 14,038
Accrued liabilities 16,088 16,274
---------- --------
Total current liabilities 25,833 30,552
---------- --------
LONG-TERM DEBT AND OTHER LIABILITIES 170,189 180,490
MINORITY INTEREST 4,575 3,600
COMMITMENTS AND CONTINGENCIES (Notes 9 and 12)
STOCKHOLDERS' EQUITY:
Preferred stock-
Series AA, $5,000 stated value, 30,000 shares authorized, 5,802.77 and
6,158.84 shares issued and
outstanding 29,014 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 (84,456) (89,547)
Deferred compensation (6) (2)
---------- --------
60,317 57,010
---------- --------
$260,914 $271,652
---------- --------
---------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
31
<PAGE>
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
OPERATIONS:
Net sales $312,284 $ 323,221 $ 352,085
Cost of sales 215,085 216,560 245,683
--------- ----------- ------------
Gross profit 97,199 106,661 106,402
Selling, general and administrative expenses 76,883 83,344 87,019
Amortization of franchise costs and other intangibles 3,664 3,648 3,648
--------- ----------- ------------
Operating income 16,652 19,669 15,735
--------- ----------- ------------
OTHER EXPENSES (INCOME):
Interest 15,094 17,865 18,770
Other, net 620 (32) 175
--------- ----------- ------------
15,714 17,833 18,945
--------- ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES,
MINORITY INTEREST AND EXTRAORDINARY
ITEM 938 1,836 (3,210)
Income tax provision (1,745) (2,040) (436)
Minority interest, net of taxes 48 65 335
--------- ----------- ------------
LOSS BEFORE EXTRAORDINARY ITEM (759) (139) (3,311)
Extraordinary item - loss on extinguishment
of debt, net of income tax benefit of $953 (1,519) - -
--------- ----------- ------------
NET LOSS $ (2,278) $ (139) $ (3,311)
--------- ----------- ------------
--------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
32
<PAGE>
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(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>
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 --
Preferred stock dividends 356.07 1,780 -- -- -- --
Recognition of expense under
deferred compensation plan -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- -------- ---------- ------- --------- ------
BALANCE AT DECEMBER 31, 1998 6,158.84 $ 30,794 20,301.87 $ -- 32,949.93 $ --
--------- -------- ---------- ------- --------- ------
--------- -------- ---------- ------- --------- ------
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-in Accumulated Deferred
Capital Deficit Compensation Total
---------- ----------- ------------ -------
<S> <C> <C> <C> <C>
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
Preferred stock dividends -- (1,780) -- --
Recognition of expense under
deferred compensation plan -- -- 4 4
Net loss -- (3,311) -- (3,311)
---------- ----------- ------------ -------
BALANCE AT DECEMBER 31, 1998 $115,765 $ (89,547) $ (2) $ 57,010
---------- ----------- ------------ -------
---------- ----------- ------------ -------
</TABLE>
The accompanying notes are an integral part of these statements.
33
<PAGE>
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,278) $ (139) $ (3,311)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 10,314 11,441 13,938
Noncash interest on long-term debt 4,891 5,514 5,884
Write-off of deferred financing fees 2,472 -- --
Change in deferred income taxes 357 1,670 (29)
Minority interest expense (income), before taxes 98 70 (367)
Net expense (payments) under deferred
compensation plans (3) 1,812 325
Changes in current assets and liabilities:
Receivables 3,426 (5,444) (4,527)
Inventories (692) (3,781) 2,004
Shells, tanks and pallets (147) (671) (38)
Prepaid expenses and other 665 (512) (655)
Accounts payable and accrued liabilities 2,606 198 3,822
------------ ------------ ----------
Net cash provided by operating activities 21,709 10,158 17,046
------------ ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,964) (14,988) (14,885)
Payments for exclusive beverage pouring rights (594) (1,625) (7,495)
Acquisitions of businesses (1,130) -- --
Deposit on land lease -- -- (540)
Purchase of franchise rights (1,994) -- --
Proceeds from sales of property and equipment -- 388 304
Collections on note receivable 110 -- --
Other -- 37 (21)
------------ ------------ ----------
Net cash used in investing activities (12,572) (16,188) (22,637)
------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 120,000 -- --
Retirement of long-term debt (111,250) -- --
Borrowings under revolving line of credit -- 12,000 20,500
Payments on revolving line of credit -- (12,000) (14,900)
Payment of deferred financing costs (5,946) (78) --
Principal payments on long-term debt and other
liabilities (7,703) (585) (263)
Cash distribution to minority interest holder -- (798) (608)
------------ ------------ ----------
Net cash provided by (used in) financing
activities (4,899) (1,461) 4,729
------------ ------------ ----------
CHANGE IN CASH AND CASH EQUIVALENTS 4,238 (7,491) (862)
CASH AND CASH EQUIVALENTS, beginning of year 7,933 12,171 4,680
------------ ------------ ----------
CASH AND CASH EQUIVALENTS, end of year $ 12,171 $ 4,680 $ 3,818
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
The accompanying notes are an integral part of these statements.
34
<PAGE>
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. ORGANIZATION AND NATURE OF OPERATIONS:
Delta Beverage Group, Inc. ("Delta") and the partnership described below
(collectively, the "Company") bottle and distribute 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 Company operates under exclusive bottling appointments and franchise
agreements with a number of soft drink concentrate and syrup producers. These
agreements contain provisions regarding the manufacturing, bottling, canning,
distribution and sale of the franchisors' products. The Company also
distributes alcoholic beverages pursuant to distributor agreements that
contain provisions regarding the distribution and sale of alcoholic beverages.
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. As of December 31,
1998, the Company had bank overdrafts of $2,054. Bank overdrafts are included
in accounts payable in the accompanying consolidated balance sheet.
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 is 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 2-10
</TABLE>
35
<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 on
a straight-line basis 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 adjusts the asset to 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.
Amounts paid pursuant to contracts with outside parties providing the Company
with exclusive beverage pouring rights are capitalized as other assets in the
consolidated balance sheets and are amortized over the terms of the related
contracts.
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 1996, 1997 and 1998, the Company issued additional preferred shares as
payment-in-kind dividends on preferred stock of $1,580, $1,678 and $1,780,
respectively (see Note 8).
Interest paid in cash during 1996, 1997 and 1998 was $12,363, $12,281 and
$12,931, respectively. Income taxes of $177, $247 and $371 were paid in 1996,
1997 and 1998, 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 $187,000 at December 31, 1998 and
$178,000 at December 31, 1997, compared to a recorded value of $180,000 at
December 31, 1998 and $170,000 at December 31, 1997.
36
<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. In May 1996, the Joint Venture
acquired the franchise rights from Heineken USA to distribute Heineken beer
products in the greater New Orleans area. The acquisitions were accounted for
as purchases, and the Company's consolidated results of operations include
the results of the acquisitions since their respective purchase dates. The
impact of the 1996 acquisitions on the Company's consolidated results of
operations was not material.
In connection with the 1996 acquisition of Delta Distributing Company and the
1995 acquisition of the assets of Miller Brands of Greater New Orleans, Inc.
and certain assets of Svoboda Distributing Company, Inc., 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 over five years.
4. INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out method) or
market and included the following at December 31:
<TABLE>
<CAPTION>
1997 1998
----------- ---------
<S> <C> <C>
Raw materials $ 4,988 $ 3,116
Finished goods 13,165 13,033
--------- ---------
$ 18,153 $ 16,149
--------- ---------
--------- ---------
</TABLE>
5. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
------------- ---------
<S> <C> <C>
Payroll and related benefits $ 2,841 $ 1,713
Income and other taxes 2,689 2,970
Insurance and related costs 4,203 4,632
Interest 1,768 1,858
Marketing and advertising costs 4,180 4,665
Other 407 436
------------- ---------
$ 16,088 $ 16,274
------------- ---------
------------- ---------
</TABLE>
6. INCOME TAXES:
At December 31, 1998, the Company had federal income tax net operating loss
carryforwards of $27,074 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, 1998 the Company had
similar net operating loss and tax credit carryforwards of $3,803 and $1,187,
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 $3,000 per year.
These net operating loss and tax credit carryforwards may be used through
2003.
37
<PAGE>
6. INCOME TAXES (Continued):
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:
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
Current deferred income tax assets $ 5,747 $ 4,186
Noncurrent deferred income tax assets 25,109 27,245
--------- ----------
30,856 31,431
Noncurrent deferred income tax liabilities (5,628) (6,174)
--------- ----------
$ 25,228 $ 25,257
--------- ----------
--------- ----------
</TABLE>
The tax effects of significant temporary differences representing deferred
income tax assets and liabilities at December 31, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Net operating loss and tax credit carryforwards $ 14,213 $12,398
Basis difference in preferred stock and
common stock 8,120 8,020
Difference in book and tax basis of property
and equipment, deferred financing costs
and other assets (4,590) (5,280)
Deferred interest on subordinated debt,
deferred compensation, and reserves
not currently deductible for income
tax purposes 7,485 10,119
--------- ---------
$ 25,228 $25,257
--------- ---------
--------- ---------
</TABLE>
Income tax provision recorded in the consolidated statements of operations, net
of taxes applicable to minority interest and extraordinary item, was as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------- --------- ---------
<S> <C> <C>
Current $ (289) $ (235) $ (465)
Deferred (1,456) (1,805) 29
---------- --------- ---------
$(1,745) $(2,040) $ (436)
---------- --------- ---------
---------- --------- ---------
</TABLE>
38
<PAGE>
6. INCOME TAXES (Continued):
A reconciliation of the income tax provision to the amount computed by
applying the federal statutory tax rate to income or loss before income taxes
was as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax rate (34.0)% (34.0)% 34.0%
State income taxes, net of federal benefit (4.6) (4.5) (1.1)
Franchise cost amortization (138.0) (70.4) (39.8)
Change in effective state tax rate - - (5.0)
Meals and entertainment disallowance (8.4) (4.9) (2.6)
State tax credits - 5.2 1.8
Other, net (1.0) (2.5) (0.9)
--------- -------- ---------
(186.0)% (111.1)% (13.6)%
--------- -------- ---------
--------- -------- ---------
</TABLE>
7. LONG-TERM DEBT AND OTHER LIABILITIES:
Long-term debt and other liabilities consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Senior notes payable, 9.75%, due
December 16, 2003 $120,000 $120,000
Subordinated notes payable, 11%, due
December 23, 2003 43,640 48,573
Revolving line of credit -- 5,600
Note payable to Poydras, interest at the
prime rate plus 1% (9.50% and 8.75%
at December 31, 1997 and 1998,
respectively), due December 31, 2007 1,839 1,839
Capital lease obligations, 10.89%, due
in monthly installments through May 1999 202 96
Marketing support obligation, imputed interest
at 8.25% to 8.75%, payments due quarterly through
June 30, 2000 489 331
Obligations under deferred compensation plans 3,276 3,333
Deferred purchase obligation 900 900
Other long-term debt 58 58
-------- --------
170,404 180,730
Less current maturities (215) (240)
-------- --------
$170,189 $180,490
-------- --------
-------- --------
</TABLE>
39
<PAGE>
7. LONG-TERM DEBT AND OTHER LIABILITIES (Continued):
In December 1996, the Company placed $120 million of new senior notes and
execuetd 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.
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 0.5% (the "base
rate"). Borrowings are limited to the sum of 80% of Delta's eligible
receivables and 50% of Delta's eligible inventory. 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 or at an otherwise mutually agreed upon rate
of interest. The line of credit also 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 0.125%. The agreement also provides for
a fee on the unused commitment ranging from 0.25% to 0.50%. 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, 1997. $5,600 was outstanding under the revolving line of credit
as of December 31, 1998, including $2,500 under the swing line facility. The
interest rate as of December 31, 1998 on amounts outstanding under the swing
line facility was 6.88%, while the interest rate on remaining amounts
outstanding was 8.25%.
In connection with the debt placement described above, the Company incurred
financing fees of $4,885. 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 $2,472 were written off. This
write-off, less a related income tax benefit of $953, is reported as an
extraordinary item in the 1996 consolidated statement of operations.
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 $4,431 and $4,935 under
this provision in 1997 and 1998, 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.
In 1995, the Company acquired Miller Brands of Greater New Orleans, Inc. The
purchase price included a $900 deferred obligation payable upon the Miller
business achieving an annual $8,000 gross profit.
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 1999 are as follows:
<TABLE>
<CAPTION>
Year Amount
---- --------
<S> <C>
2000 $ 154
2001 5,634
2002 --
2003 168,573
</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 thousand 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
1996, 1997 and 1998 were paid with additional preferred shares and are
included in stockholders' equity at December 31, 1996, 1997 and 1998. 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 thousand 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 2010.
41
<PAGE>
9. LEASES (Continued):
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, 1998:
<TABLE>
<CAPTION>
Year Amount
---- --------
<S> <C>
1999 $ 3,983
2000 3,054
2001 2,459
2002 1,785
2003 1,184
Thereafter 1,643
--------
$14,108
--------
--------
</TABLE>
Total rent expense during 1996, 1997 and 1998 was $3,587, $4,252 and $5,130,
respectively.
10. RELATED PARTY TRANSACTIONS:
The Company has entered into a management agreement with a company (the
"management company") controlled by three individuals who own shares of the
Company's common stock. For services performed pursuant to the agreement, the
Company pays the management company a management fee and a transaction fee.
Management fees of $533, $551 and $550 were paid during 1996, 1997 and 1998,
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.
In 1998 the Company entered into an accounting services agreement with a
separate entity in which the management company described above owns a
controlling interest. For services performed pursuant to this agreement, the
affiliate pays the Company an accounting services fee. Accounting services
fees of $170 were incurred with this affiliate in 1998. In addition, the
Company sold $5,411 of product at cost to this affiliate in 1998 and as of
December 31, 1998 had a receivable from this affiliate of $255.
11. EMPLOYEE BENEFITS:
The Company sponsors a defined contribution employee benefit 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 $5 hundred 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 thousand per employee. The Company's contributions were $257 for 1996,
$581 for 1997 and $546 for 1998.
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 sheets, totaled $1,225
and $1,692 at December 31, 1997 and 1998, 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, 1997 and 1998, 22 restricted shares
were outstanding, all of which were held by an officer.
42
<PAGE>
11. EMPLOYEE BENEFITS (Continued):
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 defined, in 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 and 1998 benefits of $1,900 and $295,
respectively, were 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, 1997 and 1998, the Company had $9,124 and $8,454 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
subsidiary included in this Form 10-K and have issued our report thereon
dated March 2, 1999. Our audit was made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The schedule listed in
Item 14(a)(2) 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, 1999.
44
<PAGE>
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(Dollars 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, 1996 $ 433 $ 90 $ 539 $ (562) $ 500
------------ ----------- ---------- -------- ------------
------------ ----------- ---------- -------- ------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1997 $ 500 $ (439) $ 596 $ (95) $ 562
------------ ----------- ---------- -------- ------------
------------ ----------- ---------- -------- ------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1998 $ 562 $ 162 $ 341 $ (468) $ 597
------------ ----------- ---------- -------- ------------
------------ ----------- ---------- -------- ------------
</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 15, 1999. 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. There are no family relationships
between any director or officer.
<TABLE>
<CAPTION>
Name Age Position(s) With Company
- ---- --- ------------------------
<S> <C> <C>
Robert C. Pohlad 44 Chief Executive Officer and Director
John F. Bierbaum 54 Chief Financial Officer, Vice President and Director
Kenneth E. Keiser 47 President and Chief Operating Officer
Bradley J. Braun 44 Vice President, Finance and Assistant Secretary
Jay S. Hulbert 45 Vice President, Operations
Michael G. Naylor 38 Vice President, General Manager
Charles M. Pullias 49 Vice President, General Manager
Raymond R. Stitle 45 Vice President, Human Resources
Donald E. Benson 68 Chairman of the Board
John H. Agee 50 Director
Christopher E. Clouser 47 Director
Philip N. Hughes 64 Director
Philip A. Marineau 52 Director
Gerald A. Schwalbach 54 Director
John F. Woodhead 59 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 Pepsi-Cola Puerto Rico Bottling Company, Mesaba Holdings,
Inc. and Grow Biz International, 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 March 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. Mr. Bierbaum is also Chief
Financial
47
<PAGE>
Officer of Pepsi-Cola Puerto Rico Bottling Company. From 1986 to 1988, Mr.
Bierbaum served as Vice President of the Pepsi-Cola Bottling Company of
Tampa. See "Certain Relationships and Related 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 "Executive Compensation - Employment
Agreement."
BRADLEY J. BRAUN. Mr. Braun became Vice President, Finance and
Assistant Secretary for the Company in September 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. Mr. Braun is also an executive officer of Pepsi-Cola Puerto Rico
Bottling Company.
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.
Mr. Hulbert is also an executive officer of Pepsi-Cola Puerto Rico Bottling
Company.
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. Mr. Naylor is also
an executive officer of Pepsi-Cola Puerto Rico Bottling Company.
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. Mr. Pullias is also an executive
officer of Pepsi-Cola Puerto Rico Bottling Company.
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. Mr. Stitle is also an executive
officer of Pepsi-Cola Puerto Rico Bottling Company.
DONALD E. BENSON. Mr. Benson has been a director of the Company
since 1988. Mr. Benson also serves as director for Mass Mutual Corporate
Investors, Mass Mutual Participation Investors, Mesaba Holdings, Inc.,
National Mercantile Bancorp and 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 a
director and 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 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
48
<PAGE>
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 responsibility for
worldwide human resources, corporate communications, advertising, audit and
security functions. Prior to joining Northwest Airlines in April 1991, 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 Pepsi-Cola Puerto Rico Bottling Company and Mesaba
Holdings, Inc.
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, and 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. 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. Mr. Hughes
serves as a director of Pepsi-Cola Puerto Rico Bottling Company.
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 - Other Business
Relationships."
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 I, LLC and related companies, owners and operators of
self-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 a director of WisPak, Inc. having served in this capacity since
December 1997. Mr. Woodhead is also a director of Pepsi-Cola Puerto Rico
Bottling Company.
49
<PAGE>
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. Agee, 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 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 $500 for each board meeting attended, plus
reasonable travel expenses. No payment is made to employee-directors or
directors with an equity interest in the Company.
ITEM 11 EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid
by the Company to its most highly paid executive officers for the fiscal
years ended December 31, 1996, 1997 and 1998. Neither Robert C. Pohlad, the
Company's Chief Executive Officer, nor John F. Bierbaum, the Company's Chief
Financial Officer, receive any compensation from the Company, except that Mr.
Bierbaum participates in the Company's Superior Performance Incentive Bonus
Plan and the Company's Phantom Stock Plan. See " - Employee Benefit Plans."
The services of Messrs. Pohlad and Bierbaum are provided to the Company
pursuant to a Management Agreement between the Company and the Pohlad
Companies. See "Certain Relationships and Related Transactions - Management
Agreement."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------
OTHER ANNUAL
COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(1) ($)(2)
- --------------------------- ---- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Kenneth E. Keiser 1998 274,000 107,750 -
President and Chief Operating Officer 1997 260,000 143,000 -
1996 250,000 140,250 -
Charles M. Pullias 1998 150,200 22,600 108,334
Vice President, General Manager 1997 144,900 43,500 73,333
1996 139,300 55,600 60,000
Jay S. Hulbert 1998 125,100 32,250 54,167
Vice President, Operations 1997 118,900 47,600 83,333
1996 114,300 34,200 73,333
Michael G. Naylor 1998 134,000 20,100 54,167
Vice President, General Manager 1997 116,600 46,640 83,333
1996 106,000 37,100 73,333
Bradley J. Braun 1998 116,100 30,900 108,334
Vice President, Finance 1997 110,500 44,200 73,333
1996 104,000 41,600 60,000
</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 payments awarded pursuant to the Company's Superior Performance
Incentive Bonus Agreement based on operating income performance of the
Company.
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 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
51
<PAGE>
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 1996, 1997 or 1998. No awards vested under the
Phantom Stock Plan during 1998.
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
contributions up to $1,000.
COMPENSATION OF DIRECTORS
See "Directors and Executive Officers -- Board of Directors
Committees and Compensation."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the compensation committee of the Company's board of
directors was an officer, former officer or employee of the Company during
the fiscal year ended December 31, 1998. Other than Robert C. Pohlad, no
executive officer of the Company served as a member of the compensation
committee or the board of directors of another entity, one of whose executive
officers served on the Company's compensation committee or board of directors
during the fiscal year ended December 31, 1998. Mr. Pohlad, the Company's
Chief Executive Officer, serves as a member of the compensation committee of
the board of directors of Pepsi-Cola Puerto Rico Bottling Company. Robert C.
Pohlad and John F. Bierbaum, executive officers of Pepsi-Cola Puerto Rico
Bottling Company, serve on the Company's board of directors.
52
<PAGE>
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of the close of business on February 1, 1999, the Company had
outstanding 53,251.80 shares of Common Stock and 6,158.84 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 February 1,
1999 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
BENEFICIALLY PERCENT OF
NAME OF BENEFICIAL OWNER OF OR GROUP OWNED CLASS
- ------------------------------------ ------------------- -----------
<S> <C> <C>
Pohlad Companies (1)............................. 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 (2)............................. 12,137.87 59.8
John H. Agee (3)................................. 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) (4)........................ 16,880.30 83.1%
</TABLE>
-------------------
* Less than 1%
(1) Excludes 300 shares over which the Pohlad Companies disclaims
beneficial ownership.
53
<PAGE>
(2) 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.
(3) Includes 4,187.92 shares owned by Arbeit & Co. John H.
Agee has power of attorney and exercises sole investment
and voting power over such shares.
(4) 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., Pepsi-Cola Puerto
Rico Bottling Company 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 1997 and 1998, the
Company paid the Pohlad Companies $551,000 and $550,000, 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
54
<PAGE>
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, 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 $27.6 million to
the Joint Venture as of December 31, 1998, of which $3.0 million was a
Mandatory Loan. Poydras had loaned approximately $1.8 million to the Joint
Venture as of December 31, 1998, 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
55
<PAGE>
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 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.
OTHER 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.
EMPLOYMENT AGREEMENT
See "Executive Compensation -- Employment Agreement."
56
<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 (incorporated by reference
to the Company's Annual Report on Form 10-K filed on
March 31, 1998).
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
57
<PAGE>
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.
(b) Reports on Form 8-K.
None
58
<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 30, 1999.
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
- -------------------------- (Principal Executive Officer) March 30, 1999
Robert C. Pohlad
/s/ John F. Bierbaum Chief Financial Officer and Director
- -------------------------- (Principal Accounting Officer and
John F. Bierbaum Principal Financial Officer) March 30, 1999
/s/ Donald E. Benson Chairman of the Board March 30, 1999
- --------------------------
Donald E. Benson
/s/ John H. Agee Director March 30, 1999
- --------------------------
John H. Agee
/s/ Christopher E. Clouser Director March 30, 1999
- --------------------------
Christopher E. Clouser
/s/ Philip N. Hughes Director March 30, 1999
- --------------------------
Philip N. Hughes
/s/ Philip A. Marineau Director March 30, 1999
- --------------------------
Philip A. Marineau
/s/ Gerald A. Schwalbach Director March 30, 1999
- --------------------------
Gerald A. Schwalbach
/s/ John F. Woodhead Director March 30, 1999
- --------------------------
John F. Woodhead
</TABLE>
59
<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 (incorporated
by reference to the Company's Annual Report on Form 10-K filed on March 31, 1998).
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>
60
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,818
<SECURITIES> 0
<RECEIVABLES> 24,798
<ALLOWANCES> 597
<INVENTORY> 16,149
<CURRENT-ASSETS> 66,637
<PP&E> 118,015
<DEPRECIATION> 56,476
<TOTAL-ASSETS> 271,652
<CURRENT-LIABILITIES> 30,552
<BONDS> 180,490
0
30,794
<COMMON> 0
<OTHER-SE> 26,216
<TOTAL-LIABILITY-AND-EQUITY> 271,652
<SALES> 352,085
<TOTAL-REVENUES> 352,085
<CGS> 245,683
<TOTAL-COSTS> 336,350
<OTHER-EXPENSES> 18,945
<LOSS-PROVISION> 162
<INTEREST-EXPENSE> 18,770
<INCOME-PRETAX> (3,210)
<INCOME-TAX> 436
<INCOME-CONTINUING> (3,311)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,311)
<EPS-PRIMARY> (95.60)
<EPS-DILUTED> (95.60)
</TABLE>