10-Q 1 a10-q.txt FORM 10-Q =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ----------------- FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER _________ DELTA BEVERAGE GROUP, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 75-2048317 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 2221 DEMOCRAT ROAD, MEMPHIS, TENNESSEE 38132 (Address of Principal Executive Offices, including Zip Code) (901) 344-7100 (Registrant's Telephone Number, including Area Code) As of August 14, 2000, the issuer had outstanding: (i) 6,440.17 shares of Series AA Preferred Stock, $5,000 stated value, (ii) 20,301.87 shares of voting Common Stock, $.01 par value, and (iii) 32,949.93 shares of nonvoting Common Stock, $.01 par value. =============================================================================== TABLE OF CONTENTS

PART I ITEM 1. FINANCIAL STATEMENTS DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS UNAUDITED (Dollars in thousands)

The accompanying notes are an integral part of these financial statements. 2 DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (CONTINUED) UNAUDITED (Dollars in thousands, except share data)

The accompanying notes are an integral part of these financial statements. 3 DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED (Dollars in thousands)

The accompanying notes are an integral part of these financial statements. 4 DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30 UNAUDITED (Dollars in thousands)

The accompanying notes are an integral part of these financial statements. 5 DELTA BEVERAGE GROUP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited 1. BASIS OF PRESENTATION: The accompanying unaudited consolidated financial statements of Delta Beverage Group, Inc. ("Delta," a Delaware corporation) and subsidiary (collectively, the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and, in the opinion of management, include all adjustments (consisting of normal and recurring adjustments) which are considered necessary for a fair presentation of financial position, results of operations and cash flows as of June 30, 2000, and for all interim periods presented. These condensed interim financial statements do not include all of the financial information and disclosures required by generally accepted accounting principles for complete financial statements, and should be read in conjunction with the Company's audited consolidated financial statements and the notes thereto for the year ended December 31, 1999. Also, the results of operations for the interim periods presented may not be indicative of the results for the entire year. 2. COMBINATION OF INTEREST: On June 28, 1999, the shareholders of Delta and Dakota Beverage Company, Inc. ("Dakota") entered into share exchange agreements with a related party entity, Pepsi-Cola Puerto Rico Bottling Company ("PPR"). On October 1, 1999, PPR's shareholders approved the issuance of shares as outlined in the exchange agreements, as well as an amendment to PPR's certificate of incorporation changing PPR's name to PepsiAmericas, Inc. ("PAS"). On October 15, 1999, PAS issued shares of its Class B Common Stock in connection with the acquisitions of Delta and Dakota pursuant to the exchange agreements, including 18,310,006 shares to the common shareholders of Delta. Prior to the issuance of PAS stock to the Delta and Dakota shareholders, PAS, Delta and Dakota shared common ownership and were under the common control of Pohlad Companies. Pohlad Companies continues to be a controlling shareholder of PAS. The combination was accounted for as a merger of entities under common control. 3. PREFERRED STOCK: Authorized preferred stock consists of 30,000 designated shares of Series AA preferred stock, of which 6,440.17 shares were outstanding at June 30, 2000. The Series AA preferred stock does not contain voting rights and is not convertible into common stock. 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%. Prior to the combination transaction described in Note 2, dividends were payable in cash or in additional shares of Series AA preferred stock. The preferred dividends through October 15, 1999 were paid with additional shares of preferred stock. Following the combination, dividends are paid quarterly in cash using contributed capital from PAS. During the six months ended June 30, 2000, the Company paid approximately $965,000 of preferred stock dividends using capital contributions from PAS. 4. LONG-TERM DEBT AND OTHER LIABILITIES: The Company maintains a $30.0 million bank revolving line of credit, which matures on December 16, 2001. The line of credit also includes a swing line facility of up to $2.5 million. Swing line loans bear interest at either the base rate (defined below) or at an otherwise mutually agreed upon rate of interest. Interest on remaining amounts outstanding under the line of credit bear interest, at the Company's option, at LIBOR or a 6 defined margin over the higher of (1) the bank's prime rate or (2) the federal funds rate plus 0.5% (the "base rate"). Borrowings are limited to the sum of approximately 80% of the Company's eligible receivables and approximately 50% of the Company's eligible inventory. The line of credit also includes a $10.0 million limit for the issuance of letters of credit. The Company's accounts receivable and inventory secure borrowings under the line. Borrowings outstanding under the line of credit approximated $16.0 million as of June 30, 2000, including $2.5 million under the swing line facility. The Company also maintains subordinated notes ("Notes"), with interest due semi-annually on April 1 and October 1, that can be paid in cash or, at the option of the Company, by the issuance of additional subordinated notes. The Notes bear interest at 11% or 15% depending upon whether the terms of the note agreement would have permitted Delta to pay any portion of the interest in cash. The Notes mature on December 23, 2003. In connection with the combination transaction described in Note 2, the subordinated noteholders sold their Notes to PAS. The Notes are classified as Notes Payable to PAS in the accompanying consolidated balance sheets. In June 2000, The Pepsi-Cola/Seven-Up Beverage Group of Louisiana, (the "Joint Venture"), entered into a credit agreement with Hibernia National Bank, which provided for a $1.6 million loan. The loan has a fixed interest rate of 9.75%, and is payable in monthly installments beginning in July 2000. The note is secured by real estate owned by the Joint Venture and matures in June 2005. 5. INVENTORIES: Inventories included the following (in thousands):

7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS DESCRIBES CERTAIN FACTORS AFFECTING THE RESULTS OF OPERATIONS OF DELTA BEVERAGE GROUP, INC. (THE "COMPANY") FOR THE FISCAL QUARTER AND SIX MONTHS ENDED JUNE 30, 2000 AND ITS FINANCIAL CONDITION AS OF JUNE 30, 2000. THIS DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999. CERTAIN OF THE STATEMENTS IN THE FOLLOWING DISCUSSION CONSTITUTE FORWARD-LOOKING STATEMENTS WHICH ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. VARIOUS FACTORS MAY CAUSE ACTUAL RESULTS OF OPERATIONS AND FINANCIAL CONDITION TO VARY SIGNIFICANTLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENT MADE HEREIN OR IN OTHER REPRESENTATIONS MADE BY THE COMPANY'S MANAGEMENT OR BY OTHERS ON BEHALF OF THE COMPANY. PLEASE REFER TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 FOR A DESCRIPTION OF THE FACTORS KNOWN TO THE COMPANY THAT MAY CAUSE ACTUAL RESULTS TO VARY. GENERAL OVERVIEW The Company has accomplished a number of business combinations over the last decade, including (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 a majority owner and managing venturer, (ii) acquiring in 1995 the distribution rights for Miller and Heineken products in a significant portion of the joint venture territory and (iii) combining with Dakota and Pepsi-Cola Puerto Rico Bottling Company to form PAS effective October 15, 1999. On June 28, 1999, the Company announced the entry by its stockholders into the Delta Exchange Agreement, which resulted in the combination of the Company with two related-party Pepsi-Cola bottlers: PAS and Dakota. The three companies generated combined revenues in 1999 of approximately $576 million. Such transactions were consummated during the fourth quarter of 1999, with both the Company and Dakota becoming wholly owned subsidiaries of PAS. The combined company is PepsiCo's third largest U.S. based anchor bottler. The Company's primary source of revenue is franchise 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% to 12.0% of total net sales, may fluctuate from year to year, and are made at relatively low prices and gross profit margins due to the competition for such sales. Contract sales are not a primary focus of management in determining the Company's business strategy. As a result, management believes that changes in franchise sales more accurately measure growth than changes in total net sales. The Company's primary measurement of unit volume is a franchise case, which is a case-sized quantity of the various packages in which products are produced and 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. 8 RESULTS OF OPERATIONS QUARTER ENDED JUNE 30, 2000 COMPARED TO QUARTER ENDED JUNE 30, 1999 Net sales, excluding contract sales, for the three months ended June 30, 2000 increased by 3.3% to $88.4 million compared to $85.6 million for the same period in 1999. The increase was due to an increase in revenue per franchise case of approximately 7.5% as a result of higher net pricing, offset by a 3.9% decrease in franchise case volume. Volume decreased in the take-home market as a result of increased pricing. However, with continued expanded placement of marketing equipment, cold bottle sales continued to increase. Contract sales represented 12.2% of net sales for the three months ended June 30, 2000, compared to 11.3% of net sales for the same period in 1999. As a result of the foregoing, aggregate net sales for the three months ended June 30, 2000 increased 4.2% to $100.6 million compared to $96.5 million for the same period in 1999. Cost of sales for the three months ended June 30, 2000 increased to $67.2 million compared to $65.7 million for the same period in 1999. The increase occurred despite the decrease in volume and was primarily due to increased concentrate costs. As a percentage of net sales, cost of sales for the three months ended June 30, 2000 decreased to 66.8% compared to 68.1% for the same period in 1999. The improved margin associated with the single-serve packages of soft drinks and the increase in soft drink revenue per franchise case resulted in gross profit for the three months ended June 30, 2000 of $33.4 million or 8.4% more than the gross profit of $30.8 million for the same period in 1999. Selling, general and administrative expenses for the three months ended June 30, 2000 increased to $25.5 million compared to $22.7 million for the same period in 1999. Selling, general and administrative expenses are comprised of selling, distribution and warehousing expenses, advertising and marketing expenses, and general and administrative expenses ("G&A"). G&A increased by $2.4 million due to increased professional and legal costs associated with the settlement of an antitrust lawsuit filed in Texas plus increased personnel and insurance costs. Selling and distribution expenses increased by $0.5 million due to the placement of equipment dedicated to single-serve packages of soft drinks and increased fuel costs. As a result of the above factors, income from operations for the three months ended June 30, 2000 was $7.0 million, or 7.0% of net sales, compared to $7.2 million, or 7.5% of net sales, for the same period in 1999. Interest expense for the three months ended June 30, 2000 increased to $5.0 million from $4.9 million for the same period in 1999. The increase was due primarily to increased borrowing on the revolving credit line for working capital needs. The Company had income before income taxes and minority interest of $1.9 million for the three months ended June 30, 2000 compared to $2.2 for the same period in 1999. The Company's effective income tax rate differs from statutory rates due to several factors. The most significant factors are the non-tax-deductibility of franchise rights amortization and separate reporting of the income tax effect of minority interest. For interim periods, income tax expense and benefit are provided at the effective rate projected for a full fiscal year. As a result of the foregoing factors, the Company had a net income of $1.9 million for the three months ended June 30, 2000 compared to net loss of $2.1 million for the same period in 1999. 9 SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 Net sales, excluding contract sales, for the six months ended June 30, 2000 increased by 2.4% to $160.7 million compared to $157.0 million for the same period in 1999. Contract net sales for the six months ended June 30, 2000 increased 7.9% compared to the same period in 1999. As a result of the foregoing, aggregate net sales for the six months ended June 30, 2000 increased 3.0% to $183.1 million compared to $177.7 million for the same period in 1999. Cost of sales for the six months ended June 30, 2000 increased to $122.8 million compared to $122.0 million for the same period in 1999. The increase was due primarily to increased concentrate costs. As a percentage of net sales, cost of sales for the six months ended June 30, 2000 decreased to 67.1% compared to 68.7% for the same period in 1999. The improved margin associated with single-serve packages of soft drinks resulted in gross profit for the six months ended June 30, 2000 of $60.2 million or 7.9% greater than the gross profit of $55.8 million for the same period in 1999. Selling, general, and administrative expenses for the six months ended June 30, 2000 increased to $49.0 million compared to $44.6 million for the same period in 1999. Selling and distribution expenses increased by $1.2 million due to the placement of equipment dedicated to single-serve packages of soft drinks and increased fuel costs compared to the same period in 1999. G&A increased due to increased professional and legal costs associated with the settlement of an antitrust lawsuit filed in Texas. The lawsuit was settled in the second quarter of 2000. As a result of the above factors, income from operations for the six months ended June 30, 2000 increased to $9.4 million, or 5.1% of net sales, from $9.3 million, or 5.2% of net sales, for the same period in 1999. The Company's operating results are affected by seasonal demand for its products which generally results in higher sales and operating income in the second and third quarters of each fiscal year. Interest expense for the six months ended June 30, 2000 increased to $10.0 million from $9.6 million for the same period in 1999. The increase was due primarily to the interest associated with additional borrowing on the revolving credit line. As a result of the above factors, the Company had a loss before income taxes and minority interest of $0.6 million for the six months ended June 30, 2000, compared to a loss before income taxes and minority interest of $0.3 million for the same period in 1999. The Company's effective income tax rate differs from statutory rates due to several factors. The most significant factors are the non-tax-deductibility of franchise cost amortization and separate reporting of the income tax effect of minority interest. For interim periods, income tax expense and benefit are provided at the effective rate projected for a full fiscal year. As a result of the foregoing factors, the Company had a net loss of $0.6 million for the six months ended June 30, 2000, compared to a net loss of $0.1 million for the same period in 1999. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company is highly leveraged and there are no significant reductions in debt scheduled before December 2003. The Company's principal use of funds until 2003 will be the payment of interest and investment in capital assets and strategic acquisitions. It is expected that the Company's primary sources of funds for its future activities will be funds from operations. While the Company does not currently anticipate utilizing the funds available under its credit agreement for other than seasonal working capital requirements, such funds may be used to augment operating cash flow. Pursuant to the credit agreement, the Company has a 10 borrowing capacity of up to $30.0 million, including $10.0 million available for the issuance of letters of credit. At June 30, 2000, letters of credit of $8.2 million had been issued and $16.0 million had been drawn on the line of credit for seasonal working capital requirements. The credit facility will mature in 2001. The Company had cash of $4.0 million and working capital of $42.0 million at June 30, 2000, compared to cash of $4.6 million and working capital of $33.8 million at December 31, 1999. Working capital represents current assets (excluding cash and cash equivalents) less current liabilities (excluding current maturities of long-term debt). The $0.6 million decrease in cash from December 31, 1999 to June 30, 2000 resulted from net cash used in operations of $0.7 million, augmented by $11.7 million provided by net financing activities, less cash used by investing activities of $11.5 million. The cash provided by operations was net of a $8.2 million increase in working capital. In the same period in 1999, cash increased by $0.2 million resulting from net cash provided by operations of $8.8 million and from net financing activities of $3.1 million less cash used by investing activities of $11.8 million. Cash used in investing activities of $11.5 million in the six months ended June 30, 2000 represented a $0.3 million decrease from cash used in the same period of 1999. Capital expenditures were $1.5 million higher in 2000 offset by a reduction in commitments for exclusive beverage pouring rights of $2.0 million compared to the same period in 1999. Financing activities in the six months ended June 30, 2000 provided $11.7 million in net cash, which represented a $8.6 million increase over the $3.1 million in net cash provided in the same period of 1999. This increase in net cash provided resulted primarily from net credit agreement advances of approximately $11.3 million. The increase was primarily due to the working capital cash requirements due to the timing of cash payments on current liabilities and accruals, including interest expense that had been paid in kind in 1999. Management believes that the Company's production facilities will be sufficient to meet anticipated unit growth for the next several years. Accordingly, management anticipates that capital expenditures with respect to such facilities will consist of expenditures to maintain operating efficiency. Capital expenditures will be required primarily for the Company's automobile and truck fleet, vending machines, and routine plant, bottling, and canning equipment additions or maintenance. Management believes that the Company's future operating activities will generate sufficient cash flows to repay borrowings under the credit agreement as they become due and payable. However, based on such anticipated operating results, management does not expect that the Company's future operating activities will generate sufficient cash flows to repay in their entirety its Senior Notes payable (with a balance of $120.0 million at June 30, 2000) at their maturity on December 15, 2003. While management believes that the Company will be able to refinance the Senior Notes at or prior to their maturity, or raise sufficient funds through equity or asset sales to repay such indebtedness, or effect a combination of the foregoing, there can be no assurance that it will be able to do so. Prior to consummation of the transaction contemplated by the Delta Exchange Agreement, the Company maintained subordinated notes with interest due semi-annually on April 1 and October 1, that could be paid in cash or, at the option of the Company, by the issuance of additional subordinated notes ("PIK Notes"). The PIK Notes bore 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 subordinated notes mature on December 23, 2003. Prior to the refinancing, certain of the Company's preferred and non-voting common stockholders were subordinated debt holders. In connection with the transaction contemplated by the Delta Exchange Agreement, the subordinated noteholders sold their notes to PAS. 11 Series AA preferred stockholders receive cumulative dividends at an annual rate of 6% based on the $5 thousand stated value per share. Prior to the combination transaction, dividends were payable in cash or in additional shares of Series AA preferred stock. The preferred dividends through October 15, 1999 were paid with additional shares of preferred stock. Following the combination, dividends are paid quarterly in cash using contributed capital from PAS. During the six months ended June 30, 2000, the Company paid approximately $1.0 million of preferred stock dividends using a capital contribution from PAS. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company uses financial instruments, including fixed and variable rate debt, to finance operations, for capital expenditures and for general corporate purposes. The Company's exposure to market risk for changes in interest rates relates primarily to short and long term debt obligations. The Company does not use derivative financial instruments or engage in trading activities. There have been no significant changes in the Company's exposure to market risk for changes in interest rates during the six months ended June 30, 2000. PART II ITEM 1. LEGAL PROCEEDINGS In November and December 1999, the Company was named a defendant in several class action lawsuits filed in the District Court of the Parish of St. John the Baptist, Louisiana, by a group of residents near the Company's facility in Reserve, Louisiana. The residents complained of personal injuries resulting from noxious fumes emitted from the wastewater pond owned by the Port of South Louisiana, into which the Company discharges its wastewater. There are approximately 4,000 potential plaintiffs. No dollar amount has been demanded as yet. The Company intends to fully defend itself in this action and does not expect any material consequences to result from this litigation. The Company owns 62% of the Pepsi-Cola/Seven-Up Beverage Group of Louisiana (the "Joint Venture"), which distributes beer in the New Orleans metropolitan area. The Miller distributor agreement provides that a publicly-held company cannot own a distributor directly or indirectly. Because Delta is owned by PAS, a publicly-held company, PAS is working to resolve this ownership issue. No assurance can be given that PAS will be able to resolve this issue with Miller. From time to time, the Company is involved in various other legal proceedings arising in the ordinary course of business. The Company believes ultimate resolution of such litigation will not have a material adverse effect on the Company's business, financial condition or results of operations. 12 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 27 - Financial Data Schedule (b) The Company did not file any reports on Form 8-K during the quarter for which this report is filed. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on August 14, 2000. DELTA BEVERAGE GROUP, INC. By: /s/ John F. Bierbaum ----------------------------------------------- John F. Bierbaum Chief Financial Officer 14 EXHIBIT INDEX

DELTA BEVERAGE GROUP INC 10-Q