Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
PURSUANT TO THE TERMS OF THE INDENTURE, THIS SPECIAL FINANCIAL REPORT CONTAINS DISCLOSURE REQUIRED BY ITEM 7 OF FORM 10-K IN ADDITION TO FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996.
RESULTS OF OPERATIONS
GENERAL
Delta Beverage Group, Inc., a Delaware corporation, was acquired by its current owners in March 1988 in a highly leveraged transaction which was premised on a turnaround of operations and expansion of business opportunities. The results of operations started to reflect a significant turnaround in 1990 when the current senior management group took office. The Company has accomplished a number of business combinations since 1988, the most significant of which have been (i) combining in 1992 its PepsiCo based sales operation in southern Louisiana with a Seven-Up based sales operation in the same territory through a joint venture in which the Company is majority owner and managing venturer and (ii) acquiring in April 1995 the distribution rights for Miller products in a significant portion of the joint venture territory.
In September 1993, the Company issued the 1993 Senior Notes (the "1993 Senior Notes"), the Subordinated Notes and other equity to refinance the debt incurred in 1988. As a result the Company's interest expense burden was substantially reduced. However, effective in May 1996, the interest rate on the 1993 Senior Notes was adjusted as part of obtaining covenant waivers necessitated by the down-turn in operating results in 1995. The Company fully repaid the 1993 Senior Notes in December 1996.
As is typical of acquisitions in the beverage industry, the Company's balance sheet reflects significant allocation of purchase price to the cost of franchise rights in excess of net assets acquired ($116.8 million and $116.4 million, each net of accumulated amortization, at December 31, 1995 and December 31, 1996, respectively). Amortization of the cost of (i) franchises, (ii) obtaining financing and (iii) non-compete agreements from former owners constitutes a significant non-cash charge to operations.
The Company accumulated significant tax-basis net operating loss carryforwards (NOL's) during the turnaround period prior to the 1993 recapitalization. Management believes the NOL's will be utilized before their expiration to offset future income otherwise taxable. A deferred income tax asset representing the income tax benefit to be realized through future utilization of the NOL's was recorded on the Company's balance sheet in 1993 following the recapitalization. Provision for income taxes related to the results of operations for years subsequent to and including 1993 are offset against the deferred income tax asset and thus are effectively a non-cash charge to the results of operations.
The Company's primary measurement of unit volume is franchise case sales which are case-sized quantities of the various packages in which products are produced. Franchise case sales refers to physical cases of beverages sold. The Company also sells premix or draft products (ready-to-serve beverages which are sold in tanks or kegs) and postmix products (fountain syrups to which carbonated water must be added). Premix and postmix products, while effectively containing the identical beverages as packaged product, are not included in case sales measurements as they are not the primary focus of the Company's selling efforts.
The Company's primary source of revenue is franchise case sales which are sales of the Company's branded products directly to retailers whether of package, premix or postmix configuration. Another source of revenue is contract sales which are sales, primarily of products in cans, to unaffiliated companies that hold soft drink franchises. Contract sales, which historically represent approximately 10.0% of total net sales, may
fluctuate from year to year, and are made at relatively low prices and gross profit margins due to the competition for such sales, and are not a primary focus of management in determining the Company's business strategy. As a result, management believes that changes in franchise case sales more accurately measure growth than changes in total net sales.
THIS DISCUSSION AND ANALYSIS CONTAINS CERTAIN FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "ANTICIPATES," "EXPECTS," AND "INTENDS," OR COMPARABLE TERMINOLOGY. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. HOLDERS AND POTENTIAL PURCHASERS OF THE COMPANY'S SECURITIES ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS WHICH ARE QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONS AND RISKS DESCRIBED HEREIN.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales, excluding contract net sales, for the year ended December 31, 1996 increased by 11.4% to $287.4 million compared to $258.1 million for the same period in 1995. The increase was due in part to a 5.8% increase in franchise case sales, of which (i) 3.1% was attributable to increased sales of the Company's beer products due to the acquisition of additional territories and products in April and July 1995 and April and May 1996 and (ii) 2.7% was attributable to increased sales of the Company's soft drink products. The increase in soft drink sales was accompanied by an increase in unit selling prices of approximately 4.3% as consumers increasingly accepted higher selling prices instituted in 1995. Contract net sales for the year ended December 31, 1996 decreased 5.0% compared to the same period in 1995. As a result of the foregoing, net sales for the year ended December 31, 1996 increased 9.7% to $312.3 million compared to $284.7 million for the same period in 1995.
Cost of sales for the year ended December 31, 1996 increased to $215.1 million compared to $198.8 million for the same period in 1995. The increase was due primarily to an increase in franchise case sales offset by a decrease in the unit prices paid by the Company for certain soft drink raw materials, primarily packaging materials and sweetener. As a percentage of net sales, cost of sales for the year ended December 31, 1996 decreased to 68.9% compared to 69.8% for the same period in 1995. The improved margin and increased franchise case sales resulted in gross profit for the year ended December 31, 1996 of $97.2 million or 13.2% greater than the gross profit of $85.9 million for the same period in 1995.
Selling, general and administrative expenses for the year ended December 31, 1996 increased to $76.9 million compared to $71.8 million for the same period in 1995. This increase was primarily due to variable costs associated with the increase in franchise case sales. The remainder of the increase was due to general increases in the cost of goods and services of 2.3% which was 2.0% less than the increase in unit selling prices.
As a result of the above factors, income from operations for the year ended December 31, 1996 increased to $16.7 million, or 5.3% of net sales, compared to $10.6 million, or 3.7% of net sales, for the same period in 1995.
Interest expense for the year ended December 31, 1996 increased to $15.1 million from $13.3 million for the same period in 1995. The increase was due primarily to additional debt related to the acquisition of additional beer territories and products and the imposition of higher interest rates on the 1993 Senior Notes related to certain covenant waivers in respect of those notes, partially offset by the scheduled repayment in September 1995 of $6.0 million of the 1993 Senior Notes.
As a result of the above factors, the Company generated income before income taxes, minority interest and an extraordinary item of $0.9 million for the year ended December 31, 1996 compared to a loss before income taxes and minority interest of $2.8 million for the same period in 1995.
On December 17, 1996, the Company retired existing senior debt with proceeds from the issuance of the Notes. Financing costs related to the retired debt of $1.5 million after consideration of income tax benefits were written off as an extraordinary charge.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net sales, excluding contract net sales, for the year ended December 31, 1995 increased by 19.5% to $258.1 million compared to $215.9 million for 1994. The increase was primarily due to a 6.9% increase in franchise case sales, which was entirely attributable to the acquisition of beer distribution rights in April and July 1995. Further, unit selling prices of franchised soft drink products increased approximately 5.2% in reaction to increases in the cost of raw materials; nonetheless, the Company was able to maintain franchise case sales of soft drinks while increasing unit selling prices to counteract higher costs of raw materials. Contract net sales for the year ended December 31, 1995 decreased by 10.3% compared to 1994. As a result of the foregoing, net sales for the year ended December 31, 1995 increased 16.0% to $284.7 million compared to $245.5 million in 1994.
Cost of sales for the year ended December 31, 1995 increased to $198.8 million compared to $162.7 million in 1994. This increase was primarily due to increases in the unit prices paid by the Company for soft drink packaging materials and fructose and to a lesser degree to the increase in franchise case sales. The raw materials increases were contrary to the trend in recent years of annual decreases in the prices of the same purchases. As a percentage of net sales, cost of sales for the year ended December 31, 1995 increased to approximately 69.8% as compared to 66.3% in 1994. The increase in case volume, offset by the decreased margins, resulted in gross profit of $85.9 million, a 3.7% increase over the Company's $82.8 million gross profit in 1994.
Selling, general and administrative expenses for the year ended December 31, 1995 increased to $71.8 million compared to $62.7 million in 1994, primarily due to an increase of approximately $5.0 million related to the acquisition of beer distribution rights in April and July 1995 in a portion of the Company's territory. Operating costs in the existing soft drink business increased $4.0 million primarily due to increases in salaries and wages and insurance costs.
As a result of the above factors, income from operations for the year ended December 31, 1995 decreased to $10.6 million, or 3.7% of net sales, compared to $16.5 million, or 6.7% of net sales, for 1994.
Interest expense for the year ended December 31, 1995 increased to $13.3 million in 1995 from $12.2 million in 1994, due to increased debt which financed the acquisition of the beer distribution rights, the effect of which was partially offset by an interest expense reduction related to the scheduled repayment in September 1995 and in September 1994 of $6.0 million and $4.0 million, respectively, of the 1993 Senior Notes.
As a result of the above factors, the Company generated a loss before income taxes of $2.8 million for the year ended December 31, 1995 compared to income before income taxes of $4.4 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company remains highly leveraged following the issuance of the Notes, retirement of certain existing indebtedness of the Company and the consummation of the transaction contemplated in the Credit Agreement. The Company's principal use of funds in the future will be the payment of principal and interest under the Credit Agreement and Notes, investment in capital assets and strategic acquisitions.
It is expected that the Company's primary sources of financing for its future business activities will be funds from operations. While the Company does not currently anticipate utilizing the funds available under the Credit Agreement other than for seasonal working capital requirements, such funds may be used to augment operating cash flow. Pursuant to the Credit Agreement, at December 31, 1996, the Company had borrowing capacity of up to $30.0 million, including $10.0 million available thereunder for the issuance of letters of credit, of which $7.1 million had been issued. The such credit facility will mature in 2001.
Because the obligations under the Credit Agreement will bear interest at floating rates, the Company will be sensitive to changes in prevailing interest rates.
The Company had working capital of $24.0 million at December 31, 1996, compared to working capital of $27.5 million at December 31, 1995. Working capital represents current assets (excluding cash and cash equivalents) less current liabilities (excluding current maturities of long-term debt and other long-term liabilities).
Based on the Company's anticipated operating results, management believes that the Company's future operating activities will generate sufficient cash flows to repay borrowings under the Credit Agreement as they become due and payable. However, based on such anticipated operating results, management does not expect that the Company's future operating activities will generate sufficient cash flows to repay the Notes at their maturity. Accordingly, the Company expects it will be required to refinance all or substantially all of the Notes at their maturity or sell equity or assets to fund the repayment of all or substantially all of the Notes at their maturity, or effect a combination of the foregoing. While management believes that the Company will be able to refinance the Notes at or prior to their maturity, or raise sufficient funds through equity or asset sales to repay such indebtedness, or effect a combination of the foregoing, there can be no assurance that it will be able to do so.
The Subordinated Notes mature on December 23, 2003. However the maturity of the Subordinated Notes can be extended to December 23, 2004 and then to December 23, 2005 if any debt incurred to refinance the 1993 Senior Notes is then outstanding. The Subordinated Notes have an interest rate of 11.0% which can be paid under certain conditions with additional Subordinated Notes ("PIK Notes"). Management expects those conditions will exist at least until December 1998 and that it will make payments of interest in PIK Notes to conserve cash. Management does not expect that the Company's future operating activities will generate sufficient cash flows to repay the Subordinated Notes at their maturity. Accordingly, the Company expects it will be required to refinance all or substantially all of the Subordinated Notes, including any PIK Notes, at their maturity or sell equity or assets to fund the repayment of all or substantially all of the Subordinated Notes, including any PIK Notes, at their maturity, or effect a combination of the foregoing. While management believes that the Company will be able to refinance the Subordinated Notes, including any PIK Notes, at or prior to their maturity, or raise sufficient funds through equity or asset sales to repay such indebtedness, or effect a combination of the foregoing, there can be no assurance that it will be able to do so.
The 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. The Indenture also contains covenants that impose limitations on the liquidity of the Company including a limitation on the incurrence of additional indebtedness. The ability of the Company to meet its 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 believes that the Company's production facilities will be sufficient to meet anticipated unit growth for the next several years. Accordingly, management anticipates that capital expenditures in respect of such facilities will consist of expenditures to maintain operating efficiency. Capital expenditures will be required primarily for the Company's automobile and truck fleet, vending machines, and routine plant, bottling, and canning equipment additions or maintenance. During 1995 and 1996, capital expenditures totaled $11.0 million and $9.2 million respectively. The Company anticipates that capital expenditures will total approximately $10.0 million to $12.0 million for each of the years 1997 and 1998.
INFLATION
There was no significant impact on the Company's operations as a result of inflation during the fiscal year ended December 31, 1996 or during the fiscal years ended December 31, 1995 or 1994.
IMPACT OF CHANGES IN ACCOUNTING STANDARDS
In 1996, the Company implemented the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement addresses the timing of recognition and the measurement of (i) long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used and (ii) long-lived assets and certain identifiable intangibles to be disposed of. This statement requires that such assets be reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable, and that such assets be reported at the lower of carrying amount or fair value. The adoption of this statement did not have a material impact on the Company's consolidated financial position or results of operations.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PURSUANT TO RULE 15d-2 OF THE SECURITIES EXCHANGE ACT OF 1934, THIS SPECIAL FINANCIAL REPORT CONTAINS FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996, AS THE CERTIFIED FINANCIAL REPORTS FOR THE YEAR ENDED DECEMBER 31, 1996 WERE NOT AVAILABLE WHEN THE REGISTRATION STATEMENT ON FORM S-4 (REGISTRATION NO. 333-19233) WAS DECLARED EFFECTIVE ON FEBRUARY 12, 1997.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Delta Beverage Group, Inc.:
We have audited the accompanying consolidated balance sheets of DELTA BEVERAGE GROUP, INC. (a Delaware corporation) and subsidiary as of December 31, 1995 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Delta Beverage Group, Inc. and subsidiary as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years ended December 31,1996 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Memphis, Tennessee, February 28, 1997.
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31
(Dollars in thousands, except share data)
1995 1996 --------- -------- ASSETS
CURRENT ASSETS: Cash and cash equivalents $ 7,933 $ 12,171 Receivables, net of allowance for doubtful accounts of $433 and $500 Trade 19,047 16,657 Marketing and advertising 6,472 5,853 Other 2,013 1,842 Inventories, at cost (Note 4) 13,517 14,372 Bottles, cases and pallets, at deposit value 5,511 5,669 Prepaid expenses and other 1,027 827 Deferred income taxes (Note 6) 2,324 4,131 -------- -------- Total current assets 57,844 61,522 -------- --------
PROPERTY AND EQUIPMENT: Land 4,639 4,639 Buildings and improvements 15,614 15,706 Machinery and equipment 72,216 80,527 -------- -------- 92,469 100,872 Less accumulated depreciation and amortization (46,556) (52,648) -------- -------- 45,913 48,224 -------- --------
OTHER ASSETS: Cost of franchises in excess of net assets acquired, net of accumulated amortization of $43,382 and $47,007 116,839 116,336 Deferred income taxes (Note 6) 24,931 22,767 Deferred financing costs and other 2,910 6,478 -------- -------- 144,680 145,581 -------- -------- $248,437 $255,327 -------- -------- -------- --------
The accompanying notes are an integral part of these balance sheets.
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Continued) AS OF DECEMBER 31
(Dollars in thousands, except share data)
1995 1996 --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES: Current maturities of long-term debt and other liabilities $ 7,643 $ 529 Accounts payable 7,250 9,038 Accrued liabilities (Note 5) 15,114 16,261 -------- -------- Total current liabilities 30,007 25,828 -------- --------
LONG-TERM DEBT AND OTHER LIABILITIES (Note 7) 150,507 163,747
MINORITY INTEREST 5,205 5,303
COMMITMENTS AND CONTINGENCIES (Notes 9 and 12)
STOCKHOLDERS' EQUITY (Note 8): Preferred stock Series AA, $5,000 stated value, 30,000 shares authorized, 5,151.18 and 5,467.27 shares issued and outstanding 25,756 27,336 Common Stock Voting, $.01 par value, 60,000 shares authorized, 20,301.87 shares issued and outstanding -- -- Nonvoting, $.01 par value, 35,000 shares authorized, 32,949.93 shares issued and outstanding -- -- Additional paid-in capital 115,765 115,765 Accumulated deficit (78,781) (82,639) Deferred compensation (Note 11) (22) (13) -------- -------- 62,718 60,449 -------- -------- $248,437 $255,327 -------- -------- -------- --------
The accompanying notes are an integral part of these balance sheets
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31
(Dollars in thousands, except per share data)
The accompany notes are an integral part of these statements.
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Dollars in thousands)
The accompanying notes are an integral part of these statements.
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31
(Dollars in thousands)
The accompanying notes are an integral part of these statements.
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS:
Delta Beverage Group, Inc. ("Delta") and the partnership described below (collectively, the "Company") are licensed bottlers and distributors of beverage products, principally Pepsi-Cola and Seven-Up products, in the mid-southern United States. The franchise territories cover portions of Arkansas, Louisiana, Mississippi, Tennessee and Texas. The partnership also distributes Miller Brewing Company alcoholic beverages in southern Louisiana.
On September 3, 1992, Delta Beverage of Louisiana, Inc. ("DBL"), a then wholly-owned subsidiary of Delta, and Poydras Street Investors, L.L.C. ("Poydras," formerly The Seven-Up/Royal Crown Bottling Company of Louisiana, Inc.) formed The Pepsi-Cola/Seven-Up Beverage Group of Louisiana (the "Joint Venture"). Effective December 31, 1994, DBL merged into Delta. In April 1995, the partnership agreement was amended to, among other things, change the percentage ownerships from 50% for both Delta and Poydras to 62% for Delta and 38% for Poydras. Beginning January 1, 2000, Delta can purchase the percentage interest of Poydras at fair market value (as defined).
The Joint Venture's operations and net assets are consolidated with those of Delta in the accompanying financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation. Poydras' share of the Joint Venture's income (loss) and net assets is reflected as a minority interest in the accompanying consolidated financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES:
USE OF ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The more significant estimates with regard to these financial statements are disclosed in Note 12.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include temporary investments in short-term securities with original maturities of three months or less.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property and equipment renewals and betterments are capitalized, while maintenance and repair expenditures are charged to operations currently. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of purchased property and equipment, or the shorter of the lease terms or the estimated useful lives of assets acquired under capital lease arrangements. Those lives are as follows:
Years -----
Buildings and improvements 20-40 Machinery and equipment 3-10
INTANGIBLES AND OTHER ASSETS
The cost of franchises in excess of net assets acquired is being amortized evenly over 35 to 40 years. The Company, at least annually, evaluates whether events or circumstances have occurred that may impact the recoverability of franchise costs. Upon the occurrence of any such event or circumstance, the Company remeasures the realizable portion of franchise costs and records such intangible asset at the lesser of its carrying value or fair value.
Costs incurred to obtain long-term financing are deferred and amortized as adjustments of interest using the effective interest method over the terms of the related debt.
INCOME TAXES
The Company uses the liability method of accounting for deferred income taxes. Accordingly, deferred income taxes reflect both the estimated future tax consequences attributable to operating loss and tax credit carryforwards, and temporary differences between the Company's assets and liabilities for financial reporting and income tax purposes, using income tax rates currently in effect.
EARNINGS PER COMMON SHARE
Earnings per common share were computed by dividing net income (loss), less dividends on preferred stock, by the weighted average number of shares of common stock. Share awards issuable under the equivalent share award plan (see Note 11) were not considered in the computation of fully diluted earnings per common share as their effect was anti-dilutive.
The weighted average number of shares used in computing earnings per common share were 52,824 for 1994 and 53,252 for 1995 and 1996.
SUPPLEMENTAL CASH FLOW INFORMATION
During 1994, the Company acquired equipment under capital lease obligations totaling approximately $493,000. During 1994, 1995 and 1996, the Company issued additional preferred shares as payment-in-kind dividends on preferred stock of approximately $1,403,000, $1,489,000 and $1,580,000, respectively (see Note 8).
Interest paid in cash during 1994, 1995 and 1996 was approximately $9,992,000, $8,836,000 and $12,369,000, respectively. Income taxes of approximately $286,000, $316,000 and $177,000 were paid in 1994, 1995 and 1996, respectively.
CONCENTRATION OF CREDIT RISK
The Company's business activities are concentrated within the mid-southern United States. However, management believes that there are no significant concentrations of credit risk with any individual party or groups of parties.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments, except for fixed rate long-term debt, approximate their carrying amounts. For fixed rate long-term debt, fair value was estimated based on the current rates offered for similar obligations and maturities. Estimated fair value of total long-term debt and other liabilities was approximately $168 million at December 31, 1996 ($151 million at December 31, 1995) compared to recorded value of approximately $164 million ($158 million at December 31, 1995).
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In 1996, the Company implemented the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement addresses the timing of recognition and the measurement of impairment of (a) long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used, and (b) long-lived assets and certain identifiable intangibles to be disposed of. This statement requires that such assets be reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable, and that such assets be reported at the lower of carrying amount or fair value. The adoption of this statement did not have a material impact on the Company's consolidated financial position or results of operations.
3. ACQUISITIONS:
In April 1996, the Joint Venture acquired substantially all of the assets of Delta Distributing Company, a wholesale distributor of Miller Brewing Company alcoholic beverages in Raceland, Louisiana. The aggregate purchase price, consisting primarily of inventories and distribution rights, included approximately $1,000,000 cash and a marketing support obligation described below. In May 1996, the Joint Venture acquired for approximately $2,000,000 the franchise rights from Heineken USA to distribute Heineken beer products in the greater New Orleans area. The Joint Venture also acquired approximately $1,000,000 of Heineken beer inventory.
In April 1995, the Joint Venture acquired substantially all of the assets of Miller Brands of Greater New Orleans, Inc. In July 1995, the Joint Venture acquired certain assets of Svoboda Distributing Company, Inc. Both businesses acquired were engaged in the wholesale distribution of alcoholic beverages, primarily Miller Brewing Company products, in the greater New Orleans, Louisiana area. The aggregate purchase price for the assets of both acquisitions, consisting primarily of inventories; land, buildings and equipment; and distribution rights, included approximately $13,550,000 cash, a $900,000 deferred obligation payable upon the Miller business in New Orleans achieving an annual $8,000,000 gross profit, and a marketing support obligation described below. Management expects to pay the $900,000 deferred obligation in 1998.
In connection with the 1996 acquisition of Delta Distributing Company and the 1995 acquisitions described above, the Joint Venture entered into marketing support agreements with Miller Brewing Company's advertising agency for the general promotion of Miller products in the greater New Orleans area. The marketing support obligations have been capitalized and are being amortized.
The acquisitions described above were accounted for as purchases, and the Company's consolidated results of operations include the results of the acquisitions since their respective purchase dates. Costs of the franchises in excess of net assets acquired of approximately $2,980,000 in 1996, and approximately $5,400,000 in 1995, are being amortized evenly over 40 years. The consolidated financial statements as of December 31, 1996 include preliminary purchase price allocations for the 1996 acquisitions.
The impact of the 1996 acquisitions on the Company's consolidated results of operations was not material. The following unaudited pro forma financial information reflects the combined results of operations of the Company and the 1995 acquisitions discussed above as if the transactions occurred as of the beginning of 1995. The pro forma adjustments are based on available information, preliminary purchase price allocations and certain assumptions that the Company believes are reasonable. The pro forma information does not purport to represent the actual results of operations if the transactions described above had occurred at the beginning of the year presented. In addition, the information may not be indicative of future results.
In thousands of dollars, except per share amounts, for the year ended December 31 (unaudited):
---------
Net sales $295,700 Net loss (4,306) Earnings per common share $(108.82)
4. INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out method) or market and included the following at December 31 (in thousands of dollars):
1995 1996 -------- --------
Raw materials $ 2,796 $ 2,736 Finished goods 10,721 11,636 ------- ------- $13,517 $14,372 ------- ------- ------- -------
5. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following at December 31 (in thousands of dollars):
1995 1996 -------- --------
Payroll and related benefits $ 1,213 $ 2,134 Taxes other than income 2,178 2,897 Insurance and related costs 4,279 4,520 Interest 3,307 1,576 Marketing and advertising costs 3,949 4,771 Other 188 363 ------- ------- $15,114 $16,261 ------- ------- ------- -------
6. INCOME TAXES:
At December 31, 1996, the Company had federal income tax net operating loss carryforwards of approximately $27,074,000 which had been incurred since the predecessor business was acquired in March 1988. These net operating loss carryforwards expire through 2007. In addition, as of December 31, 1996, the Company had similar net operating loss and tax credit carryforwards of approximately $19,400,000 and $1,187,000, respectively, which were incurred prior to March 1988. Effective at that date, the predecessor business was acquired in a transaction accounted for as a purchase. The Internal Revenue Code limits the Company's utilization of the acquired net operating loss and tax credit carryforwards to approximately $3,000,000 per year. These net operating loss and tax credit carryforwards may be used through 2003.
The Company has recognized deferred income tax assets for the estimated future income tax benefits of the pre- and post-acquisition net operating loss and tax credit carryforwards that are expected to be realized through the reduction of future taxable income from operations within the carryforward periods.
Deferred income taxes were composed of the following at December 31 (in thousands of dollars):
1995 1996 ------- -------
Current deferred income tax assets $ 2,324 $ 4,131 Noncurrent deferred income tax assets, net of $1,645 valuation allowance at December 31, 1995 29,289 27,828 ------- ------- 31,613 31,959
Noncurrent deferred income tax liabilities (4,358) (5,061) ------- ------- $27,255 $26,898 ------- ------- ------- -------
The tax effects of significant temporary differences representing deferred income tax assets and liabilities at December 31, 1995 and 1996 were as follows (in thousands of dollars):
1995 1996 ------- -------
Net operating loss and tax credit carryforwards $19,372 $17,590 Basis difference in preferred stock and common stock 8,022 8,154 Difference in book and tax basis of property and equipment, deferred financing costs and other assets (3,640) (4,841) Deferred interest on subordinated debt, deferred compensation and reserves not currently deductible for income tax purposes 3,501 5,995 ------- ------- $27,255 $26,898 ------- ------- ------- -------
Income tax provision recorded in the consolidated statements of operations, net of taxes applicable to minority interest and extraordinary item, was as follows (in thousands of dollars):
1994 1995 1996 -------- -------- --------
Current $ (233) $ -- $ (289) Deferred (3,029) (1,641) (1,456) ------- ------- ------- $(3,262) $(1,641) $(1,745) ------- ------- ------- ------- ------- -------
Included in the 1995 income tax provision was a valuation allowance of $1,645,000 for deferred income tax assets relating to various state tax net operating loss carryforwards that have or are expected to expire before the carryforwards can be realized. These deferred income tax assets were originally recorded in 1993 as part of the adoption of Statement of Financial Accounting Standards No. 109. In 1996, the valuation allowance was eliminated against the related deferred income tax assets as the state tax net operating loss carryforwards have fully expired.
A reconciliation of the provision for income taxes to the amount computed by applying the federal statutory tax rate to income or loss before income taxes is as follows:
1994 1995 1996 ------- ------- -------
Statutory federal income tax rate (34.0)% 34.0% (34.0)% State income taxes, net of federal benefit (4.0) 4.0 (4.6) Franchise cost amortization (30.4) (46.4) (128.0) Valuation allowance - (59.3) - Minority interest - 3.6 (15.6) Other, net (6.5) 5.0 (3.8) ------- ------- -------- (74.9)% (59.1)% (186.0)% ------- ------- -------- ------- ------- --------
7. LONG-TERM DEBT AND OTHER LIABILITIES:
Long-term debt and other liabilities consisted of the following at December 31 (in thousands of dollars):
In December 1996, the Company placed $120 million of new senior notes and executed a new $30 million bank revolving line of credit. The net proceeds of the debt offering were used primarily to retire the prior senior notes and the amounts outstanding under the prior revolving line of credit.
In a registration statement filed with the Securities and Exchange Commission under the Securities Act of 1933 and declared effective on February 12, 1997, the Company offered to exchange the $120 million senior notes for new $120 million senior notes. The new senior notes will retain the same interest rate, maturity date and ranking as the original senior notes. The Company will not receive any cash proceeds from this transaction.
The senior notes are general unsecured obligations of the Company and are senior to all existing and future subordinated indebtedness of the Company. Interest on the senior notes is payable semi-annually on June 15 and December 15.
The new bank revolving line of credit matures on December 16, 2001 and bears interest, at Delta's option, at LIBOR or the higher of (1) the bank's prime rate or (2) the federal funds rate plus .5% and a defined margin. Borrowings are limited to the sum of approximately 80% of Delta's eligible receivables and approximately 50% of Delta's eligible inventory. The line of credit includes a $10 million limit for the issuance of letters of credit; the letter of credit facility fee is based on the Eurodollar applicable margin less .125%. The agreement also provides for a fee on the unused commitment ranging from .25% to .50%. Borrowings under the line of credit are secured by Delta's accounts receivable and inventory. Interest and commitment fees are payable quarterly. There were no borrowings under the new bank revolving line of credit during 1996.
In connection with the debt placement described above, the Company incurred financing fees of approximately $4,807,000. These fees have been capitalized and are being amortized over the terms of the related debt agreements. Deferred financing costs relating to debt retired in 1996 of approximately $2,472,000 were written off. This write-off, less a related income tax benefit of approximately $953,000, is reported as an extraordinary item in the 1996 consolidated statement of operations.
Prior to the debt refinancing, Delta maintained a credit agreement with two banks which, as amended in 1995 and 1996, provided for a total commitment of $30 million, including up to $10 million for letters of credit. Interest on borrowings accrued at a floating rate, based upon either the lender's prime rate plus a defined margin or the Eurodollar base rate plus a defined margin, as selected by Delta. Effective September 20, 1996, the applicable margin was increased by .5%. The letter of credit facility fee was based on the above Eurodollar applicable margin. The agreement also provided for a fee of .5% on the unused commitment. Interest and commitment fees were payable quarterly.
The senior notes retired in December 1996 were governed by a note agreement and were senior to the subordinated notes. Interest on the senior notes was payable semi-annually on March 23 and September 23. The senior notes accrued interest at 7.36% through March 31, 1996, then 8.72% for the period April 1, 1996 to September 19, 1996. Effective at that date, the interest rate increased to 9.72%.
Interest on the subordinated notes is due semi-annually on April 1 and October 1, and may be paid in cash or, at the option of the Company, by the issuance of additional subordinated notes ("PIK Notes"). The PIK Notes bear interest at 11% or 15% depending upon whether the terms of the note agreement would have permitted the Company to pay any portion of the interest in cash. The Company issued additional subordinated notes of approximately $3,577,000 and $3,982,000 under this provision in 1995 and 1996, respectively. These additional notes bear interest at 11% and are included with subordinated notes payable in the preceding table.
Certain of the subordinated debt holders are also preferred and non-voting common stockholders of the Company.
The Company's long-term debt agreements require, among other things, the maintenance of certain minimum financial ratios and financial requirements, and limit additional indebtedness, sales of assets, investments and capital expenditures. The agreements also restrict the payment of dividends and limit capital stock transactions.
Certain obligations to former owners of acquired beverage companies and former key employees, including obligations under noncompete agreements, have been discounted using the Company's incremental borrowing rate at the date of acquisition. These discounts are being amortized over the terms of the related obligations.
Scheduled maturities of long-term debt and other liabilities during the four years subsequent to 1997 are as follows (in thousands of dollars):
Year Amount ---- ------
1998 $1,162 1999 304 2000 138 2001 41
8. STOCKHOLDERS' EQUITY:
PREFERRED STOCK
Authorized preferred stock consists of 30,000 designated Series AA preferred shares. The Series AA preferred stock does not contain voting rights. Series AA preferred stockholders receive cumulative dividends at an annual rate of 6% based on the $5,000 stated value per share. The rate will increase 2% annually beginning October 1, 2004, but is limited to a cumulative increase of 8%. Dividends are payable quarterly in cash or in additional shares of Series AA preferred stock. The Company is obligated to pay the dividends in cash once the senior notes are retired. The preferred stock dividends for 1995 and 1996 were paid with additional preferred shares and are included in stockholders' equity at December 31, 1995 and 1996. So long as the Series AA preferred stock is outstanding, the Company cannot declare or pay dividends on its common stock.
In the event of a liquidation, Series AA preferred stockholders have a $5,000 per share liquidation preference.
VOTING COMMON STOCK
Voting common stock consists of 60,000 authorized shares.
NON-VOTING COMMON STOCK
Non-voting common stock consists of 35,000 authorized shares. Should the Company register its shares in a public offering, the non-voting common stock may be converted, at the holder's option, into voting common stock. The conversion rate is one share of non-voting common stock for one share of voting common stock. The conversion rate is subject to adjustment in certain instances as defined in the Certificate of Incorporation.
The transfer and sale of shares by and among the stockholders and the Company are restricted by a Shareholders' Agreement.
9. LEASES:
The Company leases certain buildings and other facilities, vehicles and equipment under agreements expiring through 2009. Future minimum rental payments under all noncancellable operating leases with initial or remaining lease terms of one year or more were as follows at December 31, 1996 (in thousands of dollars):
1997 $2,355 1998 1,947 1999 1,525 2000 667 2001 222 Thereafter 695 ------ $7,411 ------ ------
Total rent expense for all operating leases during 1994, 1995 and 1996 was approximately $2,564,000, $3,158,000 and $3,587,000, respectively.
10. RELATED PARTY TRANSACTIONS:
The Company has entered into a management agreement with a company controlled by three individuals who own shares of the Company's common stock. For services performed pursuant to the management agreement, the Company pays that company a management fee and a transaction fee. Management fees of approximately $505,000, $520,000 and $533,000 were paid to that company during 1994, 1995 and 1996, respectively. The transaction fee is payable upon the acquisition of additional franchises and is equal to 1.5% of the acquisition cost of such franchises. Affiliates of the management company also own common stock of the Company.
11. EMPLOYEE BENEFITS:
The Company sponsors a defined contribution employee benefit plan (the "Plan") which covers all eligible full-time employees. Employees who participate in the Plan may defer up to 10% of their salaries and wages and receive matching payments by the Company of 50% of those deferrals, limited to annual employer contributions of $500 per employee. The Company's contributions were approximately $201,000 for 1994, $231,000 for 1995 and $257,000 for 1996.
The Company also maintains a nonqualified deferred compensation plan which is available for certain executives of the Company, as selected by the Company's board of directors. Executives who participate in the plan may elect to defer a percentage of their compensation (as defined), subject to limitations imposed by the Internal Revenue Service and the Company, and are eligible to receive discretionary contributions from the Company. Employee deferrals and employer discretionary contributions are held in a trust restricted from the general assets of the Company. Restricted assets held in trust, included in other assets in the accompanying consolidated balance sheet, totaled approximately $756,000 at December 31, 1996.
The Company has a restricted stock bonus plan under which executives and key employees may be awarded shares of the Company's common stock. All shares granted contain restrictions on sale or transfer; these restrictions lapse over an eleven-year period. A maximum of 250 shares of common stock may be awarded under this plan. At December 31, 1995 and 1996, 22 restricted shares were outstanding, all of which were held by an officer.
The Company previously granted stock appreciation rights to an officer by which this officer could receive amounts based upon changes in the quoted market value of PepsiCo, Inc. common stock since February 1, 1990. These stock appreciation rights were exercised in 1994 and 1995. The amount of compensation expense (credit) in 1994 and 1995 was approximately $(163,000) and $316,000, respectively.
Effective January 1,1994, the board of directors adopted an equivalent share award plan for certain key members of management. This plan allows eligible employees to participate in the continued success of the Company based upon the annual appreciation in the equity value of the Company, as defined. The board granted the equivalent of 38,200 shares effective January 1, 1994. Each share equivalent award vests over a three-year period, and is payable in cash or shares of the Company's common stock upon the earlier of the participant's death, disability, termination or retirement. Each participant is subject to a noncompete and nonsolicitation restriction in consideration of the share equivalent grant. All grants contain restrictions on assignment or transfer. There was no appreciation in the equity value of the Company, as defined, in 1994, 1995 or 1996.
Effective April 7,1995, the Joint Venture assumed sponsorship of the Miller Brands of Greater New Orleans, Inc. Pension Plan. The plan was a non-contributory defined benefit plan and covered all eligible hourly workers of the acquired Miller business in New Orleans, Louisiana (see Note 3). Monthly pension plan benefits were based on a stipulated amount per year of credited service. During 1996, the Joint Venture terminated this plan. The net pension liability recognized upon termination was not material.
The following table sets forth the actuarial present value of the benefit obligation and the funded status for the plan as of December 31, 1995 (in thousands of dollars):
Accumulated benefit obligation, fully vested $(464) ----- Projected benefit obligation $(464) Plan assets at fair value 635 ----- Plan assets in excess of projected benefit obligation 171 Unrecognized net actuarial gain (34) Unrecognized net transition amount (102) Unrecognized prior service cost 25 ----- Net prepaid pension asset $60 ----- -----
Assumptions used in developing the net prepaid pension asset as of December 31, 1995 were as follows:
Discount rate 7.5% Rate of increase in compensation levels 0.0% Rate of return on plan assets 9.0%
Net periodic pension income in 1995 for this plan was not material.
12. CERTAIN SIGNIFICANT ESTIMATES:
SELF INSURANCE
The Company maintains self insurance reserves for estimated workers' compensation and product, automobile and general liability claims. These estimates are based on historical information along with certain assumptions about future events. Changes in assumptions for things such as medical costs, environmental hazards and legal actions, as well as changes in actual experience, could cause these estimates to change in the near term.
As of December 31, 1995 and 1996, the Company had $7,715,068 and $7,123,994 in outstanding letters of credit to secure the obligations to insurance companies for workers' compensation and product, automobile and general liability claims.
LOSS CONTINGENCIES
The Company is subject to various litigation, claims and assessments arising in the normal course of business. Management believes that the ultimate resolution of these matters, either individually or in the aggregate, will not have a materially adverse effect on the Company's consolidated financial position or results of operations.
DEFERRED INCOME TAX ASSETS
The Company has recorded deferred income tax assets reflecting the expected future benefits of operating loss and tax credit carryforwards which expire in varying amounts through 2007 (see Note 6). Realization is dependent on generating sufficient taxable income prior to expiration of these carryforwards. Although realization is not assured, management believes that it is more likely than not that all of the deferred income tax assets will be realized. The amount of the deferred income tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward periods are reduced.
FINANCIAL STATEMENT SCHEDULE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To Delta Beverage Group, Inc.:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Delta Beverage Group, Inc. and its subsidiary included in this Form 10-K and have issued our report thereon dated February 28, 1997. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the accompanying index is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Memphis, Tennessee, February 28, 1997.
DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Dollars in thousands)
(a) Represents primarily trade accounts receivable written off.
(b) Includes $230 in recoveries of bad debts.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements.
Report of Independent Public Accountants Consolidated Financial Statements Balance Sheets Statements of Operations Statements of Stockholders' Equity Statements of Cash Flows Notes to Consolidated Financial Statements
(2) Financial Statement Schedule.
Report of Independent Public Accountants on Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts
(3) Exhibits.
12 Statement of Computation of Per Share Earnings 27 Financial Data Schedule
(b) Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on April 30, 1997.
DELTA BEVERAGE GROUP, INC.
By: /s/ ROBERT C. POHLAD ---------------------------------- Robert C. Pohlad Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ ROBERT C. POHLAD Chief Executive Officer and - ------------------------ Director (Principal Executive Robert C. Pohlad Officer) April 30, 1997
/s/ JOHN F. BIERBAUM Chief Financial Officer and - ------------------------ Director (Principal Accounting John F. Bierbaum Officer and Principal Financial Officer) April 30, 1997 /s/ DONALD E. BENSON - ------------------------ Chairman of the Board April 30, 1997 Donald E. Benson
- ------------------------ Director John H. Agee
- ------------------------ Director Brenda C. Barnes
- ------------------------ Director Christopher E. Clouser
- ------------------------ Director Philip N. Hughes
/s/ GERALD A. SCHWALBACH - ------------------------ Director April 30, 1997 Gerald A. Schwalbach
/s/ JOHN F. WOODHEAD - ------------------------ Director April 30, 1997 John F. Woodhead
INDEX TO EXHIBITS
Exhibit Number Description - ------ -----------
12 Statement of Computation of Per Share Earnings 27 Financial Data Schedule