<PAGE> 1
PROSPECTUS
Rule 424(b)(3)
File No. 33-56292
File No. 33-56292-01
MAY 9, 1995
DR PEPPER BOTTLING COMPANY OF TEXAS
$125,000,000 10 1/4% SENIOR NOTES DUE 2000
AND
DR PEPPER BOTTLING HOLDINGS, INC.
$125,000,000 11 5/8% SENIOR DISCOUNT NOTES DUE 2003
This Prospectus relates to $125,000,000 in aggregate principal amount of
10 1/4% Senior Notes due 2000 (the "Senior Notes") of Dr Pepper Bottling Company
of Texas (the "Company") and $125,000,000 in aggregate principal amount of
11 5/8% Senior Discount Notes due 2003 (the "Discount Notes") of Dr Pepper
Bottling Holdings, Inc. ("Holdings"), which were issued in an underwritten
public offering in connection with the Recapitalization Plan (as defined herein)
of the Company and Holdings.
The Senior Notes bear interest at a rate of 10 1/4% per annum, payable
semi-annually on February 15 and August 15 of each year, commencing August 15,
1993. The Senior Notes are redeemable at the option of the Company, in whole or
in part, at any time on or after February 16, 1998 at the redemption prices set
forth herein plus accrued interest, if any, to the date of redemption. No
sinking fund will exist with respect to the Senior Notes. In the event of a
Change in Control (as defined herein) of the Company or Holdings, the Company
will be obligated to make an offer to purchase all outstanding Senior Notes at a
redemption price of 101% of the principal amount thereof plus accrued and unpaid
interest to the date of repurchase. The Senior Notes are senior unsecured
obligations of the Company, rank pari passu in right of payment with all
existing and future senior debt of the Company, and are senior in right of
payment to all subordinated indebtedness of the Company. For a more complete
description of the Senior Notes, see "Description of the Senior Notes."
The Discount Notes were issued at a substantial discount from their
principal amount. See "Description of the Discount Notes" and "Certain Federal
Income Tax Considerations." Commencing February 16, 1998, interest will accrue
until maturity on the Discount Notes at the rate of 11 5/8% per annum. Interest
on the Discount Notes is payable semi-annually on February 15 and August 15 of
each year, commencing August 15, 1998. The Discount Notes are redeemable, in
whole or in part, at the option of Holdings, on or after February 16, 1998, at
the redemption prices set forth herein plus accrued interest. In the event
Holdings consummates an initial public offering of its common stock on or before
the third anniversary of the issuance of the Discount Notes, Holdings may, at
its option, use all or a portion of the proceeds of such sale to redeem up to
one-third of the aggregate principal amount of the Discount Notes originally
issued at 108% of the Accreted Value (as defined herein) thereof at the date of
redemption. No sinking fund will exist with respect to the Discount Notes. In
the event of a Change in Control (as defined herein) of Holdings, Holdings will
be obligated to make an offer to purchase all outstanding Discount Notes at a
redemption price of 101% of the Accreted Value thereof on any repurchase date
prior to February 16, 1998, or 101% of the principal amount thereof plus accrued
and unpaid interest to any repurchase date on or after February 16, 1998. The
Discount Notes are senior unsecured obligations of Holdings, rank pari passu in
right of payment with all existing and future senior debt of Holdings, and are
senior in right of payment to all subordinated indebtedness of Holdings. As
indebtedness of Holdings, however, the Discount Notes are effectively
subordinated to all obligations of the Company. At February 28, 1995, the
aggregate amount of indebtedness and other obligations of the Company was
approximately $255.2 million. For a more complete description of the Discount
Notes, see "Description of the Discount Notes."
There is currently no established public trading market for the Senior Notes
or the Discount Notes. The Company and Holdings have been advised by Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ Securities") that it has made a
market in the Senior Notes and the Discount Notes in the past, and that, subject
to applicable laws and regulations, it currently intends to do so in the future;
however, DLJ Securities is not obligated to do so. Any market making may be
discontinued at any time and there is no assurance that an active public market
for the Senior Notes or the Discount Notes will develop or that if such a market
develops, that it will continue. This Prospectus has been prepared for use by
DLJ Securities in connection with offers of the Senior Notes and the Discount
Notes in market making transactions. DLJ Securities may act as principal or
agent in such transactions. See "Plan of Distribution."
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SENIOR NOTES OR THE DISCOUNT
NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 2
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFERINGS MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, HOLDINGS OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE
TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION SET FORTH HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary...................... 3
The Company and Holdings................ 8
Recapitalization Plan................... 9
Risk Factors............................ 10
Use of Proceeds......................... 14
Capitalization.......................... 15
Selected Historical Financial Data...... 16
Management's Discussion and Analysis of
Results of Operations and Financial
Condition............................. 18
Business................................ 22
Management.............................. 27
Securities Ownership and Certain
Transactions.......................... 31
Description of the Senior Notes......... 34
Description of the Discount Notes....... 49
Description of the 1993 Bank
Financing............................. 65
Description of the Preferred Stock and
the Warrant........................... 67
Description of Certain Existing
Obligations........................... 69
Certain Federal Income Tax
Considerations........................ 70
Plan of Distribution.................... 74
Legal Matters........................... 75
Experts................................. 75
Available Information................... 75
Index to Financial Statements........... F-1
</TABLE>
THE COMPANY WILL FURNISH HOLDERS OF THE SENIOR NOTES AND HOLDINGS WILL
FURNISH HOLDERS OF THE DISCOUNT NOTES WITH ANNUAL REPORTS CONTAINING, AMONG
OTHER INFORMATION, AUDITED FINANCIAL STATEMENTS CERTIFIED BY AN INDEPENDENT
PUBLIC ACCOUNTING FIRM AND QUARTERLY REPORTS CONTAINING UNAUDITED FINANCIAL
INFORMATION FOR THE FIRST THREE QUARTERS OF EACH FISCAL YEAR. THE COMPANY AND
HOLDINGS WILL ALSO FURNISH SUCH OTHER REPORTS AS THEY MAY DETERMINE OR AS MAY BE
REQUIRED BY LAW.
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Certain capitalized terms
used in this Prospectus Summary are defined elsewhere in this Prospectus.
THE COMPANY AND HOLDINGS
The Company is the largest independent franchise bottler of DR PEPPER brand
products, accounting for approximately 12% of the total volume of such products,
and is one of the largest independent soft drink bottlers in the United States.
The Company produces, markets, and distributes carbonated soft drinks pursuant
to franchise agreements with companies owning the rights to various soft drink
formulae. Principal products are bottled and canned under franchises from Dr
Pepper/Seven-Up Corporation (DR PEPPER and SEVEN-UP brand products), Cadbury
Beverages North America, Inc. (CANADA DRY, SUNKIST, A&W, SQUIRT, and COUNTRYTIME
brand products), Royal Crown Cola Company, Big Red, Inc. (BIG RED) and Monarch
Company (NUGRAPE). The Company also distributes certain other non-carbonated
soft drinks, including leading bottled waters such as Evian and Naya, within
defined territories pursuant to distribution agreements with various companies.
These franchise and distribution agreements generally grant to the Company the
exclusive right to market and distribute the licensed product in bottles and
cans within defined territories. Certain of the franchise agreements also grant
to the Company the nonexclusive right to sell and distribute fountain syrup
within a defined territory. The Company's three major franchise and distribution
territories are Dallas/Fort Worth, Houston, and Waco, Texas.
The Company's operating strategy is to (i) manufacture and market leading
soft drink products within a comprehensive range of soft drink categories,
principally focusing on sales of national brands in the non-cola segments of the
soft drink market; (ii) increase the market shares of its portfolio of brands by
utilizing a wide range of marketing activities, including price and consumer
promotion, retail space management and advertising; (iii) broaden penetration of
the higher margin "single drink" segment of the soft drink market; and (iv)
acquire contiguous bottling territories and additional franchises for major
brands within existing territories.
Holdings is a holding company, the primary asset of which is the common
stock of the Company. Holdings was formed in 1988 to acquire the Company in a
leveraged recapitalization transaction. See "The Company and Holdings."
RECAPITALIZATION PLAN
In 1993, the Company and Holdings completed a recapitalization plan (the
"Recapitalization Plan") the purpose of which plan was to reduce the aggregate
amount of interest expense and preferred stock dividend requirements. The
principal elements of the Recapitalization Plan are described below. The
following elements of the Recapitalization Plan were completed on February 18,
1993 (the "Closing Date"):
(i) the issuance and sale by the Company of the Senior Notes;
(ii) the issuance and sale by Holdings of the Discount Notes;
(iii) the issuance and sale by Holdings of senior exchangeable
preferred stock and a warrant to purchase 15% of the common stock of
Holdings in a private transaction for $30 million (the "Equity Offering");
(iv) the repurchase of $154,650,000 of the $162 million aggregate
principal amount of outstanding Senior Subordinated Discount Notes due 1998
of the Company (the "Old Discount Notes") pursuant to a cash tender offer
(the "Tender Offer") and a related solicitation of consents from the
holders of the Old Discount Notes (the "Consent Solicitation"); and
(v) the repayment of all amounts outstanding under two then existing
credit agreements of the Company.
The following elements of the Recapitalization Plan were completed on March
22, 1993:
(a) borrowings by the Company of approximately $91.7 million pursuant
to a Credit Agreement, dated February 18, 1993 (the "1993 Bank Credit
Agreement"), among the Company, Texas Commerce Bank National Association
("TCB"), as Agent, and the banks named therein (the "1993 Bank Financing");
and
(b) the redemption of all of the outstanding Senior Exchangeable
Preferred Stock of the Company (the "Old Preferred Stock").
On November 20, 1993 the Company redeemed the remaining $7,350,000
aggregate principal amount of Old Discount Notes not repurchased pursuant to the
Tender Offer.
3
<PAGE> 4
THE SECURITIES
SENIOR NOTES
Maturity...................... February 15, 2000.
Interest Rate................. 10 1/4% per annum.
Interest Payment Dates........ February 15 and August 15, commencing August
15, 1993.
Ranking....................... The Senior Notes are senior unsecured
obligations of the Company and rank pari
passu with other senior indebtedness of the
Company and senior to all subordinated debt
of the Company. However, other than trade
payables, virtually all of the other senior
indebtedness of the Company is secured by
substantially all of the assets of the
Company. Because such other senior
indebtedness is secured, the Senior Notes
effectively rank junior to such
indebtedness.
Optional Redemption........... The Senior Notes may not be redeemed prior
to February 16, 1998. On or after February
16, 1998, the Company, at its option, may
redeem the Senior Notes in whole or in part
at the redemption prices set forth herein
plus accrued interest to the date of
redemption.
Certain Covenants............. The indenture under which the Senior Notes
were issued contains certain covenants
that, among other things, limit the ability
of the Company to pay dividends or make
certain other restricted payments, to incur
additional indebtedness, to encumber or
sell assets, to enter into transactions
with affiliates, to make certain
investments, to merge or consolidate with
any other person and to transfer or lease
its assets.
Change in Control............. If a Change in Control (as defined) of the
Company or Holdings occurs, each holder of
Senior Notes will have the right to require
the Company to repurchase any or all Senior
Notes owned by such holder at 101% of the
principal amount thereof, plus accrued and
unpaid interest, if any, to the repurchase
date.
DISCOUNT NOTES
Maturity...................... February 15, 2003.
Interest Rate................. 11 5/8% per annum.
Interest Payment Dates........ No interest will accrue on the Discount
Notes prior to February 16, 1998.
Commencing February 16, 1998, interest on
the Discount Notes will accrue at the rate
of 11 5/8% per annum, and will be payable
in cash semiannually on each February 15
and August 15, commencing on August 15,
1998.
Original Issue Discount....... For federal income tax purposes, the
Discount Notes were issued with "original
issue discount" equal to the difference
between the issue price of the Discount
Notes and the sum of all cash payments
(whether denominated as principal or
interest) to be made thereon. Each holder
of a Discount Note must include in gross
income for federal income tax purposes the
sum of the daily portions of such original
issue discount for each day during each
taxable year in which the Discount Note is
held, even though no interest payments will
4
<PAGE> 5
be received prior to August 15, 1998. See
"Certain Federal Income Tax
Considerations."
Ranking....................... The Discount Notes are senior unsecured
obligations of Holdings, but are
structurally subordinated to claims against
Holdings' subsidiaries. Accordingly, the
Discount Notes effectively rank junior to
all of the outstanding indebtedness of the
Company and in the event of the
dissolution, bankruptcy, liquidation or
reorganization of the Company and Holdings,
the holders of the Discount Notes may not
receive any amounts with respect to the
Discount Notes until after the payment in
full of the claims of creditors of the
Company. As of February 28, 1995, the
aggregate amount of indebtedness and other
obligations of the Company to which the
holders of the Discount Notes were
effectively subordinated was approximately
$255.2 million. In addition, all of the
common stock of the Company was pledged to
secure Holdings' guarantee of the
obligations of the Company under the 1993
Bank Credit Agreement.
Optional Redemption........... The Discount Notes may not be redeemed prior
to February 16, 1998. On or after February
16, 1998, Holdings, at its option, may
redeem the Discount Notes in whole or in
part at the redemption prices set forth
herein plus accrued interest to the date of
redemption. In the event Holdings
consummates an initial public offering of
its common stock on or before the third
anniversary of the issuance of the Discount
Notes, Holdings may, at its option, use all
or a portion of the proceeds of such sale
to redeem up to one-third of the aggregate
principal amount of the Discount Notes
originally issued at 108% of the Accreted
Value thereof at the date of redemption.
Certain Covenants............. The indenture under which the Discount Notes
were issued contains certain covenants
that, among other things, limit the ability
of Holdings and the Company to pay
dividends or make certain other restricted
payments, to incur additional indebtedness,
to encumber or sell assets, to enter into
transactions with affiliates, to make
certain investments, to merge or
consolidate with any other person or to
transfer or lease their assets.
Change in Control............. If a Change in Control (as defined) of
Holdings occurs, each holder of Discount
Notes will have the right to require
Holdings to repurchase any or all Discount
Notes owned by such holder at a redemption
price of 101% of the Accreted Value (as
defined) thereof on any repurchase date
prior to February 16, 1998 or 101% of the
principal amount thereof plus accrued and
unpaid interest, if any, to any repurchase
date on or after February 16, 1998.
5
<PAGE> 6
COMPANY SUMMARY FINANCIAL DATA
The following table presents selected operating, balance sheet and other
data of the Company as of and for the years ended December 31, 1992, 1993 and
1994. The financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and the financial statements of the Company and the related notes
thereto contained elsewhere herein.
<TABLE>
<CAPTION>
COMPANY
------------------------------
YEAR ENDED DECEMBER 31,
------------------------------
1992 1993(A)(B) 1994
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING DATA:
Net sales.................................................... $288,271 $310,881 $332,204
Gross profit................................................. 102,488 114,924 117,828
Operating profit............................................. 30,001 33,606 35,995
Other expense (income):
Interest.................................................. 30,830 23,957 22,392
Other..................................................... 908 (1,280) 983
Income (loss) before extraordinary item...................... (1,737) 10,929 12,480
Extraordinary item -- loss on
recapitalization.......................................... -- (31,559) --
Net earnings (loss).......................................... (1,737) (20,630) 12,480
Dividends on preferred stock................................. 13,171 5,806 --
OTHER DATA:
EBITDA(c).................................................... 43,811 49,061 51,188
Depreciation................................................. 8,658 9,593 9,273
Amortization of excess cost over net assets of business
acquired.................................................. 5,505 5,751 5,519
Amortization of debt issuance costs.......................... 1,107 1,337 1,384
Additions to property, plant and
equipment, net(d)......................................... 6,346 8,367 10,644
Deficiency of earnings available to cover
fixed charges(e).......................................... 1,737 -- --
Ratio of earnings to fixed charges(e)(f)..................... -- 1.43x 1.53x
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital.............................................. 3,258 657 (9,818)
Total assets................................................. 227,625 243,175 237,816
Long-term debt, less current maturities...................... 212,562 227,696 199,261
Stockholders' deficit........................................ (24,896) (37,593) (25,113)
</TABLE>
- ---------------
(a) The operating data for the year ended December 31, 1993 reflect the impact
of the acquisition of substantially all the assets of Dr Pepper Bottling
Company of Galveston, Inc. for the period from April 13, 1993 to December
31, 1993. See "The Company and Holdings."
(b) On a pro forma basis, assuming the transactions contemplated by the
Recapitalization Plan had been consummated on January 1, 1993, for the year
ended December 31, 1993, interest expense would have been $22,579, income
before extraordinary item would have been $12,260, extraordinary loss on
recapitalization would have been $31,738, net loss would have been $19,478,
dividends on preferred stock would have been $0, amortization of debt
issuance costs would have been $1,384 and ratio of earnings to fixed charges
would have been 1.51x. Such pro forma financial data does not purport to
represent what the results of operations of the Company would actually have
been if the transactions contemplated by the Recapitalization Plan had in
fact been consummated on January 1, 1993, or to project the results of
operations for any future periods.
(c) "EBITDA" represents, for any relevant period, income (loss) before
extraordinary item plus interest, taxes, depreciation, amortization of
excess cost over net assets of businesses acquired, amortization of debt
issuance costs, and other non-cash expenses. EBITDA is presented here not a
measure of operating results, but rather as a measure of the Company's
operating cash flow and debt service ability. Certain restrictive covenants
contained in the 1993 Bank Credit Agreement and in the indenture governing
the Senior Notes are based on the Company's operating cash flow, subject to
certain adjustments. See "Description of the Senior Notes -- Certain
Definitions" and "Description of the 1993 Bank Financing -- Covenants."
(d) Additions to property, plant and equipment are presented net of proceeds
received upon the disposition of such assets. Additions to property, plant
and equipment for the year ended December 31, 1992 reflect the receipt of
$1,487 by the Company upon the sale/leaseback of a portion of its trucking
fleet.
(e) "Fixed charges" consist of interest (including amortization of discount and
debt issuance costs) and the interest component of lease expense.
(f) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" represents income (loss) before extraordinary item plus fixed
charges.
6
<PAGE> 7
HOLDINGS SUMMARY FINANCIAL DATA
The following table presents selected operating, balance sheet and other
data of Holdings as of and for the years ended December 31, 1992, 1993 and 1994.
The financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and the financial statements of Holdings and the related notes
thereto contained elsewhere herein.
<TABLE>
<CAPTION>
HOLDINGS
---------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------
1992 1993(A)(B) 1994
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING DATA:
Net sales.................................................. $288,271 $ 310,881 $ 332,204
Gross profit............................................... 102,488 114,924 117,828
Operating profit........................................... 30,001 33,606 35,995
Other expense (income):
Interest................................................. 30,830 31,304 31,777
Other.................................................... 908 (1,014) 1,287
Dividends on Company preferred stock....................... 13,171 5,806 --
Income (loss) before extraordinary item.................... (14,908) (2,490) 2,791
Extraordinary item -- loss on recapitalization............. -- (31,559) --
Net earnings (loss)........................................ (14,908) (34,049) 2,791
Net loss per common share.................................. (1.12) (2.67) (.08)
Dividends on Preferred Stock............................... -- 2,079 3,677
OTHER DATA:
EBITDA(c).................................................. 43,811 49,067 51,211
Depreciation............................................... 8,658 9,593 9,273
Amortization of excess cost over net assets of business
acquired................................................. 5,505 5,751 5,519
Amortization of debt issuance costs........................ 1,107 1,610 1,711
Accretion of bond discount................................. -- 7,340 9,385
Additions to property, plant and equipment, net(d)......... 6,346 8,367 10,644
Deficiency of earnings available to cover fixed
charges(e)............................................... 14,908 2,490 --
Ratio of earnings to fixed charges(e)(f)................... -- -- 1.08x
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital............................................ 3,258 374 (10,078)
Total assets............................................... 227,625 245,863 240,199
Long-term debt, less current maturities.................... 212,562 306,149 287,099
Preferred Stock(g)......................................... -- 29,635 33,502
Stockholders' deficit...................................... (109,394) (142,994) (144,070)
</TABLE>
- ---------------
(a) The operating data for the year ended December 31, 1993 reflect the impact
of the acquisition of substantially all the assets of Dr Pepper Bottling
Company of Galveston, Inc. for the period from April 13, 1993 to December
31, 1993. See "The Company and Holdings."
(b) On a pro forma basis, assuming the transactions contemplated by the
Recapitalization Plan had been consummated on January 1, 1993, for the year
ended December 31, 1993, interest expense would have been $31,019, dividends
on Company preferred stock would have been $0, income before extraordinary
item would have been $3,500, extraordinary loss on recapitalization would
have been $31,738, net loss would have been $28,238, amortization of debt
issuance costs would have been $1,711, accretion of bond discount would have
been $8,433 and the ratios of earnings to (i) fixed charges and (ii)
combined fixed charges and preferred stock dividend requirements on the
Preferred Stock would have been 1.11x and 1.03x, respectively. (For purposes
of calculating such ratios, "earnings" represents income (loss) before
extraordinary item plus fixed charges.) Such pro forma financial data does
not purport to represent what the results of operations of Holdings would
actually have been if the transactions contemplated by the Recapitalization
Plan had in fact been consummated on January 1, 1993, or to project the
results of operations for any future periods.
(c) "EBITDA" represents, for any relevant period, income (loss) before
extraordinary item plus interest, taxes, depreciation, amortization of
excess cost over net assets of business acquired, amortization of debt
issuance costs, other non-cash expenses and dividends on Company preferred
stock. EBITDA is presented here not as a measure of operating results, but
rather as a measure of Holdings' consolidated operating cash flow and debt
service ability. Certain restrictive covenants contained in the indenture
governing the Discount Notes are based on Holdings' consolidated operating
cash flow, subject to certain adjustments. See "Description of the Discount
Notes -- Certain Definitions."
(d) Additions to property, plant and equipment are presented net of proceeds
received upon the disposition of such assets. Additions to property, plant
and equipment for the year ended December 31, 1992 reflect the receipt of
$1,487 by the Company upon the sale/leaseback of a portion of its trucking
fleet.
(e) "Fixed charges" consist of interest (including amortization of discount and
debt issuance costs), the interest component of lease expense, and dividend
requirements for the Old Preferred Stock. Dividend requirements for the
Company's Old Preferred Stock have not been tax effected because Holdings
had no provision for income tax expense applicable to income from continuing
operations for the periods presented.
(f) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" represents income before taxes and extraordinary items plus fixed
charges.
(g) The Preferred Stock is subject to mandatory redemption under certain
circumstances.
7
<PAGE> 8
THE COMPANY AND HOLDINGS
The Company is the largest independent franchise bottler of DR PEPPER brand
products, accounting for approximately 12% of the total volume of such products,
and is one of the largest independent soft drink bottlers (i.e., bottlers that
have no affiliations with either The Coca-Cola Company or PepsiCo, Inc.) in the
United States. The Company produces, markets, and distributes carbonated soft
drinks pursuant to franchise agreements with companies owning the rights to
various soft drink formulae. Principal products are bottled and canned under
franchises from Dr Pepper/Seven-Up Corporation (DR PEPPER and SEVEN-UP brand
Cadbury Beverages North America, Inc. (CANADA DRY, SUNKIST, A&W , SQUIRT, and
COUNTRYTIME brand products), Royal Crown Cola Company, Big Red, Inc. (BIG RED)
and Monarch Company (NUGRAPE). The Company also distributes certain other
non-carbonated soft drinks, including leading bottled waters such as Evian and
Naya, within defined territories pursuant to distribution agreements with
various companies. These franchise and distribution agreements generally grant
to the Company the exclusive right to market and distribute the licensed product
in bottles and cans within defined territories. Certain of the franchise
agreements also grant to the Company the nonexclusive right to sell and
distribute fountain syrup within a defined territory. The Company's three major
franchise and distribution territories are Dallas/Fort Worth, Houston, and Waco,
Texas.
The Company was formed in 1985 to acquire Dallas/Fort Worth Dr Pepper
Bottling Company and Dr Pepper Bottling Company of Waco, which companies held
franchises to produce, market, and distribute DR PEPPER brand soft drink
products in the Dallas/Fort Worth and Waco, Texas franchise territories, as well
as franchises to produce, market, and distribute certain other soft drink
products within defined franchise territories. Since that time, the Company has
continued to grow through the acquisition of new franchise territories and
additional brand products within existing franchise territories. The following
table sets forth information regarding certain of the subsequent acquisitions:
<TABLE>
<CAPTION>
ACQUISITION FRANCHISE MAJOR BRAND
ACQUISITION DATE COST TERRITORY PRODUCTS
<S> <C> <C> <C> <C>
Certain assets of The October 1985 $ 1.3 million Waco 7UP
Seven-Up Company
Certain assets of Dr December 1986 58.8 million Houston DR PEPPER, 7UP
Pepper Bottling Company
of Houston, Inc.
Certain assets of Full January 1989 24.5 million(a) Dallas/Fort Worth RC, CANADA DRY,
Service Beverage SUNKIST
Company of Texas Fort Worth 7UP
Seven-Up Bottling Company January 1990 4.0 million(b) Dallas 7UP
of Dallas, Inc.
Certain assets of Dr April 1993 9.0 million(c) Galveston DR PEPPER, 7UP
Pepper Bottling Company
of
Galveston, Inc.
</TABLE>
- ---------------
(a) Includes a payment made by the Company with respect to a noncompetition
agreement entered into by the seller and certain of its principals.
(b) In addition to the cash purchase price of $4 million, the Company entered
into a noncompetition agreement with certain stockholders of the seller
providing for cash payments, aggregating $3 million, to be made over a
specified period.
(c) In addition to the cash purchase price of $9 million, the Company entered
into a noncompetition agreement with certain stockholders of the seller
providing for cash payments, aggregating $1 million, to be made over a
specified period.
Holdings is a holding company, the primary asset of which is the common
stock of the Company. Holdings was formed in 1988 to acquire the Company in a
leveraged recapitalization transaction.
The Company's and Holdings' principal executive offices are located at 2304
Century Center, Irving, Texas 75062 and their telephone number is (214)
579-1024.
8
<PAGE> 9
RECAPITALIZATION PLAN
In 1993, the Company and Holdings completed the Recapitalization Plan. The
purpose of the Recapitalization Plan was to reduce aggregate interest expense
and preferred stock dividend requirements. The sources and uses of funds for,
and the principal elements of, the Recapitalization Plan are described below.
SOURCES AND USES OF FUNDS
The following table sets forth the sources of funds used by the Company and
Holdings to effect the Recapitalization Plan and the application of such funds
by the Company and Holdings.
<TABLE>
<CAPTION>
AMOUNT
(IN MILLIONS)
<S> <C>
Sources of Funds:
Cash on hand........................................................... $ 9.6
1993 Bank Financing.................................................... 91.7
Senior Notes........................................................... 125.0
Discount Notes......................................................... 71.1
Equity Offering........................................................ 30.0
-------
Total.......................................................... $ 327.4
=======
Uses of Funds:
Repurchase of Old Discount Notes pursuant to the Tender Offer and
Consent Solicitation................................................ $ 180.7
Repayment of Old Credit Agreements..................................... 30.3
Redemption of Old Preferred Stock...................................... 91.7
Redemption of remaining Old Discount Notes............................. 7.8
Estimated transaction fees and expenses................................ 16.9
-------
Total.......................................................... $ 327.4
=======
</TABLE>
ELEMENTS OF THE RECAPITALIZATION PLAN
Sources of Funds
Cash on Hand. The Company used $9.6 million of cash on hand to fund the
transactions contemplated by the Recapitalization Plan.
1993 Bank Financing. The 1993 Bank Financing consists of (i) a term loan
facility (the "1993 Term Loan Facility") pursuant to which the Company borrowed
$91.7 million on March 22, 1993 and (ii) a revolving line of credit facility in
a principal amount of up to $25 million (the "1993 Revolving Line of Credit
Facility"). The 1993 Bank Financing was provided under the 1993 Bank Credit
Agreement. See "Description of the 1993 Bank Financing."
Senior Notes. The Company issued and sold the Senior Notes in the aggregate
principal amount of $125 million. See "Description of the Senior Notes."
Discount Notes. Holdings issued and sold the Discount Notes in the
aggregate principal amount of $125 million, generating gross proceeds of
approximately $71.1 million. See "Description of the Discount Notes."
Equity Offering. Holdings issued and sold to Crown, Cork & Seal Company,
Inc. Master Retirement Trust ("Crown") $30 million liquidation preference of
senior exchangeable preferred stock (the "Preferred Stock") and a warrant (the
"Warrant") to purchase up to 15% of the common stock of Holdings on a fully
diluted basis.
Uses of Funds
Tender Offer and Consent Solicitation. The Company purchased $154,650,000
of the $162 million aggregate principal amount of Old Discount Notes previously
outstanding from holders of Old Discount Notes pursuant to the Tender Offer and
Consent Solicitation. The total consideration paid pursuant to the Tender
9
<PAGE> 10
Offer and the Consent Solicitation was approximately $173.6 million plus accrued
interest of approximately $7.1 million to but excluding the Closing Date.
Repayments of Old Credit Agreements. Upon the closing of the offerings of
the Senior Notes and the Discount Notes, the Company repaid all the outstanding
principal of the borrowings under the Credit Agreement dated as of October 28,
1988, as amended (the "1988 Credit Agreement"), between the Company and the
lenders and agent named therein, and the Credit Agreement dated as of January
18, 1989, as amended (the "1989 Credit Facility"), between the Company and the
lenders and agent named therein (the 1988 Credit Agreement and 1989 Credit
Facility collectively being referred to as the "Old Credit Agreements") and paid
all the accrued and unpaid interest thereon (approximately $30.3 million) (the
"Loan Repayments").
Redemption of Old Preferred Stock. On the date of the closing of the
offerings of the Senior Notes and the Discount Notes, the Company called for
redemption all of the then outstanding Old Preferred Stock (approximately $89.5
million liquidation preference) on March 22, 1993 at a redemption price equal to
100% of the liquidation preference plus accrued and unpaid dividends of
approximately $2.2 million to but excluding the redemption date.
Redemption of Remaining Old Discount Notes. On November 20, 1993, the
Company redeemed the remaining $7,350,000 aggregate principal amount of Old
Discount Notes not repurchased pursuant to the Tender Offer at a redemption
price of 105.8125% of such principal amount plus unpaid interest on the
outstanding Old Discount Notes to the redemption date, or an aggregate
redemption price of approximately $7.8 million.
Expenses. Approximately $16.9 million of funds available to the Company and
Holdings were used to pay fees and expenses related to the Recapitalization
Plan, including the underwriting discounts and commissions and related expenses
incurred in connection with the initial offerings of the Senior Notes and the
Discount Notes.
RISK FACTORS
Prospective purchasers of the Senior Notes and the Discount Notes should
consider the specific factors set forth below as well as the other information
set forth in this Prospectus.
HIGH LEVERAGE AND ABILITY TO SERVICE DEBT
Each of the Company and Holdings is and will continue to be highly
leveraged. As of December 31, 1994, the Company and Holdings had total
outstanding long-term indebtedness (including current maturities) of
approximately $213.7 million and $301.5 million, respectively.
As of December 31, 1994, approximately $68.1 million was outstanding under
the 1993 Term Loan Facility. The Company will be required to repay the principal
under the 1993 Term Loan Facility as follows: $13.8 million in 1995, $15.5
million in 1996, $17.2 million in each of 1997 and 1998 and $4.4 million in
1999, subject to reduction for mandatory and optional repayments. The 1993
Revolving Line of Credit Facility will mature in 1999, and any amounts remaining
outstanding thereunder will be required to be paid in full at maturity.
The substantial indebtedness of the Company and Holdings will continue to
limit their ability to respond to changing business and economic conditions.
Changing business and economic conditions may affect the financial condition or
financing requirements of the Company and Holdings and could impose risks to the
holders of the Senior Notes and the Discount Notes. Moreover, the Company's
existing sale-leaseback arrangement, 1993 Bank Credit Agreement and the
indentures governing the Senior Notes and the Discount Notes impose operating
and financial restrictions on the Company and Holdings. Such restrictions
affect, and in many respects limit or prohibit, among other things, the ability
of the Company and Holdings to incur additional indebtedness, make capital
expenditures, create liens, sell assets, engage in mergers or acquisitions or
make dividends or other payments.
The 1993 Bank Credit Agreement also requires that the Company satisfy
certain financial covenants. Any failure by the Company to comply with these or
other covenants and restrictions contained in the 1993 Bank
10
<PAGE> 11
Credit Agreement and the Company's sale-leaseback arrangements could result in a
default thereunder, which in turn could cause such indebtedness to be declared
immediately due and payable. The ability of the Company to comply with these
covenants and restrictions may be affected by events beyond its control.
Borrowings under the 1993 Bank 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 and Holdings. While
interest rates are currently at low levels, increases in interest rates could
negatively impact the ability of the Company and Holdings to meet their debt
service obligations, including their obligations pursuant to the Senior Notes
and the Discount Notes. As required by the 1993 Bank Credit Agreement, the
Company entered into interest rate protection arrangements, expiring June 30,
1996, in an aggregate notional amount equal to $45 million, subject to reduction
by $2 million at the end of each quarter starting with the quarter ending June
30, 1994.
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 1993 Term Loan Facility 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 the Senior Notes and the Discount Notes at their
respective maturities. Accordingly, the Company and Holdings expect that they
will be required to refinance all or substantially all of the Senior Notes and
the Discount Notes at their respective maturities or sell equity or assets to
fund the repayment of all or substantially all of the Senior Notes and the
Discount Notes at their respective maturities, or effect a combination of the
foregoing. While the Company and Holdings believe that they will be able to
refinance the Senior Notes and the Discount Notes at or prior to their
respective maturities, or raise sufficient funds through equity or asset sales
to repay such indebtedness, or effect a combination of foregoing, there can be
no assurance that such will be the case.
The ability of the Company and Holdings to meet their debt service
obligations will depend on the future operating performance and financial
results of the Company, which will be subject in part to factors beyond the
control of the Company, such as prevailing economic conditions and financial,
business, and other factors. The highly leveraged position of the Company and
the restrictive covenants contained in the debt instruments of the Company could
significantly limit its ability to withstand competitive pressures or adverse
economic conditions, make acquisitions, or take advantage of business
opportunities that may arise.
HOLDING COMPANY STRUCTURE; LIMITATIONS ON ACCESS TO CASH FLOW OF THE COMPANY
Holdings conducts business through the Company and has no operations of its
own. The primary asset of Holdings is the common stock of the Company. Holdings
is dependent on the cash flow of the Company in order to meet its debt service
obligations. The 1993 Bank Credit Agreement and the Senior Notes indenture
impose significant restrictions on the payment of dividends and the making of
loans by the Company to Holdings. However, the Senior Notes indenture allows the
Company to pay dividends to Holdings in accordance with a specified formula if,
after giving effect thereto, no event of default, or an event that with the
passage of time or the giving of notice, or both, would constitute an event of
default under the Senior Notes indenture shall have occurred and be continuing.
See "Description of the Senior Notes -- Covenants -- Limitation on Restricted
Payments." In addition, the 1993 Bank Credit Agreement allows the Company to pay
dividends to Holdings in an amount necessary to make cash interest payments on
the Discount Notes, provided that no event of default exists or would be created
under the 1993 Bank Credit Agreement. The final amounts outstanding under the
1993 Bank Credit Agreement mature June 30, 1999, the Senior Notes mature
February 15, 2000 and the Discount Notes mature February 15, 2003.
As a result of the holding company structure of Holdings, the creditors of
Holdings, including the holders of the Discount Notes, effectively rank junior
to all creditors of the Company, including the bank lenders under the 1993 Bank
Credit Agreement, the holders of the Senior Notes, trade creditors and the
holders of the Company's obligations under the sale-leaseback arrangements
related to the Company's two bottling plants. In the event of the dissolution,
bankruptcy, liquidation or reorganization of the Company, the holders of the
Discount Notes will not receive any amounts in respect of the Discount Notes
until after the payment in full of the claims of the creditors of the Company.
As of February 28, 1995, the aggregate amount of indebtedness and other
obligations of the Company to which the holders of the Discount Notes were
effectively
11
<PAGE> 12
subordinated was approximately $255.2 million. In addition, all of the common
stock of the Company was pledged to secure Holdings' guarantee of the
obligations of the Company under the 1993 Bank Credit Agreement.
UNSECURED STATUS OF SENIOR NOTES AND DISCOUNT NOTES
The Senior Notes and the Discount Notes are not secured by any of the
assets of the Company or Holdings. In addition, the obligations of the Company
under the 1993 Bank Credit Agreement and Holdings' guarantee of such obligations
are secured by pledges of substantially all of their respective assets.
ORIGINAL ISSUE DISCOUNT CONSEQUENCES OF THE DISCOUNT NOTES
The Discount Notes were issued at a substantial discount from their
principal amount. Consequently, the purchasers of the Discount Notes generally
will be required to include amounts in gross income for federal income tax
purposes in advance of receipt of the cash payments to which the income is
attributable. See "Certain Federal Income Tax Considerations" for a more
detailed discussion of the federal income tax consequences to the holders of the
Discount Notes of the purchase, ownership and disposition of the Discount Notes.
If a bankruptcy case is commenced by or against Holdings under the United
States Bankruptcy Code, the claim of a holder of Discount Notes with respect to
the principal amount thereof may be limited to an amount equal to the sum of (i)
the initial public offering price and (ii) that portion of the original issue
discount which is not deemed to constitute "unmatured interest" for purposes of
the United States Bankruptcy Code. Any original issue discount that was not
amortized as of any such bankruptcy filing would constitute "unmatured
interest."
FRAUDULENT TRANSFER CONSIDERATIONS
Under fraudulent transfer law, if a court were to find, in a lawsuit by an
unpaid creditor or representative of creditors of the Company or Holdings, that
the Company or Holdings received less than fair consideration or reasonably
equivalent value for incurring the indebtedness represented by the Senior Notes
or the Discount Notes, respectively, and, at the time of such incurrence, the
Company or Holdings (i) was insolvent or was rendered insolvent by reason of
such incurrence, (ii) was engaged or about to engage in a business or
transaction for which its remaining property constituted unreasonably small
capital or (iii) intended to incur, or believed it would incur, debts beyond its
ability to pay as such debts mature, such court could, among other things, (a)
avoid all or a portion of the Company's or Holdings' obligations to the holders
of the Senior Notes or the Discount Notes; and/or (b) subordinate the Company's
or Holdings' obligations to the holders of the Senior Notes or the Discount
Notes to other existing and future indebtedness of the Company or Holdings, the
effect of which would be to entitle such other creditors to be paid in full
before any payment could be made on the Senior Notes or the Discount Notes, as
the case may be. The measure of insolvency for purposes of determining whether a
transfer is avoidable as a fraudulent transfer varies depending upon the law of
the jurisdiction which is being applied. Generally, however, a debtor would be
considered insolvent if the sum of all of its liabilities were greater than the
value of all of its property at a fair valuation, or if the present fair salable
value of the debtor's assets were less than the amount required to repay its
probable liability on its debts as they become absolute and matured. There can
be no assurance as to what standard a court would apply in order to determine
solvency. To the extent that proceeds from the sale of the Senior Notes or the
Discount Notes are deemed to have been used to redeem the Old Preferred Stock, a
court may find that the Company or Holdings did not receive fair consideration
or reasonably equivalent value for the incurrence of the indebtedness
represented thereby. In addition, if a court were to find that the incurrence of
the indebtedness incurred in connection with the acquisition of the Company by
Holdings (i.e., indebtedness outstanding under one of the Old Credit Agreements
and the Old Discount Notes) constituted a fraudulent transfer, to the extent
that proceeds from the sale of the Senior Notes or the Discount Notes are used
to retire such indebtedness, a court may find that the Company or Holdings did
not receive fair consideration or reasonably equivalent value for the incurrence
of the indebtedness represented by the Senior Notes or the Discount Notes.
12
<PAGE> 13
On the basis of its historical financial information, its recent operating
history as discussed in "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and other factors, the Company and Holdings
believe that, following the issuance of the Senior Notes and the Discount Notes
and the incurrence of the indebtedness under the 1993 Term Loan Facility upon
consummation of the Recapitalization Plan, the Company and Holdings were
solvent, had sufficient capital for the business in which they are engaged and
did not incur debts beyond their ability to pay such debts as they mature. There
can be no assurance, however, that a court would necessarily agree with these
conclusions.
DEPENDENCE ON FRANCHISES
The Company operates under franchise agreements with a number of soft drink
concentrate and syrup producers. The franchise agreements contain comprehensive
provisions regarding the bottling, 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.
Most of the Company's franchise agreements also contain provisions
requiring the Company to obtain the consent of the concentrate producer in the
event of certain changes in ownership of the Company. Such provisions vary among
the franchise agreements. In addition, the Company's franchise agreements are
not assignable without the consent of the concentrate producer.
CHANGE IN CONTROL
The 1993 Bank Credit Agreement provides that, if a "Change in Control", as
defined in the indentures governing the Senior Notes or the Discount Notes or
the documents governing the Preferred Stock, occurs, it constitutes an event of
default under the 1993 Bank Credit Agreement. In addition, in the event of a
"Change in Control" as defined in the indentures governing the Senior Notes and
the Discount Notes, each holder of such notes has the right to require the
Company or Holdings, as the case may be, to repurchase any or all Senior Notes
or Discount Notes owned by such holder at the prices stated herein. See
"Description of the Senior Notes -- Covenants -- Change in Control" and
"-- Certain Definitions -- Change in Control" and "Description of the Discount
Notes -- Covenants -- Change in Control" and " -- Certain Definitions -- Change
in Control." In the event of a Change in Control as defined under the documents
governing the Preferred Stock, each holder of shares of Preferred Stock has the
right to require Holdings to repurchase any or all such shares owned by such
holder at the price stated herein. See "Description of the Preferred Stock and
the Warrant -- Preferred Stock." In the event of a Change in Control as defined
under either of such indentures or the documents governing the Preferred Stock,
the Company and Holdings will likely be required to refinance the indebtedness
outstanding under the 1993 Bank Credit Agreement, the Senior Notes, the Discount
Notes and the Preferred Stock. There can be no assurance that the Company and
Holdings would be able to refinance such indebtedness and Preferred Stock.
DEPENDENCE ON MANAGEMENT
The performance of the Company is dependent on the active participation of
its principal officers and the retention of certain key personnel, including Jim
L. Turner, the President and Chief Executive Officer of the Company. The loss of
the services of Mr. Turner could have a material adverse effect upon the
Company. The Company maintains a key-man life insurance policy on Mr. Turner in
the amount of $2.5 million, which is payable to the Company in the event of Mr.
Turner's death, and policies to fund certain payments due to Mr. Turner's estate
under his employment agreement following his death.
INTEREST OF DLJ SECURITIES
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ Securities") has
performed various financial advisory and investment banking services for the
Company, including services performed in connection with the Recapitalization
Plan. DLJ Securities received $6.9 million in underwriting discounts and
13
<PAGE> 14
commissions for serving as underwriter for the Senior Notes and the Discount
Notes. DLJ Securities also served as dealer manager for the Tender Offer and the
Consent Solicitation and received customary fees and was reimbursed for expenses
in connection therewith. DLJ Securities also earned a commission of
approximately $177,000 in connection with its effecting the sale of a note of
the landlord under the Company's sale-leaseback arrangement and was reimbursed
for expenses in connection therewith. DLJ Capital Corporation ("DLJ Capital"),
which is an affiliate of DLJ Securities, beneficially owns a significant equity
interest in Holdings and has the right to designate a member of the board of
directors of Holdings and has so designated a member. DLJ Securities, as
custodian, also holds a significant equity interest in Holdings. See "Securities
Ownership and Certain Transactions," "Description of Certain Existing
Obligations -- Sale-Leaseback Arrangement," and "Plan of Distribution."
ABSENCE OF PRIOR PUBLIC MARKET
The Senior Notes and the Discount Notes are issues of securities for which
there is currently no established public trading market. DLJ Securities has
informed the Company and Holdings that it has made a market in the Senior Notes
and the Discount Notes in the past and that, subject to applicable laws and
regulations, it currently intends to do so in the future. However, DLJ
Securities is not obligated to do so, and any such market making may be
discontinued at any time without notice. There can be no assurance that an
active trading market will develop for the Senior Notes and the Discount Notes.
See "Plan of Distribution."
The liquidity of, and trading markets for, the Senior Notes and the
Discount Notes may also be adversely affected by declines in the market for high
yield securities generally. Such a decline may adversely affect such liquidity
and trading markets independent of the financial performance of, and prospects
for, the Company and Holdings.
COMPETITION
The soft drink business is highly competitive. The Company's soft drink
products compete generally with all liquid refreshments and in particular with
numerous nationally-known soft drinks such as Coca-Cola and Pepsi Cola, the
bottlers of which have greater financial resources than the Company. Principal
methods of competition in the soft drink industry are advertising campaigns,
pricing, packaging, management of shelf space in retail outlets, and the
development of new products. In recent years, price competition has been
especially intense with respect to sales of soft drink products to food stores,
with local bottlers granting significant discounts and allowances off wholesale
prices in order to maintain or increase market share in the food store segment.
USE OF PROCEEDS
This Prospectus has been prepared for use by DLJ Securities in connection
with offers of the Senior Notes and the Discount Notes in market making
transactions. Neither the Company nor Holdings will receive any proceeds from
sales of Senior Notes or Discount Notes, respectively, in such transactions.
14
<PAGE> 15
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
December 31, 1994 and (ii) the consolidated capitalization of Holdings as of
December 31, 1994. The table should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this Prospectus.
See "Selected Historical Financial Data."
<TABLE>
<CAPTION>
COMPANY HOLDINGS
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Current maturities of long-term debt and obligations under capital
leases............................................................. $ 14,448 $ 14,448
Long-term debt:
1993 Bank Financing................................................... 54,291 54,291
Senior Notes.......................................................... 117,000 117,000
Sale/leaseback borrowings............................................. 26,670 26,670
Discount Notes........................................................ -- 87,838
Capital leases and other.............................................. 1,300 1,300
-------- ---------
Total long-term debt.......................................... $199,261 $ 287,099
======== =========
Preferred Stock......................................................... $ -- $ 33,502
Stockholders' deficit:
Common Stock.......................................................... 1 136
Additional paid-in capital............................................ 110,227 14,383
Consideration to continuing predecessor stockholders in excess of book
value.............................................................. (33,948) (33,948)
Accumulated deficit................................................... (101,393) (124,641)
-------- ---------
Total stockholders' deficit................................... (25,113) (144,070)
-------- ---------
Total capitalization.......................................... $188,596 $ 190,979
======== =========
</TABLE>
15
<PAGE> 16
SELECTED HISTORICAL FINANCIAL DATA
COMPANY SELECTED HISTORICAL FINANCIAL DATA
The following table presents selected operating, balance sheet and other
data of the Company as of and for the years ended December 31, 1990, 1991, 1992,
1993 and 1994 derived from the consolidated financial statements of the Company,
which have been audited by KPMG Peat Marwick LLP. The financial data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Results of Operations and Financial Condition" and the financial statements
of the Company and the related notes thereto contained elsewhere herein.
<TABLE>
<CAPTION>
COMPANY
------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1990(A) 1991 1992 1993(B)(C) 1994
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales................................ $247,029 $267,225 $288,271 $310,881 $332,204
Gross profit............................. 89,332 97,063 102,488 114,924 117,828
Operating profit......................... 19,753 24,949 30,001 33,606 35,995
Other expense (income):
Interest.............................. 31,888 31,793 30,830 23,957 22,392
Other................................. 1,094 1,586 908 (1,280) 983
Earnings (loss) before extraordinary
item.................................. (13,292) (8,430) (1,737) 10,929 12,480
Extraordinary item -- loss on
recapitalization...................... -- -- -- (31,559) --
Net earnings (loss)...................... (13,229) (8,430) (1,737) (20,630) 12,480
Dividends on preferred stock............. 9,442 11,152 13,171 5,806 --
OTHER DATA:
Depreciation............................. 10,282 10,127 8,658 9,593 9,273
Amortization of excess cost over net
assets of business acquired........... 5,956 5,439 5,505 5,751 5,519
Amortization of debt issuance costs...... 974 1,433 1,107 1,337 1,384
Accretion of bond discount............... 19,881 19,000 -- -- --
Additions to property, plant and
equipment, net(d)..................... 5,236 5,580 6,346 8,367 10,644
Deficiency of earnings available to cover
fixed charges(e)...................... 13,229 8,430 1,737 -- --
Ratio of earnings to fixed
charges(e)(f)......................... -- -- -- 1.43x 1.53x
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital.......................... 13,933 4,622 3,258 657 (9,818)
Total assets............................. 245,536 229,618 227,625 243,175 237,816
Long-term debt, less current
maturities............................ 233,260 221,069 212,562 227,696 199,261
Stockholders' deficit.................... (14,723) (23,157) (24,896) (37,593) (25,113)
</TABLE>
- ---------------
(a) The operating data for the year ended December 31, 1990 reflect the impact
of the acquisition of all of the outstanding capital stock of Seven-Up
Bottling Company of Dallas, Inc. for the period from January 12, 1990
through December 31, 1990. See "The Company and Holdings."
(b) The operating data for the year ended December 31, 1993 reflect the impact
of the acquisition of substantially all the assets of Dr Pepper Bottling
Company of Galveston, Inc. for the period from April 13, 1993 to December
31, 1993. See "The Company and Holdings."
(c) On a pro forma basis, assuming the transactions contemplated by the
Recapitalization Plan had been consummated on January 1, 1993, for the year
ended December 31, 1993, interest expense would have been $22,579, income
before extraordinary item would have been $12,260, extraordinary loss on
recapitalization would have been $31,738, net loss would have been $19,478,
dividends on preferred stock would have been $0, amortization of debt
issuance costs would have been $1,384 and ratio of earnings to fixed charges
would have been 1.51x. Such pro forma financial data does not purport to
represent what the results of operations of the Company would actually have
been if the transactions contemplated by the Recapitalization Plan had in
fact been consummated on January 1, 1993, or to project the results of
operations for any future periods.
(d) Additions to property, plant and equipment are presented net of proceeds
received upon the disposition of such assets. Additions to property, plant
and equipment for the year ended December 31, 1992 reflect the receipt of
$1,487 by the Company upon the sale/leaseback of a portion of its trucking
fleet.
(e) "Fixed charges" consist of interest (including amortization of discount and
debt issuance costs) and the interest component of lease expense.
(f) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" represents income (loss) before extraordinary item plus fixed
charges.
16
<PAGE> 17
HOLDINGS SELECTED HISTORICAL FINANCIAL DATA
The following table presents selected operating, balance sheet and other
data of Holdings as of and for the years ended December 31, 1990, 1991, 1992,
1993 and 1994 derived from the consolidated financial statements of Holdings,
which have been audited by KPMG Peat Marwick LLP. The financial data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Results of Operations and Financial Condition" and the financial statements
of Holdings and the related notes thereto contained elsewhere herein.
<TABLE>
<CAPTION>
HOLDINGS
-------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1990(A) 1991 1992 1993(B)(C) 1994
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............................... $247,029 $267,225 $ 288,271 $ 310,881 $332,204
Gross profit............................ 89,332 97,063 102,488 114,924 117,828
Operating profit........................ 19,753 24,949 30,001 33,606 35,995
Other expense (income):
Interest.............................. 31,888 31,793 30,830 31,304 31,777
Other................................. 1,094 1,586 908 (1,014 ) 1,287
Dividends on Company preferred stock.... 9,442 11,152 13,171 5,806 --
Earnings (loss) before extraordinary
item.................................. (22,671) (19,582) (14,908) (2,490 ) 2,791
Extraordinary item -- loss on
recapitalization...................... -- -- -- (31,559 ) --
Net earnings (loss)..................... (22,671) (19,582) (14,908) (34,049 ) 2,791
Net earnings (loss) per common share.... (1.70) (1.46) (1.12) (2.67 ) (.08)
Dividends on Preferred Stock............ -- -- -- 2,079 3,677
OTHER DATA:
Depreciation............................ 10,282 10,127 8,658 9,593 9,273
Amortization of excess cost over net
assets of business acquired........... 5,956 5,439 5,505 5,751 5,519
Amortization of debt issuance costs..... 974 1,433 1,107 1,610 1,711
Accretion of bond discount.............. 19,881 19,000 -- 7,340 9,385
Additions to property, plant and
equipment, net(e)..................... 5,236 5,580 6,346 8,367 10,644
Deficiency of earnings available to
cover:
Fixed charges(f)...................... 22,671 19,582 14,908 2,490 --
Ratio of earnings to fixed
charges(e)(f)......................... -- -- -- -- 1.08x
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital......................... 13,933 4,622 3,258 374 (10,078)
Total assets............................ 245,536 229,618 227,625 245,863 240,199
Long-term debt, less current
maturities............................ 233,260 221,069 212,562 306,149 287,099
Preferred Stock(g)...................... -- -- -- 29,635 33,502
Stockholders' deficit................... (74,904) (94,486) (109,394) (142,994 ) (144,070)
</TABLE>
- ---------------
(a) The operating data for the year ended December 31, 1990 reflect the impact
of the acquisition of all of the outstanding capital stock of Seven-Up
Bottling Company of Dallas, Inc. for the period from January 12, 1990
through December 31, 1990. See "The Company and Holdings."
(b) The operating data for the year ended December 31, 1993 reflect the impact
of the acquisition of substantially all the assets of Dr Pepper Bottling
Company of Galveston, Inc. for the period from April 13, 1993 to December
31, 1993. See "The Company and Holdings."
(c) On a pro forma basis, assuming the transactions contemplated by the
Recapitalization Plan had been consummated on January 1, 1993, for the year
ended December 31, 1993, interest expense would have been $31,019, dividends
on Company preferred stock would have been $0, income before extraordinary
item would have been $3,500, extraordinary loss on recapitalization would
have been $31,738, net loss would have been $28,238, amortization of debt
issuance costs would have been $1,711, accretion of bond discount would have
been $8,433 and the ratios of earnings to (i) fixed charges and (ii)
combined fixed charges and preferred stock dividend requirements on the
Preferred Stock would have been 1.11x and 1.03x, respectively. (For purposes
of calculating such ratios, "earnings" represents income (loss) before
extraordinary item plus fixed charges.) Such pro forma financial data does
not purport to represent what the results of operations of Holdings would
actually have been if the transactions contemplated by the Recapitalization
Plan had in fact been consummated on January 1, 1993, or to project the
results of operations for any future periods.
(d) Additions to property, plant and equipment are presented net of proceeds
received upon the disposition of such assets. Additions to property, plant
and equipment for the year ended December 31, 1992 reflect the receipt of
$1,487 by the Company upon the sale/leaseback of a portion of its trucking
fleet.
(e) "Fixed charges" consist of interest (including amortization of discount and
debt issuance costs), the interest component of lease expense, and dividend
requirements for the Old Preferred Stock.
(f) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" represents income before taxes and extraordinary items plus fixed
charges.
(g) The Preferred Stock is subject to mandatory redemption under certain
circumstances.
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
General
The Company's primary measurement of unit volume is case sales. Case sales
refers to physical cases of beverages sold, including both premix products
(ready-to-serve beverages which are sold in tanks and converted to case sales on
the basis of four cases per tank) and postmix products (fountain syrups to which
carbonated water must be added and which are converted to case sales on the
basis of one case per gallon).
Franchise case sales represent primarily sales of the Company's branded
products to retailers only. Contract case sales are comprised of sales,
primarily of products in cans, to unaffiliated bottling companies that hold soft
drink franchises and to a wholesaler of private label brand soft drink products.
Contract sales may fluctuate significantly from year to year, and are made at
relatively low prices and gross profit margins (historically representing
approximately 16% of contract sales revenues) 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
net sales more accurately measure growth than changes in total net sales.
The primary asset of Holdings is the common stock of the Company. Holdings
conducts no business other than holding the common stock of the Company. As a
result, the operating data items for both Holdings and the Company are the same
for the years ended December 31, 1990, 1991 and 1992, with the exception that
dividends on the Company's Old Preferred Stock are shown as a minority interest
in Holdings' statements of operations. With respect to 1993 and 1994, as a
result of the consummation of the transactions contemplated by the
Recapitalization Plan, only net sales, cost of sales, gross profit, operating
expenses and operating profit are the same for the Company and Holdings.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Net sales, excluding contract net sales, for the year ended December 31,
1994 increased to $308.0 million compared to $287.3 million for 1993. The
increase was due to a 7.8% increase in franchise case sales, with growth
attributable to the acquisition of the franchise territory of Dr Pepper Bottling
Company of Galveston, Inc. ("Dr Pepper Galveston") on April 13, 1993 (the
"Galveston Acquisition") and to strong results from Dr Pepper and 7UP brands.
Contract net sales for the year ended December 31, 1994 increased 2.6% from 1993
due to an increase in lower-margin private label contract sales volume partially
offset by a small reduction in regular contract sales. As a result of the
foregoing, net sales for the year ended December 31, 1994 increased 6.9% to
$332.2 million compared to $310.9 million for 1993.
Cost of sales for the year ended December 31, 1994 increased to $214.4
million compared to $196.0 million for 1993. The increase was due primarily to
an increase in franchise case sales as well as increases in the prices paid by
the Company for certain raw materials, primarily concentrate, sweetener, and
plastic bottles. These increases in costs were partially offset by reduced costs
for aluminum cans. As a percentage of net sales, cost of sales for the year
ended December 31, 1994 increased to 64.5% from 63.0% for 1993.
Marketing expenses for the year ended December 31, 1994 decreased to $7.6
million compared to $9.4 million for 1993 due to a higher level of sports media
advertising and sponsorship agreements in 1993. Marketing expenses represented
approximately 2.3% of net sales in 1994 compared to 3.0% in 1993.
Administrative and general expenses for the year ended December 31, 1994
increased to $62.9 million compared to $60.6 million for 1993. The increase was
due primarily to an increase of $2.0 million in labor and employee benefit
expenses, an increase of $.1 million in fleet expenses under a full service
lease arrangement, an increase of $.6 million in full service commissions, and
an increase of $.2 million in other expenses, partially offset by an increase of
$.6 million in incentive credits from The Dr Pepper Company for placement of
vending machines. Depreciation expense for the year ended December 31, 1994
increased to $5.8 million from
18
<PAGE> 19
$5.6 million for 1993. Amortization of intangible assets for the year ended
December 31, 1994 decreased to $5.5 million from $5.8 million for 1993.
As a result of the above factors, operating profit for the year ended
December 31, 1994 increased to $36.0 million, or 10.8% of net sales, compared to
$33.6 million, or 10.8% of net sales, for 1993.
Interest expense for the Company for the year ended December 31, 1994
decreased to $22.4 million from $24.0 million for 1993 due to reduction of
outstanding indebtedness under the 1993 Bank Credit Agreement.
Amortization of the Company's deferred debt issuance costs for the year
ended December 31, 1994 was $1.4 million compared to $1.3 million for 1993.
Other income for the Company for the year ended December 31, 1994 was $.4
million compared to $2.6 million for 1993. The 1993 amount included $2.5 million
paid to the Company in settlement of its 1988 lawsuit against Del Monte
Corporation for its refusal to consent to the acquisition of the Company by
Holdings and the subsequent termination of the Company's license to produce and
distribute Hawaiian Punch products.
As a result of the above factors, the Company's income before income taxes
for the year ended December 31, 1994 was $12.6 million compared to income before
income taxes of $10.9 million for 1993. Income taxes for the year ended December
31, 1994 were $.1 million. Income before extraordinary item for the year ended
December 31, 1994 was $12.5 million compared to income before extraordinary item
of $10.9 million for 1993.
Holdings' amortization of deferred debt issuance costs for the year ended
December 31, 1994 increased to $1.7 million compared to $1.6 million for 1993.
Interest expense (including bond accretion on the Discount Notes) for
Holdings for the year ended December 31, 1994 increased to $31.8 million from
$31.3 million for 1993. The increase was due to additional bond accretion on the
Discount Notes, partially offset by reduced cash interest due to a paydown of
indebtedness under the 1993 Bank Credit Agreement.
As a result of the above factors, Holdings generated income before
extraordinary item of $2.8 million for the year ended December 31, 1994,
compared to a loss before extraordinary item of $2.5 million for 1993. The net
loss before extraordinary item for Holdings of $2.5 million for the year ended
December 31, 1993 reflects charges of $5.8 million relating to dividends on the
Company's Old Preferred Stock. The Old Preferred Stock was classified as a
minority interest for purposes of the financial statements of Holdings.
Extraordinary loss for the year ended December 31, 1993 amounted to $31.6
million, due to transactions contemplated by the Recapitalization Plan. There
was no extraordinary item for the year ended December 31, 1994. As a result,
Holdings generated net income of $2.8 million for the year ended December 31,
1994, compared to a net loss of $34.0 million for 1993.
Year Ended December 31, 1993 Compared to Year Ended December 31, 1992
Net sales, excluding contract net sales, for the year ended December 31,
1993 increased to $287.3 million compared to $262.8 million for 1992. The
increase was due to a 10.2% increase in franchise case sales, with growth
attributable to the acquisition of the franchise territory of Dr Pepper
Galveston in the Galveston Acquisition and to strong results from DR PEPPER as
well as from allied brands. Contract net sales for the year ended December 31,
1993 decreased 7.5% from 1992 due to the elimination of contract sales to Dr
Pepper Galveston as a result of the consummation of the Galveston Acquisition.
As a result of the foregoing, net sales for the year ended December 31, 1993
increased 7.8% to $310.9 million compared to $288.3 million in 1992.
Cost of sales for the year ended December 31, 1993 increased to $196.0
million compared to $185.8 million in 1992. The increase was due primarily to an
increase in franchise case sales as well as increases in the prices paid by the
Company for certain raw materials, primarily concentrate. Increases in
concentrate costs were partially offset by cost decreases in other ingredients
and materials including sweetener,
19
<PAGE> 20
P.E.T. bottles, and aluminum cans. As a percentage of net sales, cost of sales
for the year ended December 31, 1993 decreased to 63.0% from 64.4% in 1992.
Marketing expense for the year ended December 31, 1993 increased to $9.4
million compared to $6.0 million in 1992. This increase was due primarily to
higher expenditures for sports media advertising and sponsorship agreements with
various sports organizations, including the new Dallas NHL hockey team, the new
baseball stadium in Arlington for the Texas Rangers, and the Southwest
Conference basketball tournament. Marketing expenses represented approximately
3.0% of net sales for the year ended December 31, 1993 compared to 2.1% of net
sales in 1992.
Administrative and general expenses for the year ended December 31, 1993
increased to $60.6 million compared to $55.6 million in 1992. This increase was
primarily due to an increase of $3.3 million in labor and employee benefit
expenses, an increase of $1.5 million in fleet expenses due to an upgrade in
fleet vehicles under a full service lease arrangement, an increase of $0.7
million in full service commissions, and an increase of $0.3 million in other
expenses, offset by a reduction in bad debts expense of $0.8 million due to
recoveries in 1993. Depreciation expense for the year ended December 31, 1993
increased to $5.6 million from $5.4 million in 1992. Amortization of intangible
assets for the year ended December 31, 1993 increased to $5.8 million compared
to $5.5 million in 1992.
As a result of the above factors, operating profit for the year ended
December 31, 1993 increased to $33.6 million, or 10.8% of net sales, compared to
$30.0 million, or 10.4% of net sales, in 1992.
Interest expense for the Company for the year ended December 31, 1993
decreased to $24.0 million from $30.8 million in 1992. The decrease was due
primarily to lower interest rates on outstanding indebtedness as a result of the
transactions contemplated by the Recapitalization Plan.
Amortization of the Company's deferred debt issuance costs for the year
ended December 31, 1993 was $1.3 million compared to $1.1 million in 1992.
Loss from disposition of assets for the year ended December 31, 1993 was
$32,000 compared to a gain of $0.2 million in 1992.
Other income for the Company for the year ended December 31, 1993 was $2.6
million compared to other expenses of $28,000 in 1992, due to the $2.5 million
settlement of the Company's 1988 lawsuit against Del Monte Corporation for its
refusal to consent to the acquisition of the Company by Holdings and the
subsequent termination of the Company's license to produce and distribute
Hawaiian Punch products.
As a result of the above factors, the Company's income before extraordinary
item for the year ended December 31, 1993 was $10.9 million compared to a loss
of $1.7 million in 1992.
Holdings' amortization of deferred debt issuance costs for the year ended
December 31, 1993 increased to $1.6 million compared to $1.1 million in 1992.
Interest expense for Holdings for the year ended December 31, 1993
increased to $31.3 million from $30.8 million in 1992. The increase was due to
higher indebtedness as a result of the Recapitalization Plan, partially offset
by lower interest rates on such indebtedness. Interest expense for Holdings for
the year ended December 31, 1993 includes $7.3 million of bond accretion on the
Discount Notes.
As a result of the above factors, Holdings generated income before
dividends on the Company's Old Preferred Stock and extraordinary item of $3.3
million for the year ended December 31, 1993 compared to a loss of $1.7 million
in 1992. The net loss before extraordinary item for Holdings of $2.5 million for
the year ended December 31, 1993 reflects charges of $5.8 million related to
dividends on the Company's Old Preferred Stock. The net loss before
extraordinary item for Holdings for the year ended December 31, 1992 reflects
charges of $13.2 million relating to dividends on the Company's Old Preferred
Stock. The Old Preferred Stock was classified as a minority interest for
purposes of the financial statements of Holdings. As a result of the above
factors, a net loss before extraordinary item of $2.5 million was reported for
Holdings for the year ended December 31, 1993 compared to a net loss before
extraordinary item of $14.9 million in 1992.
20
<PAGE> 21
Extraordinary loss for the year ended December 31, 1993 amounted to $31.6
million, due to the transactions contemplated by the Recapitalization Plan.
After the extraordinary item, Holdings generated a net loss of $34.0 million for
the year ended December 31, 1993 compared to a net loss of $14.9 million in
1992.
LIQUIDITY AND CAPITAL RESOURCES
Holdings conducts business through the Company and has no material
operations of its own. The primary asset of Holdings is the common stock of the
Company. Accordingly, Holdings is dependent on the cash flow of the Company to
meet its obligations. Holdings has no material obligations other than those
under the Discount Notes, the Preferred Stock and any exchange debentures of
Holdings into which such stock becomes exchangeable, and certain contingent
obligations under Holdings' guarantee of the Company's obligations under the
1993 Bank Credit Agreement. Holdings, though, is not expected to have any
material need for cash until interest on the Discount Notes becomes payable in
cash beginning August 15, 1998. The Discount Notes will mature in 2003. The 1993
Bank Credit Agreement and the Senior Notes indenture impose significant
restrictions on the payment of dividends and the making of loans by the Company
to Holdings. However, the Senior Notes indenture allows the Company to pay
dividends to Holdings in accordance with a specified formula if, after giving
effect thereto, no event of default, or an event that with the passage of time
or the giving of notice, or both, would constitute an event of default under the
Senior Notes indenture shall have occurred and be continuing. See "Description
of the Senior Notes -- Covenants -- Limitation on Restricted Payments." In
addition, the 1993 Bank Credit Agreement allows the Company to pay dividends to
Holdings in an amount necessary to make cash interest payments on the Discount
Notes, provided that no event of default exists or would be created under the
1993 Bank Credit Agreement.
The Company remains highly leveraged following the consummation of the
transactions contemplated by the Recapitalization Plan. The Company's principal
use of funds in the future will be the payment of principal and interest under
the 1993 Bank Financing and the Senior Notes. As of December 31, 1994,
approximately $68.1 million was outstanding under the 1993 Term Loan Facility.
The Company will be required to repay the principal under the 1993 Term Loan
Facility as follows: $13.8 million in 1995, $15.5 million in 1996, $17.2 million
in each of 1997 and 1998 and $4.4 million in 1999, subject to reduction for
mandatory and optional prepayments. In addition, the Company will be required to
further retire the principal amount outstanding under the 1993 Bank Credit
Agreement with Excess Cash Flow (as defined in the 1993 Bank Credit Agreement).
It is expected that the Company's primary sources of financing for its future
business activities will be funds from operations, together with additional
borrowings under the 1993 Revolving Line of Credit Facility. The 1993 Revolving
Line of Credit Facility provides for revolving loans in an aggregate amount of
up to $25 million with a $5 million sublimit for the issuance of letters of
credit. The 1993 Revolving Line of Credit Facility will mature in 1999. During
1994, the Company purchased $8.0 million aggregate principal amount of its
outstanding Senior Notes at an aggregate purchase price of $8.2 million. The
purchase price was funded from cash on hand. In January 1995 the Company used
the Revolving Line of Credit Facility to purchase an additional $5.0 million of
its Senior Notes for $5.1 million. See "Description of the 1993 Bank Financing."
Because the obligations under the 1993 Bank Credit Agreement bear interest
at floating rates, the Company will be sensitive to changes in prevailing
interest rates. As required by the 1993 Bank Credit Agreement, the Company
entered into interest rate protection arrangements, expiring June 30, 1996, in
an aggregate notional amount equal to $45 million, subject to reduction by $2
million at the end of each quarter starting with the quarter ended June 30,
1994.
The Company had negative working capital of $9.8 million at December 31,
1994 compared to working capital of $0.7 million at December 31, 1993.
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 1993 Term Loan Facility 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 the Senior Notes and the Discount Notes at their
respective maturities. Accordingly, the Company and Holdings expect
21
<PAGE> 22
that they will be required to refinance all or substantially all of the Senior
Notes and the Discount Notes at their respective maturities or sell equity or
assets to fund the repayment of all or substantially all of the Senior Notes and
the Discount Notes at their respective maturities, or effect a combination of
the foregoing. While the Company and Holdings believe that they will be able to
refinance the Senior Notes and the Discount Notes at or prior to their
respective maturities, 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 such will be the case.
The 1993 Bank Credit Agreement contains numerous financial and operating
covenants and prohibitions that impose limitations on the liquidity of the
Company, including requirements that the Company satisfy certain financial
ratios and maintain certain specified levels of net worth, and limitations on
the incurrence of additional indebtedness. See "Description of the 1993 Bank
Financing -- Covenants." The indentures governing the Senior Notes and the
Discount Notes also contain covenants that impose limitations on the liquidity
of the Company and Holdings, including a limitation on the incurrence of
additional indebtedness. See "Description of the Senior Notes -- Certain
Covenants" and "Description of the Discount Notes -- Certain Covenants." The
ability of the Company and Holdings to meet their debt service requirements and
to comply with such covenants will be dependent upon future operating
performance and financial results of the Company, which will be subject to
financial, economic, competitive and other factors affecting the Company, many
of which are beyond its control.
Management anticipates expansion related capital expenditures in 1995 and
1996 to service volume growth at several locations. During 1994 capital
expenditures totaled $10.8 million. The Company anticipates that capital
expenditures will total approximately $8.0 million to $8.5 million for each of
the years 1995 through 1997.
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement 109"). Statement 109 requires a change from the deferred method of
accounting for income taxes of APB Opinion 11 to the asset and liability method
of accounting for income taxes. Under the asset and liability method of
Statement 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. The Company
and Holdings have adopted the provisions of Statement 109 effective January 1,
1993 and the cumulative effect of the change in accounting for income taxes was
immaterial.
In December 1990, the Financial Accounting Standards Board issued Statement
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions"
("Statement 106") which is effective for fiscal years beginning after December
15, 1992. The Company and Holdings do not provide postretirement benefits and,
therefore, the provisions of Statement 106 are not applicable.
In November 1992, the Financial Accounting Standards Board issued Statement
112, "Employers' Accounting for Postemployment Benefits" ("Statement 112") which
is effective for fiscal years beginning after December 15, 1993. The Company and
Holdings do not provide postretirement benefits and, therefore, the provisions
of Statement 112 are not applicable.
BUSINESS
GENERAL
The Company produces, markets and distributes carbonated soft drinks
pursuant to franchise agreements with companies owning the rights to various
soft drink formulae. Principal products are bottled and canned under franchises
from Dr Pepper/Seven-Up Corporation (DR PEPPER and SEVEN-UP brand products),
Cadbury Beverages North America, Inc. (CANADA DRY, SUNKIST, A&W, SQUIRT, and
COUNTRYTIME brand products), Royal Crown Cola Company, Big Red, Inc. (BIG RED)
and The Monarch
22
<PAGE> 23
Company, Inc. (NUGRAPE). The Company also distributes certain other
non-carbonated soft drinks, including leading bottled waters such as Evian and
Naya, within defined territories pursuant to distribution agreements with
various companies. The Company's three major franchise territories are
Dallas/Fort Worth, Houston, and Waco, Texas. The Company's products compete
principally in the non-cola segments of the soft drink market, which represented
in the aggregate approximately 43% of the total soft drink sales volume through
supermarkets and grocery stores in the Company's franchise territories in 1994,
and appeal to a wide variety of consumer taste preferences. The Company believes
that its portfolio of highly recognizable non-cola franchise brands (which, in
the Company's territories, generally rank first or second in their respective
beverage flavor categories) enhance the Company's ability to compete effectively
for retail shelf space and further penetrate the "single drink" market.
The franchise and distribution agreements pursuant to which the Company
operates generally grant to the Company the exclusive right to market and
distribute the licensed product in bottles and cans. Certain of the franchise
agreements also grant to the Company the nonexclusive right to sell and
distribute fountain syrup within a described territory. Substantially all of the
franchise agreements are perpetual. However, the respective franchisors
generally may terminate such agreements in the event of a material breach of the
terms thereof by the Company. The Company's franchise agreements contain
comprehensive provisions regarding the production, distribution, and sale of the
franchisors' products and impose substantial obligations on the Company. Most of
the Company's franchise agreements contain special provisions that require the
Company to obtain the consent of the franchisor in the event of certain changes
in ownership of the Company. The terms of such change in ownership provisions
vary from agreement to agreement. The Company's franchise agreements contain
provisions prohibiting the Company from assigning its rights thereunder to any
other person without the consent of the franchisor. The Company may terminate
such franchise agreements generally upon the expiration of a notice period.
INDUSTRY TRENDS
The soft drink industry has historically been characterized by certain
favorable factors, including a low level of technological risk and the exclusive
marketing and distribution rights granted under franchise agreements. The
challenge to bottlers and franchisors has been to meet changing consumer tastes
with innovative products and packaging and increased product availability. The
Company believes that a growing awareness of health-related issues has caused
many consumers to shift their preferences away from hot drinks, such as tea or
coffee, and alcoholic beverages, and towards products such as bottled water,
diet and caffeine-free soft drinks and juice-added, sodium-free and
nutrient-added beverages. Additional concerns about the content and purity of
tap water have further strengthened the growth of these beverage categories, as
well as contributing to the demand for more traditional naturally sweetened soft
drinks.
In certain regions of the United States, the independent bottling industry
continues to be fragmented, with many small franchise territories and a number
of bottlers with only a few established brands. The Company believes that the
lack of a multi-brand product offering or large case volume renders many of
these bottlers unable to compete effectively for retail shelf space and limits
their ability to consistently match the advertising and promotional support
which larger bottlers can give to their brands. Accordingly, the Company
believes that smaller independent bottlers with contiguous territories may
represent acquisition opportunities for the Company which would allow the
Company to expand the geographic region within which the Company markets leading
non-cola products and to realize operating efficiencies in production and
distribution as a result of increased volume.
PRODUCTS
Franchise Case Sales. Franchise case sales represent primarily sales of the
Company's branded products to retailers only. The Company's principal soft drink
products are produced, marketed and distributed pursuant to franchise agreements
and include DR PEPPER, Diet DR PEPPER, 7UP, Diet 7UP, various CANADA DRY and
SUNKIST products, RC Cola, Diet Rite Cola, A & W Root Beer, Diet A & W Root
Beer, A & W Cream Soda, Diet A & W Cream Soda, SQUIRT, COUNTRYTIME Lemonade, BIG
RED and NUGRAPE.
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<PAGE> 24
Franchise case sales for the Company's principal soft drink products as a
percentage of the Company's total franchise case sales for the three years ended
December 31, 1992, 1993 and 1994 are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1992 1993 1994
<S> <C> <C> <C>
DR PEPPER................................................... 52.2% 51.5% 52.9%
Cadbury Beverages North America, Inc.(1).................... 12.1 12.5 12.2
7UP and Diet 7UP............................................ 10.6 11.1 11.2
Diet DR PEPPER.............................................. 11.1 10.6 10.5
RC Cola and Diet Rite Cola.................................. 4.8 4.6 4.3
BIG RED..................................................... 4.5 4.3 4.1
Other....................................................... 4.7 5.4 4.8
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
- ---------------
(1) Includes SUNKIST flavors, CANADA DRY products, CRUSH products A&W products,
SQUIRT, SUNDROP products and COUNTRYTIME Lemonade. On March 1, 1995,
Cadbury Beverages North America, Inc. consummated a tender offer whereby it
acquired the capital stock of Dr Pepper/Seven-Up Corporation.
Contract Sales. The Company also bottles and cans soft drink products for
sale to unaffiliated bottling companies that hold soft drink franchises and to
retailers of private label brand soft drink products. Contract sales may
fluctuate significantly from year to year, and are made at relatively low prices
and gross profit margins due to the competition for such sales. As a result,
contract case sales are not a primary focus of management in determining the
Company's business strategy, but are undertaken to utilize available capacity
and to offset fixed overhead expenses. Contract sales represented approximately
8.8%, 7.6% and 7.3% of the Company's net sales in 1992, 1993, and 1994,
respectively, and approximately 5.3%, 5.4% and 6.0% of the Company's gross
profit in 1992, 1993 and 1994, respectively.
OPERATING STRATEGY
The Company's operating strategy is to (i) manufacture and market leading
soft drink products within a comprehensive range of soft drink categories,
principally focusing on sales of national brands in the non-cola segments of the
soft drink market; (ii) increase the market shares of its portfolio of brands by
utilizing a wide range of marketing activities, including price and consumer
promotion, retail space management and advertising; (iii) broaden its
penetration of the higher margin "single drink" segment of the soft drink market
and (iv) acquire contiguous bottling territories and additional franchises for
major brands within existing territories. Management believes that this strategy
will enable the Company to market products meeting a wide variety of consumer
preferences and result in case sales growth within its operating territories.
By utilizing the Company's marketing and distribution strengths, the
Company believes that it can realize growth in the major segments where soft
drink products are sold. These segments are the "home market," consisting of
supermarkets, grocery stores, mass merchandisers, drugstores, liquor stores and
other similar retail outlets, and the "single drink" or on-premise segment,
consisting of convenience stores, vending, and fountain outlets. Single drink
sales generally are less susceptible to price competition and, accordingly,
offer the prospect of higher margins. In addition, the Company believes that
single drink sales afford the Company the opportunity to introduce its products
and packaging innovations to new consumers. The Company, therefore, has
aggressively pursued, and intends to continue to aggressively pursue, sales in
the single drink or on-premise segment.
MARKETING
The principal components of the Company's marketing program are brand
management, customer service, promotional activities and product merchandising.
The Company's marketing programs vary according to geographic location, consumer
preferences and the competitive environment.
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<PAGE> 25
Marketing programs for each of the Company's franchised brands 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 efforts
focuses on price discounting and allowances, newspaper advertising and coupons.
The goal of these activities is to position the Company's brands competitively
in the marketplace and obtain "feature" retail advertisements and end-aisle
displays in high volume retail outlets. End-aisle and secondary displays are
important marketing tools because they are tied to special promotions and
feature advertisements designed to stimulate sales and encourage impulse
purchases. The Company's merchandisers are responsible for building displays in
conjunction with promotional programs and restocking products on the beverage
aisles of grocery stores.
Marketing expenditures are incurred by the Company, by the franchisors and
by cooperative arrangements between the two. 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 cooperative
arrangements with the franchisors. National media advertising is funded
primarily by the franchisors, while local media advertising is funded through
cooperative arrangements.
SALES AND DISTRIBUTION
The Company's sales methods vary according to its geographic markets and
specific customer segments. Sales in the larger markets are oriented towards
high-volume customers such as large retail chains, which results in economies of
scale in selling and distribution expenses. Products are generally sold in
advance by a salesperson. Orders are then delivered and merchandised within 24
hours by other Company employees. Some market segments, however, are served by
traditional route sales. This sales method requires that the drivers of the
route trucks perform both a sales and delivery function. Account volume is often
the determining factor in establishing the appropriate sales method.
The Company seeks to maximize market penetration by effectively utilizing
its distribution channels. The Company's principal method of distribution is
direct-store-door ("DSD") delivery, which is also the Company's preferred method
of distribution because the Company has greater control over the sales,
marketing and merchandising of products. Deliveries are made from distribution
facilities by the Company's fleet of trucks. In certain rural territories or
small volume areas where DSD is not cost efficient, an independent distributor
is engaged by the Company to sell its franchise products. In most situations,
the distributor is required to purchase finished product from the Company.
The Company also manufactures products for other independent bottlers or
private label owners that lack sufficient volume to justify the capital
investment of a manufacturing plant. These contract bottling operations generate
profit margins which are typically less than DSD operations.
The "single drink" or on-premise segment consists of convenience stores,
vending, and fountain outlets. The Company's estimated 42,000 vending machines
are typically Company-owned and loaned to retail outlets or distributors. The
Company is primarily responsible for machine maintenance and product restocking.
Both the Company and retail customers effect sales through vending machines.
Fountain equipment, which is primarily owned by the Company, dispenses products
in restaurants, bars, amusement parks, theaters and other similar locations. The
Company sells either premix products (ready-to-serve beverages) or postmix
products (fountain syrups to which carbonated water must be added) to retailers
in stainless steel or disposable containers for use in fountain equipment. The
Company generally loans visi-coolers (brand identified refrigerated cabinets) to
large retail outlets and convenience stores that sell the Company's products.
COMPETITION
The soft drink business is highly competitive. The Company's soft drink
products compete generally with all liquid refreshments and in particular with
numerous nationally-known soft drinks such as Coca-Cola and Pepsi Cola, the
bottlers of which have greater financial resources than the Company. Principal
methods of competition in the soft drink industry are advertising campaigns,
pricing, packaging, management of shelf
25
<PAGE> 26
space in retail outlets, and the development of new products. In recent years,
price competition has been especially intense with respect to sales of soft
drink products to food stores, with local bottlers granting significant
discounts and allowances off wholesale prices in order to maintain or increase
market share in the food store segment.
PLANTS AND PHYSICAL PROPERTIES
The Company currently bottles and cans soft drink products in its
production facilities located in Irving and Houston, Texas. The Houston facility
was completed, and its bottling and canning lines were installed, in 1981. The
Irving facility's lines were installed in 1978. The Irving and Houston, Texas
facilities primarily operate on the equivalent of a one-shift basis, consisting
of 10 hours, four days a week. Management believes that there is substantial
additional capacity available with little or no capital expenditures required to
realize such capacity. The Company also owns warehouse distribution facilities
in Waco, Spring, Beaumont, Fort Worth, Sherman, and Galveston, Texas and a
facility in Dallas, Texas from which it conducts vending operations.
On June 30, 1989, the Company completed the sale and leaseback of its
Irving and Houston production facilities. The net proceeds from such transaction
were used to reduce outstanding borrowings under the term loan portion of the
1988 Credit Agreement.
The Company owns the trucks used to service its Houston and Waco franchise
territories. The Company leases the trucks used to service its Dallas/Ft. Worth
franchise territory.
SOURCES AND AVAILABILITY OF RAW MATERIALS; INVENTORIES
The Company may purchase concentrates and syrups only from its franchisors
for use in the production of its respective soft drink products. The Company
purchases sweeteners, carbon dioxide, glass and plastic bottles, cans, closures,
premix and postmix containers (including metal tanks and plastic bags and
cardboard boxes) and other packaging materials from multiple suppliers.
The Company does not anticipate any significant difficulties in securing
adequate supplies of raw materials at acceptable prices in the future.
One week's inventory of concentrate is kept on site for the Company's
principal soft drink brands. An inventory of two to three days of high fructose
corn sweetener is usually maintained. As numerous suppliers are available, only
one to two days' inventory for cans, glass, and plastic bottles is maintained.
EMPLOYEES
As of February 28, 1995, the Company employed 1,347 persons. No Company
employees are represented by a union, and the Company considers its employee
relations to be good.
GOVERNMENT REGULATION
The production and marketing of beverages are subject to rules and
regulations of the United States Food and Drug Administration ("FDA") and other
federal, state, and local health agencies. The FDA also regulates the labelling
of containers. The Company believes that it is in material compliance with the
rules and regulations of the FDA.
The Company is subject to the rules and regulations of the United States
Environmental Protection Agency (the "EPA") and state and local environmental
authorities. The Company believes that it is in material compliance with the
rules and regulations of the EPA and such authorities.
LEGAL PROCEEDINGS
The Company is a party to various lawsuits arising in the ordinary course
of business. The Company, however, does not believe that the outcome of any of
these lawsuits will have a material adverse effect on its business or financial
condition.
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<PAGE> 27
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages, and positions of the executive
officers and directors of the Company and the executive officers and directors
of Holdings. All directors hold office until the next annual meeting of
stockholders and until their successors are duly elected and qualified and all
executive officers hold office at the pleasure of the Board of Directors. The
New Stockholders Agreement (as defined herein) contains certain provisions
regarding the composition of the Board of Directors of Holdings. See "Securities
Ownership and Certain Transactions -- Certain Transactions -- Stockholders
Agreement."
NAME AND AGE OFFICE AND PRINCIPAL OCCUPATION
Jim L. Turner, 49..................... Chairman of the Board of Holdings;
Chairman, President, and Chief
Executive Officer of the Company
since 1985; Director of The
Morningstar Group Inc.; Director of
All American Bottling Corporation;
Director of G. Heileman Brewing
Company, Inc.
Thomas O. Hicks, 49................... Director of Holdings; Director of the
Company; Director of Sybron
Corporation; Director of Neodata
Corporation; Director of Life
Partners Group, Inc.; Director of
Berg Electronics, Inc.; Director of
G. Heileman Brewing Company, Inc.;
Chairman of the Board of Chancellor
Communications Corporation;
Director of HMW Communications,
Inc.; Director of Semi-Tech, Inc.;
Co-Founder, Chairman of the Board,
President, Chief Executive Officer
and Chief Operating Officer of
Hicks, Muse, Tate & Furst,
Incorporated, a Dallas-based
private investment firm organized
in 1989; Co-Chairman of the Board
and Co-Chief Executive Officer of
Hicks & Haas Incorporated.
William O. Hunt, 61................... Director of Holdings; Director of
Michael's Stores, Inc.; Chairman of
the Board of Hogan Systems, Inc.;
Director of Allen Group, Inc.;
Chairman of the Board, Chief
Executive Officer and President of
Intellical Inc. from 1992 to
present; Chairman of the Board,
Chief Executive Officer and
President of Alliance
Telecommunications Corporation from
1989 to 1992; private investor from
1988 to 1989; Chairman of the Board
and Chief Executive Officer of
Alliance Telecommunications
Corporation from 1986 to 1988;
private investor from 1985 to 1986;
Chairman of the Board and Chief
Executive Officer of NetAmerica,
Inc. from 1983 to 1985.
J. Kent Sweezey, 42................... Director of Holdings; Managing
Director of DLJ Securities, which
is engaged in the investment
banking business, since 1990;
Senior Vice President of DLJ
Securities from 1989 to 1990; Vice
President of DLJ Securities from
1984 to 1989.
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<PAGE> 28
NAME AND AGE OFFICE AND PRINCIPAL OCCUPATION
Harold Wisnoski, 61................... Senior Vice President -- Operations
since 1988; Vice President --
Operations from 1984 to 1988.
C. Marvin Montgomery, 54.............. Vice President -- Finance and Chief
Financial Officer of the Company
and Holdings since 1989; Vice
President -- Finance of Coca-Cola
Bottlers of Detroit, Inc. from 1987
to 1989.
Thomas J. Taszarek, 48................ Senior Vice President --
Administration since 1993; Vice
President -- Personnel since 1986.
Charles D. Burkhart, 46............... Senior Vice President -- Marketing,
D/FW Division since 1993; General
Manager of Quality Beverage
Company, Inc., a distributor of
alcoholic and non-alcoholic
beverages, from 1992 to 1993;
President of Shenley Affiliated
Brands, a division of Guinness,
PLC, a producer and importer of
alcoholic and non-alcoholic
beverages, from 1988 to 1992.
L. Glenn Glasco, 61................... Vice President -- Southwest Fountain
Supply/ Vending Services since
1983.
Richard E. Edgell, 39................. Regional Vice President -- Sales and
Marketing, Houston Region since
1990; Regional Vice President of
Sales of Kemmerer Bottling,
Indianapolis, Indiana from 1988 to
1990.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth all compensation paid by the Company to its
Chief Executive Officer and the four remaining most highly compensated executive
officers for the three fiscal years ended December 31, 1992, 1993 and 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL AWARDS
COMPENSATION ------------
------------------ OPTIONS/ ALL OTHER
SALARY BONUS SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($)(1)
- ----------------------------------------- ---- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Jim L. Turner 1994 410,000 299,000 -- 3,946
Chairman, President and 1993 404,153 318,750 6,449
Chief Executive Officer 1992 396,461 226,000 6,262
Charles D. Burkhart(2) 1994 140,000 17,050 -- --
Senior Vice President -- Marketing, 1993 29,615 15,000 -- --
Dallas/Ft. Worth division 1992 -- -- -- --
Harold Wisnoski 1994 110,933 24,050 -- 2,025
Senior Vice President -- 1993 107,500 31,000 2,264
Operations 1992 111,634 30,000 2,545
Eugene W. Honermann(3) 1994 118,029 23,050 -- 2,116
Senior Vice President -- Sales, 1993 115,000 31,000 2,389
Dallas/Ft. Worth division 1992 111,347 30,000 2,540
C. Marvin Montgomery 1994 99,469 15,050 -- 1,718
Vice President -- Finance and Chief 1993 94,942 22,000 1,923
Financial Officer 1992 91,384 17,000 1,851
</TABLE>
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<PAGE> 29
- ---------------
(1) The 1994 amounts include:
(a) As to Mr. Turner, (i) the Company's matching contributions of $2,250
under the Savings Plan (as defined herein), (ii) payment by the
Company of a premium of $989 for the term portion of a life insurance
policy on behalf of Mr. Turner, and (iii) $707, which represents the
dollar value of the benefit to Mr. Turner of the remainder of the
premiums paid by the Company during 1994 under such insurance policy.
(b) As to Messrs. Wisnoski, Honermann, Montgomery and Edgell, the
Company's matching contributions of the respective amounts under the
Savings Plan.
(2) Mr. Burkhart was hired by the Company on October 11, 1993.
(3) Mr. Honermann resigned from the Company during the first quarter of 1995.
Employment Agreement
Mr. Turner has entered into an eight-year employment agreement, dated as of
February 18, 1993, with the Company to serve as its Chairman, President and
Chief Executive Officer. Such employment agreement provides that Mr. Turner
receive an annual salary of $425,000 during the first year of the agreement, and
that such salary be increased during each succeeding year of the agreement by 7%
of the base salary paid in the preceding year of the agreement. Mr. Turner also
will be provided the use of a car during the term of the agreement and other
benefits customary in employment agreements. The employment agreement also
contains provisions governing Mr. Turner's participation in employee benefit
plans and the payment of an annual incentive bonus to Mr. Turner based on the
Company's attainment of specified operating goals. The employment agreement
provides that the Company will purchase an annuity contract for the benefit of
Mr. Turner to provide an annuity income at age 55 of approximately $150,000 per
year.
The employment agreement provides that if Mr. Turner's employment is
terminated due to death or disability, Mr. Turner or his personal representative
will receive on the dates when due payments equal to 100% of his salary and
bonus for the first three years following death or disability and 75% of his
salary and bonus for each remaining year of the agreement plus any amounts due
under a policy of life insurance to be provided by the Company for the benefit
of his designated beneficiaries. In the event that Mr. Turner's employment is
terminated for reasons other than death or disability, the agreement provides
that he may elect to receive from the Company a lump-sum payment equal to the
present value of the base salary and bonus due to him for the remaining term of
the agreement, provided that he may not make such an election at any time when
there is a default under the 1993 Credit Agreement, or if the exercise of such
election or the payment by the Company of the amount required as a result of
such election would result in such a default. Further, the agreement provides
that regardless of his decision to make the above-described election, Mr. Turner
shall be entitled to receive in full any bonus not previously received by him
with respect to the fiscal year prior to the termination of his employment and a
pro-rated portion of the bonus payable with respect to the fiscal year in which
his employment is terminated.
Director Compensation
Messrs. Turner, Hicks and Sweezey do not receive compensation for their
services as directors. William O. Hunt, who served as trustee under a voting
trust agreement with DLJ Capital, received $25,000 per annum from DLJ Capital,
which was reimbursed by the Company, for serving as voting trustee and a
director of Holdings. See "Securities Ownership and Certain
Transactions -- Voting Trust Agreement." Mr. Hunt may receive compensation as an
"outside director" following the termination of the referenced voting trust
agreement. Holdings' current policy is to pay each "outside director" $1,000 per
month plus $1,000 per meeting attended. Directors of the Company and Holdings
are reimbursed for their reasonable expenses in attending meetings of the
respective boards of directors.
Company Profit Sharing Benefits
The Company maintains a tax-qualified defined contribution 401(k) profit
sharing plan known as the Dr Pepper Retirement & Savings Plan (the "Savings
Plan"). All employees over age 21 with one year of service are eligible to
participate in the Savings Plan. Participants may elect to defer up to fifteen
percent of
29
<PAGE> 30
their compensation and have it contributed to the Savings Plan on a pre-tax
basis. In addition, as long as it has sufficient net profits, as determined by
the Company's board of directors, the Company automatically matches fifty
percent of the first three percent of each participant's salary deferral
contributions. In accordance with the Internal Revenue Code of 1986, as amended,
the amount which may be contributed annually to the Savings Plan by or on behalf
of any participant is subject to the limitations imposed on defined contribution
plan contributions. Currently, these limitations prohibit participant salary
deferrals in excess of $9,240 annually (as adjusted for inflation) and limit
total participant and company contributions to the lesser of $30,000 annually
per participant or 25% of the participant's annual compensation. Additional
limitations on salary deferral and employer matching contributions apply to
highly compensated employees if certain nondiscrimination tests are not
satisfied.
Holdings' Stock Option Plan
Holdings adopted the Dr Pepper Bottling Holdings, Inc. 1989 Stock Option
Plan on January 17, 1989 (the "Stock Option Plan"). Options granted under the
Stock Option Plan will be exercisable for the Class A Common Stock of Holdings.
The maximum number of shares of the Class A Common Stock of Holdings to be
issued pursuant to the exercise of options granted under the Stock Option Plan
is 666,665 (which number is subject to adjustment in the case of certain
corporate reorganizations). Options granted under the Stock Option Plan may be
either qualified ("incentive options") under section 422 of the Internal Revenue
Code of 1986, as amended, or nonqualified ("non-statutory options"). Options may
be granted to consultants, employees, officers, and directors of Holdings and of
the Company. The Stock Option Plan provides that the board of directors, a
committee thereof, the President, or the Chief Executive Officer of Holdings
have the authority to grant options. Options granted under the Stock Option Plan
will be exercisable at such times, in such amounts, and at such exercise prices
as shall be determined by such of the board of directors, a committee thereof,
the President, or the Chief Executive Officer that actually grants the options;
provided, however, that the exercise price for incentive options granted under
the Stock Option Plan will be not less than the fair market value of the Class A
Common Stock of Holdings on the date of grant and the exercise price for
non-statutory options granted under the Stock Option Plan will be not less than
50% of the fair market value of the Class A Common Stock of Holdings on the date
of grant. The Stock Option Plan also contains provisions concerning the
treatment of an optionee's options in the event of the death or disability of
such optionee, a change in the optionee's relationship with Holdings or the
Company as an employee or director thereof or as a consultant thereto, or the
occurrence of certain fundamental corporate changes involving Holdings. The
Stock Option Plan also provides that optionees may be granted cash awards in
connection with the exercise of options.
As of February 28, 1995, 424,800 non-statutory options, exercisable at an
exercise price of $1.00 per share, had been granted pursuant to the Stock Option
Plan. In addition, 241,865 options, exercisable at an exercise price of $.90 per
share, had been granted under the Stock Option Plan. As of February 28, 1995,
666,165 options remained unexercised.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Neither the Company nor Holdings has a compensation committee. Functions
equivalent to those of a compensation committee are performed by the Company's
entire board of directors, of which Mr. Turner is the Chairman. Accordingly, Mr.
Turner participated in the deliberations of the Board of Directors concerning
compensation of executive officers (other than himself).
30
<PAGE> 31
SECURITIES OWNERSHIP AND CERTAIN TRANSACTIONS
SECURITIES OWNERSHIP
All the issued and outstanding shares of common stock of the Company are
held by Holdings. Holdings has guaranteed the obligations of the Company under
the 1993 Bank Credit Agreement and such guarantee is secured by a first
priority, perfected security interest in the common stock of the Company. The
following table sets forth the beneficial ownership of the outstanding shares of
Class A Common Stock, par value $.01 per share, of Holdings ("Class A Common
Stock") by each person who is a director of the Company or Holdings, each
executive officer listed in the Summary Compensation Table under the caption
"Management -- Compensation of Directors and Executive Officers" above, all
persons that are directors and executive officers of the Company and Holdings as
a group, and each person known by Holdings to be the beneficial owner of more
than 5% of the outstanding shares of such Class A Common Stock (i) as of May 1,
1995 and (ii) as of May 1, 1995 on a fully-diluted basis. Except as otherwise
discussed below, each of the directors, executive officers, and 5% stockholders
has sole voting and investment power with respect to all shares indicated as
being owned by such person. For information regarding the New Stockholders
Agreement (as defined herein), see "Certain Transactions -- Stockholders
Agreement" below.
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
CLASS A OUTSTANDING FULLY-DILUTED
NAME AND ADDRESS COMMON STOCK COMMON STOCK(1) COMMON STOCK(1)(2)
<S> <C> <C> <C>
DLJ Capital Corporation(3)(4)............................ 5,667,000 41.54% 33.67%
140 Broadway
New York, New York
Thomas O. Hicks(5)....................................... 925,322 6.78% 5.50%
200 Crescent Court
Suite 1600
Dallas, Texas
Jim L. Turner(3)(6)...................................... 3,550,200 25.57% 21.09%
2304 Century Center
Irving, Texas
William O. Hunt(7)....................................... 66,667 * *
6901 McKamy
Dallas, Texas
J. Kent Sweezey(8)....................................... -- -- --
2200 Ross Avenue
Suite 2900
Dallas, Texas
Charles D. Burkhart...................................... -- -- --
2304 Century Center
Irving, Texas
Harold Wisnoski(9)....................................... 8,500 * *
2304 Century Center
Irving, Texas
Eugene W. Honermann(9)................................... 10,000 * *
2304 Century Center
Irving, Texas
C. Marvin Montgomery(9).................................. 7,500 * *
2304 Century Center
Irving, Texas
Crown Cork & Seal Company, Inc.
Master Retirement Trust(3)(10)......................... 2,525,000 15.62% 15.00%
9300 Ashton Road
Philadelphia, Pennsylvania
Directors and officers
as a group (11 persons)(11)............................ 4,582,689 32.87% 27.22%
</TABLE>
- ---------------
* Less than one percent.
(1) Pursuant to Holdings' Certificate of Incorporation, each holder of Class A
Common Stock is entitled to one vote for each share thereof held.
(2) For purposes of calculating the percentage of outstanding shares of common
stock on a fully-diluted basis, the shares of Class A Common Stock issuable
upon the exercise of the Warrant issued as part of
31
<PAGE> 32
the Equity Offering and all the shares issuable upon the exercise of
options outstanding under the Stock Option Plan (including the options held
by Mr. Turner) are assumed to be outstanding.
(3) The shares of Class A Common Stock of such person are subject to the New
Stockholders Agreement. See "Certain Transactions -- Stockholders
Agreement" below.
(4) The referenced shares include 3,722,465 shares held by DLJ Securities as
Custodian under a Note, Pledge and Custody Agreement dated as of December
15, 1992 for the benefit of certain employees of Donaldson, Lufkin &
Jenrette Inc. and its affiliates. DLJ Securities and DLJ Capital are
affiliates of Donaldson, Lufkin & Jenrette Inc.
(5) As of May 1, 1995, Mr. Hicks held 465,744 shares of Class A Common Stock,
four trusts for the benefit of Mr. Hicks' children for which Mr. Hicks
serves as trustee owned an aggregate of 459,578 shares of Class A Common
Stock (representing in the aggregate 925,322 shares of Class A Common
Stock).
(6) Includes 241,865 shares of Class A Common Stock issuable to Mr. Turner upon
the exercise of outstanding stock options.
(7) Mr. Hunt has the right under an option to purchase such shares from DLJ
Capital. Mr. Hunt formerly served as the voting trustee under a voting
trust agreement with DLJ Capital. See "Certain Transactions -- Voting Trust
Agreement" below.
(8) Mr. Sweezey, a Managing Director of DLJ Securities, has been designated to
the Board of Directors of Holdings by DLJ Capital pursuant to the New
Stockholders Agreement.
(9) All such shares of Class A Common Stock are issuable upon the exercise of
outstanding stock options. Mr. Honermann resigned from the Company during
the first quarter of 1995.
(10) The 2,525,000 shares set forth in the table are the shares issuable upon
exercise of the Warrant issued as part of the Equity Offering. The Warrant
entitles the holder thereof to purchase up to 15% of the fully-diluted
common stock of Holdings.
(11) The shares of Class A Common Stock set forth in the table include the
shares held by Mr. Turner (including the shares referenced in note (6)
above), the shares held by Mr. Hicks (including the shares held by the
trusts referenced in note (5) above), the shares that Mr. Hunt has the
right to purchase from DLJ Capital, and the shares issuable to Mr.
Wisnoski, Mr. Honermann and Mr. Montgomery upon the exercise of outstanding
stock options.
CERTAIN TRANSACTIONS
Stockholders Agreement
In connection with the Recapitalization Plan and on the Closing Date,
Holdings, DLJ Capital, William O. Hunt, as voting trustee (the "Voting Trustee")
under the Voting Trust Agreement identified under "Voting Trust Agreement"
below, Jim L. Turner and Crown entered into a stockholders agreement (the "New
Stockholders Agreement"). Pursuant to the New Stockholders Agreement, DLJ
Capital, the Voting Trustee, Jim L. Turner and Crown agreed to vote their
capital stock to insure that the Board of Directors of Holdings will at all
times consist of five persons, one person designated by DLJ Capital, one person
designated by the Voting Trustee, and three persons designated by Jim L. Turner.
DLJ Capital designated Mr. Sweezey, the Voting Trustee designated himself and
Mr. Turner designated Mr. Hicks and himself to the Board of Directors. Mr.
Turner has advised Holdings that he has not yet determined whether he will
exercise his right under the New Stockholders Agreement to name one other
designee and, if so, who such designee will be. DLJ Capital has informed
Holdings that, in connection with the termination of the Voting Trust Agreement,
the Voting Trustee will assign its right to designate a director to DLJ Capital.
The New Stockholders Agreement also prohibits (with certain exceptions) Holdings
or any of its subsidiaries from engaging in certain fundamental corporate
transactions without the consent of DLJ Capital including, without limitation,
amendments to its charter or by-laws, mergers, acquisitions or the sale or lease
of substantially all of its assets, or issuances or sales of its capital stock,
or any rights to acquire capital stock or any securities or notes convertible
into or exchangeable for its capital stock. The right of Mr. Turner to designate
directors under the New Stockholders Agreement will terminate in the event that
Mr. Turner and/or his Affiliates (as defined) no longer own common stock and
common stock equivalents that collectively represent at least 17.5% of the fully
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<PAGE> 33
diluted common stock of Holdings (excluding from such calculation any common
stock and common stock equivalents issued after the date of the New Stockholders
Agreement). The right of designation of DLJ Capital and the requirement of
obtaining DLJ Capital's consent, as described above, will terminate in the event
that DLJ Capital and its Affiliates and/or the employees of DLJ Capital or its
Affiliates no longer own common stock or common stock equivalents that
collectively represent 17.5% of the fully diluted common stock of Holdings
(excluding from such calculation any common stock and common stock equivalents
issued after the date of the New Stockholders Agreement). The New Stockholders
Agreement grants certain rights of first refusal and tag-along rights with
respect to transfers of Class A Common Stock by the parties, other than certain
transfers by parties to the New Stockholders Agreement to their respective
affiliates and certain employees, or except pursuant to certain public
offerings. In addition, Holdings granted certain preemptive rights to the other
parties to the New Stockholders Agreement with respect to the issuance of common
stock and common stock equivalents. Also, under the New Stockholders Agreement,
Holdings granted the parties thereto certain demand and piggy-back registration
rights in respect of Class A Common Stock. The demand registration rights may be
exercised no earlier than two years after the date of the New Stockholders
Agreement. The New Stockholders Agreement will terminate in its entirety upon a
public offering of Holdings' common stock in the amount of $30.0 million or
more.
The preceding summary of certain provisions of the New Stockholders
Agreement is qualified in its entirety by reference to the full text of such
agreement, a copy of which has been filed with the Securities and Exchange
Commission (the "Commission") as an exhibit to the Registration Statement of
which this Prospectus is a part.
Voting Trust Agreement
DLJ Capital and William O. Hunt were parties to a Voting Trust Agreement
dated as of October 28, 1988, (the "Voting Trust Agreement"), pursuant to which
Mr. Hunt, as trustee, had exclusive power to vote any shares of Class A Common
Stock at any time owned by DLJ Capital or its affiliates that represented in
excess of 5% of the total number of shares of Holdings' voting stock at any time
outstanding. Pursuant to the Voting Trust Agreement, DLJ Capital directed Mr.
Hunt to enter into the New Stockholders Agreement. Mr. Hunt had full power and
authority to vote the shares subject to the Voting Trust Agreement as in his
sole judgment he believed to be in the best interests of the stockholders of
Holdings generally. Further, Mr. Hunt was required to vote the shares subject to
the Voting Trust Agreement (or use his power to designate a director of
Holdings) to prevent the election of more than one affiliate of DLJ Capital or
The Equitable Life Assurance Society of the United States, the parent company of
DLJ Capital, as a director of Holdings at each election of directors.
DLJ Capital has informed Holdings that DLJ Capital has terminated the
Voting Trust Agreement.
DLJ Capital entered into a Stock Option Agreement dated as of October 28,
1988, granting Mr. Hunt, in his individual capacity, an option to purchase from
DLJ Capital up to 66,667 shares of Class A Common Stock of Holdings for a period
of ten years at an option exercise price of $.90 per share. In addition, while
Mr. Hunt served as trustee under the Voting Trust Agreement, DLJ Capital paid to
him an annual fee of $25,000, which fee was reimbursed by the Company.
The preceding summary of certain provisions of the Voting Trust Agreement
is qualified in its entirety by reference to the full text of such agreement, a
copy of which has been filed with the Commission as an exhibit to the
Registration Statement of which this Prospectus is a part.
Transactions with DLJ Capital and its Affiliates
In connection with the Recapitalization Plan, DLJ Securities received $6.9
million in underwriting discounts and commissions for serving as underwriter of
the Senior Notes and the Discount Notes. DLJ Securities also served as dealer
manager for the Tender Offer and Consent Solicitation and received customary
fees and was reimbursed for expenses in connection therewith.
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DLJ Securities sold the note of the landlord (the "Landlord Note") under
the Company's sale-leaseback arrangement on October 19, 1993 at a price of
$17,698,500 (the "Sales Price") plus accrued interest of $95,985. DLJ Securities
received a commission of $176,985 in connection with such sale (1% of the Sales
Price) and reimbursement of $94,472 for expenses incurred in connection with
such sale, both of which were paid out of the proceeds from such sale. The
remaining proceeds from such sale in excess of the principal amount of the
Landlord Note plus accrued interest ($1,227,043) were paid to the Company.
Transactions with Jim L. Turner
Jim L. Turner, President and Chief Executive Officer of the Company and
Holdings, is a party to the New Stockholders Agreement.
As part of the Recapitalization Plan, in April 1993 Holdings issued and
sold 308,335 shares of Class A Common Stock to Mr. Turner at a purchase price of
$.90 per share, or $277,501.50 in the aggregate. The purchase price was paid by
the delivery by Mr. Turner to Holdings of $3,083.35 in cash and a promissory
note in the aggregate principal amount of $274,418.15 which has a term of five
years and bears a rate of interest at TCB's prime rate. Holdings has the right
to require Mr. Turner to reconvey to Holdings 140,000 of such shares in the
event that Holdings does not achieve certain minimum levels of net sales and
earnings before interest, taxes, depreciation and amortization for the year
ending December 31, 1994.
DESCRIPTION OF THE SENIOR NOTES
The Senior Notes were issued under an Indenture (the "Senior Notes
Indenture") between the Company and U.S. Trust Company of Texas, N.A., as
Trustee (the "Senior Notes Trustee"), a copy of which is filed as an exhibit to
the Registration Statement of which this Prospectus is a part. The following
summaries of certain provisions of the Senior Notes Indenture are qualified in
their entirety by reference to all the provisions of the Senior Notes Indenture.
Wherever particular sections or defined terms of the Senior Notes Indenture are
referred to, such sections or defined terms are incorporated herein by
reference. Capitalized terms not otherwise defined below or elsewhere in this
Prospectus have the meanings given to them in the Senior Notes Indenture.
GENERAL
The Senior Notes are general unsecured obligations of the Company, senior
in right of payment to all subordinated indebtedness of the Company (including
the Old Discount Notes) and pari passu in right of payment to all other
unsecured indebtedness of the Company, and are limited to $125 million in
aggregate principal amount. The Senior Notes are issuable only in registered
form, without coupons, in denominations of $1,000 or any integral multiple
thereof.
MATURITY, INTEREST AND PRINCIPAL
The Senior Notes will mature on February 15, 2000. Interest on the Senior
Notes is payable in cash semi-annually on each February 15 and August 15,
commencing August 15, 1993 (each an "Interest Payment Date"), to the persons in
whose names the Senior Notes are registered at the close of business on the
preceding February 1 and August 1 (each an "Interest Record Date"). Interest
will accrue from the most recent Interest Payment Date to which interest has
been paid or duly provided for or, if no interest has been paid or duly provided
for, from the date of issuance. Interest will be computed on the basis of a
360-day year of twelve 30-day months.
Principal and premium, if any, and interest on each Senior Note is be
payable, and the Senior Notes may be presented for transfer or exchange, at the
office or agency of the Company maintained for such purpose. At the option of
the Company, payment of interest may be made by check mailed to registered
holders of the Senior Notes at the addresses set forth on the registry books of
the Company. No service charge will be made for any exchange or registration of
transfer of Senior Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith. Unless otherwise designated by the Company, the Company's office or
agency will be the corporate trust office of the Senior Notes Trustee.
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<PAGE> 35
OPTIONAL REDEMPTION
The Senior Notes may not be redeemed prior to February 16, 1998. On or
after February 16, 1998, the Company, at its option, may redeem the Senior Notes
in whole or in part at the following redemption prices (expressed as percentages
of the principal amount thereof) together with accrued and unpaid interest to
the redemption date:
<TABLE>
<CAPTION>
IF REDEEMED DURING THE TWELVE-MONTH REDEMPTION
PERIOD BEGINNING FEBRUARY 16, PRICE
<S> <C>
1998............................................................ 101.708%
1999............................................................ 100.000%
</TABLE>
In case of a partial redemption, selection of Senior Notes or portions
thereof for redemption shall be made by the Senior Notes Trustee in such manner
as in its sole discretion it shall deem appropriate and fair. Senior Notes may
be redeemed in part in multiples of $1,000 only.
The 1993 Bank Credit Agreement contains provisions that prohibit optional
redemption of the Senior Notes until all amounts due thereunder have been paid
in full.
Notice of redemption will be sent, by first-class mail, at least 30 days
and not more than 60 days prior to the date fixed for redemption to each holder
of Senior Notes to be redeemed at the last address for such holder then shown on
the registry books. Any notice that relates to a Senior Note to be redeemed in
part only shall state the portion of the principal amount to be redeemed and
that on and after the redemption date, upon surrender of the Senior Note, a new
Senior Note or Senior Notes will be issued in a principal amount equal to the
unredeemed portion thereof. On and after the redemption date (unless the Company
shall default in the payment of such Senior Notes at the redemption price,
together with accrued interest to the redemption date), interest will cease to
accrue on the Senior Notes or part thereof called for redemption.
COVENANTS
The Senior Notes Indenture contains, among other things, the following
covenants:
Change in Control
If a Change in Control occurs, each holder shall have the right to require
the Company to repurchase in whole or in part such holder's Senior Notes at a
purchase price in cash equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of repurchase.
Within 30 days following any Change in Control, the Company shall mail a
notice to each holder stating:
(1) that a Change in Control has occurred and that such holder has the
right to require the Company to repurchase in whole or in part such
holder's Senior Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the
date of repurchase;
(2) such other information as may be required by applicable law and
regulations;
(3) the repurchase date (which shall be no earlier than 20 business
days nor later than 30 business days from the date such notice is mailed);
and
(4) the instructions determined by the Company, consistent with this
covenant and applicable law, that a holder must follow in order to have its
Senior Notes repurchased.
The Company's ability to repurchase Senior Notes upon a Change in Control
may be limited by the terms of then existing contractual obligations. The 1993
Bank Credit Agreement prohibits any such repurchases unless all amounts
outstanding under the 1993 Bank Credit Agreement have been paid in full. In
addition, the Company may not have adequate financial resources to effect such
an offer. The inability of the Company to repurchase Senior Notes upon a Change
in Control would constitute an Event of Default under the Senior Notes
Indenture.
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The Company will comply with all applicable tender offer rules (including,
without limitation, Rule 14e-1 under the Exchange Act) in the event that the
Company is required to make an offer to repurchase the Senior Notes following a
Change in Control.
Limitation on Debt
The Company will not, and will not permit its subsidiaries to, create,
incur or assume or otherwise become liable for any Debt, except (a) Debt
incurred by the Company pursuant to borrowings under the 1993 Bank Credit
Agreement in an aggregate principal amount not to exceed $125 million; provided
that such $125 million limit shall be reduced by any scheduled prepayments under
the term loan portion of the 1993 Bank Credit Agreement as in effect on the date
of the Senior Notes Indenture; (b) Debt evidenced by the Senior Notes; (c) Debt
of the Company to any subsidiary and of any subsidiary to the Company or any
other subsidiary; (d) Acquisition Debt related to an advance, loan or investment
permitted by clause (f) under the "Limitations on Investments, Loans or
Advances" covenant described below or the acquisition by the Company of all or
any portion of the assets of any person engaged in the manufacturing, packaging,
marketing, or distribution of beverages, the full line vending business, or the
manufacturing of products used in any of the foregoing provided a majority of
such assets acquired relate to the foregoing and provided that the principal
amount of such Acquisition Debt at any time outstanding does not exceed $40
million; (e) Debt outstanding on the date of the Senior Notes Indenture; (f)
Debt of the Company attributable to any Interest Rate Agreement; (g) Debt of the
Company attributable to letters of credit used in the ordinary course of
business; (h) to the extent not otherwise provided for in clauses (a) through
(g) above, Debt of the Company the aggregate outstanding principal amount of
which shall not at any time exceed $10 million; and (i) any extension, renewal
or replacement by the Company of any of (a), (b), (d) and (e) above provided
that (1) the amount of the Debt issued pursuant to this clause (i) (or, if such
new Debt is issued at a price less than the principal amount thereof, the
original issue price) shall not exceed the Debt being extended, renewed or
replaced (plus accrued interest and fees and expenses related thereto) or, in
the case of any extension or renewal of a revolving credit facility or the
replacement of any revolving credit facility with another revolving credit
facility, without increasing the aggregate principal amount that may be borrowed
under such facility, (2) if the Debt being extended, renewed or replaced has a
maturity after February 15, 2000, the Debt issued pursuant to this clause (i)
shall have not have a maturity prior to February 16, 2000, and (3) if the Debt
being extended, renewed or replaced is subordinate to the Senior Notes, the Debt
issued pursuant to this clause (i) must be subordinate at least to the same
extent.
Notwithstanding the foregoing, the Company may create, incur or assume or
otherwise become liable with respect to Debt if, at the time such Debt is so
created, incurred or assumed (the "Incurrence Date") and after giving effect
thereto and to the application of the proceeds thereof, the pro forma ratio of
Consolidated Cash Flow to Fixed Charges for the four fiscal quarters ending with
the fiscal quarter ended immediately preceding the Incurrence Date shall not be
less than 1.75 to 1 if the Incurrence Date is on or prior to March 31, 1996 and
2.25 to 1 if the Incurrence Date is subsequent thereto. The pro forma ratio of
Consolidated Cash Flow to Fixed Charges will, as applicable, be calculated on
the following basis: (a) notwithstanding clauses (a) and (b) of the definition
of Consolidated Net Income (Loss) set forth under "Certain Definitions," if the
Debt which is being created, incurred or assumed is Acquisition Debt, the ratio
of Consolidated Cash Flow to Fixed Charges shall be determined on a pro forma
basis giving effect to the creation, incurrence or assumption of such
Acquisition Debt, application of the proceeds therefrom, Fixed Charges related
thereto and Consolidated Cash Flow of such acquired person, business, property
or asset as if such transaction had occurred at the beginning of such four
quarter period; and (b) there shall be excluded from Fixed Charges any Fixed
Charges related to Debt (other than Debt created, incurred or assumed for
working capital purposes) repaid during the pro forma period or thereafter and
which is not outstanding on the Incurrence Date. For purposes of the foregoing
provision, cash flow generated by any acquired person, business, property or
asset shall be determined on the same basis provided in the definition of
Consolidated Cash Flow set forth under "Certain Definitions" during the
immediately preceding four full fiscal quarter period plus (y) (i) the savings
in cost of goods sold that would have resulted during that period from the
effect of using the Company's actual costs for comparable goods and services
during that period and (ii) other savings in cost of goods sold or eliminations
of selling, general and administrative expenses as determined by
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<PAGE> 37
the Company in good faith in its consideration of such acquisitions and
consistent with the Company's experiences in acquisitions of similar businesses
minus (z) the incremental expenses that would be included in costs of goods sold
and selling, general and administrative expenses that would have been incurred
by the Company in the operation of such acquired person, business, property or
assets during such period as determined by the Company in good faith in its
consideration of such acquisitions and consistent with the Company's experiences
in acquisitions of similar businesses. In addition, for purposes of this
paragraph, Consolidated Cash Flow and Fixed Charges shall be calculated after
giving effect on a pro forma basis for the period of such calculation to the
creation, incurrence or assumption of any Debt (other than Debt created,
incurred or assumed for working capital purposes) at any time during the period
commencing on the first day following the four full fiscal quarter period that
precedes the Incurrence Date and ending on and including the Incurrence Date
(and that is outstanding on the Incurrence Date), including, without limitation,
the incurrence of the Debt giving rise to the need to make such calculation, as
if such creation, incurrence or assumption occurred and the proceeds therefrom
had been applied on the first day of such four full fiscal quarter period.
For purposes of the preceding two paragraphs, any waiver, extension or
continuation of any or all mandatory prepayments or installment payments by the
Company of any of the Debt under the term loan portion of the 1993 Bank Credit
Agreement shall not be or be deemed to be the creation, incurrence or assumption
of Debt by the Company to the extent that the amount of outstanding borrowings
by the Company thereunder has not been increased.
Limitation on Restricted Payments
The Company and its subsidiaries will not make any Restricted Payment if,
after giving effect thereto: (a) an Event of Default, or an event that with the
passage of time or the giving of notice, or both, would constitute an Event of
Default, shall have occurred and be continuing; or (b) the aggregate amount of
all Restricted Payments made by the Company and its subsidiaries (the amount
expended or distributed for such purposes, if other than in cash, to be
determined in good faith by the Board of Directors, whose determination shall be
conclusive and evidenced by a resolution of the Board of Directors filed with
the Senior Notes Trustee) from and after the date of the Senior Notes Indenture,
shall exceed the sum (without duplication) of (i) the aggregate of 50% of the
Consolidated Net Income (Loss) (or in the event of a loss, 100% of any such
loss) of the Company accrued for the period (taken as one accounting period)
commencing with the first full fiscal quarter after the date of the Senior Notes
Indenture to and including the fiscal quarter ended immediately prior to the
date of such calculation plus (ii) the aggregate net proceeds, including the
fair market value of property other than cash (as determined in good faith by
the Board of Directors, whose determination shall be conclusive and evidenced by
a resolution of the Board of Directors filed with the Senior Notes Trustee),
received by the Company from the issuance or sale (other than to a subsidiary)
from and after the date of the Senior Notes Indenture of its Capital Stock
(excluding any Redeemable Stock or Capital Stock convertible into Redeemable
Stock, but including Capital Stock other than Redeemable Stock issued upon
conversion of, or exchange for, Redeemable Stock or securities other than its
Capital Stock), and warrants and rights to purchase its Capital Stock plus (iii)
$7.5 million; provided that the foregoing clause (b) shall not prevent (A) the
making of Permitted Payments; and (B) the payment of any dividend within 60 days
after the date of its declaration if such dividend could have been made on the
date of its declaration without violation of clauses (a) and (b) above; provided
that the amount of Restricted Payments made pursuant to clause (B) above shall
be included in any computation of the amount of Restricted Payments made
pursuant to this provision. As used herein, the aggregate net proceeds received
by the Company (x) from the issuance of its Capital Stock upon the conversion
of, or exchange for, securities evidencing Debt of the Company shall be
calculated on the assumption that the gross proceeds from such issuance are
equal to the aggregate principal amount of the Debt evidenced by such securities
converted or exchanged and (y) upon the conversion or exchange of other
securities of the Company shall be equal to the aggregate net proceeds of the
original sale of the securities so converted or exchanged if such proceeds of
such original sale were not previously included in any calculation of aggregate
proceeds for purposes of this provision plus any additional sums payable upon
conversion or exchange.
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Limitation on Investments, Loans and Advances
The Company will not, and will not permit any of its subsidiaries to, make
any advances or loans to, or investments (by way of transfers of property,
contributions to capital, acquisitions of stock, securities or evidences of
indebtedness, or otherwise) in, any other person, except that: (a) any
subsidiary of the Company may make advances or loans to or investments in the
Company and the Company may make investments in any wholly-owned subsidiary to
the extent permitted under the 1993 Bank Credit Agreement as in effect on the
date of the Senior Notes Indenture; (b) each of the Company and its subsidiaries
may acquire and hold receivables owing to it, if created or acquired in the
ordinary course of business and payable or dischargeable in accordance with
customary trade terms (provided that nothing in the foregoing shall prevent the
Company or any subsidiary from offering such concessionary trade terms as
management deems reasonable in the circumstances); (c) the Company and its
subsidiaries may make investments in cash and Cash Equivalents; (d) the Company
or any of its subsidiaries may make payroll, travel and similar advances to
cover matters that are expected at the time of such advances ultimately to be
treated as expenses for accounting purposes and that are made in the ordinary
course of business; (e) the Company or any of its subsidiaries may acquire and
own stock, obligations or securities received in settlement of debts created in
the ordinary course of business and owing to the Company or such subsidiary or
in satisfaction of judgments; (f) the Company and any of its subsidiaries may
make investments (by way of transfers of property, contributions to capital,
acquisitions of equity securities or evidences of indebtedness, or otherwise) in
any person (including, without limitation, any subsidiary of the Company),
provided that (i) at least a majority of such person's revenues result from the
manufacturing, packaging, marketing, or distribution of beverages, the full line
vending business, or the manufacturing of products used in any of the foregoing
and (ii) immediately after making such investment, the Company or the Company
and its subsidiaries possess the power to direct the management and policies of
such entity, directly or indirectly, through the ownership of voting securities,
by contract or otherwise; (g) the Company and its subsidiaries may make
investments in (i) stock options to purchase Common Stock of Holdings issued to
employees of the Company or any of its subsidiaries pursuant to any employee
stock option plan or (ii) Common Stock of Holdings issued in respect thereof, in
either case upon termination of such employee's employment with the Company or
such subsidiary; provided that the aggregate amount of payments described in
this clause (g) shall not exceed $200,000 in any 12-month period; and (h)
transactions with affiliates permitted as described below under "Transactions
with Affiliates."
Restrictions on Disposition of Assets
Subject to the paragraph headed "Limitations on Merger" below, the Company
will not, and will not permit any of its subsidiaries to, sell, transfer or
otherwise dispose of, in any 12-month period, any assets (including by way of
sale-and-leaseback), other than in the ordinary course of business, or the
Capital Stock of any subsidiary directly or indirectly owned by the Company,
with an aggregate value of greater than $5 million, unless (a) at least 75% in
value of the consideration received therefor by the Company or such subsidiary
is in the form of cash; provided that the amount of (i) any liabilities (as
shown on the Company's or such subsidiary's most recent balance sheet or in the
notes thereto) of the Company or any such subsidiary that are assumed by the
transferee in any such transaction and (ii) any marketable securities, notes or
other obligations received by the Company or any such subsidiary from such
transferee that are immediately converted by the Company or such subsidiary into
cash, shall both be deemed to be cash for the purposes of this provision;
provided further, however, that the 75% limitation referred to above shall not
apply to any sale, transfer or other disposition of assets (including the
Capital Stock of any subsidiary directly or indirectly owned by the Company) in
which the cash portion of the consideration received therefor, determined in
accordance with the foregoing proviso, is equal to or greater than what the
after-tax net proceeds would have been had such transaction complied with the
aforementioned 75% limitation; and (b) the net cash proceeds of the sale,
transfer or other disposition of such assets or Capital Stock are, within 12
months of receipt of such net cash proceeds, (i) applied to the permanent
reduction of amounts outstanding under the 1993 Bank Credit Agreement, (ii)
reinvested in the business or businesses of the Company or any of its
subsidiaries, (iii) subject to the "Limitations on Loans, Investments and
Advances" described above, utilized to make any advances or loans to or
investments (by way of transfers of property, contributions to capital,
acquisitions of stock, securities or evidences of indebtedness, or otherwise) in
any person, or (iv) are used to acquire all or a portion
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of the assets of any person engaged in the manufacturing, packaging, marketing
or distribution of beverages, the full line vending business, or the
manufacturing of products used in any of the foregoing provided a majority of
such acquired assets relate to the foregoing. If the Company or such subsidiary
does not elect to, or is not permitted to, apply any or all of such net cash
proceeds in accordance with one or more of the foregoing clauses (b)(i), (ii),
(iii) or (iv), then such net cash proceeds or any remaining portion thereof
shall be applied by the Company or such subsidiary within 12 months of such
receipt to make an offer to purchase Senior Notes (an "Asset Sale Offer") at a
price equal to 100% of the principal amount of Senior Notes to be repurchased
plus accrued interest thereon to the date of repurchase. Notwithstanding the
foregoing, in the event that such net cash proceeds, after giving effect to any
application thereof permitted by clause (b)(i), (ii), (iii) or (iv) above, are
less than $5 million, the application of such net cash proceeds to an Asset Sale
Offer may be deferred until such time as such net cash proceeds not otherwise
applied pursuant to clause (b)(i), (ii), (iii) or (iv) above are at least equal
to $5 million, at which time the Company or such subsidiary shall apply all such
net cash proceeds to an Asset Sale Offer.
The Company will comply with all applicable tender offer rules (including,
without limitation, Rule 14e-1 under the Exchange Act) in the event that the
Company is required to make an Asset Sale Offer.
Conduct of Business
The Company will not, and will not permit any of its subsidiaries to,
engage, directly or indirectly, in any business other than the manufacturing,
packaging, marketing or distribution of beverages, the full line vending
business, to the extent reasonably deemed necessary by the Company in connection
with the maintenance or extension of its beverage vending business, or the
manufacturing of any products used in any of the foregoing, to the extent
reasonably deemed necessary by the Company in connection with good faith efforts
by the Company to reduce its cost of goods sold. Notwithstanding the foregoing,
if the Company or any of its subsidiaries shall acquire, in a transaction
permitted under the "Limitation on Investments, Loans and Advances" covenant
described above, an interest in any person engaged in a business other than as
specified in the preceding sentence or assets used in any such other business,
it will not constitute a breach or violation of this covenant for the Company or
such subsidiary to continue such other business so long as it shall be using its
best efforts to promptly sell such other business.
Restriction on Issuance and Sale of Subsidiary Stock
The Company will not permit any of its subsidiaries to issue any shares of
its Capital Stock to any person other than the Company or one or more
wholly-owned subsidiaries. The Company will not and will not permit any of its
subsidiaries to sell, transfer or otherwise dispose of any shares of Capital
Stock of any of its subsidiaries to any person unless, at the time of such sale,
transfer or other disposition, all such shares of such subsidiary then owned by
the Company or any of its subsidiaries are so sold, transferred or otherwise
disposed of.
Limitations on Merger
The Senior Notes Indenture provides that the Company may not consolidate
with or merge with or into another person or sell, lease or convey all or
substantially all its assets to another person unless (a)(i) the Company is the
continuing corporation in the case of a merger or (ii) the resulting, surviving
or transferee person (the "Surviving Entity") is a corporation or partnership
organized under the laws of the United States, any state thereof or the District
of Columbia and expressly assumes by supplemental indenture all the obligations
of the Company under the Senior Notes Indenture and the Senior Notes; (b) no
Event of Default (or event or condition that with the passage of time, the
giving of notice, or both, would become an Event of Default) shall have occurred
and be continuing immediately after giving effect to such transaction; (c) the
Net Worth of the Company or the Surviving Entity on a pro forma basis after
giving effect to such transaction (but prior to any purchase accounting
adjustments resulting from the transaction) is not less than the Net Worth of
the Company immediately prior to such transaction; and (d) immediately after
giving effect to such transaction, the Company or the Surviving Entity, as the
case may be, could incur at least $1.00 of additional
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<PAGE> 40
Debt pursuant to the provisions of the Senior Notes Indenture described above in
the second paragraph under the caption "Limitation on Debt."
For purposes of clause (d) above, the ratio of Consolidated Cash Flow to
Fixed Charges shall be calculated such that (x) notwithstanding clauses (a) and
(b) of the definition of Consolidated Net Income (Loss) set forth below under
"Certain Definitions," the ratio of Consolidated Cash Flow to Fixed Charges
shall be determined on a pro forma basis giving effect to the creation,
incurrence or assumption of Debt by the Company in connection with any merger or
consolidation, the Fixed Charges related thereto and the Consolidated Cash Flow
of the person merging with or into or consolidating with the Company, and (y)
there shall be excluded from Fixed Charges any Fixed Charges related to Debt
(other than Debt created, incurred or assumed for working capital purposes) of
the Company and its subsidiaries repaid during the pro forma period or
thereafter and which is not outstanding on the date of the transaction giving
rise to such calculation (the "Transaction Date"). For purposes of this
"Limitations on Merger" provision, Consolidated Cash Flow and Fixed Charges
shall be calculated after giving effect on a pro forma basis for the period of
such calculation to the creation, incurrence or assumption of any Debt (other
than Debt created, incurred or assumed for working capital purposes) at any time
during the period commencing on the first day following the four full fiscal
quarter period that precedes the Transaction Date and ending on and including
the Transaction Date (and that is outstanding on the Transaction Date),
including, without limitation, the creation, incurrence or assumption of any
Debt in connection with such transaction, as if such creation, incurrence or
assumption occurred and the proceeds therefrom had been applied on the first day
of such four full fiscal quarter period.
Notwithstanding the foregoing, clauses (c) and (d) shall not prohibit a
transaction the principal purpose of which is to change the state of
incorporation of the Company and which does not have as one of its purposes the
evasion of the limitations imposed on consolidations, mergers, sales or
conveyances by the Company.
Limitations on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Company will not, and will not permit any of its subsidiaries to,
create, assume or otherwise cause or suffer to exist or to become effective any
consensual encumbrance or restriction on the ability of any subsidiary to (a)
pay dividends or make any other distributions on its Capital Stock to the
Company; (b) make payments in respect of any Debt owed to the Company or any of
the Company's subsidiaries; (c) make loans or advances to the Company or any of
the Company's wholly-owned subsidiaries; or (d) transfer any of its property to
the Company or any of the Company's wholly-owned subsidiaries; provided,
however, that (i) the restrictions contained in the 1993 Bank Credit Agreement
as in effect on the date of the Senior Notes Indenture, (ii) consensual
encumbrances or restrictions that are no less favorable to the Company than
those required by the 1993 Bank Credit Agreement as in effect on the date of the
Senior Notes Indenture granted in connection with any Debt, (iii) consensual
encumbrances or restrictions binding upon any person at the time such person
becomes a subsidiary of the Company so long as such encumbrances or restrictions
are not created, incurred or assumed in contemplation of such person becoming a
subsidiary of the Company, (iv) customary non-assignment or sublease provisions
of any lease of the Company or any of its subsidiaries, (v) non-assignment
provisions of any franchise or distribution agreement, (vi) restrictions imposed
by applicable law, and (vii) any restrictions with respect to a subsidiary of
the Company imposed pursuant to an agreement which has been entered into for the
sale or disposition of all or substantially all of the Capital Stock or assets
of such subsidiary, shall not be prohibited. Nothing contained in this
"Limitations on Dividends and Other Payment Restrictions Affecting Subsidiaries"
covenant shall prevent the Company from entering into any agreement providing
for the incurrence of Permitted Liens or restricting the sale or other
disposition of property or assets of the Company or any of its subsidiaries
which are subject to any Permitted Liens.
Limitations on Liens
The Company will not, and will not permit any of its subsidiaries to,
directly or indirectly, create, incur, assume or permit to exist any lien upon
or with respect to any of the property of the Company or any such subsidiary
whether now owned or hereafter acquired, or on any income or profits therefrom,
or assign or otherwise convey any right to receive income to secure any Debt
unless, contemporaneously therewith or prior thereto, effective provision shall
be made whereby the Senior Notes are secured equally and ratably with such
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<PAGE> 41
other Debt; provided that this provision shall not prohibit the creation,
incurrence, existence, or assumption of any Permitted Liens or any lien securing
other Debt required to be equally and ratably secured as a result of the
incurrence of such lien.
Transactions with Affiliates
So long as any of the Senior Notes remain outstanding, neither the Company
nor any of its subsidiaries will, directly or indirectly, enter into any
transaction with any affiliate of the Company except for transactions (including
any loans or advances by or to any affiliate) in good faith the terms of which
are fair and reasonable to the Company or such subsidiary, as the case may be,
and are at least as favorable as the terms that could be obtained by the Company
or such subsidiary, as the case may be, in a comparable transaction made on an
arm's length basis between unaffiliated parties; provided that, subject to the
next succeeding proviso, any such transaction shall be conclusively deemed to be
on terms which are fair and reasonable to the Company or any of its subsidiaries
and on terms which are at least as favorable as the terms which could be
obtained on an arm's length basis between unaffiliated parties if such
transaction is approved by a majority of the Company's Board of Directors
(including a majority of the Company's independent directors, if any); provided
further that, with respect to the purchase or disposition of assets of the
Company or any of its subsidiaries, other than the purchase of inventory in the
ordinary course of business, having a net book value in excess of $10 million,
the Company shall, in addition to obtaining approval of its Board of Directors,
obtain a written opinion of an Independent Financial Advisor stating that the
terms of such transaction are fair and reasonable to the Company or its
subsidiary, as the case may be, and are at least as favorable to the Company or
such subsidiary, as the case may be, as could have been obtained on an arm's
length basis between unaffiliated parties. Notwithstanding the foregoing, the
restriction on transactions with affiliates shall not apply to (a) payments to
DLJ Securities or any affiliate thereof pursuant to any underwriting or
financial advisory agreement, whether or not existing on the date of the Senior
Notes Indenture, between DLJ Securities or any affiliate thereof and the Company
and any subsidiary thereof, (b) any transactions (including loans, advances or
other payments) related to compensation arrangements with employees of the
Company or any of its subsidiaries (including any such employee who may be
deemed an affiliate of the Company or its subsidiaries), such arrangements to
include, without limitation, employment agreements and severance arrangements,
(c) the transactions and payments contemplated in the Dealer Manager Agreement,
dated December 30, 1992, between DLJ Securities and the Company and any other
transactions and payments related to the Recapitalization Plan, (d) tax-sharing
arrangements to the extent substantially consistent with the past practice of
the Company and its affiliates, (e) any transaction between the Company and any
of its wholly-owned subsidiaries or between any of its wholly-owned
subsidiaries, and (f) any other transactions with affiliates of the Company
entered into prior to February 18, 1993, the date of the Senior Notes Indenture.
Recapitalization Plan
Notwithstanding the foregoing covenants, the Senior Notes Indenture permits
the Company and its subsidiaries to consummate the transactions which are part
of the Recapitalization Plan as described herein, including the payment of fees
and expenses in connection with the Recapitalization Plan.
SUPPLEMENTAL SENIOR NOTES INDENTURES
The Senior Notes Indenture permits the Company and the Senior Notes
Trustee, with the consent of the holders of not less than a majority in
aggregate principal amount of the Senior Notes at the time outstanding, to amend
or supplement the Senior Notes Indenture or any supplemental indenture or modify
the rights of the holders of the Senior Notes, provided that no such
modification may, without the consent of each holder of the Senior Notes
affected thereby, (a) reduce the amount of Senior Notes whose holders must
consent to any amendment, supplement or waiver, (b) reduce the rate of or extend
the time for payment of interest on any Senior Note, (c) reduce the principal of
(or change the manner of computing the amount due on acceleration) or extend the
final maturity of any Senior Notes, (d) reduce any amount payable on redemption,
(e) adversely affect any right of repayment at the option of the holder of any
Senior Note under the "Change
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in Control" or "Restrictions on Disposition of Assets" covenants described above
or (f) impair or affect the right of any holder of Senior Notes to institute
suit for the payment of any Senior Note.
EVENTS OF DEFAULT AND REMEDIES
The Senior Notes Indenture defines an Event of Default as being (a) default
in the payment of any installment of interest on the Senior Notes as and when
the same becomes due and payable, and the continuance of such default for 30
days, (b) default in the payment of all or any part of the principal on the
Senior Notes as and when the same shall become due and payable at maturity, upon
any redemption, by declaration or otherwise, (c) failure on the part of the
Company duly to observe or perform any other covenant or agreement on the part
of the Company contained in the Senior Notes or the Senior Notes Indenture and
the continuance of such failure for a period of 60 days after the date on which
written notice specifying such failure, stating that such notice is a "Notice of
Default" and demanding that the Company remedy the same is given to the Company
by the Senior Notes Trustee or to the Company and the Senior Notes Trustee by
the holders of at least 25% in aggregate principal amount of the Senior Notes,
(d) a court having jurisdiction in the premises shall enter a decree or order
for relief in respect of the Company or any of its Material Subsidiaries in an
involuntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, or appointing a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or similar official) of the Company or any of
its Material Subsidiaries or for any substantial part of the property of the
Company or any of its Material Subsidiaries or ordering the winding up or
liquidation of the affairs of the Company or any of its Material Subsidiaries
and such decree or order shall remain unstayed and in effect for a period of 60
consecutive days, (e) the Company or any of its Material Subsidiaries shall
commence a voluntary case under any applicable bankruptcy, insolvency, or other
similar law nor or hereafter in effect, or consent to the entry of an order for
relief in an involuntary case under any such law, or consent to the appointment
or taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or similar official) of the Company or any of its Material
Subsidiaries or for any substantial part of the property of the Company or any
of its Material Subsidiaries, or the Company or any of its Material Subsidiaries
shall make any general assignment for the benefit of creditors, (f) any
acceleration of the maturity of Debt of the Company or any of its Material
Subsidiaries, or a failure to pay any such Debt at its stated maturity,
aggregating in either case at least $10 million to the extent not effectively
waived, and after expiration of any applicable grace period with respect thereto
and (g) final judgments not covered by insurance aggregating in excess of $5
million rendered against the Company or any of its Material Subsidiaries and not
stayed or discharged within 90 days. The Senior Notes Indenture will provide
that if a default (the term "default" for purposes of this provision being
defined as any event or condition which is, or with notice or lapse of time or
both would be, an Event of Default) occurs and is continuing and if is it known
to the Senior Notes Trustee, the Senior Notes Trustee must, within 90 days after
the occurrence of such default, give to the holders of Senior Notes notice of
such default, provided that, except in the case of default in payment of
principal or interest in respect of such Senior Notes, the Senior Notes Trustee
will be protected in withholding such notice if it in good faith determines that
the withholding of such notice is in the interests of the holders of Senior
Notes. "Material Subsidiary" means, as of any date, any subsidiary of the
Company (a) the value of whose assets, as such assets would appear on a
consolidated balance sheet of such subsidiary and its consolidated subsidiaries
prepared on such date in accordance with generally accepted accounting
principles, is at least 10% of the value of the assets of the Company and its
consolidated subsidiaries, or (b) whose Consolidated Cash Flow for the most
recently completed fiscal quarter immediately preceding such date was at least
10% of the Consolidated Cash Flow of the Company for such fiscal quarter.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (d) or (e) relating to the Company), unless the
principal of all of the Senior Notes shall have already become due and payable,
either the Senior Notes Trustee or the holders of not less than 25% in aggregate
principal amount of the Senior Notes then outstanding, by notice in writing to
the Company (and to the Senior Notes Trustee if given by holders of Senior
Notes) (an "Acceleration Notice"), may declare all the Senior Notes, and the
accrued interest thereon, to be due and payable immediately. If an Event of
Default specified in clause (d) or (e) above relating to the Company occurs, all
the Senior Notes, and the accrued interest thereon, shall be immediately due and
payable without any declaration or other act on the part of the Senior Notes
Trustee or
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the holders of Senior Notes. In the event of a declaration of acceleration
because an Event of Default set forth in clause (f) above has occurred and is
continuing, such declaration of acceleration shall be automatically annulled if
the holders of the Debt that is the subject of such Event of Default have
rescinded the declaration of acceleration in respect of such Debt within 15
business days thereof and if (i) the annulment of such acceleration would not
conflict with any judgment or decree of a court of competent jurisdiction, (ii)
all existing Events of Default, except non-payment of principal or interest
which shall have become due solely because of the acceleration, have been cured
or waived and (iii) the Company has delivered an Officer's Certificate to the
Senior Notes Trustee to the effect of clauses (i) and (ii) above.
Prior to the declaration of acceleration of the maturity of the Senior
Notes, the holders of a majority in aggregate principal amount of the Senior
Notes at the time outstanding may on behalf of all the holders of Senior Notes
waive any default or Event of Default and its consequences, except a default (a)
in the payment of principal of or interest on any Senior Note or (b) in the
repurchase of any Senior Note at the option of the holder thereof under the
"Change in Control" and "Restrictions on Disposition of Assets" covenants set
forth above. Subject to the provisions of the Senior Notes Indenture relating to
the duties of the Senior Notes Trustee, the Senior Notes Trustee is under no
obligation to exercise any of its rights or powers under the Senior Notes
Indenture at the request, order or direction of any of the holders of Senior
Notes, unless such holders of Senior Notes have offered to the Senior Notes
Trustee reasonable security or indemnity. Subject to all provisions of the
Senior Notes Indenture and applicable law, the holders of a majority in
aggregate principal amount of the Senior Notes at the time outstanding have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Senior Notes Trustee, or exercising any trust or power
conferred on the Senior Notes Trustee.
The Company is required to furnish the Senior Notes Trustee, within 120
days after the end of each fiscal year, an officers' certificate to the effect
that such officers have supervised a review of the activities of the Company and
its subsidiaries and of performance under the Senior Notes Indenture and that,
to the best of such officers' knowledge, based on their review, the Company has
fulfilled all its obligations under the Senior Notes Indenture, or, if there has
been a default in the fulfillment of any such obligation, specifying each such
default known to them, its nature and its status.
SATISFACTION AND DISCHARGE OF THE SENIOR NOTES INDENTURE; COVENANT DEFEASANCE
The Senior Notes Indenture will cease to be of further effect as to all
outstanding Senior Notes (except as to (a) rights of registration of transfer
and exchange, and the Company's right of optional redemption, (b) substitution
of mutilated, defaced, destroyed, lost or stolen Senior Notes, (c) rights of
holders to receive payments of principal of and interest on the Senior Notes,
(d) the rights, obligations and immunities of the Senior Notes Trustee under the
Senior Notes Indenture and (e) the rights of the holders of the Senior Notes as
beneficiaries with respect to the property so deposited with the Senior Notes
Trustee under the provisions referred to in this paragraph) when (x) the Company
shall have paid or caused to be paid the principal of and interest on the Senior
Notes outstanding as and when the same shall have become due and payable or (y)
the Company shall have delivered to the Senior Notes Trustee for cancellation
all outstanding Senior Notes (except lost, stolen or destroyed Senior Notes
which have been replaced or paid) or (z)(i) the Senior Notes not previously
delivered to the Senior Notes Trustee for cancellation shall have become due and
payable, or are by their terms to become due and payable within one year, or are
to be called for redemption under arrangements satisfactory to the Senior Notes
Trustee for the giving of notice of redemption, and (ii) the Company shall have
irrevocably deposited or caused to be deposited with the Senior Notes Trustee,
as trust funds, (A) money in an amount or (B) U.S. government obligations which
through the payment of interest and principal will provide, not later than one
day before the due date of payments in respect of the Senior Notes, money in an
amount or (C) a combination thereof, sufficient to pay the principal of and
interest on the outstanding Senior Notes to maturity or redemption, as the case
may be.
The Senior Notes Indenture will also cease to be in effect (except as
aforesaid) on the 91st day after the deposit by the Company with the Senior
Notes Trustee, in trust for the benefit of the holders of Senior Notes, (a)
money in an amount or (b) U.S. government obligations which through the payment
of interest and principal will provide not later than one day before the due
date of any payment referred to below, money in an
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amount, or (c) a combination thereof, sufficient in the opinion of a nationally
recognized independent public accounting firm to pay and discharge without
consideration of reinvestment of such interest the principal of and each
installment of principal and interest on the Senior Notes then outstanding at
the maturity date of such principal or installment of interest on the
outstanding Senior Notes on the maturity date of such principal or installment
of interest. Such a trust may only be established if the Company has delivered
to the Senior Notes Trustee an opinion of counsel acceptable to the Senior Notes
Trustee (who may be counsel to the Company) to the effect that the defeasance
and discharge will not be deemed, or result in, a taxable event, with respect to
holders of the Senior Notes. The Senior Notes Indenture will not be discharged
if, among other things, an Event of Default, or an event which with notice or
lapse of time would have become an Event of Default, shall have occurred and be
continuing on the date of such deposit or during the period ending on the 91st
day after such date. In the event of any such defeasance and discharge, Senior
Note holders will thereafter be able to look only to such trust fund for payment
of principal and interest on the Senior Notes.
The Senior Notes Indenture provides that the Company may cease to comply
with certain of the covenants contained in the Senior Notes Indenture, including
those described above under the captions "Change in Control," "Limitation on
Debt," "Limitations on Restricted Payments," "Limitation on Investments, Loans
and Advances," "Restrictions on Disposition of Assets," "Conduct of Business,"
"Restriction on Issuance and Sale of Subsidiary Stock," "Limitations on Merger,"
"Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries,"
"Limitation on Liens" and "Transactions with Affiliates," if the Company
irrevocably deposits with the Senior Notes Trustee (a) money in an amount, or
(b) U.S. government obligations, which, through the payment of interest and
principal in respect thereof in accordance with their terms, will provide, not
later than one day before the due date of any payment referred to below, money
in an amount, or (c) a combination thereof, sufficient in the opinion of a
nationally recognized independent public accounting firm to pay and discharge
without consideration of the reinvestment of such interest the principal of and
each installment of interest on the outstanding Senior Notes on the maturity
date of such principal or installment of interest. The obligations of the
Company under the Senior Notes Indenture other than with respect to the
covenants referred to above shall remain in full force and effect. Such a trust
may only be established if the Company has delivered to the Senior Notes Trustee
an opinion of counsel acceptable to the Senior Notes Trustee (who may be counsel
to the Company) to the effect that the deposit and related covenant defeasance
will not be deemed, or result in, a taxable event with respect to holders of
Senior Notes.
In the event the Company takes the necessary action to enable it to omit to
comply with certain covenants of the Senior Notes Indenture as described above
and the Senior Notes are declared due and payable because of the occurrence of
an Event of Default, the amount of money and U.S. government obligations on
deposit with the Senior Notes Trustee will be sufficient to pay amounts due on
the Senior Notes at the time of their stated maturity but may not be sufficient
to pay amounts due on the Senior Notes at the time of the acceleration resulting
from such Event of Default. In such event, the Company shall remain liable for
such payments.
REPORTS
So long as Senior Notes are outstanding, the Company will furnish to the
holders thereof such quarterly and annual financial reports that the Company is
required to file with the Commission under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") (or similar reports in the event the Company is
not at the time required to file such reports with the Commission).
CERTAIN DEFINITIONS
In addition to the terms defined above, the Senior Notes Indenture
contains, among other things, the following definitions:
"Acquisition Debt" means (i) Debt of any person existing at the time such
person became a subsidiary of the Company (or such person is merged into the
Company or one of its subsidiaries) or assumed in connection with the
acquisition of assets from any such person (other than assets acquired in the
ordinary course of
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business), but excluding Debt of such person incurred in connection with, or in
contemplation of, such person becoming a subsidiary of the Company or being
merged into a subsidiary of the Company and Debt of such person which is
extinguished, retired or repaid in connection with such person becoming a
subsidiary of the Company or being merged into the Company or one of its
subsidiaries, and (ii) Debt incurred or created by the Company in connection
with the transaction or series of transactions pursuant to which a person became
a subsidiary of the Company (or such person is merged into the Company or one of
its subsidiaries) or in connection with the acquisition of assets from any such
person (other than assets acquired in the ordinary course of business).
"Capital Stock" means, with respect to any person, any and all shares,
interests, participations or other equivalents (however designated) of such
person's capital stock, whether or not outstanding on the date of the Senior
Notes Indenture, including, without limitation, any option, warrant or other
right relating to any such capital stock.
"Cash Equivalents" shall mean (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), (ii) time deposits and
certificates of deposit of any bank party to the 1993 Bank Credit Agreement or
any domestic commercial bank of recognized standing having capital and surplus
in excess of $500,000,000, (iii) repurchase obligations with a term of not more
than 7 days for underlying securities of the types described in clause (i)
entered into with any bank meeting the qualifications specified in clause (ii)
above, (iv) commercial paper issued by the parent corporation of any bank party
to the Credit Agreement or domestic commercial bank of recognized standing
having capital and surplus in excess of $500,000,000 and commercial paper rated
at least A-2 or the equivalent thereof by Standard & Poor's Corporation or at
least P-2 or the equivalent thereof by Moody's Investors Service, Inc. and in
each case maturing within one year after the date of acquisition, and (v)
investments in money market funds substantially all of the assets of which are
comprised of securities of the types described in clauses (i) through (iv)
above.
"Change in Control" means (a) a sale of all or substantially all the assets
of the Company or Holdings to any person or related group of persons (other than
DLJ Capital, Jim L. Turner, any of their respective affiliates or any voting
trustee for any of the foregoing) as an entirety or substantially as an entirety
in one transaction or series of transactions, (b) the merger or consolidation of
the Company or Holdings with or into another corporation or the merger of
another corporation into the Company or Holdings with the effect that
immediately after such transaction the stockholders of the Company, in the event
of a merger or consolidation involving the Company, or Holdings, in the event of
a merger or consolidation involving Holdings, immediately prior to such
transaction hold less than 50% of the total voting power generally entitled to
vote in the election of directors, managers or trustees of the person surviving
such merger or consolidation, (c) any person or related group of persons (other
than DLJ Capital, Jim L. Turner, any of their respective affiliates or any
voting trustee for any of the foregoing) acquires by way of purchase, merger,
consolidation, or other business combination a majority interest of the total
voting power entitled to vote in the election of directors, managers or trustees
of the Company or Holdings, (d) a majority of the Board of Directors of the
Company or Holdings ceases to be individuals elected by the Board of Directors
or nominated by the Board of Directors for election by the stockholders of the
Company or Holdings or (e) the liquidation or dissolution of the Company or
Holdings.
"Consolidated Cash Flow" of any person for any period means (a) the
Consolidated Net Income (Loss) of such person for such period, plus (b) the sum
of (i) income taxes, determined on a consolidated basis for such person and its
consolidated subsidiaries in accordance with generally accepted accounting
principles, (ii) Fixed Charges of such person and its consolidated subsidiaries,
(iii) depreciation expense, determined on a consolidated basis for such person
and its consolidated subsidiaries in accordance with generally accepted
accounting principles, (iv) amortization expense, determined on a consolidated
basis for such person and its consolidated subsidiaries in accordance with
generally accepted accounting principles, and (v) all other non-cash items
deducted from net revenues in determining Consolidated Net Income (Loss) for
such period, all determined on a consolidated basis for such person and its
consolidated subsidiaries in accordance with generally accepted accounting
principles, and less (c)(i) any non-cash items added to net revenues in
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determining Consolidated Net Income (Loss) for such period and (ii) the lesser
of (A) the aggregate amount actually paid by such person and its consolidated
subsidiaries during such period on account of capital expenditures and (B) the
average amount paid on account of such expenditures during an equivalent period
based on the three next preceding periods, in each case determined in accordance
with generally accepted accounting principles.
"Consolidated Net Income (Loss)" of any person for any period means the Net
Income of such person and its consolidated subsidiaries for such period,
determined on a consolidated basis for such person and its consolidated
subsidiaries in accordance with generally accepted accounting principles;
provided that (a) the Net Income of any person other than a consolidated
subsidiary in which such person or any of its consolidated subsidiaries has a
joint interest with a third party shall be included only to the extent of the
amount of dividends or distributions actually paid to such person or a
consolidated subsidiary during such period, (b) the Net Income of any person
acquired in a pooling of interests transaction for any period prior to the date
of such acquisition shall be excluded, and (c) the Net Income of any
consolidated subsidiary of such person shall be excluded (i) to the extent such
subsidiary is prohibited, directly or indirectly, from distributing any such Net
Income or any portion thereof to such person and (ii) to the extent of any other
person's interest in dividends or other distributions by such subsidiary.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any of its subsidiaries against fluctuations in currency values.
"Debt" of any person means at any date, without duplication, (i) all
obligations of such person for borrowed money, (ii) all obligations of such
person evidenced by bonds, debentures, notes, letters of credit or other similar
instruments, (iii) all obligations of such person to pay the deferred purchase
price of property or services, except accounts payable arising in the ordinary
course of business, (iv) all obligations of such person as lessee under capital
leases, (v) all Debt of others guaranteed by such person and (vi) to the extent
not otherwise included, obligations under Interest Rate Agreements and Currency
Agreements.
"Fixed Charges" of any person for any period means (a) interest expense of
such person and its consolidated subsidiaries (including amortization of
original issue discount or non-cash interest payments or accruals and the
interest component of capital leases but excluding the amortization of debt
issuance costs), plus (b) the product of (i) cash dividends paid on any
preferred stock of such person and cash and non-cash dividends paid on any
preferred stock of any consolidated subsidiary of such person times (ii) a
fraction, the numerator of which is one and the denominator of which is one
minus the effective aggregate federal, state and local tax rate of such person
or consolidated subsidiary, as the case may be, for the determination period
after giving effect to the application of net operating loss carryforwards,
expressed as a decimal.
"Independent Financial Advisor" means a nationally recognized investment
banking firm (i) which does not (and whose directors, officers, employees and
affiliates do not) have a direct or indirect financial interest in the Company
or any successor to the Company or any subsidiary of the Company that is
material to the Company, any such subsidiary or such investment banking firm,
(ii) which has not been and, at the time it is called upon to give independent
financial advice to the Company or any successor to the Company or any such
subsidiary, as the case may be, is not (and none of whose directors, officers,
employees or affiliates is) a promoter, director or officer with respect to the
Company or any successor to the Company or any such subsidiary and (iii) which,
in the judgment of the Board of Directors of the Company or any successor to the
Company or the Board of Directors, general partner or partners or individuals in
the case of any such subsidiary, is otherwise qualified to serve as an
independent financial advisor. Any such person may be compensated and
indemnified by the Company or any successor to the Company and any such
subsidiary, as the case may be, and such compensation and indemnity shall not of
itself be considered a direct or indirect material financial interest within the
meaning of clause (i) of the next preceding sentence.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future, interest rate option, interest rate swap, interest rate
cap or other interest rate hedge arrangement, to or under which the Company or
any of its subsidiaries is a party or a beneficiary.
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"Material Subsidiary" of any person means, as of any date, any subsidiary
of such person (a) the value of whose assets, as such assets would appear on a
consolidated balance sheet of such subsidiary and its consolidated subsidiaries
prepared on such date in accordance with generally accepted accounting
principles, is at least 10% of the value of the assets of such person and its
consolidated subsidiaries, determined as aforesaid, or (b) whose Consolidated
Cash Flow for the most recently completed fiscal quarter immediately preceding
such date was at least 10% of the Consolidated Cash Flow of such person for such
fiscal quarter.
"Net Income" of any person for any period means the net income (loss) of
such person for such period, before preferred stock dividend requirements,
determined in accordance with generally accepted accounting principles, except
that extraordinary items and non-recurring gains and losses as determined in
accordance with generally accepted accounting principles shall be excluded.
"Net Worth" of any person means as of any date the aggregate of capital,
surplus and retained earnings of such person and its consolidated subsidiaries
as would be shown on a balance sheet of such person and its consolidated
subsidiaries prepared as of such date in accordance with generally accepted
accounting principles.
"Permitted Liens" with respect to the Company and its subsidiaries means:
(a) liens for taxes not yet due or which are being contested in good faith by
appropriate proceedings, provided that adequate reserves with respect thereto
are maintained on the books of the Company or its subsidiaries, as the case may
be, in conformity with generally accepted accounting principles; (b) carriers',
warehousemen's, mechanics', materialmen's, repairmen's, or other like liens
arising in the ordinary course of business and not overdue for a period of more
than 60 days or which are being contested in good faith by appropriate
proceedings; (c) pledges or deposits in connection with workers' compensation,
unemployment insurance and other social security legislation; (d) deposits to
secure the performance of bids, trade contracts (other than for borrowed money),
leases, statutory obligations, surety and appeal bonds, performance bonds and
other obligations of a like nature incurred in the ordinary course of business;
(e) easements, rights-of-way, restrictions and other similar encumbrances
incurred in the ordinary course of business which, in the aggregate, are not
substantial in amount and which do not in any case materially detract from the
value of the property subject thereto or materially interfere with the ordinary
conduct of business of the Company or such subsidiary and any exceptions to
title set forth in any title insurance policies; (f) any attachment or judgment
lien, unless the judgment it secures shall not, within 60 days after the entry
thereof, have been discharged or execution thereof stayed pending appeal, or
shall not have been discharged within 60 days after the expiration of any such
stay; (g) any other liens imposed by operation of law which do not materially
affect the Company's ability to perform its obligations under the Senior Notes
Indenture; (h) liens existing on the date of the Senior Notes Indenture
(including, without limitation, liens granted pursuant to the Security Documents
(as defined in the 1993 Bank Credit Agreement)) and liens granted after the date
of the Senior Notes Indenture by the Company or any subsidiary of the Company
pursuant to the terms and provisions of the 1993 Bank Credit Agreement, as in
effect on the date of the Senior Notes Indenture, or the Security Documents, as
in effect on the date of the Senior Notes Indenture, to secure obligations of
the Company or such subsidiary under the 1993 Bank Credit Agreement or the
Security Documents, as in effect on the date of the Senior Notes Indenture, and
amendments, renewals and extensions thereof if the principal amount of any Debt
secured thereby is not increased and the lien, as amended, renewed or extended,
does not cover any property not covered by such lien prior to such amendment,
extension or renewal; (i) rights of banks to set off deposits against debts owed
to said banks; (j) purchase money mortgages and purchase money security
interests incurred in the normal and ordinary course of the Company's business;
(k) rights of landlords, lenders, investors and/or creditors under
sale/leaseback arrangements; and (l) liens on the assets of any entity existing
at the time such assets are acquired by the Company or any of its subsidiaries,
whether by merger, consolidation, purchase of assets or otherwise; provided that
such liens (i) are not created, incurred or assumed in contemplation of such
assets being acquired by the Company or any of its subsidiaries and (ii) do not
extend to any other property of the Company or any of its subsidiaries.
"Permitted Payments" means, with respect to the Company or any of its
subsidiaries, (a) any dividend payable to the Company or any wholly-owned
subsidiary of the Company by any subsidiary of the Company; (b) the redemption,
defeasance, repurchase or other acquisition or retirement for value prior to
scheduled
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maturity of any Debt which by its terms is subordinated to the Senior Notes with
the proceeds from the issuance of (1) Debt which is subordinated in right of
payment to the Senior Notes and which has no mandatory prepayment (including any
payment at the option of the holder of such Debt other than an option given to a
holder pursuant to a "Change in Control" covenant which is no more favorable to
the holders of such Debt than the provisions contained in the Senior Notes
Indenture and such Debt provides that the Company will not repurchase such Debt
pursuant to such provisions prior to the Company's repurchase of the Senior
Notes required to be repurchased by the Company pursuant to the Senior Notes
Indenture) prior to, and has a scheduled maturity no earlier than, the earlier
of (i) February 15, 2000 and (ii) the scheduled maturity of the Debt being
redeemed, defeased, repurchased or otherwise acquired or retired, as the case
may be, provided that such Debt is called for redemption, defeased, repurchased
or otherwise acquired within 45 days after the date the additional Debt is
incurred or (2) Capital Stock (other than Redeemable Stock); (c) the repurchase
of Debt subordinated to the Senior Notes pursuant to the "Change in Control"
covenant set forth in the indenture with respect to such subordinated Debt or
such other instrument governing any such subordinated Debt; provided that such
repurchases shall only be permitted if all of the terms and conditions in such
covenant have been fully complied with and such repurchases are made in
accordance with the terms of the Senior Notes Indenture and such indenture or
other instrument; and provided further, that the Company has repurchased all
Senior Notes required to be repurchased by the Company pursuant to the terms and
conditions of the "Change in Control" covenant included in the Senior Notes
Indenture prior to the repurchase of any subordinated Debt pursuant to the
"Change in Control" covenant included in the indenture with respect to such
subordinated Debt of the Company or pursuant to the terms of such subordinated
Debt's governing instrument; (d) the repurchase of Redeemable Stock pursuant to
the "Change in Control" covenant set forth in the instrument governing any such
Redeemable Stock; provided that such repurchases shall only be permitted if all
of the terms and conditions in such covenant have been fully complied with and
such repurchases are made in accordance with the terms of the Senior Notes
Indenture and such instrument; and provided further, that the Company has
repurchased all Senior Notes required to be repurchased by the Company pursuant
to the terms and conditions of the "Change in Control" covenant included in the
Senior Notes Indenture prior to the repurchase of any Redeemable Stock pursuant
to the terms of such Redeemable Stock's governing instrument; (e) the redemption
by a wholly-owned subsidiary of its Capital Stock; (f) the payment of dividends
to Holdings in such amounts as may be necessary to pay taxes of Holdings;
provided that such payment shall actually be used by Holdings to pay such taxes;
(g) the payment of dividends to Holdings in such amounts as may be necessary to
pay operating and/or administrative expenses of Holdings, up to a maximum of
$50,000 in each fiscal year; (h) the repurchase or other acquisition or
retirement for value of any shares of the Company's Capital Stock with
additional shares of Capital Stock of the Company other than Redeemable Stock
(unless the redemption provisions of such Redeemable Stock prohibit the
redemption thereof prior to the date on which the Capital Stock to be acquired
or retired could have been redeemed) or the proceeds from the issuance thereof;
and (i) the redemption of the Old Preferred Stock pursuant to a notice of
redemption issued in connection with issuance and sale of the Senior Notes.
"Redeemable Stock" means any class or series of Capital Stock of any person
that by its terms or otherwise is (i) required to be redeemed prior to the
stated maturity of the Senior Notes, (ii) redeemable at the option of the holder
thereof at any time prior to the stated maturity of the Senior Notes or (iii)
convertible into or exchangeable for Capital Stock referred to in clause (i) or
(ii) or Debt having a scheduled maturity prior to the stated maturity of the
Senior Notes; provided that any Capital Stock which would not constitute
Redeemable Stock but for the provisions thereof giving holders thereof the right
to require the Company to repurchase or redeem such Capital Stock upon the
occurrence of a change in control occurring prior to the stated maturity of the
Senior Notes shall not constitute Redeemable Stock if the change in control
provisions applicable to such Capital Stock are no more favorable to the holders
of such Capital Stock than the provisions contained in the "Change in Control"
covenant included in the Senior Notes Indenture and such Capital Stock
specifically provides that the Company will not repurchase or redeem any such
stock pursuant to such provision prior to the Company's repurchase of such
Senior Notes as may be required to be repurchased pursuant to the provisions of
the "Change in Control" covenant included in the Senior Notes Indenture.
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<PAGE> 49
"Restricted Payment" means with respect to any person (a) any dividend or
other distribution on any shares of such person's Capital Stock (except
dividends or distributions in additional shares of Capital Stock of such person
other than Redeemable Stock); (b) any payment on account of the purchase,
redemption, retirement for value or other acquisition of any shares of such
person's Capital Stock; or (c) any defeasance, redemption, repurchase or other
acquisition or retirement for value prior to final maturity of any Debt ranked
subordinate in right of payment to the Senior Notes and having a final maturity
date subsequent to the maturity of the Senior Notes.
DESCRIPTION OF THE DISCOUNT NOTES
The Discount Notes were issued under an Indenture (the "Discount Notes
Indenture") between Holdings and United States Trust Company of New York, as
Trustee (the "Discount Notes Trustee"), a copy of which is filed as an exhibit
to the Registration Statement of which this Prospectus is a part. The following
summaries of certain provisions of the Discount Notes Indenture are qualified in
their entirety by reference to all the provisions of the Discount Notes
Indenture. Wherever particular sections or defined terms of the Discount Notes
Indenture are referred to, such sections or defined terms are incorporated
herein by reference. Capitalized terms not otherwise defined below or elsewhere
in this Prospectus have the meanings given to them in the Discount Notes
Indenture.
GENERAL
The Discount Notes are general unsecured obligations of Holdings, senior in
right of payment to all subordinated indebtedness of Holdings (including the Old
Discount Notes) and pari passu in right of payment to all other unsecured
indebtedness of Holdings, and are limited to $125 million in aggregate principal
amount. The Discount Notes are issuable only in registered form, without
coupons, in denominations of $1,000 or any integral multiple thereof.
MATURITY, INTEREST AND PRINCIPAL
The Discount Notes will mature on February 15, 2003. Interest on the
Discount Notes will not accrue on the Discount Notes prior to February 16, 1998.
Commencing August 15, 1998, interest on the Discount Notes will be payable in
cash semiannually on each February 15 and August 15 (each an "Interest Payment
Date") to the persons in whose names the Discount Notes are registered at the
close of business on the preceding February 1 and August 1 (each an "Interest
Record Date"). Interest will accrue from the most recent Interest Payment Date
to which interest has been paid or duly provided for or, if no interest has been
paid or duly provided for, from February 16, 1998. Interest will be computed on
the basis of a 360-day year of twelve 30-day months.
Principal and premium, if any, and interest on each Discount Note will be
payable, and the Discount Notes may be presented for transfer or exchange, at
the office or agency of Holdings maintained for such purpose. At the option of
Holdings, payment of interest may be made by check mailed to registered holders
of the Discount Notes at the addresses set forth on the registry books of
Holdings. No service charge will be made for any exchange or registration of
transfer of Discount Notes, but Holdings may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection therewith.
Unless otherwise designated by Holdings, Holdings' office or agency will be the
corporate trust office of the Discount Notes Trustee.
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<PAGE> 50
OPTIONAL REDEMPTION
The Discount Notes may not be redeemed prior to February 16, 1998. On or
after February 16, 1998, Holdings, at its option, may redeem the Discount Notes
in whole or in part at the following redemption prices (expressed as percentages
of the principal amount thereof) together with accrued and unpaid interest to
the redemption date:
<TABLE>
<CAPTION>
IF REDEEMED DURING THE TWELVE-MONTH REDEMPTION
PERIOD BEGINNING FEBRUARY 16, PRICE
<S> <C>
1998........................................................... 104.359%
1999........................................................... 102.906%
2000........................................................... 101.453%
2001 and thereafter............................................ 100.000%
</TABLE>
In the event Holdings consummates an initial public offering of its common
stock on or before the third anniversary of the issuance of the Discount Notes,
Holdings may, at its option, use all or a portion of the proceeds of such sale
to redeem up to one-third of the aggregate principal amount of the Discount
Notes originally issued at 108% of the Accreted Value (as defined herein)
thereof at the date of redemption. Only one redemption may be made pursuant to
the provisions described in this paragraph.
In case of a partial redemption, selection of Discount Notes or portions
thereof for redemption shall be made by the Discount Notes Trustee in such
manner as in its sole discretion it shall deem appropriate and fair. Discount
Notes may be redeemed in part in multiples of $1,000 only.
Notice of redemption will be sent, by first-class mail, at least 30 days
and not more than 60 days prior to the date fixed for redemption to each holder
of Discount Notes to be redeemed at the last address for such holder then shown
on the registry books. Any notice that relates to a Discount Note to be redeemed
in part only shall state the portion of the principal amount to be redeemed and
that on and after the redemption date, upon surrender of the Discount Note, a
new Discount Note or Discount Notes will be issued in a principal amount equal
to the unredeemed portion thereof. On and after the redemption date (unless
Holdings shall default in the payment of such Discount Notes at the redemption
price, together with accrued interest to the redemption date), interest will
cease to accrue on the Discount Notes or part thereof called for redemption.
COVENANTS
The Discount Notes Indenture contains, among other things, the following
covenants:
Change in Control
If a Change in Control occurs, each holder shall have the right to require
Holdings to repurchase in whole or in part such holder's Discount Notes at a
purchase price in cash equal to 101% of the Accreted Value thereof on the date
of repurchase (if such date of repurchase is prior to February 16, 1998) or 101%
of the principal amount thereof, plus accrued and unpaid interest, if any, to
the date of repurchase (if such date of repurchase is on or after February 16,
1998).
Within 30 days following any Change in Control, Holdings shall mail a
notice to each holder stating:
(1) that a Change in Control has occurred and that such holder has the
right to require Holdings to repurchase in whole or in part such holder's
Discount Notes at a purchase price in cash equal to 101% of the Accreted
Amount thereof on any date of repurchase prior to February 16, 1998 or 101%
of the principal amount thereof plus accrued and unpaid interest, if any,
to any date of repurchase on and after February 16, 1998;
(2) such other information as may be required by applicable law and
regulations;
(3) the repurchase date (which shall be no earlier than 20 business
days nor later than 30 business days from the date such notice is mailed);
and
(4) the instructions determined by Holdings, consistent with this
covenant and applicable law, that a holder must follow in order to have its
Discount Notes repurchased.
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Holdings' ability to repurchase Discount Notes upon a Change in Control may
be limited by the terms of then existing contractual obligations. In addition,
Holdings may not have adequate financial resources to effect such an offer. The
inability of Holdings to repurchase Discount Notes upon a Change in Control
would constitute an Event of Default under the Discount Notes Indenture.
Holdings will comply with all applicable tender offer rules (including,
without limitation, Rule 14e-1 under the Exchange Act) in the event that
Holdings is required to make an offer to repurchase the Discount Notes following
a Change in Control.
Limitation on Debt and Subsidiary Preferred Stock
Holdings will not, and will not permit its subsidiaries to, create, incur
or assume or otherwise become liable for any Debt, except (a) Debt incurred by
the Company and guaranteed by Holdings pursuant to borrowings under the 1993
Bank Credit Agreement in an aggregate principal amount not to exceed $125
million; provided that such $125 million limit shall be reduced by any scheduled
prepayments under the term loan portion of the 1993 Bank Credit Agreement as in
effect on the date of the Discount Notes Indenture; (b) Debt evidenced by the
Senior Notes and the Discount Notes; (c) Debt of Holdings to any subsidiary and
of any subsidiary to Holdings or any other subsidiary; (d) Acquisition Debt
related to an advance, loan or investment permitted by clause (f) under the
"Limitations on Investments, Loans or Advances" covenant described below or the
acquisition by the Company or Holdings of all or any portion of the assets of
any person engaged in the manufacturing, packaging, marketing, or distribution
of beverages, the full line vending business, or the manufacturing of products
used in any of the foregoing, provided a majority of such assets acquired relate
to the foregoing and provided that the principal amount of such Acquisition Debt
at any time outstanding does not exceed $40 million; (e) Debt outstanding on the
date of the Discount Notes Indenture; (f) Debt of the Company attributable to
any Interest Rate Agreement; (g) Debt of the Company attributable to letters of
credit used in the ordinary course of business; (h) to the extent not otherwise
provided for in clauses (a) through (h) above, Debt of the Company or Holdings
the aggregate outstanding principal amount of which shall not at any time exceed
$10 million; and (i) any extension, renewal or replacement by the Company or
Holdings, as the case may be, of any of (a), (b), (d) and (e) above provided
that (1) the amount of the Debt issued pursuant to this clause (i) (or, if such
new Debt is issued at a price less than the principal amount thereof, the
original issue price) shall not exceed the Debt being extended, renewed or
replaced (plus accrued interest and fees and expenses related thereto) or, in
the case of any extension or renewal of a revolving credit facility or the
replacement of any revolving credit facility with another revolving credit
facility, without increasing the aggregate principal amount that may be borrowed
under such facility, (2) if the Debt being extended, renewed or replaced has a
maturity after February 15, 2003, the Debt issued pursuant to this clause (i)
shall have not have a maturity prior to February 16, 2003, and (3) if the Debt
being extended, renewed or replaced is subordinate to the Discount Notes, the
Debt issued pursuant to this clause (i) must be subordinate at least to the same
extent.
Notwithstanding the preceding paragraph, the Company and its subsidiaries
may create, incur or assume or otherwise become liable with respect to Debt if,
at the time such Debt is so created, incurred or assumed (the "Incurrence Date")
and after giving effect thereto and to the application of the proceeds thereof,
the pro forma ratio of Consolidated Cash Flow to Fixed Charges for the four
fiscal quarters ending with the fiscal quarter ended immediately preceding the
Incurrence Date for the Company shall not be less than 1.75 to 1, if the
Incurrence Date is on or prior to March 31, 1996, or 2.25 to 1, if the
Incurrence Date is subsequent thereto. Notwithstanding the preceding paragraph,
Holdings may create, incur or assume or otherwise become liable with respect to
Debt if, at the Incurrence Date and after giving effect to such creation,
incurrence or assumption and to the application of the proceeds thereof, the pro
forma ratio of Consolidated Cash Flow to Fixed Charges for the four fiscal
quarters ending with the fiscal quarter ended immediately preceding the
Incurrence Date shall not be less than 1.5 to 1 for Holdings and 1.75 to 1 for
the Company if the Incurrence Date is on or prior to March 31, 1996 and 2.0 to 1
for Holdings and 2.25 to 1 for the Company if the Incurrence Date is subsequent
thereto. Notwithstanding the covenant set forth under "Restriction on Issuance
and Sale of Subsidiary Stock" below, Holdings may permit the issuance or sale,
transfer or other disposition of Subsidiary Preferred Stock if, at the time such
Subsidiary Preferred Stock is issued or sold, transferred, or
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<PAGE> 52
otherwise disposed of (an "Incurrence Date") and after giving effect thereto and
to the application of the proceeds thereof, the pro forma ratio of Consolidated
Cash Flow to Fixed Charges for the four fiscal quarters ending with the fiscal
quarter ended immediately preceding the Incurrence Date shall not be less than
1.5 to 1 if the Incurrence Date is on or prior to March 31, 1996 or 2.0 to 1 if
the Incurrence Date is subsequent thereto. The pro forma ratio of Consolidated
Cash Flow to Fixed Charges will, as applicable, be calculated on the following
basis: (a) notwithstanding clauses (a) and (b) of the definition of Consolidated
Net Income (Loss) set forth under "Certain Definitions," if the Debt which is
being created, incurred or assumed is Acquisition Debt, the ratio of
Consolidated Cash Flow to Fixed Charges shall be determined on a pro forma basis
giving effect to the creation, incurrence or assumption of such Acquisition
Debt, application of the proceeds therefrom, Fixed Charges related thereto and
Consolidated Cash Flow of such acquired person, business, property or asset as
if such transaction had occurred at the beginning of such four quarter period;
and (b) there shall be excluded from Fixed Charges any Fixed Charges related to
Debt (other than Debt created, incurred or assumed for working capital purposes)
repaid during the pro forma period or thereafter and which is not outstanding on
the Incurrence Date. For purposes of the foregoing provision, cash flow
generated by any acquired person, business, property or asset shall be
determined on the same basis provided in the definition of Consolidated Cash
Flow set forth under "Certain Definitions" during the immediately preceding four
full fiscal quarter period plus (y) (i) the savings in cost of goods sold that
would have resulted during that period from the effect of using the Company's or
Holdings' actual costs for comparable goods and services during that period and
(ii) other savings in cost of goods sold or eliminations of selling, general and
administrative expenses as determined by the Company or Holdings in good faith
in its consideration of such acquisitions and consistent with the Company's or
Holdings' experiences in acquisitions of similar businesses minus (z) the
incremental expenses that would be included in costs of goods sold and selling,
general and administrative expenses that would have been incurred by the Company
or Holdings in the operation of such acquired person, business, property or
assets during such period as determined by the Company or Holdings in good faith
in its consideration of such acquisitions and consistent with the Company's or
Holdings' experiences in acquisitions of similar businesses. In addition, for
purposes of this paragraph, Consolidated Cash Flow and Fixed Charges shall be
calculated after giving effect on a pro forma basis for the period of such
calculation to the creation, incurrence or assumption of any Debt (other than
Debt created, incurred or assumed for working capital purposes) or Subsidiary
Preferred Stock at any time during the period commencing on the first day
following the four full fiscal quarter period that precedes the Incurrence Date
and ending on and including the Incurrence Date (and that is outstanding on the
Incurrence Date), including, without limitation, the incurrence of the Debt or
Subsidiary Preferred Stock giving rise to the need to make such calculation, as
if such creation, incurrence or assumption occurred and the proceeds therefrom
had been applied on the first day of such four full fiscal quarter period. Any
Debt incurred by Holdings pursuant to this paragraph may not have a scheduled
maturity prior to the stated maturity of the Discount Notes; provided that any
Debt which would not have a scheduled maturity prior to the stated maturity of
the Discount Notes but for the provisions thereof giving holders thereof the
right to require Holdings to repurchase or redeem such Debt upon the occurrence
of a change in control occurring prior to the stated maturity of the Discount
Notes shall not constitute Debt having a maturity prior to the stated maturity
of the Discount Notes if the change in control provisions applicable to such
Debt are no more favorable to the holders of such Debt than the provisions
contained in the "Change in Control" covenant included in the Discount Notes
Indenture and such Debt specifically provides that Holdings will not repurchase
or redeem any such Debt pursuant to such provision prior to Holdings' repurchase
of such Discount Notes as may be required to be repurchased pursuant to the
provisions of the "Change in Control" covenant included in the Discount Notes
Indenture.
For purposes of the preceding two paragraphs, any waiver, extension or
continuation of any or all mandatory prepayments or installment payments by the
Company of any of the Debt under the term loan portion of the 1993 Bank Credit
Agreement shall not be or be deemed to be the creation, incurrence or assumption
of Debt by the Company to the extent that the amount of outstanding borrowings
by the Company thereunder has not been increased.
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<PAGE> 53
Limitation on Restricted Payments
Holdings and its subsidiaries will not make any Restricted Payment if,
after giving effect thereto: (a) an Event of Default, or an event that with the
passage of time or the giving of notice, or both, would constitute an Event of
Default, shall have occurred and be continuing; or (b) the aggregate amount of
all Restricted Payments made by Holdings and its subsidiaries (the amount
expended or distributed for such purposes, if other than in cash, to be
determined in good faith by the Board of Directors, whose determination shall be
conclusive and evidenced by a resolution of the Board of Directors filed with
the Discount Notes Trustee) from and after the date of the Discount Notes
Indenture, shall exceed the sum (without duplication) of (i) the aggregate of
50% of the Consolidated Net Income (Loss) (or in the event of a loss, 100% of
any such loss) of Holdings accrued for the period (taken as one accounting
period) commencing with the first full fiscal quarter after the date of the
Discount Notes Indenture to and including the fiscal quarter ended immediately
prior to the date of such calculation plus (ii) the aggregate net proceeds,
including the fair market value of property other than cash (as determined in
good faith by the Board of Directors, whose determination shall be conclusive
and evidenced by a resolution of the Board of Directors filed with the Discount
Notes Trustee), received by Holdings and its subsidiaries from the issuance or
sale (other than to a subsidiary) from and after the date of the Discount Notes
Indenture of Capital Stock (excluding any Redeemable Stock or Capital Stock
convertible into Redeemable Stock, but including Capital Stock other than
Redeemable Stock issued upon conversion of, or exchange for, Redeemable Stock or
securities other than its Capital Stock), and warrants and rights to purchase
its Capital Stock plus (iii) $7.5 million; provided that the foregoing clause
(b) shall not prevent (A) the making of Permitted Payments; and (B) the payment
of any dividend within 60 days after the date of its declaration if such
dividend could have been made on the date of its declaration without violation
of clauses (a) and (b) above; provided that the amount of Restricted Payments
made pursuant to clause (B) above shall be included in any computation of the
amount of Restricted Payments made pursuant to this provision. As used herein,
the aggregate net proceeds received by Holdings or any subsidiary (x) from the
issuance of Capital Stock upon the conversion of, or exchange for, securities
evidencing Debt of Holdings or such subsidiary shall be calculated on the
assumption that the gross proceeds from such issuance are equal to the aggregate
principal amount of the Debt evidenced by such securities converted or exchanged
and (y) upon the conversion or exchange of other securities of Holdings or such
subsidiary shall be equal to the aggregate net proceeds of the original sale of
the securities so converted or exchanged if such proceeds of such original sale
were not previously included in any calculation of aggregate proceeds for
purposes of this provision plus any additional sums payable upon conversion or
exchange.
Limitation on Investments, Loans and Advances
Holdings will not, and will not permit any of its subsidiaries to, make any
advances or loans to, or investments (by way of transfers of property,
contributions to capital, acquisitions of stock, securities or evidences of
indebtedness, or otherwise) in, any other person, except that: (a) any
subsidiary of Holdings may make advances or loans to or investments in Holdings
and Holdings may make investments in any wholly-owned subsidiary to the extent
permitted under the 1993 Bank Credit Agreement as in effect on the date of the
Discount Notes Indenture; (b) each of Holdings and its subsidiaries may acquire
and hold receivables owing to it, if created or acquired in the ordinary course
of business and payable or dischargeable in accordance with customary trade
terms (provided that nothing in the foregoing shall prevent Holdings or any
subsidiary from offering such concessionary trade terms as management deems
reasonable in the circumstances); (c) Holdings and its subsidiaries may make
investments in cash and Cash Equivalents; (d) Holdings or any of its
subsidiaries may make payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of business;
(e) Holdings or any of its subsidiaries may acquire and own stock, obligations
or securities received in settlement of debts created in the ordinary course of
business and owing to Holdings or such subsidiary or in satisfaction of
judgments; (f) Holdings and any of its subsidiaries may make investments (by way
of transfers of property, contributions to capital, acquisitions of equity
securities or evidences of indebtedness, or otherwise) in any person (including,
without limitation, any subsidiary of Holdings), provided that (i) at least a
majority of such person's revenues result from the manufacturing, packaging,
marketing, or distribution of beverages, the full line vending business, or the
manufacturing of
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<PAGE> 54
products used in any of the foregoing and (ii) immediately after making such
investment, Holdings or Holdings and its subsidiaries possess the power to
direct the management and policies of such entity, directly or indirectly,
through the ownership of voting securities, by contract or otherwise; (g)
Holdings and its subsidiaries may make investments in (i) stock options to
purchase Common Stock of Holdings issued to employees of Holdings or any of its
subsidiaries pursuant to any employee stock option plan or (ii) Common Stock of
Holdings issued in respect thereof, in either case upon termination of such
employee's employment with Holdings or such subsidiary; provided that the
aggregate amount of payments described in this clause (g) shall not exceed
$200,000 in any 12-month period; and (h) transactions with affiliates permitted
as described below under "Transactions with Affiliates."
Restrictions on Disposition of Assets
Subject to the paragraph headed "Limitations on Merger" below, Holdings
will not, and will not permit any of its subsidiaries to, sell, transfer or
otherwise dispose of, in any 12-month period, any assets (including by way of
sale-and-leaseback), other than in the ordinary course of business, or the
Capital Stock of any subsidiary directly or indirectly owned by Holdings, with
an aggregate value of greater than $5 million, unless (a) at least 75% in value
of the consideration received therefor by Holdings or such subsidiary is in the
form of cash; provided that the amount of (i) any liabilities (as shown on the
Company's or such subsidiary's most recent balance sheet or in the notes
thereto) of Holdings or any such subsidiary that are assumed by the transferee
in any such transaction and (ii) any marketable securities, notes or other
obligations received by Holdings or any such subsidiary from such transferee
that are immediately converted by Holdings or such subsidiary into cash, shall
both be deemed to be cash for the purposes of this provision; provided further,
however, that the 75% limitation referred to above shall not apply to any sale,
transfer or other disposition of assets in which the cash portion of the
consideration received therefor, determined in accordance with the foregoing
proviso, is equal to or greater than what the after-tax net proceeds would have
been had such transaction complied with the aforementioned 75% limitation; and
(b) the net cash proceeds of the sale, transfer or other disposition of such
assets (including Capital Stock of any subsidiary directly or indirectly owned
by Holdings) or Capital Stock are, within 12 months of receipt of such net
proceeds, (i) applied to permanent reduction of amounts outstanding under the
1993 Bank Credit Agreement, (ii) reinvested in the business or businesses of
Holdings or any of its subsidiaries, (iii) subject to the "Limitations on Loans,
Investments and Advances" described above, utilized to make any advances or
loans to or investments (by way of transfers of property, contributions to
capital, acquisitions of stock, securities or evidences of indebtedness, or
otherwise) in any person, (iv) are used to acquire all or a portion of the
assets of any person engaged in the manufacturing, packaging, marketing or
distribution of beverages, the full line vending business, or the manufacturing
of products used in any of the foregoing provided a majority of such acquired
assets relate to the foregoing or (v) applied to redemption or repurchase of the
Senior Notes. If Holdings or such subsidiary does not elect to, or is not
permitted to, apply any or all of such net cash proceeds in accordance with one
or more of the foregoing clauses (b)(i), (ii), (iii), (iv) or (v), then such net
cash proceeds or any remaining portion thereof shall be applied by Holdings or
such subsidiary within 12 months of such receipt to make an offer to purchase
Discount Notes (an "Asset Sale Offer") at a price equal to 100% of the Accreted
Value thereof on the date of repurchase (if such date of repurchase is prior to
February 16, 1998) or 100% of the principal amount of Discount Notes to be
repurchased plus accrued interest thereon to the date of repurchase (if such
date of repurchase is on or after February 16, 1998). Notwithstanding the
foregoing, in the event that such net cash proceeds, after giving effect to any
application thereof permitted by clause (b)(i), (ii), (iii), (iv) or (v) above,
are less than $5 million, the application of such net cash proceeds to an Asset
Sale Offer may be deferred until such time as such net cash proceeds not
otherwise applied pursuant to clause (b)(i), (ii), (iii), (iv) or (v) above are
at least equal to $5 million, at which time Holdings or such subsidiary shall
apply all such net cash proceeds to an Asset Sale Offer.
Holdings will comply with all applicable tender offer rules (including,
without limitation, Rule 14e-1 under the Exchange Act) in the event that
Holdings is required to make an Asset Sale Offer.
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<PAGE> 55
Conduct of Business
Holdings will not, and will not permit any of its subsidiaries to, engage,
directly or indirectly, in any business other than the manufacturing, packaging,
marketing or distribution of beverages, the full line vending business, to the
extent reasonably deemed necessary by the Company in connection with the
maintenance or extension of its beverage vending business, or the manufacturing
of any products used in any of the foregoing, to the extent reasonably deemed
necessary by the Company in connection with good faith efforts by the Company to
reduce its cost of goods sold. Notwithstanding the foregoing, if Holdings or any
of its subsidiaries shall acquire, in a transaction permitted under the
"Limitation on Investments, Loans and Advances" covenant described above, an
interest in any person engaged in a business other than as specified in the
preceding sentence or assets used in any such other business, it will not
constitute a breach or violation of this covenant for Holdings or such
subsidiary to continue such other business so long as it shall be using its best
efforts to promptly sell such other business.
Restriction on Issuance and Sale of Subsidiary Stock
Holdings will not permit any of its subsidiaries to issue any shares of its
Capital Stock to any person other than Holdings or one or more wholly-owned
subsidiaries. Notwithstanding the foregoing, the subsidiaries of Holdings may
issue preferred stock to persons other than Holdings or a wholly-owned
subsidiary if the issuance is permitted pursuant to the provisions of the second
paragraph under "Limitation on Debt" above. Holdings will not and will not
permit any of its subsidiaries to sell, transfer or otherwise dispose of any
shares of Capital Stock of any of its subsidiaries to any person unless, at the
time of such sale, transfer or other disposition, all such shares of such
subsidiary then owned by Holdings or any of its subsidiaries are so sold,
transferred or otherwise disposed of or, if preferred stock of a subsidiary is
to be sold, transferred or otherwise disposed of, the sale, transfer or other
disposition of such preferred stock to the transferee is permitted pursuant to
the provisions of the second paragraph under "Limitation on Debt" above.
Limitations on Merger
The Discount Notes Indenture provides that Holdings may not consolidate
with or merge with or into another person or sell, lease or convey all or
substantially all its assets to another person unless (a)(i) Holdings is the
continuing corporation in the case of a merger or (ii) the resulting, surviving
or transferee person (the "Surviving Entity") is a corporation or partnership
organized under the laws of the United States, any state thereof or the District
of Columbia and expressly assumes by supplemental indenture all the obligations
of Holdings under the Discount Notes Indenture and the Discount Notes; (b) no
Event of Default (or event or condition that with the passage of time, the
giving of notice, or both, would become an Event of Default) shall have occurred
and be continuing immediately after giving effect to such transaction; (c) the
Net Worth of Holdings or the Surviving Entity on a pro forma basis after giving
effect to such transaction (but prior to any purchase accounting adjustments
resulting from the transaction) is not less than the Net Worth of Holdings
immediately prior to such transaction; and (d) immediately after giving effect
to such transaction, Holdings or the Surviving Entity, as the case may be, could
incur at least $1.00 of additional Debt pursuant to the provisions of the
Discount Notes Indenture described above in the second paragraph under the
caption "Limitation on Debt."
For purposes of clause (d) above, the ratio of Consolidated Cash Flow to
Fixed Charges shall be calculated such that (x) notwithstanding clauses (a) and
(b) of the definition of Consolidated Net Income (Loss) set forth below under
"Certain Definitions," the ratio of Consolidated Cash Flow to Fixed Charges
shall be determined on a pro forma basis giving effect to the creation,
incurrence or assumption of Debt by Holdings in connection with any merger or
consolidation, the Fixed Charges related thereto and the Consolidated Cash Flow
of the person merging with or into or consolidating with Holdings, and (y) there
shall be excluded from Fixed Charges any Fixed Charges related to Debt (other
than Debt created, incurred or assumed for working capital purposes) of Holdings
and its subsidiaries repaid during the pro forma period or thereafter and which
is not outstanding on the date of the transaction giving rise to such
calculation (the "Transaction Date"). For purposes of this "Limitations on
Merger" provision, Consolidated Cash Flow and Fixed Charges shall be calculated
after giving effect on a pro forma basis for the period of such calculation to
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the creation, incurrence or assumption of any Debt (other than Debt created,
incurred or assumed for working capital purposes) at any time during the period
commencing on the first day following the four full fiscal quarter period that
precedes the Transaction Date and ending on and including the Transaction Date,
(and that is outstanding on the Transaction Date), including, without
limitation, the creation, incurrence or assumption of any Debt in connection
with such transaction, as if such creation, incurrence or assumption occurred
and the proceeds therefrom had been applied on the first day of such four full
fiscal quarter period.
Notwithstanding the foregoing, clauses (c) and (d) shall not prohibit a
transaction the principal purpose of which is to change the state of
incorporation of Holdings and which does not have as one of its purposes the
evasion of the limitations imposed on consolidations, mergers, sales or
conveyances by Holdings.
Limitations on Dividends and Other Payment Restrictions Affecting Subsidiaries
Holdings will not, and will not permit any of its subsidiaries to, create,
assume or otherwise cause or suffer to exist or to become effective any
consensual encumbrance or restriction on the ability of any subsidiary to (a)
pay dividends or make any other distributions on its Capital Stock to Holdings;
(b) make payments in respect of any Debt owed to Holdings or any of Holdings'
subsidiaries; (c) make loans or advances to Holdings or any of Holdings'
wholly-owned subsidiaries; or (d) transfer any of its property to Holdings or
any of Holdings' wholly-owned subsidiaries; provided, however, that (i) the
restrictions contained in the 1993 Bank Credit Agreement as in effect on the
date of the Discount Notes Indenture, (ii) consensual encumbrances or
restrictions that are no less favorable to Holdings than those required by the
1993 Bank Credit Agreement as in effect on the date of the Discount Notes
Indenture, (iii) consensual encumbrances or restrictions binding upon any person
at the time such person becomes a subsidiary of Holdings so long as such
encumbrances or restrictions are not created, incurred or assumed in
contemplation of such person becoming a subsidiary of Holdings, (iv) customary
non-assignment or sublease provisions of any lease of Holdings or any of its
subsidiaries, (v) non-assignment provisions of any franchise or distribution
agreement, (vi) restrictions imposed by applicable law, and (vii) any
restrictions with respect to a subsidiary of Holdings imposed pursuant to an
agreement which has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such subsidiary, shall not
be prohibited. Nothing contained in this "Limitations on Dividends and Other
Payment Restrictions Affecting Subsidiaries" covenant shall prevent Holdings
from entering into any agreement providing for the incurrence of Permitted Liens
or restricting the sale or other disposition of property or assets of Holdings
or any of its subsidiaries which are subject to any Permitted Liens.
Limitations on Liens
Holdings will not create, incur, assume or permit to exist any lien upon or
with respect to any of the property of Holdings, whether now owned or hereafter
acquired, or on any income or profits therefrom, or assign or otherwise convey
any right to receive income to secure any Debt unless, contemporaneously
therewith or prior thereto, effective provision shall be made whereby the
Discount Notes are secured equally and ratably with such other Debt; provided
that this provision shall not prohibit the creation, incurrence, existence, or
assumption of any Permitted Liens or any lien securing other Debt required to be
equally and ratably secured as a result of the incurrence of such lien.
Transactions with Affiliates
So long as any of the Discount Notes remain outstanding, neither Holdings
nor any of its subsidiaries will, directly or indirectly, enter into any
transaction with any affiliate of Holdings except for transactions (including
any loans or advances by or to any affiliate) in good faith the terms of which
are fair and reasonable to Holdings or such subsidiary, as the case may be, and
are at least as favorable as the terms that could be obtained by Holdings or
such subsidiary, as the case may be, in a comparable transaction made on an
arm's length basis between unaffiliated parties; provided that, subject to the
next succeeding proviso, any such transaction shall be conclusively deemed to be
on terms which are fair and reasonable to Holdings or any of its subsidiaries
and on terms which are at least as favorable as the terms which could be
obtained on an arm's length basis between unaffiliated parties if such
transaction is approved by a majority of Holdings' Board of Directors (including
a majority of Holdings' independent directors, if any); provided further that,
with respect
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to the purchase or disposition of assets of Holdings or any of its subsidiaries,
other than the purchase of inventory in the ordinary course of business, having
a net book value in excess of $10 million, Holdings shall, in addition to
obtaining approval of its Board of Directors, obtain a written opinion of an
Independent Financial Advisor stating that the terms of such transaction are
fair and reasonable to Holdings or its subsidiary, as the case may be, and are
at least as favorable to Holdings or such subsidiary, as the case may be, as
could have been obtained on an arm's length basis between unaffiliated parties.
Notwithstanding the foregoing, the restriction on transactions with affiliates
shall not apply to (a) payments to DLJ Securities or any affiliate thereof
pursuant to any underwriting or financial advisory agreement, whether or not
existing on the date of the Discount Notes Indenture, between DLJ Securities or
any affiliate thereof and Holdings and any subsidiary thereof, (b) any
transactions (including loans, advances or other payments) related to
compensation arrangements with employees of Holdings or any of its subsidiaries
(including any such employee who may be deemed an affiliate of Holdings or its
subsidiaries), such arrangements to include, without limitation, employment
agreements and severance arrangements, (c) the transactions and payments
contemplated in the Dealer Manager Agreement, dated December 30, 1992, between
DLJ Securities and the Company and any other transactions and payments related
to the Recapitalization Plan, (d) tax-sharing arrangements to the extent
substantially consistent with the past practice of Holdings and its affiliates,
(e) any transaction between Holdings and any of its wholly-owned subsidiaries or
between any of its wholly-owned subsidiaries, and (f) any other transactions
with affiliates of Holdings entered into prior to February 18, 1993, the date of
the Discount Notes Indenture.
Recapitalization Plan
Notwithstanding the foregoing covenants, the Discount Notes Indenture
permits Holdings and its subsidiaries to consummate the transactions which are
part of the Recapitalization Plan as described herein, including the payment of
fees and expenses in connection with the Recapitalization Plan.
SUPPLEMENTAL DISCOUNT NOTES INDENTURES
The Discount Notes Indenture permits Holdings and the Discount Notes
Trustee, with the consent of the holders of not less than a majority in
aggregate principal amount of the Discount Notes at the time outstanding, to
amend or supplement the Discount Notes Indenture or any supplemental indenture
or modify the rights of the holders of the Discount Notes, provided that no such
modification may, without the consent of each holder of the Discount Notes
affected thereby, (a) reduce the amount of Discount Notes whose holders must
consent to any amendment, supplement or waiver, (b) reduce the rate of or extend
the time for payment of interest on any Discount Note, (c) reduce the principal
of (or change the manner of computing the amount due on acceleration) or extend
the final maturity of any Discount Notes, (d) reduce any amount payable on
redemption, (e) adversely affect any right of repayment at the option of the
holder of any Discount Note under the "Change in Control" or "Restrictions on
Disposition of Assets" covenants described above, or (f) impair or affect the
right of any holder of Discount Notes to institute suit for the payment of any
Discount Note.
EVENTS OF DEFAULT AND REMEDIES
The Discount Notes Indenture defines an Event of Default as being (a)
default in the payment of any installment of interest on the Discount Notes as
and when the same becomes due and payable, and the continuance of such default
for 30 days, (b) default in the payment of all or any part of the principal on
the Discount Notes as and when the same shall become due and payable at
maturity, upon any redemption, by declaration or otherwise, (c) failure on the
part of Holdings duly to observe or perform any other covenant or agreement
contained in the Discount Notes or the Discount Notes Indenture and the
continuance of such failure for a period of 60 days after the date on which
written notice specifying such failure, stating that such notice is a "Notice of
Default" and demanding that Holdings remedy the same is given to Holdings by the
Discount Notes Trustee or to Holdings and the Discount Notes Trustee by the
holders of at least 25% in aggregate principal amount of the Discount Notes, (d)
a court having jurisdiction in the premises shall enter a decree or order for
relief in respect of Holdings or any of its Material Subsidiaries in an
involuntary case under
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any applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, or appointing a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or similar official) of Holdings or any of its Material
Subsidiaries or for any substantial part of the property of Holdings or any of
its Material Subsidiaries or ordering the winding up or liquidation of the
affairs of Holdings or any of its Material Subsidiaries and such decree or order
shall remain unstayed and in effect for a period of 60 consecutive days, (e)
Holdings or any of its Material Subsidiaries shall commence a voluntary case
under any applicable bankruptcy, insolvency, or other similar law nor or
hereafter in effect, or consent to the entry of an order for relief in an
involuntary case under any such law, or consent to the appointment or taking
possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator
(or similar official) of Holdings or any of its Material Subsidiaries or for any
substantial part of the property of Holdings or any of its Material
Subsidiaries, or Holdings or any of its Material Subsidiaries shall make any
general assignment for the benefit of creditors, (f) any acceleration of the
maturity of Debt of Holdings or any of its Material Subsidiaries, or a failure
to pay any such Debt at its stated maturity, aggregating in either case at least
$10 million to the extent not effectively waived and after expiration of any
grace period with respect thereto and (g) final judgments not covered by
insurance aggregating in excess of $5 million rendered against Holdings or any
of its Material Subsidiaries and not stayed or discharged within 90 days. The
Discount Notes Indenture will provide that if a default (the term "default" for
purposes of this provision being defined as any event or condition which is, or
with notice or lapse of time or both would be, an Event of Default) occurs and
is continuing and if is it known to the Discount Notes Trustee, the Discount
Notes Trustee must, within 90 days after the occurrence of such default, give to
the holders of Discount Notes notice of such default, provided that, except in
the case of default in payment of principal or interest in respect of such
Discount Notes, the Discount Notes Trustee will be protected in withholding such
notice if it in good faith determines that the withholding of such notice is in
the interests of the holders of Discount Notes. "Material Subsidiary" means, as
of any date, any subsidiary of Holdings (a) the value of whose assets, as such
assets would appear on a consolidated balance sheet of such subsidiary and its
consolidated subsidiaries prepared on such date in accordance with generally
accepted accounting principles, is at least 10% of the value of the assets of
Holdings and its consolidated subsidiaries, or (b) whose Consolidated Cash Flow
for the most recently completed fiscal quarter immediately preceding such date
was at least 10% of the Consolidated Cash Flow of Holdings for such fiscal
quarter.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (d) or (e) relating to Holdings), unless the
principal of all of the Discount Notes shall have already become due and
payable, either the Discount Notes Trustee or the holders of not less than 25%
in aggregate principal amount of the Discount Notes then outstanding, by notice
in writing to Holdings (and to the Discount Notes Trustee if given by holders of
Discount Notes) (an "Acceleration Notice"), may declare all the Discount Notes
and the accrued interest thereon (or, prior to February 16, 1998, the Accreted
Amount) to be due and payable immediately. If an Event of Default specified in
clause (d) or (e) above relating to Holdings occurs, all the Discount Notes and
the accrued interest thereon (or, prior to February 16, 1998, the Accreted
Amount), shall be immediately due and payable without any declaration or other
act on the part of the Discount Notes Trustee or the holders of Discount Notes.
In the event of a declaration of acceleration because an Event of Default set
forth in clause (f) above has occurred and is continuing, such declaration of
acceleration shall be automatically annulled if the holders of the Debt that is
the subject of such Event of Default have rescinded the declaration of
acceleration in respect of such Debt within 15 business days thereof and if (i)
the annulment of such acceleration would not conflict with any judgment or
decree of a court of competent jurisdiction, (ii) all existing Events of
Default, except non-payment of principal (or, prior to February 16, 1998, the
Accreted Amount) or interest which shall have become due solely because of the
acceleration, have been cured or waived and (iii) Holdings has delivered an
Officer's Certificate to the Discount Notes Trustee to the effect of clauses (i)
and (ii) above.
The declaration of acceleration is subject to the condition that if, at any
time after the principal of the Discount Notes shall have been so declared due
and payable, and before any judgment or decree for the payment of monies due
shall have been obtained or entered as hereinafter provided, Holdings shall pay
or shall deposit with the Discount Notes Trustee a sum sufficient to pay all
matured installments of interest on all the Discount Notes and the principal of
any and all Discount Notes which shall have become due otherwise than by
acceleration and such amount as shall be sufficient to cover reasonable
compensation to the Discount Notes
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Trustee and its agents, attorneys and counsel, and all other expenses and
liabilities incurred, and all advances made, by the Discount Notes Trustee
except as a result of negligence or bad faith, and if any and all Events of
Default under the Discount Notes Indenture, other than the non-payment of the
principal of the Discount Notes which shall have become due by acceleration,
shall have been cured, waived or otherwise remedied as provided herein -- then
and in every such case the holders of a majority in aggregate principal amount
of the Discount Notes then outstanding, by written notice to Holdings and to the
Discount Notes Trustee, may waive all defaults and rescind and annul such
declaration and its consequences, but no such waiver or rescission and annulment
shall extend to or shall affect any subsequent default or shall impair any right
consequent thereon.
Prior to the declaration of acceleration of the maturity of the Discount
Notes, the holders of a majority in aggregate principal amount of the Discount
Notes at the time outstanding may on behalf of all the holders of Discount Notes
waive any default or Event of Default and its consequences, except a default (a)
in the payment of principal of or interest on any Discount Note or (b) in the
repurchase of any Discount Note at the option of the holder thereof under the
"Change in Control" and "Restrictions on Disposition of Assets" covenants set
forth above. Subject to the provisions of the Discount Notes Indenture relating
to the duties of the Discount Notes Trustee, the Discount Notes Trustee is under
no obligation to exercise any of its rights or powers under the Discount Notes
Indenture at the request, order or direction of any of the holders of Discount
Notes, unless such holders of Discount Notes have offered to the Discount Notes
Trustee reasonable security or indemnity. Subject to all provisions of the
Discount Notes Indenture and applicable law, the holders of a majority in
aggregate principal amount of the Discount Notes at the time outstanding have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Discount Notes Trustee, or exercising any trust or
power conferred on the Discount Notes Trustee.
Holdings is required to furnish the Discount Notes Trustee, within 120 days
after the end of each fiscal year, an officers' certificate to the effect that
such officers have supervised a review of the activities of Holdings and its
subsidiaries and of performance under the Discount Notes Indenture and that, to
the best of such officers' knowledge, based on their review, Holdings has
fulfilled all its obligations under the Discount Notes Indenture, or, if there
has been a default in the fulfillment of any such obligation, specifying each
such default known to them, its nature and its status.
SATISFACTION AND DISCHARGE OF THE DISCOUNT NOTES INDENTURE; COVENANT DEFEASANCE
The Discount Notes Indenture will cease to be of further effect as to all
outstanding Discount Notes (except as to (a) rights of registration of transfer
and exchange, and Holdings' right of optional redemption, (b) substitution of
mutilated, defaced, destroyed, lost or stolen Discount Notes, (c) rights of
holders to receive payments of principal of and interest on the Discount Notes,
(d) the rights, obligations and immunities of the Discount Notes Trustee under
the Discount Notes Indenture and (e) the rights of the holders of the Discount
Notes as beneficiaries with respect to the property so deposited with the
Discount Notes Trustee under the provisions referred to in this paragraph) when
(x) Holdings shall have paid or caused to be paid the principal of and interest
on the Discount Notes outstanding as and when the same shall have become due and
payable or (y) Holdings shall have delivered to the Discount Notes Trustee for
cancellation all outstanding Discount Notes (except lost, stolen or destroyed
Discount Notes which have been replaced or paid) or (z)(i) the Discount Notes
not previously delivered to the Discount Notes Trustee for cancellation shall
have become due and payable, or are by their terms to become due and payable
within one year or are to be called for redemption under arrangements
satisfactory to the Discount Notes Trustee for the giving of notice of
redemption and (ii) Holdings shall have irrevocably deposited or caused to be
deposited with the Discount Notes Trustee, as trust funds, (A) money in an
amount or (B) U.S. government obligations which through the payment of interest
and principal will provide, not later than one day before the due date of
payments in respect of the Senior Notes, money in an amount or (C) a combination
thereof, sufficient to pay the principal of and interest on the outstanding
Discount Notes to maturity or redemption, as the case may be.
The Discount Notes Indenture will also cease to be in effect (except as
aforesaid) on the 91st day after the deposit by Holdings with the Discount Notes
Trustee, in trust for the benefit of the holders of Discount Notes, (a) money in
an amount or (b) U.S. government obligations which through the payment of
interest and principal will provide, not later than one day before the due date
of any payment referred to below, money
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in an amount, or (c) a combination thereof, sufficient in the opinion of a
nationally recognized independent public accounting firm to pay and discharge
without consideration of reinvestment of such interest the principal of and each
installment of principal and interest on the Discount Notes then outstanding at
the maturity date of such principal or installment of interest on the
outstanding Discount Notes on the maturity date of such principal or installment
of interest. Such a trust may only be established if Holdings has delivered to
the Discount Notes Trustee an opinion of counsel acceptable to the Discount
Notes Trustee (who may be counsel to Holdings) to the effect that the defeasance
and discharge will not be deemed, or result in, a taxable event, with respect to
holders of the Discount Notes. The Discount Notes Indenture will not be
discharged if, among other things, an Event of Default, or an event which with
notice or lapse of time would have become an Event of Default, shall have
occurred and be continuing on the date of such deposit or during the period
ending on the 91st day after such date. In the event of any such defeasance and
discharge, Discount Note holders will thereafter be able to look only to such
trust fund for payment of principal and interest on the Discount Notes.
The Discount Notes Indenture provides that Holdings may cease to comply
with certain of the covenants contained in the Discount Notes Indenture,
including those described above under the captions "Change in Control,"
"Limitation on Debt," "Limitations on Restricted Payments," "Limitation on
Investments, Loans, and Advances," "Restrictions on Disposition of Assets,"
"Conduct of Business," "Restriction on Issuance and Sale of Subsidiary Stock,"
"Limitations on Merger," "Limitation on Dividends and Other Payment Restrictions
Affecting Subsidiaries," "Limitation on Liens" and "Transactions with
Affiliates," if Holdings irrevocably deposits with the Discount Notes Trustee
(a) money in an amount, or (b) U.S. government obligations, which, through the
payment of interest and principal in respect thereof in accordance with their
terms, will provide, not later than one day before the due date of any payment
referred to below, money in an amount, or (c) a combination thereof, sufficient
in the opinion of a nationally recognized independent public accounting firm to
pay and discharge (without consideration of the reinvestment of such interest
the principal of and each installment of interest on the outstanding Discount
Notes on the maturity date of such principal or installment of interest. The
obligations of Holdings under the Discount Notes Indenture other than with
respect to the covenants referred to above shall remain in full force and
effect. Such a trust may only be established if Holdings has delivered to the
Discount Notes Trustee an opinion of counsel acceptable to the Discount Notes
Trustee (who may be counsel to Holdings) to the effect that the deposit and
related covenant defeasance will not be deemed, or result in, a taxable event
with respect to holders of Discount Notes.
In the event Holdings takes the necessary action to enable it to omit to
comply with certain covenants of the Discount Notes Indenture as described above
and the Discount Notes are declared due and payable because of the occurrence of
an Event of Default, the amount of money and U.S. government obligations on
deposit with the Discount Notes Trustee will be sufficient to pay amounts due on
the Discount Notes at the time of their stated maturity but may not be
sufficient to pay amounts due on the Discount Notes at the time of the
acceleration resulting from such Event of Default. In such event, Holdings shall
remain liable for such payments.
REPORTS
So long as Discount Notes are outstanding, Holdings will furnish to the
holders thereof such quarterly and annual financial reports that Holdings is
required to file with the Commission under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") (or similar reports in the event Holdings is not
at the time required to file such reports with the Commission).
CERTAIN DEFINITIONS
In addition to the terms defined above, the Discount Notes Indenture
contains, among other things, the following definitions:
"Accreted Value" as of any date of determination prior to February 16, 1998
means the sum of (a) the initial offering price of the Discount Notes and (b)
the portion of the original issue discount per Discount Note (which for this
purpose shall be deemed to be the excess of the principal amount over the
initial offering
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price) which shall be amortized with respect to such Discount Note through such
date, such original issue discount to be so amortized at the rate of 11 5/8% per
annum (such percentage being expressed as a percentage of the sum of the initial
offering price plus previously amortized original issue discount) using
semi-annual compounding of such rate on each February 15 and August 15,
commencing August 15, 1993, from the date of issuance of the Discount Notes
through the date of determination.
"Acquisition Debt" means (i) Debt of any person existing at the time such
person became a subsidiary of Holdings (or such person is merged into Holdings
or one of its subsidiaries) or assumed in connection with the acquisition of
assets from any such person (other than assets acquired in the ordinary course
of business), including Debt incurred in connection with, or in contemplation
of, such person becoming a subsidiary of Holdings or being merged into Holdings
or a subsidiary of Holdings (but excluding Debt of such person which is
extinguished, retired or repaid in connection with such person becoming a
subsidiary of Holdings) and (ii) Debt incurred or created by Holdings or any of
its subsidiaries in connection with the transaction or series of transactions
pursuant to which such person became a subsidiary of Holdings (or such person is
merged into Holdings or one of its subsidiaries) or in connection with the
acquisition of assets from any such person (other than assets acquired in the
ordinary course of business).
"Capital Stock" means, with respect to any person, any and all shares,
interests, participations or other equivalents (however designated) of such
person's capital stock, whether or not outstanding on the date of the Discount
Notes Indenture, including, without limitation, any option, warrant or other
right relating to any such capital stock.
"Cash Equivalents" shall mean (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), (ii) time deposits and
certificates of deposit of any bank party to the 1993 Credit Agreement or any
domestic commercial bank of recognized standing having capital and surplus in
excess of $500,000,000, (iii) repurchase obligations with a term of not more
than 7 days for underlying securities of the types described in clause (i)
entered into with any bank meeting the qualifications specified in clause (ii)
above, (iv) commercial paper issued by the parent corporation of any bank party
to the Credit Agreement or domestic commercial bank of recognized standing
having capital and surplus in excess of $500,000,000 and commercial paper rated
at least A-2 or the equivalent thereof by Standard & Poor's Corporation or at
least P-2 or the equivalent thereof by Moody's Investors Service, Inc. and in
each case maturing within one year after the date of acquisition, and (v)
investments in money market funds substantially all of the assets of which are
comprised of securities of the types described in clauses (i) through (iv)
above.
"Change in Control" means (a) a sale of all or substantially all the assets
of Holdings to any person or related group of persons (other than DLJ Capital,
Jim L. Turner, any of their respective affiliates or any voting trustee for any
of the foregoing) as an entirety or substantially as an entirety in one
transaction or series of transactions, (b) the merger or consolidation of
Holdings with or into another corporation or the merger of another corporation
into Holdings with the effect that immediately after such transaction the
stockholders of Holdings immediately prior to such transaction hold less than
50% of the total voting power generally entitled to vote in the election of
directors, managers or trustees of the person surviving such merger or
consolidation, (c) any person or related group of persons (other than DLJ
Capital, Jim L. Turner, any of their respective affiliates or any voting trustee
for any of the foregoing) acquires by way of purchase, merger, consolidation, or
other business combination a majority interest of the total voting power
entitled to vote in the election of directors, managers or trustees of Holdings,
(d) a majority of the Board of Directors of Holdings ceases to be individuals
elected by the Board of Directors or nominated by the Board of Directors for
election by the stockholders of Holdings or (e) the liquidation or dissolution
of Holdings.
"Consolidated Cash Flow" of any person for any period means (a) the
Consolidated Net Income (Loss) of such person for such period, plus (b) the sum
of (i) income taxes, determined on a consolidated basis for such person and its
consolidated subsidiaries in accordance with generally accepted accounting
principles, (ii) Fixed Charges of such person and its consolidated subsidiaries,
(iii) depreciation expense, determined on a consolidated basis for such person
and its consolidated subsidiaries in accordance with generally accepted
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accounting principles, (iv) amortization expense, determined on a consolidated
basis for such person and its consolidated subsidiaries in accordance with
generally accepted accounting principles, and (v) all other non-cash items
deducted from net revenues in determining Consolidated Net Income (Loss) for
such period, all determined on a consolidated basis for such person and its
consolidated subsidiaries in accordance with generally accepted accounting
principles, and less (c)(i) any non-cash items added to net revenues in
determining Consolidated Net Income (Loss) for such period and (ii) the lesser
of (A) the aggregate amount actually paid by such person and its consolidated
subsidiaries during such period on account of capital expenditures and (B) the
average amount paid on account of such expenditures during an equivalent period
based on the three next preceding periods, in each case determined in accordance
with generally accepted accounting principles.
"Consolidated Net Income (Loss)" of any person for any period means the Net
Income of such person and its consolidated subsidiaries for such period,
determined on a consolidated basis for such person and its consolidated
subsidiaries in accordance with generally accepted accounting principles;
provided that (a) the Net Income of any person other than a consolidated
subsidiary in which such person or any of its consolidated subsidiaries has a
joint interest with a third party shall be included only to the extent of the
amount of dividends or distributions actually paid to such person or a
consolidated subsidiary during such period, (b) the Net Income of any person
acquired in a pooling of interests transaction for any period prior to the date
of such acquisition shall be excluded, and (c) the Net Income of any
consolidated subsidiary of such person shall be excluded (i) to the extent such
subsidiary is prohibited, directly or indirectly, from distributing any such Net
Income or any portion thereof to such person (provided that this clause (i) as
it applies to the Company shall not be effective for any calculation of
Consolidated Net Income (Loss) for the purpose of the Discount Notes Indenture)
and (ii) to the extent of any other person's interest in dividends or other
distributions by such subsidiary.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect Holdings
or any of its subsidiaries against fluctuations in currency values.
"Debt" of any person means at any date, without duplication, (i) all
obligations of such person for borrowed money, (ii) all obligations of such
person evidenced by bonds, debentures, notes, letters of credit or other similar
instruments, (iii) all obligations of such person to pay the deferred purchase
price of property or services, except accounts payable arising in the ordinary
course of business, (iv) all obligations of such person as lessee under capital
leases, (v) all Debt of others guaranteed by such person and (vi) to the extent
not otherwise included, obligations under Interest Rate Agreements and Currency
Agreements.
"Fixed Charges" of any person for any period means (a) interest expense of
such person and its consolidated subsidiaries (including amortization of
original issue discount or non-cash interest payments or accruals and the
interest component of capital leases but excluding the amortization of debt
issuance costs), plus (b) the product of (i) cash dividends paid on any
preferred stock of such person and cash and non-cash dividends paid on any
preferred stock of any consolidated subsidiary of such person times (ii) a
fraction, the numerator of which is one and the denominator of which is one
minus the effective aggregate federal, state and local tax rate of such person
or consolidated subsidiary, as the case may be, for the determination period
after giving effect to the application of net operating loss carryforwards,
expressed as a decimal.
"Independent Financial Advisor" means a nationally recognized investment
banking firm (i) which does not (and whose directors, officers, employees and
affiliates do not) have a direct or indirect financial interest in Holdings or
any successor to Holdings or any subsidiary of Holdings that is material to
Holdings, any such subsidiary or such investment banking firm, (ii) which has
not been and, at the time it is called upon to give independent financial advice
to Holdings or any successor to Holdings or any such subsidiary, as the case may
be, is not (and none of whose directors, officers, employees or affiliates is) a
promoter, director or officer with respect to Holdings or any successor to
Holdings or any such subsidiary and (iii) which, in the judgment of the Board of
Directors of Holdings or any successor to Holdings or the Board of Directors,
general partner or partners or individuals in the case of any such subsidiary,
is otherwise qualified to serve as an independent financial advisor. Any such
person may be compensated and indemnified by Holdings or any successor to
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Holdings and any such subsidiary, as the case may be, and such compensation and
indemnity shall not of itself be considered a direct or indirect material
financial interest within the meaning of clause (i) of the next preceding
sentence.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future, interest rate option, interest rate swap, interest rate
cap or other interest rate hedge arrangement, to or under which Holdings or any
of its subsidiaries is a party or a beneficiary.
"Material Subsidiary" of any person means, as of any date, any subsidiary
of such person (a) the value of whose assets, as such assets would appear on a
consolidated balance sheet of such subsidiary and its consolidated subsidiaries
prepared on such date in accordance with generally accepted accounting
principles, is at least 10% of the value of the assets of such person and its
consolidated subsidiaries, determined as aforesaid, or (b) whose Consolidated
Cash Flow for the most recently completed fiscal quarter immediately preceding
such date was at least 10% of the Consolidated Cash Flow of such person for such
fiscal quarter.
"Net Income" of any person for any period means the net income (loss) of
such person for such period before preferred stock dividend requirements,
determined in accordance with generally accepted accounting principles, except
that extraordinary items and non-recurring gains and losses as determined in
accordance with generally accepted accounting principles shall be excluded.
"Net Worth" of any person means as of any date the aggregate of capital,
surplus and retained earnings of such person and its consolidated subsidiaries
as would be shown on a balance sheet of such person and its consolidated
subsidiaries prepared as of such date in accordance with generally accepted
accounting principles.
"Permitted Liens" with respect to Holdings and its subsidiaries means: (a)
liens for taxes not yet due or which are being contested in good faith by
appropriate proceedings, provided that adequate reserves with respect thereto
are maintained on the books of Holdings or its subsidiaries, as the case may be,
in conformity with generally accepted accounting principles; (b) carriers',
warehousemen's, mechanics', materialmen's, repairmen's, or other like liens
arising in the ordinary course of business and not overdue for a period of more
than 60 days or which are being contested in good faith by appropriate
proceedings; (c) pledges or deposits in connection with workers' compensation,
unemployment insurance and other social security legislation; (d) deposits to
secure the performance of bids, trade contracts (other than for borrowed money),
leases, statutory obligations, surety and appeal bonds, performance bonds and
other obligations of a like nature incurred in the ordinary course of business;
(e) easements, rights-of-way, restrictions and other similar encumbrances
incurred in the ordinary course of business which, in the aggregate, are not
substantial in amount and which do not in any case materially detract from the
value of the property subject thereto or materially interfere with the ordinary
conduct of business of Holdings or such subsidiary and any exceptions to title
set forth in any title insurance policies; (f) any attachment or judgment lien,
unless the judgment it secures shall not, within 60 days after the entry
thereof, have been discharged or execution thereof stayed pending appeal, or
shall not have been discharged within 60 days after the expiration of any such
stay; (g) any other liens imposed by operation of law which do not materially
affect Holdings' ability to perform its obligations under the Discount Notes
Indenture; (h) liens existing on the date of the Discount Notes Indenture
(including, without limitation, liens granted pursuant to the Security Documents
(as defined in the 1993 Bank Credit Agreement)) and liens granted after the date
of the Discount Notes Indenture by Holdings or any subsidiary of Holdings
pursuant to the terms and provisions of the 1993 Bank Credit Agreement, as in
effect on the date of the Discount Notes Indenture, or the Security Documents,
as in effect on the date of the Discount Notes Indenture, to secure obligations
of Holdings or such subsidiary under the 1993 Bank Credit Agreement or the
Security Documents, as in effect on the date of the Discount Notes Indenture,
and amendments, renewals and extensions thereof if the principal amount of any
Debt secured thereby is not increased and the lien, as amended, renewed or
extended, does not cover any property not covered by such lien prior to such
amendment, extension or renewal; (i) rights of banks to set off deposits against
debts owed to said banks; (j) purchase money mortgages and purchase money
security interests incurred in the normal and ordinary course of Holdings'
business; (k) rights of landlords, lenders, investors and/or creditors under
sale/leaseback arrangements; and (l) liens on the assets of any entity existing
at the time such assets are
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acquired by Holdings or any of its subsidiaries, whether by merger,
consolidation, purchase of assets or otherwise; provided that such liens (i) are
not created, incurred or assumed in contemplation of such assets being acquired
by Holdings or any of its subsidiaries and (ii) do not extend to any other
property of Holdings or any of its subsidiaries.
"Permitted Payments" means, with respect to Holdings or any of its
subsidiaries, (a) any dividend payable to Holdings or any wholly-owned
subsidiary of Holdings by any subsidiary of Holdings; (b) the redemption,
defeasance, repurchase or other acquisition or retirement for value prior to
scheduled maturity of any Debt which by its terms is subordinated to the
Discount Notes or the redemption, defeasance, repurchase or other acquisition
for value of any preferred stock of Holdings, in either case with the proceeds
from the issuance of (1) Debt which is subordinated in right of payment to the
Discount Notes and which has no mandatory prepayment (including any payment at
the option of the holder of such Debt other than an option given to a holder
pursuant to a "Change in Control" covenant which is no more favorable to the
holders of such Debt than the provisions contained in the Discount Notes
Indenture and such Debt provides that Holdings will not repurchase such Debt
pursuant to such provisions prior to Holdings' repurchase of the Discount Notes
required to be repurchased by Holdings pursuant to the Discount Notes Indenture)
prior to, and has a scheduled maturity no earlier than, the earlier of (i)
February 15, 2003 and (ii) if Debt is being redeemed, defeased, repurchased or
otherwise acquired or retired, the scheduled maturity of such Debt, provided
that such Debt or preferred stock is called for redemption, defeased,
repurchased or otherwise acquired within 45 days after the date the additional
Debt is incurred or (2) Capital Stock (other than Redeemable Stock); (c) the
repurchase of Debt subordinated to the Discount Notes pursuant to the "Change in
Control" covenant set forth in the indenture with respect to such subordinated
Debt or such other instrument governing any such subordinated Debt; provided
that such repurchases shall only be permitted if all of the terms and conditions
in such covenant have been fully complied with and such repurchases are made in
accordance with the terms of the Discount Notes Indenture and such indenture or
other instrument; and provided further, that Holdings has repurchased all
Discount Notes required to be repurchased by Holdings pursuant to the terms and
conditions of the "Change in Control" covenant included in the Discount Notes
Indenture prior to the repurchase of any subordinated Debt pursuant to the
"Change in Control" covenant included in the indenture with respect to such
subordinated Debt of Holdings or pursuant to the terms of such subordinated
Debt's governing instrument; (d) the repurchase of Redeemable Stock pursuant to
the "Change in Control" covenant set forth in the instrument governing any such
Redeemable Stock; provided that such repurchases shall only be permitted if all
of the terms and conditions in such covenant have been fully complied with and
such repurchases are made in accordance with the terms of the Discount Notes
Indenture and such instrument; and provided further, that the Company has
repurchased all Discount Notes required to be repurchased by the Company
pursuant to the terms and conditions of the "Change in Control" covenant
included in the Discount Notes Indenture prior to the repurchase of any
Redeemable Stock pursuant to the terms of such Redeemable Stock's governing
instrument; (e) the redemption by a wholly-owned subsidiary of its Capital
Stock; (f) the payment of any dividends on subsidiary preferred stock incurred
pursuant to the second paragraph of the "Limitation on Debt" covenant described
above; (g) the repurchase or redemption of subsidiary preferred stock incurred
pursuant to the second paragraph of the "Limitation of Debt" covenant described
above; (h) the payment of dividends to Holdings in such amounts as may be
necessary to pay taxes of Holdings; provided that such payment shall actually be
used by Holdings to pay such taxes; (i) the payment of dividends to Holdings in
such amounts as may be necessary to pay operating and/or administrative expenses
of Holdings, up to a maximum of $50,000 in each fiscal year; (j) the repurchase
or other acquisition or retirement for value of any shares of Holdings' Capital
Stock with additional shares of Capital Stock of Holdings other than Redeemable
Stock (unless the redemption provisions of such Redeemable Stock prohibit the
redemption thereof prior to the date on which the Capital Stock to be acquired
or retired could have been redeemed) or the proceeds from the issuance thereof;
(k) the redemption of the Old Preferred Stock pursuant to a notice of redemption
issued in connection with the issuance and sale of the Discount Notes; and (l)
the repurchase or redemption of, or payments made in connection with the
cancellation of, stock options to purchase Common Stock of Holdings issued to
employees of Holdings or any of its subsidiaries pursuant to any employee stock
option plan or Common Stock of Holdings issued in respect thereof, in either
case upon
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termination of such employee's employment with Holdings or such subsidiaries
provided that the aggregate amount of payments described in this clause (l)
shall not exceed $200,000 in any 12-month period.
"Redeemable Stock" means any class or series of Capital Stock of any person
that by its terms or otherwise is (i) required to be redeemed prior to the
stated maturity of the Discount Notes, (ii) redeemable at the option of the
holder thereof at any time prior to the stated maturity of the Discount Notes or
(iii) convertible into or exchangeable for Capital Stock referred to in clause
(i) or (ii) or Debt having a scheduled maturity prior to the stated maturity of
the Discount Notes; provided that any Capital Stock which would not constitute
Redeemable Stock but for the provisions thereof giving holders thereof the right
to require Holdings to repurchase or redeem such Capital Stock upon the
occurrence of a change in control occurring prior to the stated maturity of the
Discount Notes shall not constitute Redeemable Stock if the change in control
provisions applicable to such Capital Stock are no more favorable to the holders
of such Capital Stock than the provisions contained in the "Change in Control"
covenant included in the Discount Notes Indenture and such Capital Stock
specifically provides that Holdings will not repurchase or redeem any such stock
pursuant to such provision prior to Holdings' repurchase of such Discount Notes
as may be required to be repurchased pursuant to the provisions of the "Change
in Control" covenant included in the Discount Notes Indenture.
"Restricted Payment" means with respect to any person (a) any dividend or
other distribution on any shares of such person's Capital Stock (except
dividends or distributions in additional shares of Capital Stock of such person
other than Redeemable Stock); (b) any payment on account of the purchase,
redemption, retirement for value or other acquisition of any shares of such
person's Capital Stock; or (c) any defeasance, redemption, repurchase or other
acquisition or retirement for value prior to final maturity of any Debt ranked
subordinate in right of payment to the Discount Notes and having a final
maturity date subsequent to the maturity of the Discount Notes.
DESCRIPTION OF THE 1993 BANK FINANCING
On February 18, 1993, the Company entered into the 1993 Bank Credit
Agreement. The 1993 Bank Financing consists of (i) the 1993 Term Loan Facility,
pursuant to which the Company borrowed $91.7 million on March 22, 1993, and (ii)
the 1993 Revolving Line of Credit Facility in the aggregate amount of $25
million (the 1993 Revolving Line of Credit Facility and the 1993 Term Loan
Facility collectively being the "Facilities"). The following summaries of
certain provisions of the 1993 Bank Credit Agreement are qualified in their
entirety by reference to all the provisions of the 1993 Bank Credit Agreement, a
copy of which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
1993 TERM LOAN FACILITY
The Company borrowed $91.7 million under the 1993 Term Loan Facility to
fund the redemption of the Old Preferred Stock.
1993 REVOLVING LINE OF CREDIT FACILITY
The 1993 Revolving Line of Credit Facility provides for borrowings of up to
$25 million, which may be borrowed and repaid in minimum increments of $1
million or an integral multiple of $500,000 in excess thereof through the
maturity date. Borrowings under the 1993 Revolving Line of Credit Facility may
be applied to all working capital purposes and may be used to make approved
acquisitions. The 1993 Revolving Credit Facility has a $5 million sublimit for
the issuance of letters of credit.
MATURITY AND AMORTIZATION SCHEDULE
The Facilities mature June 30, 1999. The 1993 Term Loan Facility provides
for quarterly principal amortization payments commencing April 15, 1994 and on
each June 30, September 30, December 31 and April 15 thereafter. As of December
31, 1994, approximately $68.1 million was outstanding under the 1993 Term Loan
Facility. The Company will be required to repay the principal under the 1993
Term Loan Facility
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as follows: $13.8 million in 1995, $15.5 million in 1996, $17.2 million in each
of 1997 and 1998 and $4.4 million in 1999, subject to reduction for mandatory
and optional repayments.
The 1993 Term Loan Facility also provides for mandatory prepayments,
commencing April 15, 1994 and continuing on an annual basis thereafter, in an
amount not less than 75% of Excess Cash Flow, or in the event the ratio of
Borrower Debt to Operating Cash Flow of the Company falls below 4.0 to 1.0 for
any fiscal year, in an amount not less than 50% of Excess Cash Flow. "Borrower
Debt" means Indebtedness of the Company (determined on a consolidated basis).
"Indebtedness" means (without duplication), for any person, (i) all indebtedness
of such person for borrowed money or arising out of any extension of credit to
or for the account of such person or for the deferred purchase price of property
or services, except indebtedness which is owing to trade creditors in the
ordinary course of business and which is due within 90 days after the original
invoice date; (ii) Indebtedness of the kind described in clause (i) which is
secured by (or for which the holder of such Indebtedness has any existing right,
contingent or otherwise, to be secured by) any mortgage, deed of trust, pledge,
lien, security interest or other charge or encumbrance upon or in property owned
by such person, whether or not such person has assumed or become liable for the
payment of such Indebtedness or obligations; (iii) capitalized lease obligations
of such person; and (iv) all guaranties or other contingent liabilities (other
than endorsements for collection in the ordinary course of business), direct or
indirect, with respect to Indebtedness of the kind described in clause (i), (ii)
or (iii) of another person, through an agreement or otherwise. "Excess Cash
Flow" means Operating Cash Flow of the Company for any period, less cash
interest payments, scheduled principal reductions on debt, cash payments for
taxes, the cash portion of capital expenditures, permitted distributions, the
cash portion of the purchase price for permitted acquisitions, voluntary
prepayments under the 1993 Bank Credit Agreement and certain permitted
investments, plus (or minus) the cash effect of extraordinary gains (or losses)
and the amount by which Working Capital (as defined) decreases (or increases).
"Operating Cash Flow" means the net income (loss) of the Company plus
depreciation, amortization, interest expense, income tax expense and all other
non-cash items deducted from net revenues in determining net income (loss), plus
or minus adjustments for extraordinary items and gains (or losses) on
disposition of assets and less any non-cash items added to net revenues in
determining net income (loss).
The Facilities may be voluntarily prepaid at any time without premium.
INTEREST
Loans under the Facilities bear interest at a floating rate equal, at the
Company's option, to the Alternate Base Rate plus 1.5% per annum or the
Eurodollar Rate plus 2.75% per annum. In the event that the ratio of Borrower
Debt to Operating Cash Flow is less than 4.75 to 1.00, the applicable interest
rate will be reduced by 1/4 of 1% per annum; in the event that the ratio of
Borrower Debt to Operating Cash Flow is less than 4.00 to 1.00, the applicable
interest rate will be reduced by 1/2 of 1% per annum; and in the event that the
ratio of Borrower Debt to Operating Cash Flow is less than 3.50 to 1.00, the
applicable interest rate will be reduced by 3/4 of 1% per annum. "Alternate Base
Rate" means the highest of the prime rate of Texas Commerce Bank in effect from
time to time, the federal funds effective rate plus 1/2%, and the ninety-day
secondary CD Rate (adjusted for statutory reserves and FDIC assessments) plus
1 1/4%. The "Eurodollar Rate" means the rate established daily by an interbank
market for Eurodollar funds selected by the Agent, adjusted for actual reserves.
Interest on Alternate Base Rate borrowings will be payable quarterly in arrears
and interest on Eurodollar Rate borrowings will be payable at the end of the
relevant interest period (but not less often than quarterly). As required by the
1993 Bank Credit Agreement, the Company entered into interest rate protection
arrangements, expiring June 30, 1996, in an aggregate notional amount equal to
$45 million, subject to reduction by $2 million at the end of each quarter
starting with the quarter ending June 30, 1994.
GUARANTY
Amounts owed under the Facilities are the direct obligations of the Company
and are unconditionally guaranteed by Holdings.
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SECURITY
The Facilities are secured by a first priority, perfected security interest
in all the Company's accounts receivable, general intangibles, equipment,
inventory and other personal property (including deposit accounts) and all
unencumbered real property, and all proceeds of the foregoing, subject to no
other lien, security interest or encumbrance unless permitted. In addition,
Holdings' guarantee of the Company's obligations under the Facilities will be
secured by a first priority, perfected security interest in the common stock of
the Company.
COVENANTS
The 1993 Bank Credit Agreement contains customary covenants, including (a)
limitations on additional debt and liens, (b) limitations on sales of assets and
mergers, (c) limitations on cash dividends and stock repurchases, (d)
limitations on capital expenditures, (e) limitations on acquisitions and (f)
limitations on the prepayment of the Senior Notes or any subordinated debt. The
1993 Bank Credit Agreement also contains various financial covenants, including
covenants requiring the maintenance of minimum ratios of Operating Cash Flow to
interest on Borrower Debt and Operating Cash Flow to debt service on Borrower
Debt and maintenance of a minimum fixed charge coverage ratio and a minimum
current ratio, and setting forth maximum ratios of Borrower Debt to Operating
Cash Flow and total debt to Operating Cash Flow.
EVENTS OF DEFAULT
The 1993 Bank Credit Agreement contains typical events of default,
including, without limitation, (a) default in the payment of principal on the
Facilities when due, (b) default in the payment of any interest on the
Facilities when due and continuing for five days, (c) default in the
performance, or breach, of any covenant of the Company, (d) occurrence of any
event of default under any other debt of the Company in excess of $1 million,
(e) any final, nonappealable judgment for the payment of money in excess of $1
million (exclusive of insured amounts) shall be rendered against the Company,
(f) a change of control, as defined in the Senior Note Indenture or Discount
Note Indenture, shall have occurred, and (g) certain events involving bankruptcy
or insolvency of the Company.
FEES, EXPENSES AND INDEMNIFICATION
In connection with the 1993 Bank Credit Agreement, the Company paid the
Agent an aggregate underwriting fee of approximately $3.9 million. The Agent
also is entitled to an annual agency administrative fee of $100,000, payable
quarterly in advance. In addition, the Company will pay quarterly in arrears a
commitment fee of 0.5% per annum on the unused portion of the Facilities and the
letter of credit fee ranging between 2.75% and 2% per annum (depending on the
Company's ratio of Senior Debt to Operating Cash Flow) on the face amount of
letters of credit issued and outstanding.
The Company agreed to reimburse the Agent for its reasonable out-of-pocket
costs and expenses (including syndication expenses and reasonable fees and
expenses of the Agent's counsel) incurred in connection with the 1993 Bank
Financing and to indemnify the Agent against any losses, claims, damages,
liabilities and expenses caused by or arising out of or in connection with the
Recapitalization Plan.
DESCRIPTION OF THE PREFERRED STOCK AND THE WARRANT
As part of the Recapitalization Plan, Holdings sold to Crown 1,200,000
shares of Preferred Stock and the Warrant for an aggregate purchase price of $30
million.
PREFERRED STOCK
Each share of Preferred Stock has a liquidation preference of $25.00 per
share, plus accrued and unpaid dividends. Dividends are payable quarterly at the
rate of $2.75 per annum per share. Dividends on the Preferred Stock are
cumulative and, at the option of Holdings, may be paid through the issuance of
additional shares of Preferred Stock on each dividend payment date through April
1, 1998. The Preferred Stock is optionally redeemable, in whole or in part, at
$25.00 per share, plus accrued and unpaid dividends thereon on or after April 1,
1998, provided that Holdings is also entitled to optionally redeem Preferred
Stock with all or a portion of the proceeds from an initial public offering of
Holdings common stock consummated on or before
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the third anniversary of the issuance of the Preferred Stock. Holdings will be
required to redeem 25% of the then outstanding shares of Preferred Stock on the
twelfth anniversary of the date of the first original issuance thereof at a
redemption price equal to $25.00 per share plus all accrued and unpaid dividends
thereon and will be required to redeem an additional 25% on the thirteenth
anniversary of such issuance at such price. Holdings will be required to redeem
all remaining outstanding shares of Preferred Stock on the fourteenth
anniversary of such original issuance. The failure by Holdings to mandatorily
redeem shares of Preferred Stock will cause an automatic exchange of all shares
of Preferred Stock then outstanding into the 11% Junior Subordinated Exchange
Debentures due 2006 of Holdings (the "Holdings Exchange Debentures").
The Preferred Stock is exchangeable, in whole or in part, at the option of
Holdings on any dividend payment date for Holdings Exchange Debentures. Each
share of Preferred Stock will be exchanged for $25.00 in principal amount of
Holdings Exchange Debentures in denominations of $25.00 or integral multiples
thereof. Any such optional exchange will be prohibited if a default under the
indenture governing the Holdings Exchange Debentures exists or would exist after
giving effect to such exchange. A partial exchange will be prohibited if
dividends are in arrears on the Preferred Stock, Holdings has failed to comply
with the put option described below or Holdings has failed to comply with the
mandatory redemption provisions of the Preferred Stock. So long as the Holdings
Exchange Debentures are held by the original purchaser of the Preferred Stock,
such Exchange Debentures will have the benefit of the covenants comparable to
those contained in the Discount Note Indenture.
Upon the occurrence of a change in control (as defined below), at the
election of the holders of the Preferred Stock, Holdings will be required to
purchase for cash all shares of Preferred Stock at $25.25 per share, plus
accrued and unpaid dividends to the date of repurchase. A "change in control"
for purposes of the Preferred Stock means:
(i) a sale of all or substantially all of the assets of the Company
or Holdings to any person or related group of persons (other than an
affiliate or affiliates of Holdings or the Company) as an entirety or
substantially as an entirety in one or a series of transactions;
(ii) a merger or consolidation of Holdings occurs as a result of
which DLJ Capital, Jim L. Turner or their affiliates or any voting trustee
therefor hold in the aggregate less than 40% of the voting and economic
power of the surviving corporation;
(iii) a refinancing of more than 50% of the initial principal amount
of the Discount Notes prior to their stated maturity, unless in the opinion
of a nationally recognized investment banking firm, jointly selected by DLJ
Capital, Jim L. Turner and the purchaser of the Preferred Stock,
immediately after such refinancing the fair market value of the Preferred
Stock is at least equal to 100% of its liquidation preference;
(iv) at any time prior to the consummation of an initial public
offering of common stock by Holdings, DLJ Capital, Jim L. Turner or their
affiliates or any voting trustee therefor shall hold in the aggregate less
than 40% of the total voting and economic power of Holdings or, at any time
following the consummation of an initial public offering of common stock by
Holdings, such persons shall hold in the aggregate less than 50% of the
total voting and economic power of Holdings held by them in the aggregate
on the date of closing of the Recapitalization Plan; or
(v) a majority of the Board of Directors of Holdings ceases to be
individuals elected by the Board of Directors or nominated by the Board of
Directors for election by the stockholders of Holdings.
The terms of the securities purchase agreement relating to the sale of the
Preferred Stock prohibit Holdings from allowing the Company to issue any capital
stock other than shares currently held by Holdings and require that Holdings
continue to own such stock. In addition, such terms limit transactions with and
payments to affiliates and related parties. In addition, such terms require
that, in the event the Preferred Stock is not redeemed in connection with the
refinancing of the Discount Notes and indebtedness under the 1993 Bank
Financing, Holdings will enter into an agreement extending to the holders of the
Preferred Stock (i) covenants substantially the same as those covenants
appearing in the Discount Notes Indenture, as modified to conform such covenants
to the terms of the refinancing, or (ii) in the event Holdings issues a
subordinated debt security in connection with the refinancing and the holders of
the Preferred Stock so elect,
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substantially the same covenants appearing in such subordinated debt security.
The foregoing terms are for the benefit of Crown and transferees of the
Preferred Stock that are designated affiliates of Crown.
The holders of the Preferred Stock shall have the right to elect 25% of
Holdings' Board of Directors if Holdings fails to (i) declare and pay dividends
on any two dividend payment dates or (ii) repurchase the shares of Preferred
Stock that holders thereof have elected to have repurchased by Holdings upon the
occurrence of Change in Control. The right to elect board members will continue
to exist until all dividend arrearages are paid in full in cash, those shares of
Preferred Stock which were elected to be repurchased upon the occurrence of a
Change in Control have been repurchased or all of the Preferred Stock is
redeemed in full in cash. Except as aforesaid or as may otherwise be required by
law, the Preferred Stock has no voting rights.
WARRANT
The Warrant entitles the holder thereof to purchase 2,525,000 shares of
Class A Common Stock, representing 15% of the fully-diluted common stock of
Holdings at the time of the consummation of the transactions contemplated by the
Recapitalization Plan. The Warrant has an exercise price of $.01 per share and
will be exercisable until the later to occur of twenty years from the date of
issuance or one year after the Preferred Stock or the Holdings Exchange
Debentures are redeemed in full. The number of shares issuable upon exercise of
the Warrant will be adjusted in the event of stock dividends, subdivisions, and
combinations and for issuances of additional shares of common stock of Holdings
at less that fair market value.
The holder of the Warrant is a party to the New Stockholders Agreement. See
"Securities Ownership and Certain Transactions -- Certain
Transactions -- Stockholders Agreement."
DESCRIPTION OF CERTAIN EXISTING OBLIGATIONS
SALE-LEASEBACK ARRANGEMENT
On June 30, 1989, the Company entered into an agreement for the
sale-leaseback of its Irving and Houston, Texas production facilities. The net
proceeds of the sale-leaseback transaction were $26.5 million, which were used
to reduce the Company's outstanding borrowings under the term loan portion of
the 1988 Credit Agreement. Under the sale-leaseback agreement, the initial term
of the lease is twenty-five years, although the Company has the option to
repurchase the leased properties on the tenth anniversary date of the agreement
at the greater of the fair values of the properties at the option date or the
original sales price. On the tenth anniversary date of the agreement, and at
each the end of each successive five-year period for which the agreement is in
effect, the monthly payments under the agreement are to be adjusted, using a
formula based upon increases in the consumer price index. In addition, the
agreement provides that, at the Company's option, the lease may be extended for
successive five-year terms to 2034.
The Company entered into an amendment to the lease agreement to conform the
covenants contained therein to those set forth in the Senior Notes Indenture, to
increase the rent payment thereunder by $500,000 per annum to $3,998,000 per
annum commencing with the payment due on the first rent payment date following
the closing of the offerings of the Senior Notes and the Discount Notes and to
eliminate the consumer price index adjustment to the rent payment scheduled to
be effected as of July 1, 1994. In connection therewith, DLJ Securities sold the
note of the landlord (the "Landlord Note") under the Company's sale-leaseback
arrangement on October 19, 1993 at a price of $17,698,500 (the "Sales Price")
plus accrued interest of $95,985. DLJ Securities received a commission of
$176,985 in connection with such sale (1% of the Sales Price) and reimbursement
of $94,472 for expenses incurred in connection with such sale, both of which
were paid out of the proceeds from such sale. The remaining proceeds from such
sale in excess of the principal amount of the Landlord Note plus accrued
interest ($1,227,043) were paid to the Company. See "Securities Ownership and
Certain Transactions -- Certain Transactions -- Transactions with DLJ Capital
and its Affiliates." The Company paid to the landlord's lender $3,825,000 in
cash at the closing of the offerings of the Senior Notes and the Discount Notes
in respect of such lender's (i) consent to the amendment to the lease agreement
and (ii) grant of rights to DLJ Securities and the Company to effect the sale of
the Landlord Note.
69
<PAGE> 70
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain federal income tax
considerations relevant to the purchase, ownership and disposition of the Senior
Notes and the Discount Notes by holders acquiring Senior Notes and Discount
Notes from prior holders for cash, but does not purport to be a complete
analysis of all potential tax effects. The discussion is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), Treasury Regulations, Internal
Revenue Service ("IRS") rulings and pronouncements and judicial decisions now in
effect, all of which are subject to change at any time by legislative, judicial
or administrative action. Any such changes may be applied retroactively in a
manner that could adversely affect a holder of the Senior Notes or the Discount
Notes.
The succeeding discussion describes the material federal income tax
consequences of the purchase, ownership, and disposition of the Senior Notes and
the Discount Notes by holders who will acquire the Senior Notes and the Discount
Notes from prior holders as "capital assets" within the meaning of section 1221
of the Code. The Company and Holdings will treat the Senior Notes and the
Discount Notes as indebtedness for federal income tax purposes, and the balance
of the discussion is based on the assumption that such treatment will be
respected. The IRS has recently issued final Treasury Regulations interpreting
the original issue discount provisions of sections 1271 through 1275 of the Code
(the "OID Regulations"). Holders of Discount Notes are generally permitted to
rely upon the OID Regulations, even though the Discount Notes were issued before
the effective date of the OID Regulations. The discussion assumes, however, that
it is reasonable for taxpayers to take positions which follow the Proposed
Regulations. The discussion is not binding on the IRS or the courts. The Company
and Holdings have not sought and will not seek any rulings from the IRS with
respect to the positions of the Company and Holdings discussed below. There can
be no assurance that the IRS will not take a different position concerning the
tax consequences of the purchase, ownership or disposition of the Senior Notes
or Discount Notes or that any such position would not be sustained.
The tax treatment of a holder of Senior Notes or Discount Notes may vary
depending on his particular situation or status. Certain holders (including S
corporations, insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, taxpayers subject to alternative minimum tax,
foreign corporations and persons who are not citizens or residents of the United
States) may be subject to special rules not discussed below. In addition, the
description does not consider the effect of any applicable foreign, state, local
or other tax laws or estate or gift tax considerations.
EACH PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES TO HIM OF PURCHASING, HOLDING AND DISPOSING OF THE SENIOR NOTES OR
THE DISCOUNT NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL
OR FOREIGN TAX LAWS.
STATED INTEREST ON SENIOR NOTES
A holder of a Senior Note will be required for federal income tax purposes
to report stated interest on the Senior Note as income in accordance with the
holder's method of accounting for tax purposes.
STATED INTEREST ON DISCOUNT NOTES
The taxation to a holder of stated interest on Discount Notes is discussed
below in "Amount of Original Issue Discount on Discount Notes" and "Taxation of
Original Issue Discount on Discount Notes."
AMOUNT OF ORIGINAL ISSUE DISCOUNT ON DISCOUNT NOTES
The Discount Notes were issued with original issue discount for federal
income tax purposes. As a result, a holder who purchases a Discount Note
generally will be required to include original issue discount in gross income,
for federal income tax purposes, as it accrues in advance of the receipt of cash
payments on Discount Notes (regardless of whether the holder is a cash or
accrual basis taxpayer). See "Taxation of Original Issue Discount on Discount
Notes" below.
70
<PAGE> 71
The amount of original issue discount with respect to each Discount Note is
the excess of the "stated redemption price at maturity" of such Discount Note
over its "issue price." The "issue price" of a Discount Note equals the first
price at which a substantial amount of the Discount Notes was sold for money
(other than sales to bond houses, brokers, or similar persons or organizations
acting in the capacity of underwriters, placement agents or wholesalers). The
"stated redemption price at maturity" of each Discount Note under the OID
Regulations includes all cash payments (including principal and interest)
required to be made thereunder until maturity, and each Discount Note was
therefore issued with a substantial amount of original issue discount.
TAXATION OF ORIGINAL ISSUE DISCOUNT ON DISCOUNT NOTES
Each holder of a Discount Note generally will be required to include in
gross income an amount equal to the sum of the "daily portions" of the original
issue discount of the Discount Note for all days during the taxable year in
which he holds the Discount Note, including the purchase date and excluding the
disposition date. The daily portions of original issue discount required to be
included in a holder's gross income in a taxable year will be determined upon a
constant interest rate basis by allocating to each day during the taxable year
in which the holder holds the Discount Note a pro rata portion of the original
issue discount thereon which is attributable to the "accrual period" in which
such day is included. The amount of the original issue discount attributable to
each full accrual period will be the product of the "adjusted issue price" of
the Discount Note at the beginning of such accrual period multiplied by the
"yield to maturity" of the Discount Note (as determined by semi-annual
compounding). The adjusted issue price of a Discount Note at the beginning of an
accrual period is the original issue price of the Discount Note plus the
aggregate amount of original issue discount that accrued in all prior accrual
periods, and less any cash payments on the Discount Note. The yield to maturity
is the discount rate that, when used in computing the present value of all
principal and interest payments to be made under a Discount Note, produces an
amount equal to the issue price of the Discount Note.
The "accrual periods" of a Discount Note are each of the six-month periods
during the term of the Discount Note that end on February 15 and August 15 of
each year. The initial accrual period of a Discount Note is the short period
beginning on the issue date and ending on the day before the first day of the
first full accrual period. The amount of original issue discount attributable to
such initial accrual period may be computed under any reasonable method.
Holdings is required to furnish certain information to the IRS, and will
furnish annually to record holders of the Discount Notes, information with
respect to original issue discount accruing during the calendar year (as well as
interest paid during that year). Because this information will be based upon the
adjusted issue price of the debt instrument as if the holder were the original
holder of the debt instrument, subsequent holders who purchase Discount Notes
for an amount other than the adjusted issue price and/or on a date other than
the end of an accrual period will be required to determine for themselves the
amount of original issue discount, if any, they are required to report.
A subsequent purchaser of a Discount Note will be required to include
annual accruals of original issue discount in gross income, for federal income
tax purposes, in accordance with the rules described above, but the amount of
the original issue discount or ordinary income required to be reported may vary
depending upon the amount paid for the debt instrument by the subsequent
purchaser. See "Acquisition Premium on Discount Notes," "Amortizable Bond
Premium on Senior Notes and Discount Notes" and "Market Discount on Senior Notes
and Discount Notes" below.
EFFECT OF OPTIONAL REDEMPTION ON ORIGINAL ISSUE DISCOUNT OF DISCOUNT NOTES
Holdings may redeem the Discount Notes at any time on or after February 16,
1998, although Holdings has no intention at this time to do so. The OID
Regulations set forth special rules for determining the "maturity date" and the
"stated redemption price at maturity" of a debt instrument that may be redeemed
prior to its stated maturity date at the option of the issuer. These rules
should not apply to the Discount Notes
71
<PAGE> 72
and, hence, should not affect the determination of the maturity date or the
yield to maturity of any Discount Note.
ACQUISITION PREMIUM ON DISCOUNT NOTES
If a subsequent purchaser purchases a Discount Note at a cost that is in
excess of its "adjusted issue price" (i.e., its original issue price increased
by the portion of original issue discount previously includable in the gross
income of prior holders (determined without regard to any reduction of original
issue discount attributable to any acquisition premium paid by prior holders)
and decreased by all payments previously made on the Discount Note) immediately
after the Discount Note's acquisition by the subsequent purchaser, the
includable original issue discount (as otherwise determined) for a taxable
period will be reduced by an amount equal to the sum of the daily portions of
original issue discount (as otherwise determined to be includable) for such
taxable period multiplied by a fraction (a) the numerator of which is such
excess of cost over adjusted issue price and (b) the denominator of which is the
excess of the sum of all amounts payable on the Discount Note after the purchase
date over the Discount Note's adjusted issue price.
AMORTIZABLE BOND PREMIUM ON SENIOR NOTES
If a subsequent purchaser of a Senior Note purchases it at a cost that is
in excess of the amount payable on maturity (which will be determined by
reference to an earlier call date if the call price would reduce the amount of
premium), the excess cost may be treated as "amortizable bond premium" that is
allocated among the interest payments on the Senior Note using a constant
interest rate method over the note's remaining term. Except as may be provided
in future Treasury Regulations, the amount allocated to each interest payment
would be applied against and reduce the amount of such interest payment (with a
corresponding reduction in basis). This interest offset would be available only
if an election under section 171 of the Code is made or is in effect and if the
acquired Senior Note is held as a capital asset. This election would apply to
all debt instruments held or subsequently acquired by the electing holder on or
after the first day of the first taxable year to which the election applies and
may not be revoked without the consent of the IRS.
MARKET DISCOUNT ON SENIOR NOTES AND DISCOUNT NOTES
Purchasers of Senior Notes and Discount Notes should be aware that the gain
on sale with respect to such securities may be affected by the market discount
provisions of the Code. The market discount rules generally provide that if a
holder of a debt instrument purchases it at a "market discount" and thereafter
realizes gain upon a disposition or a retirement of the debt instrument, the
lesser of such gain or the portion of the market discount that has accrued on a
straight-line basis (or on a constant interest rate basis, if such basis of
accrual has been elected by the holder under section 1276(b) of the Code) while
the debt instrument was held by such holder will be taxed as ordinary income at
the time of such disposition. "Market discount" with respect to a Senior Note is
the amount by which the principal amount of the Senior Note exceeds the holder's
basis in the Senior Note immediately after acquisition (unless such excess is
less than .25% of the principal amount of the Senior Note times the number of
full years from acquisition by such holder to maturity, in which case there is
no "market discount"). "Market discount" with respect to a Discount Note is the
amount by which the "revised issue price" of a Discount Note (i.e., the issue
price increased by the portion of original issue discount previously included in
the gross income of prior holders (determined without regard to any reduction of
original issue discount attributable to any acquisition premium) and decreased
by all payments previously made on the Discount Note) exceeds the holder's basis
in the Discount Note immediately after acquisition (unless such excess is less
than .25% of the stated redemption price at maturity of the Discount Note times
the number of complete years from acquisition by such holder to maturity, in
which case there is no "market discount"). If a subsequent holder makes a gift
of a Senior Note or a Discount Note, accrued market discount, if any, will be
recognized as if such holder had sold such Senior Note or Discount Note for a
price equal to its fair market value. The disposition of a Senior Note or
Discount Note at the death of a holder, however, should not result in the
recognition of income under the market discount rules. The market discount rules
also provide that a holder who acquires a Senior Note or a Discount Note at a
market discount may be required to defer a portion of any interest expense that
otherwise may be deductible on any indebtedness
72
<PAGE> 73
incurred or maintained to purchase or carry such Senior Note or Discount Note
until the holder disposes of the Senior Note or Discount Note in a taxable
transaction.
The Senior Notes and Discount Notes provide for optional and (in the case
of a Change in Control) mandatory redemption, in whole or in part, prior to
maturity. If the Senior Notes or Discount Notes were redeemed, a holder
generally would be required to include in gross income as ordinary income, for
federal income tax purposes, the portion of the principal payment attributable
to accrued market discount on the Senior Notes or Discount Notes, if any. In
addition, it is possible that a portion of any payment with respect to Discount
Notes may be includable as ordinary income upon receipt to the extent of any
accrued market discount on such debt instruments.
A holder of Senior Notes or Discount Notes acquired at a market discount
may elect to include market discount in gross income, for federal income tax
purposes, as the discount accrues either on a straight-line basis or on a
constant interest rate basis. This current inclusion election, once made,
applies to all market discount obligations acquired on or after the first day of
the first taxable year to which the election applies, and may not be revoked
without the consent of the IRS. If a holder of Senior Notes or Discount Notes
makes such an election, the foregoing rules with respect to the recognition of
ordinary income on sales and other dispositions of such debt instruments, and
with respect to the deferral of interest deductions on indebtedness incurred or
maintained to purchase or carry such debt instruments, would not apply.
SALE, EXCHANGE, REDEMPTION, RETIREMENT OR OTHER DISPOSITION OF SENIOR NOTES AND
DISCOUNT NOTES
In general, the holder of a Senior Note or Discount Note will recognize
gain or loss upon the sale, exchange, redemption, retirement or other
disposition of such debt instrument measured by the difference between (a) the
amount of cash and fair market value of property received (except to the extent
attributable to the payment of accrued interest) in exchange therefor and (b)
the holder's adjusted tax basis in such debt instrument.
A holder's initial tax basis in a Senior Note or a Discount Note purchased
by him will be equal to the price paid by such holder for such Senior Note or
Discount Note, as the case may be. The holder's initial tax basis in Senior
Notes will be increased, from time to time by the accruals of market discount,
if any, which the holder has previously elected to include in gross income on an
annual basis and decreased from time to time by the accrual of amortizable bond
premium, if any, which the holder has previously elected to offset against
interest on an annual basis. The holder's initial tax basis in Discount Notes
will be increased from time to time by the portion of original issue discount
previously included in gross income to the date of disposition (and the accruals
of market discount, if any, which the holder has previously elected to include
in gross income on an annual basis) and decreased from time to time to reflect
the receipt of any payments on such Discount Notes (and the accrual of
amortizable bond premium, if any, which the holder has previously elected to
offset against interest on the Discount Notes on an annual basis).
Any gain or loss on the sale, exchange, redemption, retirement, or other
disposition of a Senior Note or Discount Note should be capital gain or loss
(except as discussed below or in "Market Discount on Senior Notes and Discount
Notes" above and except for payments for accrued interest not previously
included in income). Any capital gain or loss will be long-term capital gain or
loss if the debt instrument had been held for more than one year and otherwise
will be short-term capital gain or loss. Currently, net capital gains and
ordinary income of corporations are taxable at the same maximum rate (35%),
whereas net long-term capital gains of individuals are taxable at a rate (28%)
that is lower than the maximum rate applicable to ordinary income (39.6%). In
the case of both individuals and corporations, capital losses generally may be
used to offset only capital gains, subject to a de minimis $3,000 per annum
exception in the case of individuals. Legislation has been proposed in Congress
which would, if enacted, reduce the maximum rate of tax on long-term capital
gains to 19.8% in the case of individuals and 25% in the case of corporations.
There can be no assurance regarding whether such legislation will be enacted
into law or, if enacted, the final form of such legislation.
73
<PAGE> 74
BACKUP WITHHOLDING
The backup withholding rules require a payor to deduct and withhold a tax
if (a) the payee fails to furnish a taxpayer identification number ("TIN") to
the payor, (b) the IRS notifies the payor that the TIN furnished by the payee is
incorrect, (c) the payee has failed to report properly the receipt of
"reportable payments" on several occasions and the IRS has notified the payor
that withholding is required, or (d) there has been a failure of the payee to
certify under the penalty of perjury that a payee is not subject to withholding
under section 3406 of the Code. As a result, if any one of the events discussed
above occurs, Holdings, the Company, its paying agent or other withholding agent
will be required to withhold a tax equal to 31% of any "reportable payment" made
in connection with the Senior Notes or the Discount Notes. A "reportable
payment" includes, among other things, interest actually paid, original issue
discount and amounts paid through brokers in retirement of securities. Any
amounts withheld from a payment to a holder under the backup withholding rules
will be allowed as a refund or credit against such holder's federal income tax,
provided that the required information is furnished to the IRS. Certain holders
(including, among others, corporations and certain tax exempt organizations) are
not subject to the backup withholding and information reporting requirements.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSIDERATIONS DOES
NOT CONSIDER THE FACTS AND CIRCUMSTANCES OF ANY PARTICULAR PROSPECTIVE
PURCHASER'S SITUATION OR STATUS. THE SUMMARY IS BASED ON THE PROVISIONS OF THE
CODE, REGULATIONS, RULINGS AND JUDICIAL DECISIONS NOW IN EFFECT, ALL OF WHICH
ARE SUBJECT TO CHANGE, POSSIBLY ON A RETROACTIVE BASIS. EACH PURCHASER OF SENIOR
NOTES OR DISCOUNT NOTES SHOULD CONSULT HIS OWN TAX ADVISOR WITH RESPECT TO THE
TAX CONSEQUENCES TO HIM, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS, OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE
SENIOR NOTES OR DISCOUNT NOTES.
PLAN OF DISTRIBUTION
This Prospectus has been prepared for use by DLJ Securities in connection
with offers and sales of Senior Notes and Discount Notes in market making
transactions. DLJ Securities may act as principal or agent in such transactions.
DLJ Securities has advised the Company and Holdings that it has made a market in
the Senior Notes and the Discount Notes in the past, and that, subject to
applicable laws and regulations, it currently intends to do so in the future.
However, DLJ Securities is not obligated to do so and may discontinue any such
market making at any time without notice. Accordingly, there can be no assurance
that an active trading market will develop for, or as to the liquidity of, the
Senior Notes or the Discount Notes.
DLJ Securities has rendered financial advisory and investment banking
services to the Company in the past and may do so in the future.
DLJ Securities served as underwriter in the offerings of the Senior Notes
and the Discount Notes and received total underwriter discounts and commissions
of $6,907,000 in connection thereof. DLJ Securities also acted as dealer-manager
in connection with the Tender Offer and Consent Solicitation. As dealer-manager,
DLJ Securities received from the Company a fee equal to $5 per $1,000 principal
amount of Old Discount Notes validly tendered and accepted for payment. The
Company agreed to indemnify DLJ Securities and its controlling persons against
liabilities and expenses, including liabilities under the Securities Act,
incurred in connection with the Tender Offer and the Consent Solicitation.
DLJ Capital, an affiliate of DLJ Securities, beneficially owns a
significant number of shares of Class A Common Stock of Holdings. DLJ Capital is
a party to the New Stockholders Agreement. In addition, DLJ Securities holds a
significant number of shares of Class A Common Stock as custodian for the
benefit of certain employees of Donaldson, Lufkin & Jenrette Inc. and its
affiliates. Also, while William O. Hunt served as trustee under the Voting Trust
Agreement described above, DLJ Capital paid to him an annual fee of $25,000,
which fee was reimbursed by the Company. See "Securities Ownership and Certain
Transactions."
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<PAGE> 75
LEGAL MATTERS
The validity of the issuance of the Senior Notes and the Discount Notes
offered hereby has been passed upon for the Company by Weil, Gotshal & Manges (a
partnership including professional corporations), Dallas, Texas.
EXPERTS
The respective financial statements of the Company and Holdings as of
December 31, 1993 and 1994, and for the years ended December 31, 1992, 1993 and
1994, included in this Prospectus and the related financial statement schedules
included elsewhere in the Registration Statement of which this Prospectus is a
part have been included herein and elsewhere in the Registration Statement in
reliance upon the reports of KPMG Peat Marwick LLP, independent certified public
accountants, appearing herein and elsewhere in the Registration Statement and
upon the authority of said Firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company and Holdings have filed with the Commission a Registration
Statement on Form S-1 (the "Registration Statement") (which term includes any
amendments thereto) under the Act, with respect to the securities offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made for further information with respect to the Company,
Holdings and the securities offered hereby. Statements contained herein
concerning the provisions of any document are not necessarily complete and, in
each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement for a more complete description of the
matter involved and each such statement shall be deemed qualified in its
entirety by such reference. The Registration Statement and the exhibits and
schedules thereto filed by the Company and Holdings with the Commission may be
inspected at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such materials may be obtained from the
Public Reference Section of the Commission 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
DR PEPPER BOTTLING COMPANY OF TEXAS
Independent Auditors' Report.................................................... F-2
Balance Sheets, December 31, 1993 and 1994...................................... F-3
Statements of Operations for the years ended December 31, 1992, 1993 and 1994... F-4
Statements of Stockholders' Deficit for the years ended December 31, 1992, 1993
and 1994..................................................................... F-5
Statements of Cash Flows for the years ended December 31, 1992, 1993 and 1994... F-6
Notes to Financial Statements................................................... F-7
DR PEPPER BOTTLING HOLDINGS, INC. AND SUBSIDIARY
Independent Auditors' Report.................................................... F-19
Consolidated Balance Sheets, December 31, 1993 and 1994......................... F-20
Consolidated Statements of Operations for the years ended December 31, 1992,
1993 and 1994................................................................ F-21
Consolidated Statements of Stockholders' Deficit for the years ended
December 31, 1992, 1993 and 1994............................................. F-22
Consolidated Statements of Cash Flows for the years ended December 31, 1992,
1993 and 1994................................................................ F-23
Notes to Consolidated Financial Statements...................................... F-24
</TABLE>
F-1
<PAGE> 77
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Dr Pepper Bottling Company of Texas:
We have audited the accompanying balance sheets of Dr Pepper Bottling Company
of Texas (a wholly-owned subsidiary of Dr Pepper Bottling Holdings, Inc.) as of
December 31, 1993 and 1994, and the related statements of operations,
stockholders' deficit and cash flows for each of the years in the three-year
period ended December 31, 1994. 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 Dr Pepper Bottling Company of
Texas as of December 31, 1993 and 1994, and the results of its operations and
its cash flows for each of the years in the three-year period ended December
31, 1994, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
March 8, 1995
F-2
<PAGE> 78
DR PEPPER BOTTLING COMPANY OF TEXAS
Balance Sheets
December 31, 1993 and 1994
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Assets (note 9) 1993 1994
--------------- ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 16,930 7,769
Accounts receivable:
Trade, less allowance for doubtful accounts of $305
in 1993 and $371 in 1994 20,156 24,479
Other 3,417 3,748
Inventories (note 4) 9,806 12,183
Prepaid expenses 3,420 5,671
----------- ---------
Total current assets 53,729 53,850
----------- ---------
Property, plant and equipment, net (notes 5 and 9) 64,523 65,946
Other assets, at amortized cost:
Goodwill and other intangible assets (note 6) 116,668 111,149
Debt issuance costs 8,255 6,871
----------- ---------
$ 243,175 237,816
=========== =========
Liabilities and Stockholder's Deficit
-------------------------------------
Current liabilities:
Accounts payable $ 26,311 34,285
Accrued expenses 13,876 14,935
Current maturities of long-term debt and obligations under
capital leases (note 9) 12,885 14,448
----------- ---------
Total current liabilities 53,072 63,668
----------- ---------
Long-term debt and obligations under capital leases, less current
maturities (note 9) 227,696 199,261
Stockholder's deficit:
Common stock, $.01 par value. Authorized 11,000,000 shares;
issued and outstanding 100 shares 1 1
Additional paid-in capital 110,227 110,227
Consideration to continuing predecessor shareholders in
excess of book value (33,948) (33,948)
Deficit (113,873) (101,393)
----------- ---------
Total stockholders' deficit (37,593) (25,113)
Commitments and contingencies (notes 7, 11 and 12)
----------- ---------
$ 243,175 237,816
=========== =========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 79
DR PEPPER BOTTLING COMPANY OF TEXAS
Statements of Operations
Years ended December 31, 1992, 1993 and 1994
(in thousands)
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Net sales $ 288,271 310,881 332,204
Cost of sales (note 5) 185,783 195,957 214,376
--------- ------- -------
Gross profit 102,488 114,924 117,828
Marketing expense 6,036 9,418 7,618
Depreciation 5,371 5,577 5,765
Amortization of intangible assets 5,505 5,751 5,519
Administrative and general expenses 55,575 60,572 62,931
--------- ------- -------
Operating profit 30,001 33,606 35,995
--------- ------- -------
Other expense (income):
Interest 30,830 23,957 22,392
Amortization of deferred debt issuance costs 1,107 1,337 1,384
Other, net (199) (2,617) (401)
--------- ------- -------
31,738 22,677 23,375
--------- ------- -------
Earnings (loss) before income taxes and
extraordinary item (1,737) 10,929 12,620
Income taxes - - 140
--------- ------- -------
Earnings (loss) before extraordinary item (1,737) 10,929 12,480
Extraordinary item - loss on recapitalization (note 2) - (31,559) -
--------- ------- -------
Net earnings (loss) $ (1,737) (20,630) 12,480
========= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 80
DR PEPPER BOTTLING COMPANY OF TEXAS
Statements of Stockholder's Deficit
Years ended December 31, 1992, 1993 and 1994
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Consideration
to continuing
predecessor
Preferred stock Common stock Additional stockholders
--------------- ------------ paid-in in excess of
Shares Amount Shares Amount capital book value Deficit Totals
------ ------ ------ ------ ------- ---------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991 2,908 $ 71,329 100 $ 1 11,990 (33,948) (72,529) (23,157)
Stock dividends on senior
exchangeable preferred stock 527 13,169 - - - - (13,169) -
Cash dividends on senior
exchangeable preferred stock - - - - - - (2) (2)
Net loss - - - - - - (1,737) (1,737)
------ -------- --- --- ------- ------- --------- -------
Balance at December 31, 1992 3,435 84,498 100 1 11,990 (33,948) (87,437) (24,896)
Stock dividends on senior
exchangeable preferred stock 146 3,649 - - - - (3,649) -
Cash dividends on senior
exchangeable preferred stock - - - - - - (2,157) (2,157)
Preferred shares retired (3,581) (88,147) - - - - - (88,147)
Additional paid-in capital related
to recapitalization - - - - 98,237 - - 98,237
Net loss - - - - - - (20,630) (20,630)
------ -------- --- --- ------- ------- --------- -------
Balance at December 31, 1993 - - 100 1 110,227 (33,948) (113,873) (37,593)
Net earnings - - - - - - 12,480 12,480
------ -------- --- --- ------- ------- --------- -------
Balance at December 31, 1994 - $ - 100 $ 1 110,227 (33,948) (101,393) (25,113)
====== ======== === === ======= ======= ========= =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 81
DR PEPPER BOTTLING COMPANY OF TEXAS
Statements of Cash Flows
Years ended December 31, 1992, 1993 and 1994
(in thousands)
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (1,737) (20,630) 12,480
--------- -------- -------
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Loss on recapitalization - 31,559 -
Depreciation of property, plant and equipment 8,658 9,593 9,273
Amortization of other assets 6,612 7,088 6,903
Loss (gain) on sale of assets (224) 32 (52)
Changes in assets and liabilities,
net of effects from acquisitions:
Accounts receivable (1,228) (1,926) (4,654)
Inventories (1,444) (346) (2,377)
Prepaid expenses (1,159) 1,491 (2,251)
Accounts payable 6,878 2,079 7,974
Accrued expenses (792) 4,949 1,059
--------- -------- -------
Total adjustments 17,301 54,519 15,875
--------- -------- -------
Net cash provided by
operating activities 15,564 33,889 28,355
--------- -------- -------
Cash flows from investing activities:
Additions to property, plant and equipment (7,833) (8,971) (10,838)
Proceeds from the sale of property, plant and equipment 1,673 604 194
Cash paid for acquisitions, net of cash acquired - (8,965) -
--------- -------- -------
Net cash used in investing activities (6,160) (17,332) (10,644)
--------- -------- -------
Cash flows from financing activities:
Payment of long-term debt (6,345) (198,713) (26,872)
Debt issued - 218,819 -
Deferred debt costs - (8,768) -
Payment of costs related to recapitalization - (26,906) -
Preferred stock retired - (88,147) -
Additions to paid-in capital related to recapitalization - 98,237 -
Payment of preferred stock dividends (2) (2,157) -
--------- -------- -------
Net cash used in financing activities (6,347) (7,635) (26,872)
--------- -------- -------
Net increase (decrease) in cash and cash equivalents 3,057 8,922 (9,161)
Cash and cash equivalents at beginning of year 4,951 8,008 16,930
--------- -------- -------
Cash and cash equivalents at end of year $ 8,008 16,930 7,769
========= ======== =======
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 82
DR PEPPER BOTTLING COMPANY OF TEXAS
Notes to Financial Statements
December 31, 1992, 1993 and 1994
(in thousands, except share and per share amounts)
(1) Organization and Business
(a) Organization
Dr Pepper Bottling Company of Texas ("Company") is a
wholly-owned subsidiary of Dr Pepper Bottling Holdings, Inc.
("Holdings"). Holdings was formed expressly for the purpose
of acquiring all of the common stock of the Company.
Effective October 28, 1988, Holdings entered into an agreement
with the Company providing for the acquisition of all issued
and outstanding common stock of the Company. Stockholders'
equity reflects such continuing Predecessor stockholders'
proportionate interests in the adjusted historical book value
of the Company, reduced by the net consideration paid by
Holdings for common stock representing such interest.
(b) Business
The Company is principally engaged in producing, marketing and
distributing carbonated soft drinks in Dallas/Fort Worth,
Houston and Waco, Texas. Soft drink operations are conducted
pursuant to franchise agreements with companies owning the
rights to soft drink formulae.
(2) Recapitalization
During 1993, the Company completed a recapitalization plan (the
"Recapitalization Plan"), the purpose of which was to reduce the
aggregate amount of interest expense and preferred stock dividend
requirements. The Recapitalization Plan is described in more detail
in note 9.
F-7
<PAGE> 83
DR PEPPER BOTTLING COMPANY OF TEXAS
Notes to Financial Statements
(in thousands, except share and per share amounts)
(a) 1993 Bank Credit Agreement
Pursuant to the Recapitalization Plan, on February 18, 1993,
the Company entered into a credit agreement (the "1993 Bank
Credit Agreement") with certain banks providing for (i) a term
loan facility in the aggregate amount of $100,000 and (ii) a
revolving line of credit facility in the aggregate amount of
$25,000.
On March 22, 1993, as contemplated by the Recapitalization
Plan, the Company borrowed $91,700 under the term loan
facility of the 1993 Bank Credit Agreement to redeem all of
the then outstanding Senior Exchangeable Preferred Stock of
the Company.
(b) Sale/Leaseback
As part of the Recapitalization Plan, the Company entered into
an amendment to the lease agreement in connection with the
sale/leaseback of its Irving and Houston, Texas production
facilities. The amendment to the lease agreement modified
certain covenants and eliminated the consumer price index
adjustment to the rent scheduled to be effected on July 1,
1994. In connection with the amendment, Donaldson Lufkin &
Jenrette Securities Corporation ("DLJ") obtained the right to
sell the note held by the lender under the lease agreement,
and DLJ subsequently sold the note. The proceeds from such
sale in excess of the principal amount of the note plus
accrued interest, commissions and expenses ($1,227) were paid
to the Company and are reflected as a reduction of the loss on
recapitalization.
(c) Senior Preferred Stock
The Company redeemed all of the outstanding Senior
Exchangeable Preferred Stock of the Company, in accordance
with the Recapitalization Plan.
(d) Loss on Recapitalization
In 1993, the Company recorded an extraordinary loss of $31,600
in connection with the early retirement of a total of $192,200
principal amount of notes and debentures. The aggregate
purchase price (including certain costs to extinguish the
debt) of such indebtedness was $223,800, financed principally
through newly issued debt and preferred stock.
(Continued)
F-8
<PAGE> 84
DR PEPPER BOTTLING COMPANY OF TEXAS
Notes to Financial Statements
(in thousands, except share and per share amounts)
(3) Summary of Significant Accounting Policies
(a) Basis of Presentation
The financial statements include the accounts of the Company's
three operating branches: Dallas/Ft. Worth, Houston and
Waco. All balances and transactions between branches have
been eliminated. Certain amounts in the 1992 and 1993
financial statements have been reclassified to conform with
1994 presentation.
(b) Cash Equivalents
Cash equivalents consist of highly liquid debt instruments
with original maturities of three months or less. The Company
did not have any cash equivalents at December 31, 1993 or
1994.
(c) Inventories
Inventories are stated at the lower of first-in, first-out
("FIFO") cost or market.
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost. For
financial reporting purposes, depreciation is provided on the
straight-line method over the estimated useful lives of the
assets. Accelerated depreciation methods are generally used
for income tax purposes.
Maintenance and repairs are charged to operations as incurred;
renewals and betterments are capitalized and depreciated. The
cost and accumulated depreciation of assets sold or disposed
of are removed from the accounts. Resultant profit or loss on
such transactions is credited or charged to earnings.
(Continued)
F-9
<PAGE> 85
DR PEPPER BOTTLING COMPANY OF TEXAS
Notes to Financial Statements
(in thousands, except share and per share amounts)
(e) Goodwill and Other Intangible Assets
Excess of cost over estimated fair market value of tangible
net assets of acquired businesses and costs of franchises are
being amortized on a straight-line basis over 10 to 40 years.
Debt issuance costs are being amortized over the terms of the
related debt agreements (10 to 25 years). Covenants not to
compete are amortized over the terms of the agreements (5 to
10 years).
The Company continually evaluates the propriety of the
carrying amount of goodwill and other intangibles as well as
the amortization period to determine whether current events or
circumstances warrant adjustments to the carrying value and/or
revised estimates of useful lives. This evaluation consists
of the projection of undiscounted operating income before
depreciation, amortization, nonrecurring charges and interest
for the Company over the remaining amortization periods of the
related intangible assets. The projections are based on a
historical trend line of actual results since the acquisitions
of the respective assets and adjusted for expected changes in
operating results. To the extent such projections indicate
that the undiscounted operating income is not expected to be
adequate to recover the carrying amounts of the related
intangible assets, such carrying amounts are written down by
charges to expense. At this time, the Company believes that
no significant impairment of goodwill and other intangible
assets has occurred and that no reduction of the estimated
useful lives is warranted.
(f) Self-insurance
The Company is self-insured in these areas: (a) employer's
excess indemnity with a $250 per occurrence limit on coverage,
(b) automobile liability with a $250 per occurrence limit on
coverage, (c) general liability with a $250 per occurrence
limit on coverage, and (d) medical insurance with a $125 per
person per year limit on coverage. The Company accrues for
costs associated with its self-insured programs as incurred.
Coverage in excess of the limits defined above is provided by
third-party insurance companies. All other claims are covered
through third-party insurance policies.
(g) Financial Instruments and Credit Risk Concentrations
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash
equivalents and trade receivables. The Company places its
cash equivalents with high credit quality financial
institutions; however, such amounts are generally in excess of
federally insured limits. Although the Company
(Continued)
F-10
<PAGE> 86
DR PEPPER BOTTLING COMPANY OF TEXAS
Notes to Financial Statements
(in thousands, except share and per share amounts)
does not require collateral for trade receivables, the credit
risk is limited due to the large number of customers. For the
years ended December 31, 1992, 1993 and 1994, no customer
accounted for more than 10% of net sales. At December 31,
1993 and 1994, no receivable from any customer exceeded 5% of
stockholder's deficit.
Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments"
("Statement 107"), requires that the Company disclose
estimated fair values for its financial instruments. Fair
value estimates are set forth below for the Company's
financial instruments:
. Cash, Accounts Receivable, Accounts Payable and
Accrued Expenses - The carrying amounts approximate
fair value because of the short maturity of these
instruments.
. Long-term Debt - The carrying amounts of the term
loan and credit facility loan approximate market
because of the variable interest rate which is based
on the bank's alternative base rate.
The fair value estimates are made at a specific point in time,
based on relevant market information and information about the
financial instruments. These estimates are subjective in
nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the
estimates.
(h) Income Taxes
In February 1992, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Statement 109 requires a
change from the deferred method of accounting for income taxes
of APB Opinion 11 to the asset and liability method of
accounting for income taxes. Under the asset and liability
method of Statement 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. Under Statement 109, the effect on
(Continued)
F-11
<PAGE> 87
DR PEPPER BOTTLING COMPANY OF TEXAS
Notes to Financial Statements
(in thousands, except share and per share amounts)
deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
Pursuant to the deferred method under APB Opinion 11, which
was applied in 1992 and prior years, deferred income taxes are
recognized for income and expense items that are reported in
different years for financial reporting purposes and income
tax purposes using the tax rate applicable for the year of the
calculation. Under the deferred method, deferred taxes are
not adjusted for subsequent changes in tax rates.
Effective January 1, 1993, the Company adopted Statement 109
and the cumulative effect of the change in accounting for
income taxes was immaterial.
(4) Inventories
Inventories consist of the following at December 31, 1993 and 1994:
<TABLE>
<CAPTION>
1993 1994
---- ----
<S> <C> <C>
Finished products $ 8,396 8,154
Raw materials and supplies 1,410 4,029
------- ------
$ 9,806 12,183
======= ======
</TABLE>
(5) Property, Plant and Equipment
Property, plant and equipment and accumulated depreciation at December
31, 1993 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
1993 1994
---- ----
<S> <C> <C>
Land and improvements $ 17,540 17,589
Buildings 26,930 27,120
Machinery and other equipment 46,708 51,309
Vending equipment 29,105 32,084
--------- --------
120,283 128,102
Accumulated depreciation (55,760) (62,156)
--------- --------
Net property, plant and equipment $ 64,523 65,946
========= ========
</TABLE>
Depreciation expense on production facilities is included in cost of
sales and totaled $3,287, $4,016 and $3,508 for the years ended
December 31, 1992, 1993 and 1994, respectively.
(Continued)
F-12
<PAGE> 88
DR PEPPER BOTTLING COMPANY OF TEXAS
Notes to Financial Statements
(in thousands, except share and per share amounts)
(6) Goodwill and Other Intangible Assets
Goodwill and other intangible assets at December 31, 1993 and 1994 are
summarized as follows:
<TABLE>
<CAPTION>
1993 1994
---- ----
<S> <C> <C>
Goodwill, net of accumulated amortization
of $12,790 and $15,363 $ 86,543 83,970
Franchise costs, net of accumulated
amortization of $10,357 and $12,872 28,112 25,597
Other, net of accumulated amortization of
$5,591 and $6,022 2,013 1,582
--------- --------
$ 116,668 111,149
========= ========
</TABLE>
(7) Lease Obligations
The Company has operating leases principally for office, trucking
fleet and vending equipment. Rent expense on operating leases was
$3,197, $4,533 and $4,997 in 1992, 1993 and 1994, respectively.
At December 31, 1994, future minimum rental payments under
noncancellable operating leases are $2,183, $1,858, $1,521, $1,141,
$713 and $238 for the years 1995 through 1999 and thereafter,
respectively.
(8) Acquisition
On April 13, 1993, pursuing its operating strategy of acquiring
contiguous bottling territories, the Company acquired all of the
operating assets of Dr Pepper Bottling Company of Galveston, Inc. for
$9,000 in cash and $1,000 payable in installments over five years
under a noncompetition agreement.
(Continued)
F-13
<PAGE> 89
DR PEPPER BOTTLING COMPANY OF TEXAS
Notes to Financial Statements
(in thousands, except share and per share amounts)
(9) Long-term Debt and Obligations Under Capital Leases
Long-term debt and obligations under capital leases at December 31,
1993 and 1994 is summarized as follows:
<TABLE>
<CAPTION>
1993 1994
---- ----
<S> <C> <C>
Senior notes due in 2000, interest at 10-1/4% (a) $ 125,000 117,000
Facility A Note, interest at LIBOR (6% at
December 31, 1994) + 2%; due in varying
installments through June 1999 (b) 86,111 68,069
Sale/leaseback borrowings, interest at 12.6%, due in
monthly installments of $333 through
June 2014 (c) 27,475 27,019
Covenant not to compete liabilities at present value
of payments 1,944 1,617
Obligations under capital leases 51 4
--------- ---------
240,581 213,709
Less current portion 12,885 14,448
--------- ---------
$ 227,696 199,261
========= =========
</TABLE>
(a) Senior Notes
As contemplated by the Recapitalization Plan, on February 18,
1993, the Company issued and sold $125,000 aggregate principal
amount of Senior Notes. The Senior Notes are redeemable at
the option of the Company, in whole or in part, at any time on
or after February 16, 1998, at 101.708% of the principal
amount, plus accrued interest, if any, if redeemed during the
twelve-month period beginning February 16, 1998, and
thereafter at 100% of the principal amount, plus accrued
interest, if any, until maturity. In the event of a change in
control of the Company or Holdings, the Company will be
obligated to make an offer to purchase all outstanding Senior
Notes at a redemption price of 101% of the principal amount
plus accrued interest to the date of repurchase.
Under the terms of the indenture governing the Senior Notes,
aggregate dividend payments on capital stock subsequent to
issuance of the Senior Notes are restricted to the sum of (i)
50% of aggregate net income subsequent to issuance of the
Senior Notes (or in the case of a net loss, 100% of the
aggregate net loss) plus (ii) the proceeds from the issuance
of capital stock, warrants or options plus (iii) $7.5 million.
(Continued)
F-14
<PAGE> 90
DR PEPPER BOTTLING COMPANY OF TEXAS
Notes to Financial Statements
(in thousands, except share and per share amounts)
(b) Facility A Note
The Facility A Note contains certain restrictive covenants and
requires the Company, among other things, to satisfy certain
financial ratios and restrict investments, capital
expenditures, additional debts and payment of dividends. This
loan is secured by substantially all assets of the Company.
(c) Sale/Leaseback Borrowings
Under the sale/leaseback agreement, the Company has the option
to repurchase the property on the tenth anniversary date of
the agreement at the greater of the fair value of the property
at the option date or the original sales price. On the tenth
anniversary of the amended agreement, and at the end of each
successive five-year period for which the agreement remains in
effect, the monthly payments are to be adjusted, using a
formula based upon increases in the Consumer Price Index. In
addition, the agreement provides for, at the option of the
Company, an extension of the lease termination date for
successive five-year terms to 2034.
(d) Bank Credit Agreement
As of December 31, 1994, the Company had no balance
outstanding on the $25,000 revolving line of credit facility
of the 1993 Bank Credit Agreement. The balance available for
borrowing has been reduced by the outstanding letters of
credit discussed below. The facility matures June 30, 1999.
Interest on outstanding balances is payable at LIBOR (6% at
December 31, 1994) plus 2%.
The 1993 Bank Credit Agreement contains customary restrictive
covenants and requires the Company, among other things, to
satisfy certain financial ratios and restrict investments,
capital expenditures, additional debt and payments of
dividends. Amounts owed under the 1993 Bank Credit Agreement
are the direct obligations of the Company and are
unconditionally guaranteed by Holdings. This loan is secured
by substantially all assets of the Company.
(Continued)
F-15
<PAGE> 91
DR PEPPER BOTTLING COMPANY OF TEXAS
Notes to Financial Statements
(in thousands, except share and per share amounts)
The maturities of long-term debt and obligations under capital leases
at December 31, 1994 are as follows: 1995 - $14,448; 1996 - $16,244;
1997 - $18,058; 1998 - $18,014; 1999 - $5,177 and thereafter -
$141,768.
Interest paid for the years ended December 31, 1992, 1993 and 1994
totaled $30,830, $23,344 and $22,633, respectively.
At December 31, 1994, the Company had outstanding letters of credit of
$1,830 related to certain insurance policies.
(10) Savings Plan
The Company maintains a tax-qualified defined contribution 401(k)
profit sharing plan (Savings Plan). All employees over age 21 with
one year of service are eligible to participate in the Savings Plan.
Participants may elect to defer up to fifteen percent of their
compensation and have it contributed to the Savings Plan on a pre-tax
basis. In addition, as long as it has sufficient net profits, the
Company automatically matches fifty percent of each participant's
salary deferral contributions up to three percent of each
participant's salary. In accordance with the Internal Revenue Code of
1986, as amended, the amount which may be contributed annually to the
Savings Plan by or on behalf of any participant is subject to the
limitations imposed on defined contribution plan contributions.
Amounts expensed under the Savings Plan were not significant in 1992,
1993 or 1994.
(11) Income Taxes
Income tax expense attributable to income from continuing operations
was $140 for the year ended December 31, 1994 ($-0- in 1992 and 1993),
and differed from the amount computed by applying the U.S. federal
income tax rate of 34 percent to pretax income from continuing
operations as a result of the following:
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense $(591) (3,716) 4,291
Changes in income taxes resulting from:
Addition to (utilization of) net operating loss
carryforward 591 3,716 (4,634)
Amortization of goodwill - - 165
Alternative minimum tax - - 140
Other - - 178
----- ------ ------
Total income tax expense $ - - 140
===== ====== ======
</TABLE>
(Continued)
F-16
<PAGE> 92
DR PEPPER BOTTLING COMPANY OF TEXAS
Notes to Financial Statements
(in thousands, except share and per share amounts)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 1994 are presented below:
<TABLE>
<CAPTION>
1993 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 34,431 22,991
Obligations under capital leases 8,974 8,605
Other 1,961 2,254
-------- -------
Total gross deferred tax assets 45,366 33,850
Less valuation allowance (37,904) (26,116)
-------- -------
Net deferred tax assets 7,462 7,734
-------- -------
<CAPTION>
1993 1994
---- ----
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation $ (3,879) (3,586)
Intangible assets due to differences in amortization (3,583) (4,148)
-------- -------
Total gross deferred liabilities (7,462) (7,734)
-------- -------
Net deferred tax assets (liabilities) $ - -
======== =======
</TABLE>
For federal income tax purposes, the predecessor tax basis of assets
and liabilities was retained following the Acquisition.
At December 31, 1994, the Company has net operating loss carryforwards
of approximately $67,619 which are available to offset future federal
taxable income, if any, through 2008. At December 31, 1994, there
were approximately $48,903 of net operating loss carryforwards
available to offset future alternative minimum taxable income for
federal income tax purposes. Net operating losses may not offset more
than 90% of the Company's alternative minimum tax income.
The valuation allowance for deferred tax assets as of January 1, 1993
was $19,744. The net change in the total valuation allowance for the
years ended December 31, 1993 and 1994 was an increase (decrease) of
$18,160 and ($11,788), respectively. The changes are primarily
related to changes in net operating loss carryforwards during 1993 and
1994.
(Continued)
F-17
<PAGE> 93
DR PEPPER BOTTLING COMPANY OF TEXAS
Notes to Financial Statements
(in thousands, except share and per share amounts)
Income taxes paid for the year ended December 31, 1994 totaled
$105,000 (none in 1992 and 1993).
If the Company undergoes a more-than-50% ownership change within the
meaning of section 382(g) of the Internal Revenue Code, then the
Company will be limited in the use of its pre-ownership change net
operating losses to offset future taxable income. A similar
limitation would apply to any pre-ownership change tax credits. Also,
to the extent that the taxable income of the Company for any future
year exceeds the sum of any net operating losses arising after the
date of the ownership change plus the amount of the annual limitation
on the pre- ownership change net operating losses, the Company would
be required to pay federal income tax on such excess.
Although a more-than-50% ownership change within the meaning of
section 382(g) of the Internal Revenue Code occurred with respect to
the Company in October of 1988, the Company has determined that the
annual limitation under section 382 of the Code on its pre-October
1988 net operating losses should be adequate to permit the full use of
those net operating losses against future taxable income of the
Company. Furthermore, although there can be no assurance that the
Internal Revenue Service would not take a different position, the
Company believes that a more-than-50% ownership change within the
meaning of section 382(g) of the Internal Revenue Code has not
occurred with respect to the Company after October 1988.
(12) Other Contingencies
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's financial position.
F-18
<PAGE> 94
[KPMG Peat Marwick LLP LOGO]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Dr Pepper Bottling Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Dr Pepper
Bottling Holdings, Inc. and subsidiary as of December 31, 1993 and 1994, and
the related statements of operations, stockholders' deficit and cash flows for
each of the years in the three-year period ended December 31, 1994. These
consolidated financial statements and are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Dr Pepper Bottling
Holdings, Inc. and subsidiary as of December 31, 1993 and 1994, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1994, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
March 8, 1995
F-19
<PAGE> 95
DR PEPPER BOTTLING HOLDINGS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1993 and 1994
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Assets (note 9) 1993 1994
---- ----
<S> <C> <C>
Current assets:
Cash $ 16,955 7,794
Accounts receivable:
Trade, less allowance for doubtful accounts of $305
in 1993 and $371 in 1994 20,156 24,479
Other 3,109 3,463
Inventories (note 4) 9,806 12,183
Prepaid expenses 3,421 5,671
--------- ---------
Total current assets 53,447 53,590
--------- ---------
Property, plant and equipment, net (notes 5 and 9) 64,523 65,946
Other assets, at amortized cost:
Goodwill and other intangible assets (note 6) 116,668 111,149
Debt issuance costs 11,225 9,514
--------- ---------
$ 245,863 240,199
========= =========
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 26,311 34,285
Accrued expenses 13,877 14,935
Current maturities of long-term debt and obligations
under capital leases (note 9) 12,885 14,448
--------- ---------
Total current liabilities 53,073 63,668
--------- ---------
Long-term debt and obligations under capital leases, less current
maturities (note 9) 306,149 287,099
Cumulative, redeemable senior exchangeable preferred stock at $.01 par
value. Authorized 2,150 shares; issued and outstanding 1,283 shares
in 1993 and 1,430 in 1994; aggregate liquidation preference $35,750
(note 10) 29,635 33,502
Stockholders' deficit (note 11):
Class A common stock, $.01 par value. Authorized 22,000 shares;
issued and outstanding 13,642 shares in 1993 and 1994 136 136
Additional paid-in capital 14,383 14,383
Consideration to continuing predecessor shareholders in
excess of book value (33,948) (33,948)
Deficit (123,565) (124,641)
--------- ---------
Total stockholders' deficit (142,994) (144,070)
Commitments and contingencies (notes 7, 13 and 14)
--------- ---------
$ 245,863 240,199
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE> 96
DR PEPPER BOTTLING HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1992, 1993 and 1994
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Net sales $ 288,271 310,881 332,204
Cost of sales (note 5) 185,783 195,957 214,376
------------- ---------- ----------
Gross profit 102,488 114,924 117,828
Marketing expense 6,036 9,418 7,618
Depreciation 5,371 5,577 5,765
Amortization of intangible assets 5,505 5,751 5,519
Administrative and general expenses 55,575 60,572 62,931
------------- ---------- ----------
Operating profit 30,001 33,606 35,995
------------- ---------- ----------
Other expense (income):
Interest, including accretion of discount on
discount notes of $7,340 and $9,385 in 1993
and 1994, respectively 30,830 31,304 31,777
Amortization of deferred debt issuance costs 1,107 1,610 1,711
Other, net (199) (2,624) (424)
------------- ---------- ----------
31,738 30,290 33,064
------------- ---------- ----------
Earnings (loss) before income taxes,
extraordinary item and dividends on
subsidiary's preferred stock (1,737) 3,316 2,931
Income taxes - - 140
------------- ---------- ----------
Earnings (loss) before extraordinary
item and dividends on subsidiary's
preferred stock (1,737) 3,316 2,791
Dividends on subsidiary's preferred stock (13,171) (5,806) -
------------- ---------- ----------
Earnings (loss) before extraordinary
item (14,908) (2,490) 2,791
Extraordinary item - loss on recapitalization (note 2) - (31,559) -
------------- ---------- ----------
Net earnings (loss) $ (14,908) (34,049) 2,791
============= ========== ==========
Net loss applicable to common stock (note 3(i)) $ (14,908) (36,128) (1,076)
============= ========== ==========
Weighted average shares outstanding 13,333,000 13,543,000 13,642,000
============= ========== ==========
Loss per common share before extraordinary item $(1.12) (.34) (.08)
Extraordinary item - (2.33) -
------------- ---------- ----------
Loss per common share $(1.12) (2.67) (.08)
============= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE> 97
DR PEPPER BOTTLING HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Deficit
Years ended December 31, 1992, 1993 and 1994
(in thousands)
<TABLE>
<CAPTION>
Consideration
Common stock to continuing
--------------------------------- Predecessor
Class A Class B Additional stockholders
--------------- --------------- paid-in in excess of
Shares Amount Shares Amount capital book value Deficit Totals
------ ------ ------ ------ ------- ---------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991 11,333 $ 113 2,000 $ 20 11,858 (33,948) (72,529) (94,486)
Net loss - - - - - - (14,908) (14,908)
------ ------ ------ ------ ------ ------ ------- -------
Balance at December 31, 1992 11,333 113 2,000 20 11,858 (33,948) (87,437) (109,394)
Warrant issued (note 11) - - - - 2,250 - - 2,250
Common shares issued 309 3 275 - - 278
Class B shares converted to Class A 2,000 20 (2,000) (20) - - - -
Stock dividends on redeemable
senior exchangeable preferred
stock - - - - - - (2,079) (2,079)
Net loss - - - - - - (34,049) (34,049)
------ ------ ------ ------ ------ ------ ------- -------
Balance at December 31, 1993 13,642 136 - - 14,383 (33,948) (123,565) (142,994)
Stock dividends on redeemable
senior exchangeable preferred
stock - - - - - - (3,677) (3,677)
Net earnings - - - - - - 2,791 2,791
Accretion of preferred stock - - - - - - (190) (190)
------ ------ ------ ------ ------ ------ ------- -------
Balance at December 31, 1994 13,642 136 - $ - 14,383 (33,948) (124,641) (144,070)
====== ====== ====== ====== ====== ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE> 98
DR PEPPER BOTTLING HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1992, 1993 and 1994
(in thousands)
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (14,908) (34,049) 2,791
---------- --------- --------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Loss on recapitalization - 31,559 -
Depreciation of property, plant and equipment 8,658 9,593 9,273
Amortization of other assets 6,612 7,361 7,230
Subsidiary's preferred stock dividends 13,171 5,806 -
Accretion of discount on discount notes - 7,340 9,385
Loss (gain) on sale of assets (224) 32 (52)
Changes in assets and liabilities, net of
effects from acquisitions:
Accounts receivable (1,228) (1,618) (4,677)
Inventories (1,444) (346) (2,377)
Prepaid expenses (1,159) 1,491 (2,250)
Accounts payable 6,878 2,079 7,974
Accrued expenses (792) 4,949 1,058
---------- --------- --------
Total adjustments 30,472 68,246 25,564
---------- --------- --------
Net cash provided by
operating activities 15,564 34,197 28,355
---------- --------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (7,833) (8,971) (10,838)
Proceeds from sale of property, plant and equipment 1,673 604 194
Cash paid for acquisitions, net of cash acquired - (8,965) -
---------- --------- --------
Net cash used in investing activities (6,160) (17,332) (10,644)
---------- --------- --------
Cash flows from financing activities:
Payment of long-term debt (6,345) (198,713) (26,872)
Debt issued - 289,932 -
Deferred debt costs - (12,011) -
Payment of costs related to recapitalization - (26,906) -
Preferred stock issued - 27,556 -
Preferred stock retired - (88,147) -
Payment of dividends on subsidiary's preferred stock (2) (2,157) -
Common stock issued - 278 -
Warrant issued - 2,250 -
---------- --------- --------
Net cash used in financing activities (6,347) (7,918) (26,872)
---------- --------- --------
Net increase (decrease) in cash and cash equivalents 3,057 8,947 (9,161)
Cash and cash equivalents at beginning of year 4,951 8,008 16,955
---------- --------- --------
Cash and cash equivalents at end of year $ 8,008 16,955 7,794
========== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE> 99
DR PEPPER BOTTLING HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1992, 1993 and 1994
(in thousands, except share and per share amounts)
(1) Organization and Business
(a) Organization
Dr Pepper Bottling Holdings, Inc. ("Holdings") is a
corporation owned 41.5% (including 39% related to beneficial
ownership pursuant to the terms of a voting trust agreement)
by DLJ Capital Corporation ("DLJ Capital"), 21.2% by other new
investors and 37.3% by certain continuing predecessor
stockholders of Dr Pepper Bottling Company of Texas
("Company"). Holdings was formed expressly for the purpose of
acquiring all of the common stock of the Company. Effective
October 28, 1988, Holdings entered into an agreement with the
Company providing for the acquisition of all issued and
outstanding common stock of the Company. Stockholders' equity
reflects such continuing Predecessor stockholders'
proportionate interests in the adjusted historical book value
of the Company, reduced by the net consideration paid by
Holdings for common stock representing such interest.
(b) Business
The Company is principally engaged in producing, marketing and
distributing carbonated soft drinks in Dallas/Fort Worth,
Houston and Waco, Texas. Soft drink operations are conducted
pursuant to franchise agreements with companies owning the
rights to soft drink formulae.
(2) Recapitalization
In 1993, the Company and Holdings completed a recapitalization plan
(the "Recapitalization Plan"), the purpose of which was to reduce the
aggregate amount of interest expense and preferred stock dividend
requirements. The Recapitalization Plan is described in more detail
in notes 9, 10 and 11.
(a) 1993 Bank Credit Agreement
Pursuant to the Recapitalization Plan, on February 18, 1993,
the Company entered into a credit agreement (the "1993 Bank
Credit Agreement") with certain banks providing for (i) a term
loan facility in the aggregate amount of $100,000 and (ii) a
revolving line of credit facility in the aggregate amount of
$25,000.
On March 22, 1993, as contemplated by the Recapitalization
Plan, the Company borrowed $91,700 under the term loan
facility of the 1993 Bank Credit Agreement to redeem all of
the then outstanding Senior Exchangeable Preferred Stock of
the Company.
(Continued)
F-24
<PAGE> 100
DR PEPPER BOTTLING HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(b) Sale/Leaseback
As part of the Recapitalization Plan, the Company entered into
an amendment to the lease agreement in connection with the
sale/leaseback of its Irving and Houston, Texas production
facilities. The amendment to the lease agreement modified
certain covenants and eliminated the consumer price index
adjustment to the rent scheduled to be effected on July 1,
1994. In connection with the amendment, Donaldson Lufkin &
Jenrette Securities Corporation ("DLJ") obtained the right to
sell the note held by the lender under the lease agreement,
and DLJ subsequently sold the note. The proceeds from such
sale in excess of the principal amount of the note plus
accrued interest, commissions and expenses ($1,227) were paid
to the Company and are reflected as a reduction of the loss on
recapitalization.
(c) Loss on Recapitalization
In 1993, Company recorded an extraordinary loss of $31,600 in
connection with the early retirement of a total of $192,200
principal amount of notes and debentures. The aggregate
purchase price (including certain costs to extinguish the
debt) of such indebtedness was $223,800, financed principally
through newly issued debt and preferred stock.
(3) Summary of Significant Accounting Policies
(a) Basis of Presentation
The consolidated financial statements include the accounts of
Holdings and its wholly-owned subsidiary, Dr Pepper Bottling
Company of Texas. Certain amounts in the 1992 and 1993
financial statements have been reclassified to conform with
1994 presentation.
(b) Cash Equivalents
Cash equivalents consist of highly liquid debt instruments
with original maturities of three months or less. The Company
did not have any cash equivalents at December 31, 1993 or
1994.
(c) Inventories
Inventories are stated at the lower of first-in, first-out
("FIFO") cost or market.
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost. For
financial reporting purposes, depreciation is provided on the
straight-line method over the estimated useful lives of the
assets. Accelerated depreciation methods are generally used
for income tax purposes.
Maintenance and repairs are charged to operations as incurred;
renewals and betterments are capitalized and depreciated. The
cost and accumulated depreciation of
(Continued)
F-25
<PAGE> 101
DR PEPPER BOTTLING HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
assets sold or disposed of are removed from the accounts.
Resultant profit or loss on such transactions is credited or
charged to earnings.
(e) Goodwill and Other Intangible Assets
Excess of cost over estimated fair market value of tangible
net assets of acquired businesses and costs of franchises are
being amortized on a straight-line basis over 10 to 40 years.
Debt issuance costs are being amortized over the terms of the
related debt agreements (10 to 25 years). Covenants not to
compete are amortized over the terms of the agreements (5 to
10 years).
The Company continually evaluates the propriety of the
carrying amount of goodwill and other intangibles as well as
the amortization period to determine whether current events or
circumstances warrant adjustments to the carrying value and/or
revised estimates of useful lives. This evaluation consists
of the projection of undiscounted operating income before
depreciation, amortization, nonrecurring charges and interest
for the Company over the remaining amortization periods of the
related intangible assets. The projections are based on a
historical trend line of actual results since the acquisitions
of the respective assets and adjusted for expected changes in
operating results. To the extent such projections indicate
that the undiscounted operating income is not expected to be
adequate to recover the carrying amounts of the related
intangible assets, such carrying amounts are written down by
charges to expense. At this time, the Company believes that
no significant impairment of goodwill and other intangible
assets has occurred and that no reduction of the estimated
useful lives is warranted.
(f) Self-insurance
The Company is self-insured in these areas: (a) employer's
excess indemnity with a $250 per occurrence limit on coverage,
(b) automobile liability with a $250 per occurrence limit on
coverage, (c) general liability with a $250 per occurrence
limit on coverage, and (d) medical insurance with a $125 per
person per year limit on coverage. The Company accrues for
costs associated with its self-insured programs as incurred.
Coverage in excess of the limits defined above is provided by
third-party insurance companies. All other claims are covered
through third-party insurance policies.
(g) Financial Instruments and Credit Risk Concentrations
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash
equivalents and trade receivables. The Company places its
cash equivalents with high credit quality financial
institutions; however, such amounts are generally in excess of
federally insured limits. Although the Company does not
require collateral for trade receivables, the credit risk is
limited due to the large number of customers. For the years
ended December 31, 1992, 1993 and 1994, no customer accounted
for more than 10% of net sales. At December 31, 1993 and
1994, no receivable from any customer exceeded 5% of
stockholders' deficit.
Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments"
("Statement 107"), requires that the Company disclose
(Continued)
F-26
<PAGE> 102
DR PEPPER BOTTLING HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
estimated fair values for its financial instruments. Fair
value estimates are set forth below for the Company's
financial instruments:
-- Cash, Accounts Receivable, Accounts Payable and
Accrued Expenses - The carrying amounts approximate
fair value because of the short maturity of these
instruments.
-- Long-term Debt - The carrying amounts of the term
loan and credit facility loan approximate market
because of the variable interest rate which is based
on the bank's alternative base rate.
-- Senior Discount Notes - The fair value is based on
the amount of discounted future cash flows associated
with the notes using the Company's current borrowing
rate for similar debt instruments of comparable
maturity. The estimated fair value of the Company's
senior discount notes at December 31, 1994 was
$98,125.
The fair value estimates are made at a specific point in time,
based on relevant market information and information about the
financial instruments. These estimates are subjective in
nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the
estimates.
(h) Income Taxes
In February 1992, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Statement 109 requires a
change from the deferred method of accounting for income taxes
of APB Opinion 11 to the asset and liability method of
accounting for income taxes. Under the asset and liability
method of Statement 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. Under Statement 109, the effect on
deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
Pursuant to the deferred method under APB Opinion 11, which
was applied in 1992 and prior years, deferred income taxes are
recognized for income and expense items that are reported in
different years for financial reporting purposes and income
tax purposes using the tax rate applicable for the year of the
calculation. Under the deferred method, deferred taxes are
not adjusted for subsequent changes in tax rates.
Effective January 1, 1993, Holdings adopted Statement 109 and
the cumulative effect of the change in accounting for income
taxes was immaterial.
(Continued)
F-27
<PAGE> 103
DR PEPPER BOTTLING HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(i) Loss Per Common Share
Net loss per common share is based on the weighted average
number of Class A and Class B common shares outstanding and is
adjusted for dividends on Holdings' preferred stock and
accretion of preferred stock for the difference between the
carrying value and liquidation preference. Shares assumable
upon exercise of stock options and warrants are antidilutive
and are excluded from the calculation.
(4) Inventories
Inventories consist of the following at December 31, 1993 and 1994:
<TABLE>
<CAPTION>
1993 1994
---- ----
<S> <C> <C>
Finished products $ 8,396 8,154
Raw materials and supplies 1,410 4,029
------- -------
$ 9,806 12,183
======= =======
</TABLE>
(5) Property, Plant and Equipment
Property, plant and equipment and accumulated depreciation at December
31, 1993 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
1993 1994
---- ----
<S> <C> <C>
Land and improvements $ 17,540 17,589
Buildings 26,930 27,120
Machinery and other equipment 46,708 51,309
Vending equipment 29,105 32,084
---------- ----------
120,283 128,102
Accumulated depreciation (55,760) (62,156)
---------- ----------
Net property, plant and equipment $ 64,523 65,946
========== ==========
</TABLE>
Depreciation expense on production facilities is included in cost of
sales and totaled $3,287, $4,016 and $3,508 for the years ended
December 31, 1992, 1993 and 1994, respectively.
(6) Goodwill and Other Intangible Assets
Goodwill and other intangible assets at December 31, 1993 and 1994 are
summarized as follows:
<TABLE>
<CAPTION>
1993 1994
--------- ---------
<S> <C> <C>
Goodwill, net of accumulated amortization
of $12,790 and $15,363 $ 86,543 83,970
Franchise costs, net of accumulated
amortization of $10,357 and $12,872 28,112 25,597
Other net of accumulated amortization of
$5,591 and $6,022 2,013 1,582
--------- ---------
$ 116,668 111,149
========= =========
</TABLE>
(Continued)
F-28
<PAGE> 104
DR PEPPER BOTTLING HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(7) Lease Obligations
The Company has operating leases principally for office, trucking
fleet and vending equipment. Rent expense on operating leases was
$3,197, $4,533 and $4,997 in 1992, 1993 and 1994, respectively.
At December 31, 1994, future minimum rental payments under
noncancellable operating leases are $2,183, $1,858, $1,521, $1,141,
$713 and $238 for the years 1995 through 1999 and thereafter,
respectively.
(8) Acquisition
On April 13, 1993, pursuing its operating strategy of acquiring
contiguous bottling territories, the Company acquired all of the
operating assets of Dr Pepper Bottling Company of Galveston, Inc. for
$9,000 in cash and $1,000 payable in installments over five years
under a noncompetition agreement.
(9) Long-term Debt and Obligations Under Capital Leases
Long-term debt and obligations under capital leases at December 31,
1993 and 1994 is summarized as follows:
<TABLE>
<CAPTION>
1993 1994
---- ----
<S> <C> <C>
Senior notes due in 2000, interest at 10-1/4% (a) $ 125,000 117,000
Facility A Note, interest at LIBOR (6% at
December 31, 1994) + 2%; due in varying
installments through June 1999 (b) 86,111 68,069
Senior discount notes due in 2003 (c) 78,453 87,838
Sale/leaseback borrowings, interest at 12.6%, due in
monthly installments of $333 through June 2014 (d) 27,475 27,019
Covenant not to compete liabilities at present value
of payments 1,944 1,617
Obligations under capital leases 51 4
--------- ---------
319,034 301,547
Less current portion 12,885 14,448
--------- ---------
$ 306,149 287,099
========= =========
</TABLE>
(a) Senior Notes
As contemplated by the Recapitalization Plan, on February 18,
1993, the Company issued and sold $125,000 aggregate principal
amount of Senior Notes. The Senior Notes are redeemable at
the option of the Company, in whole or in part, at any time on
or after February 16, 1998, at 101.708% of the principal
amount, plus accrued interest, if any, if redeemed during the
twelve-month period beginning February 16, 1998, and
thereafter at 100% of the principal amount, plus accrued
interest, if any, until maturity. In the event of a change in
control of the Company or Holdings, the
(Continued)
F-29
<PAGE> 105
DR PEPPER BOTTLING HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
Company will be obligated to make an offer to purchase all
outstanding Senior Notes at a redemption price of 101% of the
principal amount plus accrued interest to the date of
repurchase.
Under the terms of the indenture governing the Senior Notes,
aggregate dividend payments on capital stock subsequent to
issuance of the Senior Notes are restricted to the sum of (i)
50% of aggregate net income subsequent to issuance of the
Senior Notes (or in the case of a net loss, 100% of the
aggregate net loss) plus (ii) the proceeds from the issuance
of capital stock, warrants or options plus (iii) $7,500.
(b) Facility A Note
The Facility A Note contains certain restrictive covenants and
requires the Company, among other things, to satisfy certain
financial ratios and restrict investments, capital
expenditures, additional debts and payment of dividends. This
loan is secured by substantially all assets of the Company.
(c) Senior Discount Notes
As contemplated by the Recapitalization Plan, on February 18,
1993, Holdings issued and sold $125,000 aggregate principal
amount of Discount Notes. The notes will mature on February
15, 2003. The Discount Notes were issued at a substantial
discount from their principal amount. Commencing February 16,
1998, interest will accrue until maturity on the Discount
Notes at a rate of 11-5/8% per annum. Interest on the
Discount Notes is payable semiannually on February 15 and
August 15 of each year, commencing August 15, 1998. The
Discount Notes are redeemable, in whole or in part, at the
option of Holdings, on or after February 16, 1998, at amounts
decreasing from 104.359% of the principal amount, plus accrued
interest, at February 16, 1998 to 100% of the principal
amount, plus accrued interest, at February 16, 2001, until
maturity. In the event of a change in control of Holdings,
Holdings will be obligated to make an offer to purchase all
outstanding Discount Notes at a redemption price of 101% of
the accreted value on any repurchase date prior to February
16, 1998, or 101% of the principal amount thereof plus accrued
interest to any repurchase date on or after February 16, 1998.
Under the terms of the indenture governing the Senior Discount
Notes, aggregate dividend payments on capital stock subsequent
to issuance of the Senior Discount Notes are restricted to the
sum of (i) 50% of aggregate net income subsequent to issuance
of the Senior Discount Notes (or in the case of a net loss,
100% of the aggregate net loss) plus (ii) the proceeds from
the issuance of capital stock, warrants or options plus (iii)
$7,500.
(d) Sale/Leaseback Borrowings
Under the sale/leaseback agreement, the Company has the option
to repurchase the property on the tenth anniversary date of
the agreement at the greater of the fair value of the property
at the option date or the original sales price. On the tenth
anniversary of the agreement, and at the end of each
successive five-year period for which the agreement remains in
effect, the monthly payments are to be adjusted, using a
formula
(Continued)
F-30
<PAGE> 106
DR PEPPER BOTTLING HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
based upon increases in the Consumer Price Index. In
addition, the agreement provides for, at the option of the
Company, an extension of the lease termination date for
successive five-year terms to 2034.
(e) Bank Credit Agreement
As of December 31, 1994, the Company had no balance
outstanding on the $25,000 revolving line of credit facility
of the 1993 Bank Credit Agreement. The balance available for
borrowing has been reduced by the outstanding letters of
credit discussed below. The facility matures June 30, 1999.
Interest on outstanding balances is payable at discussed below
LIBOR (6% at December 31, 1994) plus 2%.
The 1993 Bank Credit Agreement contains customary restrictive
covenants and requires the Company, among other things, to
satisfy certain financial ratios and restrict investments,
capital expenditures, additional debt and payments of
dividends. Amounts owed under the 1993 Bank Credit Agreement
are the direct obligations of the Company and are
unconditionally guaranteed by Holdings. This loan is secured
by substantially all assets of the Company.
The maturities of long-term debt and obligations under capital leases
at December 31, 1994 are as follows: 1995 - $14,448; 1996 - $16,244;
1997 - $18,058; 1998 - $18,014; 1999 - $5,177 and thereafter -
$229,606.
Interest paid for the years ended December 31, 1992, 1993 and 1994
totaled $30,830, $23,344 and $26,633, respectively.
At December 31, 1994, the Company had outstanding letters of credit of
$1,830 related to certain insurance policies.
(10) Redeemable Preferred Stock
As part of the Recapitalization Plan, Holdings sold, for an aggregate
purchase price of $30,000, 1,200,000 shares of redeemable senior
cumulative exchangeable preferred stock, par value $.01 per share, of
Holdings (the "Preferred Stock") and a warrant to purchase up to 15%
of the common stock of Holdings on a fully diluted basis. The Company
redeemed all of the outstanding Senior Exchangeable Preferred Stock of
the Company, in accordance with the Recapitalization Plan.
Each share of Preferred Stock has a liquidation preference of $25.00
per share, plus accrued and unpaid dividends. Dividends are payable
quarterly at the rate of $2.75 per annum per share. Dividends on the
Preferred Stock are cumulative and, at the option of Holdings, may be
paid through the issuance of additional shares of Preferred Stock on
each dividend payment date through April 1, 1998. During 1993 and
1994, dividends on the redeemable preferred stock were paid through
the issuance of additional shares of preferred stock. The Preferred
Stock is optionally redeemable, in whole or in part, at $25.00 per
share, plus accrued and unpaid dividends thereon on or after April 1,
1998, provided that Holdings is also entitled to optionally redeem
Preferred Stock with all or a portion of the proceeds from an initial
offering of Holdings common stock consummated on or before the third
anniversary of the issuance of the Preferred Stock.
(Continued)
F-31
<PAGE> 107
DR PEPPER BOTTLING HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
On each of April 1, 2005 and 2006, Holdings is required to redeem 25%
of the number of shares of Preferred Stock that is outstanding as of
March 31, 2005, at $25.00 per share. On April 1, 2007, Holdings must
redeem the remaining shares of Preferred Stock then outstanding at
$25.00 per share. Shares redeemed by Holdings prior to the mandatory
redemption dates are credited toward the mandatory redemption
requirements on a pro rata basis.
The Preferred Stock is exchangeable, in whole or in part, at the
option of Holdings on any dividend payment date for 11% Junior
Subordinated Exchange Debentures due 2006 of Holdings (the "Holdings
Exchange Debentures"). Each share of Preferred Stock will be
exchanged for $25.00 in principal amount of Holdings Exchange
Debentures in denominations of $1,000 or integral multiples thereof.
Differences between the carrying value of the Preferred Stock and
redemption price ($25.00 per share) will be recognized through
adjustments in the carrying value by charges to accumulated deficit
prior to the mandatory redemption dates.
Upon the occurrence of a change in control, at the election of the
holders of the Preferred Stock, Holdings will be required to purchase
for cash all shares of Preferred Stock at $25.25 per share, plus
accrued and unpaid dividends to the date of repurchase.
(11) Stockholders' Deficit
(a) Common Stock
On November 1, 1993, each share of Class B common stock
outstanding was converted to Class A common stock.
(b) Stock Purchase Warrant
In connection with the issuance of Senior Preferred Stock, the
Company entered into an agreement providing for issuance of
warrants to purchase 2,525,000 shares of common stock at $.01
per share. In consideration for granting the warrant, the
Company received $2,250 which was recorded as additional
paid-in capital.
(c) Stock Option Plan
In 1989, Holdings adopted the Dr Pepper Bottling Holdings,
Inc. 1989 Stock Option Plan (the Stock Option Plan). Options
granted under the Stock Option Plan will be exercisable for
the Class A common stock, $0.01 par value per share, of
Holdings. The maximum number of shares of the Class A common
stock to be issued pursuant to the exercise of options granted
under the Stock Option Plan is 666,665. Options granted under
the Stock Option Plan may be either qualified (incentive
options) or nonqualified (nonstatutory options) under Section
422A of the Internal Revenue Code. Options may be granted to
consultants, employees, officers and directors of the Company.
Options granted under the Stock Option Plan will be
exercisable at such times, in such amounts, and at such
exercise prices as shall be determined; provided, however,
that the exercise price for incentive options granted under
the Stock Option
(Continued)
F-32
<PAGE> 108
DR PEPPER BOTTLING HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
Plan will be not less than the fair market value of the Class
A common stock on the date of grant and the exercise price for
nonstatutory options granted under the Stock Option Plan will
be not less than 50% of the fair market value of the common
stock on the date of grant. At December 31, 1993 and 1994,
666,165 options remained unexercised.
(12) Savings Plan
The Company maintains a tax-qualified defined contribution 401(k)
profit sharing plan ("Savings Plan"). All employees over age 21 with
one year of service are eligible to participate in the Savings Plan.
Participants may elect to defer up to fifteen percent of their
compensation and have it contributed to the Savings Plan on a pre-tax
basis. In addition, as long as it has sufficient net profits, the
Company automatically matches fifty percent of each participant's
salary deferral contributions up to three percent of each
participant's salary. In accordance with the Internal Revenue Code of
1986, as amended, the amount which may be contributed annually to the
Savings Plan by or on behalf of any participant is subject to the
limitations imposed on defined contribution plan contributions.
Amounts expensed under the Savings Plan were not significant in 1992,
1993 or 1994.
(13) Income Taxes
Income tax expense attributable to income from continuing operations
was $140 for the year ended December 31, 1994 ($-0- in 1992 and 1993),
and differed from the amount computed by applying the U.S. federal
income tax rate of 34 percent to pretax income from continuing
operations as a result of the following:
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense $(591) (1,127) 997
Changes in income taxes resulting from:
Addition to (utilization) of net operating loss
carryforward 591 1,127 (1,340)
Amortization of goodwill - - 165
Alternative minimum tax - - 140
Other - - 178
----- ------ ------
Total income tax expense $ - - 140
===== ====== ======
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 1994 are presented below:
<TABLE>
<CAPTION>
1993 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 34,431 28,784
Obligations under capital leases 8,974 8,605
Other 1,961 2,457
-------- --------
Total gross deferred tax assets 45,366 39,846
Less valuation allowance (37,904) (32,112)
-------- --------
Net deferred tax assets $ 7,462 7,734
-------- --------
</TABLE>
(Continued)
F-33
<PAGE> 109
DR PEPPER BOTTLING HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
1993 1994
---- ----
<S> <C> <C>
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation $ (3,879) (3,586)
Intangible assets due to differences in amortization (3,583) (4,148)
--------- ---------
Total gross deferred liabilities (7,462) (7,734)
--------- ---------
Net deferred tax assets (liabilities) $ - -
========= =========
</TABLE>
For federal income tax purposes, the predecessor tax basis of assets
and liabilities was retained following the Acquisition.
At December 31, 1994, the Company has net operating loss carryforwards
of approximately $84,658 which are available to offset future federal
taxable income, if any, through 2008. At December 31, 1994, there
were approximately $64,973 of net operating loss carryforwards
available to offset future alternative minimum taxable income for
federal income tax purposes. Net operating losses may not offset more
than 90% of the Company's alternative minimum tax income.
The valuation allowance for deferred tax assets as of January 1, 1993
was $19,744. The net change in the total valuation allowance for the
years ended December 31, 1993 and 1994 was an increase (decrease) of
$18,160 and ($5,792), respectively. The changes are primarily related
to changes in net operating loss carryforwards during 1993 and 1994.
Income taxes paid for the year ended December 31, 1994 totaled
$105,000 (none in 1992 and 1993).
If the Company undergoes a more-than-50% ownership change within the
meaning of section 382(g) of the Internal Revenue Code, then the
Company will be limited in the use of its pre-ownership change net
operating losses to offset future taxable income. A similar
limitation would apply to any pre-ownership change tax credits. Also,
to the extent that the taxable income of the Company for any future
year exceeds the sum of any net operating losses arising after the
date of the ownership change plus the amount of the annual limitation
on the pre-ownership change net operating losses, the Company would be
required to pay federal income tax on such excess.
Although a more-than-50% ownership change within the meaning of
section 382(g) of the Internal Revenue Code occurred with respect to
the Company in October of 1988, the Company has determined that the
annual limitation under section 382 of the Code on its pre-October
1988 net operating losses should be adequate to permit the full use of
those net operating losses against future taxable income of the
Company. Furthermore, although there can be no assurance that the
Internal Revenue Service would not take a different position, the
Company believes that a more-than-50% ownership change within the
meaning of section 382(g) of the Internal Revenue Code has not
occurred with respect to the Company after October 1988.
(Continued)
F-34
<PAGE> 110
DR PEPPER BOTTLING HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(14) Other Contingencies
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's financial position.
F-35
