DS Services Holdings, Inc. - FORM 10-Q

DS Services Holdings, Inc. - FORM 10-Q - November 4, 2014

Attached files

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - DS Services Holdings, Inc.	Financial_Report.xls
EX-32.1 - EX-32.1 - DS Services Holdings, Inc.	d790574dex321.htm
EX-32.2 - EX-32.2 - DS Services Holdings, Inc.	d790574dex322.htm
EX-31.1 - EX-31.1 - DS Services Holdings, Inc.	d790574dex311.htm
EX-31.2 - EX-31.2 - DS Services Holdings, Inc.	d790574dex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 26, 2014

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 333-194935

DS Services Holdings, Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware		20-5752672
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5660 New Northside Drive Atlanta, Georgia		30328
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code: (770) 933-1400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of November 4, 2014, all shares of DS Services Holdings, Inc. were held by DSS Group, Inc.

DS SERVICES HOLDINGS, INC.

TABLE OF CONTENTS


Caption		Page

	PART I—FINANCIAL INFORMATION

Item 1.	Unaudited Financial Statements		3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		34

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		49

Item 4.	Controls and Procedures		50

	PART II—OTHER INFORMATION

Item 1.	Legal Proceedings		51

Item 1A.	Risk Factors		51

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		51

Item 3.	Defaults Upon Senior Securities		51

Item 4.	Mine Safety Disclosures		51

Item 5.	Other Information		51

Item 6.	Exhibits		51

PART I – FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

DS Services Holdings, Inc.

Unaudited Condensed Consolidated Balance Sheets

(in thousands of dollars, except share data)


	September 26,			December 27,
	2014			2013
Assets
Current assets
Cash and cash equivalents	$	19,559		$	34,307
Trade accounts receivable, net of allowance for doubtful accounts of $3,545 and $4,513, respectively		109,888			97,179
Inventories		41,419			36,279
Prepaid and other current assets		8,265			11,401
Income tax receivable		859			1,608
Deferred tax assets		26,127			26,127

Total current assets		206,117			206,901
Property, plant and equipment, net		415,360			428,036
Intangibles, net		351,028			365,870
Goodwill		200,079			198,849
Other assets		6,825			5,180
Deferred financing costs, net		24,892			28,855

Total assets	$	1,204,301		$	1,233,691

Liabilities and Shareholders’ Equity
Current liabilities
Current portion of long-term debt	$	3,200		$	3,211
Accounts payable		41,046			31,172
Accrued expenses and other current liabilities		38,080			63,274
Current portion of insurance reserves		11,869			14,059
Customer deposits		32,619			32,408

Total current liabilities		126,814			144,124
Long-term debt, less current portion, less discounts		654,225			655,025
Insurance reserves, less current portion		16,372			16,401
Other long-term liabilities		3,417			3,032
Deferred tax liabilities		161,719			165,052

Total liabilities		962,547			983,634

Commitments and contingencies (Note 10)
Shareholders’ equity
Common stock; $0.01 par value; 1,000 authorized shares; 199 shares issued and outstanding		—			—
Additional paid in capital		263,399			260,698
Accumulated other comprehensive income		281			281
Accumulated deficit		(21,926	)		(10,922	)

Total shareholders’ equity		241,754			250,057

Total liabilities and shareholders’ equity	$	1,204,301		$	1,233,691

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

DS Services Holdings, Inc.

Unaudited Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)


(in thousands of dollars)	Successor			Successor			Predecessor
	June 28, 2014 to September 26, 2014			June 29, 2013 to September 27, 2013			June 29, 2013 to August 30, 2013
Net product sales	$	234,637		$	65,886		$	152,241
Net rental income		25,178			7,868			16,854

Net revenue		259,815			73,754			169,095
Cost of products sold		101,681			28,146			63,321
Cost of rentals		3,202			792			2,479

Cost of revenue		104,883			28,938			65,800

Gross profit		154,932			44,816			103,295
Selling, general and administrative		134,304			40,066			105,243
Amortization of intangible assets		5,090			1,690			1,456

Operating income (loss)		15,538			3,060			(3,404	)

Other expense
Interest expense		(15,021	)		(10,247	)		(36,788	)
Other income (expense), net		(250	)		—			13

Other expenses		(15,271	)		(10,247	)		(36,775	)

Income (loss) before income taxes		267			(7,187	)		(40,179	)
Income tax (expense) benefit		(261	)		2,773			13,873

Net income (loss)	$	6		$	(4,414	)	$	(26,306	)
Other comprehensive income (loss), net of tax
Change in periodic pension and other postretirement costs, net of tax benefit of $0, $0 and $461, respectively		—			—			789

Comprehensive income (loss)	$	6		$	(4,414	)	$	(25,517	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

DS Services Holdings, Inc.

Unaudited Condensed Consolidated Statements of Loss and Comprehensive Loss


(in thousands of dollars)	Successor			Successor			Predecessor
	December 28, 2013 to September 26, 2014			June 29, 2013 to September 27, 2013			December 29, 2012 to August 30, 2013
Net product sales	$	666,663		$	65,886		$	562,145
Net rental income		75,066			7,868			65,214

Net revenue		741,729			73,754			627,359
Cost of products sold		292,212			28,146			233,450
Cost of rentals		9,752			792			7,758

Cost of revenue		301,964			28,938			241,208

Gross profit		439,765			44,816			386,151
Selling, general and administrative		393,618			40,066			350,646
Amortization of intangible assets		15,271			1,690			6,154

Operating income		30,876			3,060			29,351

Other expense
Interest expense		(44,951	)		(10,247	)		(67,199	)
Other income (expense), net		282			—			(121	)

Other expenses		(44,669	)		(10,247	)		(67,320	)

Loss before income taxes		(13,793	)		(7,187	)		(37,969	)
Income tax benefit		2,789			2,773			13,169

Net loss	$	(11,004	)	$	(4,414	)	$	(24,800	)
Other comprehensive loss, net of tax
Change in periodic pension and other postretirement costs, net of tax benefit of $0, $0 and $461, respectively		—			—			711

Comprehensive loss	$	(11,004	)	$	(4,414	)	$	(24,089	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

DS Services Holdings, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows


(in thousands of dollars)	Successor			Successor			Predecessor
	December 28, 2013 to September 26, 2014			June 29, 2013 to September 27, 2013			December 29, 2012 to August 30, 2013
Cash flows from operating activities
Net loss	$	(11,004	)	$	(4,414	)	$	(24,800	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization of property, plant and equipment		69,588			6,855			44,299
Amortization of intangibles		15,271			1,690			6,154
Amortization of debt discount and deferred financing costs		5,563			651			3,389
Mark-to-market of derivative investments and warrants		(352	)		—			50
Loss on disposal of assets		2,397			363			3,341
Loss of extinguishment of debt		—			—			26,580
Paid-in-kind (PIK) noncash interest expense		—			—			2,844
Provision for bad debts		(969	)		(586	)		38
Noncash stock compensation expense		2,701			—			2,400
Deferred income taxes		(4,047	)		(2,717	)		(12,902	)
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable		(11,740	)		552			(11,884	)
Inventories		(4,979	)		2,303			(245	)
Prepaid and other current assets		3,136			1,880			(610	)
Other assets		(1,293	)		(22	)		(730	)
Due from parent		—			—			(2,201	)
Accounts payable		8,431			(431	)		952
Accrued expenses and other current liabilities		(14,278	)		(1,165	)		2,040
Insurance reserves		(2,219	)		469			(1,883	)
Income tax receivable		749			(463	)		(1,037	)
Customer deposits		191			160			(2,412	)
Other liabilities		385			(140	)		(1,163	)

Net cash provided by operating activities		57,531			4,985			32,220

Cash flows from investing activities
Proceeds from sales of property, plant and equipment		3,962			16			404
Purchases of property, plant and equipment		(61,883	)		(6,238	)		(56,172	)
Purchases of businesses, net of $6,459 cash acquired (Note 4)		(11,056	)		(874,007	)		—
Purchases of businesses and other intangibles (Note 5)		(891	)		—			(4,848	)
Restricted cash		—			—			3,500

Net cash used in investing activities		(69,868	)		(880,229	)		(57,116	)

Cash flows from financing activities
Repayments of long-term debt and capital leases		(2,411	)		(4	)		(4,169	)
Borrowings of long-term debt		—			657,480			—
Equity contribution		—			260,698			—
Draw on asset based line of credit		—			4,000			—
Debt issuance costs		—			(30,688	)		—

Net cash (used in) provided by financing activities		(2,411	)		891,486			(4,169	)

Net (decrease) increase in cash and cash equivalents		(14,748	)		16,242			(29,065	)
Cash and cash equivalents
Beginning of the period		34,307			—			35,524

End of period	$	19,559		$	16,242		$	6,459

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

1. Business Organization and Basis of Presentation

Business Organization

Successor

On August 30, 2013, DS Services Holdings, Inc., a Delaware corporation (individually and, where appropriate in the context, collectively with its consolidated subsidiaries, the “Company”) was indirectly acquired by Crestview DSW Investors, L.P., a Delaware limited partnership and affiliate of Crestview Partners (“Parent”) and certain co-investors, including GCM Grosvenor NPS, L.P. (formerly known as CS NPS, L.P.), affiliates of StepStone LLC and various other co-investors (collectively with Parent, the “DSSG Stockholders”) in connection with their acquisition of DSS Group, Inc., a Delaware corporation and the sole shareholder of the Company (“DSSG”), pursuant to that certain Agreement and Plan of Merger dated as of July 23, 2013 (the “Merger Agreement”), by and among the DSSG Stockholders, Crestview DSW Merger Sub, Inc., a Delaware corporation (“Acquisition Sub”) and wholly owned subsidiary of Parent, DSSG, and DSW Group Holdings, LLC, a Delaware limited liability company (“Seller”), in a transaction hereinafter referred to as the “Merger.”

In connection with the Merger, Acquisition Sub merged with and into DSSG, with DSSG as the surviving corporation, and Crestview DS Merger Sub II, Inc., a Delaware corporation (“Merger Sub”) and wholly owned subsidiary of Acquisition Sub, merged with and into DS Services of America, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“DSSA”), with DSSA as the surviving corporation (such Merger Sub and DSSA merger, the “Issuer Merger”). The Merger, the Issuer Merger, the related financings, the equity contributions and the payment of all costs related to these transactions are collectively referred to in this report as the “Transactions.” See Note – 4 “Acquisition of Predecessor” for further information on the Transactions.

Predecessor

In 2012, a majority interest in DSSG was indirectly acquired from Kelso & Company (“Kelso”) by a group of noteholders under that certain Note Purchase Agreement dated as of October 24, 2007 (the “DSSG Group Note”), by and among DSSG and such noteholders, which group was led by Solar Capital, Magnetar Capital and GoldenTree Capital. These noteholders held their majority interest in DSSG through their ownership of Seller.

Business

The Company is a national direct-to-consumer provider of bottled water, office coffee service and water filtration services. The Company offers a comprehensive portfolio of beverage products, equipment and supplies to approximately 1.5 million customers through its network of over 200 sales and distribution facilities and daily operation of over 2,100 routes. With one of the broadest distribution networks in the country, the Company reaches approximately 90 percent of U.S. households and efficiently services homes and national, regional and local offices.

The Company operates through two reportable segments – “Direct-to-Consumer Services” and “Retail Services”.

Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries. The Company has no independent operations and its only asset is the stock of DSSA. As a result, the financial position and results of operations and cash flows of the Company and DSSA are substantially the same. All significant intercompany balances and transactions between the two entities have been eliminated in consolidation.

The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles and practices of the United States of America (“GAAP”) for interim financial information. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included. As set forth above and discussed in more detail in Note —4 “Acquisition of Predecessor”, the Company was acquired on August 30, 2013 (the “Merger Date”) pursuant to the Merger. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

Results for the interim periods should not be considered indicative of results for a full year. These interim Unaudited Condensed Consolidated Financial Statements do not represent complete financial statements and should be read in conjunction with the Company’s annual financial statements for the year ended December 27, 2013 set forth in the Registration Statement filed with the Securities and Exchange Commission (“SEC”).

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

Fiscal Periods

The Company’s fiscal year and fiscal quarters end on the Friday nearest the calendar year and calendar quarter end, as applicable, unless such Friday falls after such calendar period end, in which case the fiscal year end is the calendar year end and the fiscal quarter end is the final Friday in such quarter. Unless otherwise stated, references to years in this report relate to fiscal years and references to quarters in this report relate to fiscal quarters rather than calendar years and calendar quarters. For purposes of these Unaudited Condensed Consolidated Financial Statements, (a) “Quarter Successor 2014” refers to the period beginning June 28, 2014 through and including September 26, 2014, (b) “Quarter Successor 2013” refers to the period beginning June 29, 2013 through and including September 27, 2013, (c) “Quarter Predecessor 2013” refers to the period beginning June 29, 2013 through and including August 30, 2013, (d) “Year to Date Successor 2014” refers to the period beginning December 28, 2013 through and including September 26, 2014, and (e) “Year to Date Predecessor 2013” refers to the period beginning December 29, 2012 through and including August 30, 2013. The Successor period began on June 29, 2013. As a result, the Year to Date Successor period for 2013 covers the same period as Quarter to Date Successor 2013.

Merger Sub was legally formed on July 23, 2013. Prior to the incorporation of Merger Sub, DSSA incurred costs on Merger Sub’s behalf beginning on June 29, 2013. When used in this report, the term “Predecessor” refers only to the Company for periods prior to the Merger Date and the term “Successor” refers only to the Company for the period June 29, 2013 through and including September 26, 2014.

2. Recent Accounting Pronouncements

Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASUs”) or the issuance of new standards to the FASB’s Accounting Standards Codification (“ASC”).

The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on these Unaudited Condensed Consolidated Financial Statements.

Revenue From Contracts With Customers

In May 2014, the FASB and International Accounting Standards Board (“IASB”) issued a comprehensive new revenue recognition standard for contracts with customers that will supersede most current revenue recognition guidance, including industry-specific guidance. The core principle of this standard is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the standard provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. This guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The new guidance is effective for public companies which are accelerated filers for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. The standard permits the use of either the full retrospective or modified transition method. This guidance will be applicable to the Company at the beginning of its first quarter of fiscal year 2017. The Company is currently evaluating whether the full retrospective or modified transition approach will be applied and whether the new guidance will have a material impact on the Company’s Consolidated Financial Statements.

Reporting Discontinued Operations

In April 2014, the FASB issued new guidance which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The new guidance is effective for annual and interim periods beginning after December 15, 2014. The impact on the Company of adopting the new guidance will depend on the nature, terms and size of business disposals completed after the effective date. This authoritative guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

3. Revision to Previously Issued Financial Statements

In connection with preparing the September 26, 2014 financial statements, the Company identified an error in the calculation of its deferred tax liability balance that arose in the second quarter of 2014. Specifically, the Company wrote off a tax refund receivable in the second quarter but did not write off the associated deferred tax balance related to the alternative minimum tax credit generated as part of the originally filed carryback claim. The Unaudited Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss), Unaudited Condensed Consolidated Balance Sheets and Unaudited Condensed Consolidated Statements of Cash Flows for the three and six month fiscal periods ended June 27, 2014 filed with the SEC on From 10-Q/A on September 12, 2014 will be revised the next time they are presented in an SEC filing. The error is not considered to be material to the previously issued financial statements. The following table sets forth the effects of the revisions on the affected line items within the Company’s financial statements for the fiscal periods ended June 27, 2014:


Consolidated Statement of Income (Loss) and Comprehensive Income (Loss)	As Reported Successor December 28, 2013 to June 27, 2014			Adjustment			As Revised Successor December 28, 2013 to June 27, 2014
Income (Loss) before income taxes	$	(14,060	)	$	—		$	(14,060	)
Income tax benefit		3,925			(875	)		3,050
Net loss		(10,135	)		(875	)		(11,010	)
Other comprehensive loss, net of tax		(10,135	)		(875	)		(11,010	)

Consolidated Statement of Income (Loss) and Comprehensive Income (Loss)	March 29, 2014 to June 27, 2014			Adjustment			March 29, 2014 to June 27, 2014
Income (Loss) before income taxes	$	452		$	—		$	452
Income tax expense		(1,002	)		(875	)		(1,877	)
Net loss		(550	)		(875	)		(1,425	)
Other comprehensive loss, net of tax		(550	)		(875	)		(1,425	)

Consolidated Balance Sheet	June 27, 2014			Adjustment			June 27, 2014
Deferred tax liabilities	$	159,989		$	875		$	160,864
Total liabilities		981,683			875			982,558
Accumulated deficit		(21,057	)		(875	)		(21,932	)
Total shareholders’ equity		239,922			(875	)		239,047

Consolidated Statement of Cash Flows	Six Months Ended June 27, 2014			Adjustment			Six Months Ended June 27, 2014
Net loss	$	(10,135	)	$	(875	)	$	(11,010	)
Deferred income taxes		(5,063	)		875			(4,188	)
Net cash provided by operating activities		41,658			—			41,658

The Unaudited Condensed Consolidated Statement of Cash Flows for the period June 29, 2013 to September 27, 2013 (Successor) included in these Unaudited Financial Statements has been revised from that previously prepared by the Company to correct certain errors in the application of purchase accounting principles. Specifically, this revision includes (a) a reclassification of paid-in-kind (“PIK”) noncash interest expense related to the Merger from an adjustment to net cash provided by operating activities to a cash flow from investing activities, (b) certain adjustments to correct errors in Prepaid and other current assets and Accrued expenses and other current liabilities, and (c) the correction of Cash at beginning of period to zero. Additionally, the Company corrected the disclosure of the cash acquired in the Merger in Note – 4 “Acquisition of Predecessor” to reflect $6,459 instead of the previously reported $13,482. The errors are not considered to be material to the previously issued financial statements. The following table sets forth the effects of the revisions on the affected line items within the Company’s previously reported Unaudited Condensed Consolidated Statement of Cash Flows:


	As Reported						As Revised
	Successor						Successor
Consolidated Statement of Cash Flows Line Items	June 29, 2013 to September 27, 2013			Adjustment			June 29, 2013 to September 27, 2013
Payment of interest on extinguishment of PIK note	$	(7,177	)	$	7,177		$	—
Prepaid and other current assets		1,680			200			1,880
Accrued expenses and other current liabilities		(247	)		(918	)		(1,165	)
Net cash (used in) provided by operating activities		(1,474	)		6,459			4,985
Cash at beginning of period	$	6,459		$	(6,459	)	$	—

These revisions do not have any impact on the Unaudited Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) or the Unaudited Condensed Consolidated Balance Sheet.

4. Acquisition of Predecessor

As discussed in Note—1 “Business Organization and Basis of Presentation”, the DSSG Stockholders acquired DSSG pursuant to the Merger for $885,063, net of $6,459 cash acquired, subject to certain customary adjustments for working capital and tax matters. A portion of the Merger consideration was used to pay transaction costs and approximately $459,069 was used by Seller to repay existing debt of the Company as of the Merger date. The Merger was financed by:

•

Borrowings under a $320,000, 7-year, senior secured term loan facility (the “Term Loan Facility”), $316,800 of which was provided at closing, net of $3,200 discount;

•

Issuance by DSSA of $350,000, 10.000% second-priority senior secured notes due 2021 (the “Notes”) in the amount of $340,679, which amount is net of discount of $9,321; and

•

An aggregate equity contribution of $260,698 from the DSSG Stockholders.

The Merger has been accounted for using the acquisition method of accounting in accordance with ASC 805—Business Combinations, which requires, among other things, that the assets acquired and liabilities assumed be recognized at their acquisition date fair values, with any excess of the consideration transferred over the estimated fair values of the identifiable net assets acquired recorded as goodwill.

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

The accounting for the Merger is based on currently available information and was considered final as of the fiscal quarter ending September 26, 2014.

The following is a summary of the fair values of the net assets acquired:


	Purchase Price as of						Updated Purchase Price
	December 27, 2013			Adjustment			as of September 26, 2014
Total consideration transferred, net of cash acquired of $6,459	$	874,007		$	11,056		$	885,063

Income tax receivable		2,175			—			2,175
Trade accounts receivable		103,793			—			103,793
Inventories		36,108			—			36,108
Prepaid and other current assets		12,552			—			12,552
Deferred tax asset		10,409			—			10,409
Property, plant and equipment		442,676			—			442,676
Intangibles		372,353			—			372,353
Other assets		5,551			—			5,551
Accounts payable		(35,794	)		—			(35,794	)
Accrued expenses and other current liabilities		(52,409	)		11,056			(41,353	)
Customer deposits		(33,142	)		—			(33,142	)
Current portion of insurance reserves		(13,748	)		—			(13,748	)
Insurance reserves, less current portion		(15,461	)		—			(15,461	)
Other long term liabilities		(3,735	)		—			(3,735	)
Deferred tax liability		(156,170	)		(714	)		(156,884	)

Net assets acquired		675,158			10,342			685,500

Goodwill	$	198,849		$	714		$	199,563

The goodwill of $199,563 recorded as part of the acquisition is for the potential growth of the Company. See Note – 7 “Intangibles and Goodwill” for further discussion on Goodwill by segment. Included in the goodwill, $32,757 is deductible for income tax purposes and the remaining goodwill is not expected to be deductible for income tax purposes.

Pursuant to the terms of the Merger Agreement, the Merger Consideration payable to Seller was increased by $11,056 as a result of an adjustment related to working capital. This amount was paid by the Company on behalf of Parent to Seller during the first quarter ending March 28, 2014 and, as a result, the purchase price allocation was adjusted. In Quarter Successor 2014, the Company recorded $714 of additional Goodwill related to the adjustment of the IRC Sec 195 deferred tax asset that was recorded through purchase accounting, which was finalized during the quarter.

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

The $372,353 of intangible assets acquired in connection with the Merger were assigned to the following:


			Weighted
			Average Life
	Fair value		(years)
Customer Lists	$	243,352		12
Trademark/trade name		128,891		N/A
Covenants not to compete		110		5

	$	372,353

The Company incurred costs in connection with the Merger of $194, $1,423 and $15,142 during Quarter Successor 2014, Quarter Successor 2013 and Quarter Predecessor 2013, respectively. The Company incurred costs in connection with the Merger of $1,339 and $15,416 during Year to Date Successor 2014 and Year to Date Predecessor 2013, respectively. The foregoing amounts were expensed by the Company as incurred and are included in the Unaudited Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) in the line item titled Selling, general and administrative (“SG&A”) expense.

5. Business Acquisitions

During Year to Date Successor 2014 and Year to Date Predecessor 2013, the Company expanded the geographical area it services through the acquisition of several businesses. All acquisitions have been accounted for in accordance with ASC 805 – Business Combinations, as discussed in more detail in Note – 4 “Acquisition of Predecessor”. All goodwill recorded in conjunction with such acquisitions relates to the Company’s Direct-to-Consumer segment. The Company incurred acquisition costs of $86, $458 and $817 during Quarter Successor 2014, Quarter Successor 2013 and Quarter Predecessor 2013, respectively. The Company incurred acquisition costs of $1,080 and $2,368 during Year to Date Successor 2014 and Year to Date Predecessor 2013, respectively. Acquisition costs incurred were recorded as a component of SG&A on the Unaudited Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss).

Successor 2014

Coffee Pause Acquisition

On August 29, 2014, the Company purchased certain assets of The Coffee Pause Company, Inc. (“Coffee Pause”). Coffee Pause’s principal business is office coffee and water filtration services. The aggregate purchase price for Coffee Pause was as follows:


Cash purchase price paid at closing	$	160

Initial Cash purchase price		160

Deferred cash payment as described below		40

Total potential cash purchase price	$	200

The fair values of the assets acquired in connection with the Coffee Pause acquisition were as follows:


Property, plant and equipment	$	20
Customer lists		116
Noncompete agreement		5
Goodwill		59

Total potential cash purchase price	$	200

The amortization periods for the customer list and the covenant not to compete included with the Coffee Pause acquisition are 12 years and 5 years, respectively. The $59 of goodwill recorded in connection with the Coffee Pause acquisition relates to cost synergies anticipated through the consolidation of routes, route management and administrative employee headcount reduction and potential cross-selling benefits generated by the consolidation of customers and facilities. For income tax purposes, this goodwill will be amortized over a 15 year period. The total cash purchase price will be paid in two installments with $160 at closing, and a deferred cash payment of $40 which is contingent on the Company invoicing and actually receiving as payment for the provision of goods and services from each and every customer acquired in the acquisition during the ninety day period beginning after the closing date. The Company estimates that such liability is $40 and is payable 120 days after the acquisition date.

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

Pine Mountain Acquisition

On September 12, 2014, the Company purchased certain assets of Pine Mountain Springs, Inc. (“Pine Mountain”) related to its water delivery, office coffee and filtration services business. Pine Mountain’s principal business is the water delivery, office coffee and filtration service business. The aggregate purchase price for Pine Mountain was as follows:


Cash purchase price	$	751
Liabilities assumed		(20	)

Initial net cash purchase price paid at closing		731

Deferred cash payment as described below		100

Total potential net cash purchase price	$	831

The fair values of the assets acquired and liabilities assumed in connection with the Pine Mountain acquisition were as follows:


Inventory	$	6
Property, plant and equipment		80
Customer lists		286
Noncompete agreement		22
Goodwill		457
Liabilities assumed		(20	)

Total potential net cash purchase price	$	831

The amortization periods for the customer list and the covenant not to compete included with the Pine Mountain acquisition are 12 years and 5 years, respectively. The $457 of goodwill recorded in connection with the Pine Mountain acquisition relates to cost synergies anticipated through the consolidation of routes, route management and administrative employee headcount reduction and potential cross-selling benefits generated by the consolidation of customers and facilities. For income tax purposes, this goodwill will be amortized over a 15 year period. The cash purchase price will be paid in two installments with $731 at closing, and a deferred cash payment of $100 which is contingent on the Company invoicing and actually receiving as payment for the provision of goods and services from each and every customer acquired in the acquisition during the ninety day period beginning after the closing date. The Company estimates that such liability is $100 and is payable 120 days after the acquisition date.

Predecessor 2013

Cascade Coffee Acquisition

On August 9, 2013, the Company purchased certain assets of Cascade Coffee, Inc.’s (“Cascade”) OCS business. Cascade’s principal business was office coffee and water filtration services. The aggregate purchase price for Cascade Coffee was $4,200 which included a deferred payment liability of $405.


Gross purchase price	$	4,605
Liabilities assumed		(405	)

Net cash purchase price	$	4,200

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

The fair values of the assets acquired and liabilities assumed in connection with the Cascade acquisition were as follows:


Inventory	$	404
Property, plant and equipment		421
Customer lists		1,540
Trade names		230
Noncompete agreement		110
Goodwill		1,900
Liabilities assumed		(405	)

Total net cash purchase price	$	4,200

The amortization periods for the customer list and the covenant not to compete included with the Cascade acquisition are 12 years and 5 years, respectively. The trade names acquired in connection with the acquisition are intangible assets with indefinite useful lives and are accounted for as such. The $1,900 of goodwill recorded in connection with the acquisition relates to cost synergies anticipated through the consolidation of routes, route management and administrative employee headcount reduction and potential cross-selling benefits generated by the consolidation of customers and facilities. In addition to the cash purchase price paid at closing, the Company is required to pay Cascade a contingent earnout payment equal to three percent of revenues derived from acquired customers determined and payable quarterly for three years. The Company estimates that such liability is $196 as of September 26, 2014. The Company will re-measure this liability at each reporting period for the three years until fully paid out.

Pro forma Financial Information

The following unaudited pro forma summary presents consolidated information of the Company as if the Merger and the acquisition of Cascade occurred at the beginning of the annual period prior to the year purchased. No other acquisitions were included in the pro forma as they were deemed to have an immaterial impact. The pro forma adjustments primarily relate to revenue, gross profit generated, depreciation expense on stepped up fixed assets, amortization of acquired intangibles, interest expense related to new financing arrangements and the estimated impact on the Company’s income tax provision. The unaudited pro forma combined results of operations are provided for illustrative purposes only and are not necessarily indicative of what the Company’s actual consolidated results would have been.


	Proforma Quarter Ended September 27, 2013			Proforma Nine Months Ended September 27, 2013
Net revenue	$	243,285		$	704,305
Net loss		(22,553	)		(28,307	)

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

6. Inventories

Inventories consisted of the following as of September 26, 2014 and December 27, 2013:


	September 26, 2014		December 27, 2013
Raw materials	$	6,362	$	4,956
Finished goods		19,355		13,389
Resale items		15,702		17,934

	$	41,419	$	36,279

7. Intangibles and Goodwill


	As of September 26, 2014							As of December 27, 2013
	Gross					Net		Gross					Net
	Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
	Amount		Amortization			Amount		Amount		Amortization			Amount
Intangible assets not subject to amortization
Trade names	$	128,891	$	—		$	128,891	$	128,891	$	—		$	128,891
Intangible assets subject to amortization
Customer lists		243,753		(21,969	)		221,784		243,352		(6,761	)		236,591
Covenants not to compete		437		(84	)		353		410		(22	)		388

Total intangibles	$	373,081	$	(22,053	)	$	351,028	$	372,653	$	(6,783	)	$	365,870

The Company amortizes customer lists and covenants not to compete acquired in connection with the Merger over 12 years and 5 years, respectively. See Note – 4 “Acquisition of Predecessor” for further discussion. For acquisitions other than the Merger, the Company will review the purchase agreement and customer trend data to appropriately amortize the acquisition’s respective intangible assets. Prior to the Merger, the Company amortized customer lists over 6 weighted average years and covenants not to compete over 3 weighted average years. During Quarter Successor 2014, Quarter Successor 2013 and Quarter Predecessor 2013, the Company recorded $5,090, $1,690 and $1,456, respectively, of amortization expense related to its intangible assets. During Year to Date Successor 2014 and Year to Date Predecessor 2013, the Company recorded $15,271 and $6,154, respectively, of amortization expense related to its intangible assets.

Goodwill consisted of the following for September 26, 2014 and December 27, 2013:


	September 26, 2014		December 27, 2013
Direct-to-Consumer Services	$	193,716	$	192,486
Retail Services		6,363		6,363

Consolidated	$	200,079	$	198,849

8. Related Party Transactions

Successor

In connection with the Merger, the DSSG Stockholders entered into a Stockholders Agreement dated as of August 30, 2013 (the “Stockholders Agreement”). The Stockholders Agreement provides for, among other things, (a) an agreement by the DSSG Stockholders to vote their shares of common stock of DSSG to elect as directors of DSSG the individual who holds the title of Chief Executive Officer of the Company, one individual that is nominated from time to time by a significant co-investor (subject to certain continuing ownership requirements) and the individuals that are nominated from time to time by Parent and its affiliates (the “Crestview Stockholders”), (b) restrictions on transfer by the DSSG Stockholders other than Parent and its affiliates (the “NonCrestview Stockholders”), (c) certain rights of repurchase with respect to employee stockholders, and (d) certain registration rights for NonCrestview Stockholders following an initial public offering of DSSG.

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

In connection with the Merger, DSSA entered into a Monitoring Agreement dated as of August 30, 2013 (the “Monitoring Agreement”) with an affiliate of Parent (the “Manager”) relating to the monitoring of the investment of the Crestview Stockholders in DSSG following the consummation of the Merger. Under the Monitoring Agreement, during fiscal year 2014 DSSA is required to pay to the Manager a nonrefundable annual monitoring fee of $2,000 and reimburse the Manager for all reasonable fees and expenses incurred in connection with its monitoring activities. The Company paid to the Manager an amount equal to $500 and $1,500 in satisfaction of the Company’s obligations under the Monitoring Agreement with respect to Quarter Successor 2014 and Year to Date Successor 2014, respectively, which amount is based on a prorated annual fee of $2,000.

Effective August 31, 2013, DSSG engaged each of K. Dillon Schickli (“Schickli”) and Jim L. Turner (“Turner”) to serve on its Board of Directors. In connection with their respective services, Schickli is entitled to $100 annually and is eligible to participate in the Company’s medical plan and Turner is entitled to $60 annually. Each of Schickli and Turner is a minority co-investor in DSSG.

Predecessor

Prior to the Merger, pursuant to a Tax Sharing Agreement dated as of October 18, 2007 (the “Tax Sharing Agreement”) among the members of DSSG’s consolidated filing group which includes the Company, each subsidiary of DSSG was required to pay to DSSG an amount equal to the tax impact of items of income, loss and credits that were includable in the Federal Consolidated Income Tax Returns, or the Combined Consolidated State Income Tax Returns, of the consolidated group. These amounts due to or from DSSG were recorded in the Company’s due to/from DSSG account. The Tax Sharing Agreement was terminated effective August 30, 2013 and it was noted that any tax attributes of members of the consolidated group as of the termination date are made available for use by other members of the group without compensation.

DSW Group Holdings, LLC, the majority member of Seller, engaged Turner to serve on the Board of Directors of Seller. Turner was an indirect minority owner of the Company prior to the Merger. In consideration for Turner providing the foregoing services, the Company, on behalf of DSW Group Holdings, LLC, paid Turner an annual fee of $100. The Company paid Turner $25 and $50 for Quarter Predecessor 2013 and Year to Date Predecessor 2013, respectively.

The Company engaged Stewart Allen (“Allen”) to provide certain consulting services to management and the Board of Directors commencing April 20, 2012. Allen was a minority indirect owner of the Company prior to the Merger. In consideration for such services, the Company paid Allen an annual fee of $100.

9. Long-Term Debt

The Company’s long-term debt and capital lease obligations consisted of the following as of September 26, 2014 and December 27, 2013:


	September 26, 2014			December 27, 2013
Term loan facility	$	317,600		$	320,000
Notes		350,000			350,000
Capital lease obligations		—			11

Total debt		667,600			670,011
Less: Debt discount		(10,175	)		(11,775	)

		657,425			658,236
Less: Current portion		(3,200	)		(3,211	)

Total long-term debt	$	654,225		$	655,025

Successor

Senior Facilities

In connection with the Merger, on the Merger Date, the Company received borrowings under the Term Loan Facility and a $75,000 senior secured asset-based revolving credit facility (the “ABL Facility” and, collectively with the Term Loan Facility, the “Senior Facilities”).

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

Term Loan Facility

The Term Loan Facility is governed by that certain First Lien Credit Agreement (the “Term Credit Agreement”) with Barclays Bank PLC, as administrative agent, and the other lenders party thereto. The aggregate principal amount of the Term Loan Facility is $320,000, which was fully funded at closing of the Merger, net of discount of $3,200. The Company may request additional borrowings under the Term Loan Facility in an aggregate principal amount up to $100,000 and additional amounts based on certain net leverage ratios.

The Term Loan Facility has a seven-year term and amortizes in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount with the balance payable on the maturity date of August 30, 2020 of the Term Loan Facility. The maturity date of the Term Loan Facility is August 30, 2020. The weighted average interest rate as of September 26, 2014 was 5.25%. As of September 26, 2014, the Company’s outstanding principal balance on the Term Loan Facility was $317,600.

The borrowings under the Term Loan Facility bear interest at a rate equal to, as determined at the Company’s option, either (a) a base rate determined by reference to the highest of (1) the U.S. federal funds rate plus 0.50%, (2) the prime rate of Barclays Bank PLC, and (3) the adjusted LIBO rate for a one-month interest period plus 1.00%, or (b) a eurocurrency rate (“LIBOR”) determined by reference to the costs of funds for eurocurrency deposits in dollars in the London interbank market for the interest period relevant to such borrowing adjusted for certain additional costs, in each case, plus an applicable margin equal to 4.25% for LIBOR loans and 3.25% for base rate loans with a 1.00% LIBOR floor.

The Company may voluntarily repay outstanding loans under the Term Facility at any time without premium or penalty, other than customary “breakage costs” with respect to Eurocurrency loans.

All obligations under the Term Loan Facility are unconditionally guaranteed by the Company and each of DSSA’s existing and future direct and indirect wholly owned domestic subsidiaries. The obligations and guarantees are secured by (a) first-priority security interests in substantially all of DSSA’s assets (other than the ABL Priority Collateral (as defined below) and those of each domestic guarantor, including a pledge of the DSSA’s capital stock, in each case subject to certain exceptions (the “NonABL Priority Collateral”), and (b) second-priority security interests in all accounts receivable, loan receivable, other receivables, inventory, related books and records and general intangibles, deposit accounts, business interruption insurance, certain real property, cash and proceeds of the foregoing (the “ABL Priority Collateral”).

ABL Facility

The ABL Facility is governed by that certain Asset-Based Revolving Credit Agreement (the “ABL Credit Agreement”) with BMO Harris Bank N.A., as administrative agent, and the other lenders party thereto. The aggregate principal amount of the ABL Facility is the lesser of (a) $75,000, and (b) the Company’s “borrowing base” set forth in the ABL Credit Agreement. In addition, the Company may request one or more incremental revolving commitments in an aggregate principal amount up to the greater of (a) $25,000 and (b) the excess of the borrowing base (subject to certain exceptions) over the amount of the then-effective commitments under the ABL Facility. The ABL Facility has a five-year term. The ABL Facility includes borrowing capacity available for letters of credit and for short-term borrowings (swingline loans) on same-day notice.

The borrowings under the ABL Facility bear interest at a rate equal to, as determined at the Company’s option, either (a) a base rate determined by reference to the highest of (1) the U.S. federal funds rate plus 0.50%, (2) the prime rate of the Bank of Montreal, and (3) the adjusted LIBOR rate for a one-month interest period plus 1.0%, or (b) an adjusted LIBOR determined by reference to the costs of funds for eurocurrency liabilities in dollars in the London interbank market for the interest period relevant to such borrowing adjusted for certain additional costs, plus, in each case an applicable margin as set forth in the ABL Credit Agreement, as such applicable margin may be adjusted on a quarterly basis.

In addition to paying interest on outstanding principal under the ABL Facility, the Company is required to pay a commitment fee to the lenders in respect of the unutilized commitments thereunder at a rate equal to 0.25% per annum if average utilization is greater than 50% and 0.375% if average utilization is less than or equal to 50%, which amounts may be adjusted based on usage. The Company is also required to pay a customary letter of credit fee, including a fronting fee equal to 0.125% per annum of the aggregate face amount of outstanding letters of credit, and customary issuance and administration fees.

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

The Company may voluntarily repay outstanding loans under the ABL Facility at any time without premium or penalty, other than customary “breakage” costs with respect to eurocurrency loans.

All obligations under the ABL Facility are unconditionally guaranteed by the Company and each of DSSA’s existing and future direct and indirect wholly owned domestic restricted subsidiaries. The obligations and guarantees are secured by (a) first-priority security interests in the ABL Priority Collateral, and (b) third-priority security interests in the NonABL Priority Collateral.

10.000% Second-Priority Senior Secured Notes

In connection with the Merger, on August 30, 2013, DSSA issued $350,000 in principal amount of the Notes in a private placement. The Notes were issued under an indenture with Wilmington Trust, National Association as trustee. The Notes bear interest at a rate of 10.000% per annum, payable semi-annually in arrears on March 1 and September 1 of each year, commencing on March 1, 2014. The Notes were issued at a discount of 2.663%.

DSSA may redeem the Notes at its option, in whole or in part, at any time on or after September 1, 2017 at certain redemption prices. In addition, DSSA may redeem up to 35% of the aggregate principal amount of the Notes on or prior to September 1, 2016 with the net proceeds from certain equity offerings at certain redemption prices. Prior to September 1, 2017, DSSA may redeem some or all of the Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, plus the applicable “make-whole” premium.

The Notes are fully and unconditionally guaranteed by the Company and each of DSSA’s existing and future direct and indirect 100% owned domestic restricted subsidiaries. The Notes and related guarantees are secured by (a) second-priority security interests in the NonABL Priority Collateral, and (b) third-priority security interests in the ABL Priority Collateral. The guarantees may be released under certain customary circumstances with respect to a subsidiary guarantor including:

•

DSSA’s obligations under the indenture are discharged in accordance with the terms of the indenture;

•

The sale, disposition, exchange or other transfer (including through merger, consolidation, amalgamation or otherwise) of the equity interests in such subsidiary guarantor;

•

The designation of such subsidiary guarantor as an “Unrestricted Subsidiary” under the indenture;

•

The release or discharge of the guarantee by such subsidiary guarantor of the Term Loan Facility and ABL Facility or other indebtedness which resulted in the obligation to guarantee the Notes;

•

DSSA’s exercise of its legal defeasance option or covenant defeasance option in accordance with the indenture;

•

Such subsidiary guarantor ceasing to be a subsidiary of DSSA as a result of any foreclosure of any pledge or security interest in connection with the Term Loan Facility and ABL Facility; and

•

The occurrence of certain “Covenant Suspension Events” under the indenture in the event that the Notes are rated investment grade.

The Senior Facilities and the Notes contain certain customary affirmative covenants and events of default. In addition, the Senior Facilities and Notes contain a number of covenants that, among other things restrict, subject to certain exceptions, DSSA’s ability, and the ability of its restricted subsidiaries to: sell assets; incur additional indebtedness; make voluntary repayments on certain other indebtedness; pay dividends and distributions or repurchase DSSA’s capital stock; create liens on certain assets; make investments, loans, guarantees or advances; engage in mergers or acquisitions; enter into sale/leaseback transactions; engage in certain transactions with affiliates; make negative pledges; amend their respective organization documents and certain debt documents; change their respective fiscal years; change their respective businesses; or enter into agreements that restrict dividends from subsidiaries. The Senior Facilities and the Notes also contain covenants limiting the activities of the Company.

Predecessor

In connection with the Merger, a prepayment penalty of $11,416 and the write off of deferred financing fees of $15,164 were extinguished through interest expense in Quarter Predecessor 2013.

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

First Lien Facility

Prior to the Merger, the Company’s senior secured term facility (the “Predecessor First Lien Facility”) was set to expire in August 2017. As a result of the Merger, the Predecessor First Lien Facility was repaid on August 30, 2013. Under the Predecessor First Lien Facility, base rate loans would bear interest at the base rate (subject to a floor equal to the one-month eurodollar rate plus 1.00%) plus 8.00%, and USD Libor rate loans would bear interest at the USD Libor rate (subject to a floor of 1.50% per annum) plus 9.00%. Interest was payable quarterly. The interest rate as of August 30, 2013 was 10.50%.

Second Lien Facility

Prior to the Merger, the Company’s second lien facility (the “Predecessor Second Lien Facility”) was set to expire in February 2018. As a result of the Merger, the Predecessor Second Lien Facility was repaid on August 30, 2013. Under the Predecessor Second Lien Facility, base rate loans would bear interest at the base rate (subject to a floor equal to the one-month eurodollar rate plus 1.00%) plus 8.50% plus a paid-in-kind margin, or PIK Margin, of 4.00% and rate loans would bear interest at the rate (subject to a floor of 1.50% per annum) plus 9.50% plus a PIK Margin of 4.00%. Interest was payable quarterly.

$70,000 ABL Facility

Prior to the Merger, the Company’s $70,000 asset based loan facility (the “Predecessor ABL Facility”) was set to expire in February 2017. As a result of the Merger, the Predecessor ABL Facility was repaid on August 30, 2013. The Predecessor ABL Facility provided for revolving credit financing, subject to borrowing base availability.

10. Commitments and Contingencies

Legal Claims

The Company is party to a putative class action lawsuit in California alleging that it violated certain privacy obligations by recording calls made through its call centers. During Year to Date Predecessor 2013, the Company recorded a $2,000 liability in its Unaudited Condensed Consolidated Balance Sheet in connection with this lawsuit. During the fiscal quarter ending June 27, 2014 the court approved an agreement to settle the lawsuit for $2,000, and the Company paid $2,000 to the plaintiffs.

During the fiscal quarter ending March 28, 2014, the Company reached an agreement to settle two putative class action lawsuits in California alleging that it violated certain obligations under California and federal wage and hour laws for $2,000, and recorded a $2,000 liability in its Unaudited Condensed Consolidated Balance Sheet. The court preliminarily approved the agreement to settle both lawsuits for $2,000 during the fiscal quarter ended June 27, 2014. In addition, the Company placed the $2,000 settlement into escrow with the court during the Quarter Successor 2014. The settlement agreement is subject to final approval by the court. The Company is subject to a third putative class action lawsuit in California alleging similar claims.

The Company is subject to other legal claims in the ordinary course of business. The Company does not believe that the resolution of such claims will result in a material adverse impact on the Company’s financial position, results of operations or liquidity.

11. Financial Instruments and Risk Management

From time to time the Company enters into hedging contracts with respect to interest rates under its credit facilities and raw coffee beans. The Company accounts for these instruments in accordance with ASC 815—Derivatives and Hedging. The Company does not hold or issue derivative financial instruments for trading purposes.

Interest Rate Contracts

The Company is subject to long-term variable rate debt obligations in connection with its credit facilities. These debt obligations expose the Company to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

increases. Conversely, if interest rates decrease, interest expense decreases. The Company believes it is prudent to limit the variability of a portion of its interest payments and, therefore, generally hedges a portion of its variable-rate interest obligations. Accordingly, the Company enters into interest rate hedge/swap agreements whereby the Company receives variable interest rate payments and makes fixed interest rate payments on a portion of its debt.

The Company records its interest rate contracts as Other assets in the Unaudited Condensed Consolidated Balance Sheets at fair value. Changes in fair value are recorded in Interest expense in the Unaudited Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss).

The table below provides a summary of the interest rate cap contract the Company had entered into to manage its interest rate exposure related to Predecessor indebtedness:

Description

Borrowing

Notional
Amount
Outstanding

Receive

Pay

Fiscal
Year
Entered
Into

Original
Maturity
(Fiscal
Year)

Interest rate cap

Term debt

300,000

2.0

LIBOR

2012

2015

The foregoing interest rate contract was extinguished in connection with the Merger. The Company has not entered into any interest rate contracts during Year to Date Successor 2014.

Fair Value of Financial Instruments

The Company determines the fair value of its financial instruments in accordance with the ASC 820— Fair Value Measurements and Disclosures. Fair value is the price to hypothetically sell an asset or transfer a liability in an orderly manner in the principal market for that asset or liability. This topic provides a hierarchy that gives highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities. This topic requires that financial assets and liabilities be classified into one of the following three categories:

Level 1

Quoted prices are available in active markets for identical assets or liabilities;

Level 2

Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable;

Level 3

Unobservable pricing inputs in which little or no market activity exists, therefore, requiring an entity to develop its own assumptions about what market participants would use in pricing an asset or liability.

The Company makes use of observable market-based inputs to calculate fair value, in which case the measurements are classified within Level 2 of the valuation hierarchy. Derivative financial instruments that are traded on an index are valued based on direct or indirect prices and classified within Level 2. The fair value of the Company’s derivative financial instruments was estimated using the net present value of a series of cash flows on both the cap and floor components. These cash flows were based on yield curves that take into account the contractual terms of the derivatives, including the period to maturity and market-based parameters such as interest rates and volatility. The Company incorporates nonperformance risk by adjusting the present value of each liability position utilizing an estimation of its credit risk, if applicable.

The effect of the cash interest expense of derivative instruments in the Unaudited Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) was $0 for Quarter Successor 2014, Quarter Successor 2013 and Quarter Predecessor 2013. The effect of the cash interest expense of derivative instruments in the Unaudited Condensed Consolidated Statements of Loss and Comprehensive Loss was $0 for Year to Date Successor 2014 and Year to Date Predecessor 2013.

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

The effect of the noncash interest expense of derivative instruments in the Unaudited Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) was as follows:


Derivatives Not
Designated as		Amount of Gain or (Loss) Recognized in Income on Derivative ^(a)
Hedging	Location of Gain or	Quarter		Quarter		Quarter			Year to Date		Year to Date
Instruments Under	(Loss) Recognized in	Successor		Successor		Predecessor			Successor		Predecessor
ASC 815	Income on Derivative	2014		2013		2013			2014		2013
Interest rate cap	Interest expense	$	—	$	—	$	(11	)	$	—	$	(49	)

		$	—	$	—	$	(11	)	$	—	$	(49	)

^(a)	This amount includes noncash interest expense.

The Company’s cash, restricted cash and cash equivalents, accounts receivable and accounts payable are carried at cost which approximates fair value because of the short-term maturity of these instruments. The Company’s cash equivalents are classified as Level 1 within the fair value hierarchy. The Company’s pension plan assets are classified as Level 2 within the fair value hierarchy and are valued based off significant observable inputs and unobservable inputs. The Company’s derivatives are measured at fair value using significant other observable inputs and are classified as Level 2.

The Company’s short-term borrowings and long term debt are classified as Level 2 within the fair value hierarchy and are valued based on similar publicly-traded debt securities. See Note – 9 “Long-Term Debt” for additional discussion. The Company’s short-term borrowings and long term debt are summarized below at estimated fair values at September 26, 2014 and December 27, 2013:


	Successor
	Net Carrying
	Value		Fair Value		Fair Value
	September 26,		September 26,		December 27,
	2014		2014		2013
Notes	$	342,435	$	389,375	$	374,500
Term loan facility		314,990		320,800		324,800

Warrant

On January 1, 2014, the Company received a warrant related to a strategic alliance agreement it entered into with Primo Water Corporation (“Primo”). The warrant allows the Company to purchase 475,000 shares of Common Stock of the customer, $0.001 par value, of Primo at an exercise price of $3.04. The Company recorded $613 in Other assets, $88 in Accrued expenses and other current liabilities and $525 in Other long-term liabilities on the Unaudited Condensed Consolidated Balance Sheet for the original fair value of the warrant. The warrant expires in seven years and is being amortized over the term in Net product sales on the Unaudited Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss).

The warrant is classified as Level 2 within the fair value hierarchy. The fair value of our stock warrant was estimated using the Black-Scholes option pricing model. The inputs used in the model include the quoted stock price, the strike price, the underlying volatility of traded options for similar publically traded companies, the treasury risk-free rate and the estimated approximate time to conversion. The fair value of the warrant increased from the issue date by $351 as of September 26, 2014 and the increase in value was recorded as a gain in Other, net in the Unaudited Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss).

At September 26, 2014, the Company has $964 in Other assets, $88 in Accrued expenses and other current liabilities and $460 in Other long-term liabilities on the Unaudited Condensed Consolidated Balance Sheet related to the warrant.

12. Income Taxes

Under ASC 740-270 - Income Taxes - Interim Reporting, each interim period is considered an integral part of the annual period and tax expense (benefit) is measured using an estimated annual effective income tax rate. Estimates of the annual effective income tax rate at the end of interim periods are, of necessity, based on evaluation of possible future events and transactions and may be subject to subsequent refinement or revision. The Company forecasts its estimated annual effective income tax rate and then applies that rate

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

to its year-to-date pre-tax ordinary income (loss), subject to certain loss limitation provisions. In addition, certain specific transactions are excluded from the Company’s estimated annual effective tax rate computation, but are discretely recognized within income tax expense (benefit) in their respective interim period. Future changes in the forecasted annual income (loss) projections, tax rate changes, or discrete tax items could result in significant adjustments to quarterly income tax expense (benefit) in future periods.

The Company accounts for income taxes under ASC 740 – Income Taxes, whereby deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or income tax returns. Deferred tax assets and liabilities are determined based on differences between financial statement carrying amounts of existing assets and their respective tax bases 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. Deferred tax positions of the Company were impacted by the Merger and the resulting step up in fair value of the assets, which are disallowed for tax purposes.

All tax balances prior to August 31, 2013 were prepared on a separate entity basis and the Quarter Successor 2014 and Year to Date Successor 2014 were prepared on a consolidated entity basis as a result of the Merger, which caused the Company to reflect the same results as DSSG after pushing down the purchase of the Company by the Parent.

For the fiscal nine months ended September 26, 2014, Successor 2013 and Year to Date Predecessor 2013, the effective tax rate was 20.2%, 38.6% and 34.7%, respectively. In the fiscal nine months ended September 26, 2014, permanent return to provision differences, a tax refund receivable deemed uncollectible, and the write-off of a deferred tax asset decreased the effective tax rate due to the Company’s year to date loss. In Successor 2013, permanent differences and state taxes increased the effective rate above the statutory rate due to the Company’s forecasted pre-tax income. In Year to Date Predecessor 2013, permanent differences and state taxes, which were offset by 2013 tax credits and the retroactive application of the 2012 tax credits caused a minimal difference between the statutory and effective tax rate for the period.

At the end of each interim period, the Company estimates the annual effective tax rate and applies that rate to our ordinary quarterly earnings. The tax expense or benefit related to significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect and individually computed, are recognized in the interim period in which those items occur. In addition, the effect of changes in enacted tax laws or rates or tax status is recognized in the interim period in which the change occurs.

As of September 26, 2014 and December 27, 2013, the amount of the unrecognized tax benefits was $172 and $171; respectively, exclusive of interest and penalties. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. In addition to the unrecognized tax benefits, as of September 26, 2014 and December 27, 2013, the Company had $5 and $5, respectively of accrued interest and penalties associated with uncertain tax positions.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Polycycle Solutions, LLC (“PCS”), a former wholly-owned subsidiary of the Company that was merged into the Company effective December 2013, is currently under examination by the U.S. Internal Revenue Service (“IRS”) for the tax year ended November 15, 2011. There are no material state examinations currently in process. With few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by the tax authorities for years before 2010. For U.S federal and state jurisdiction purposes, the statute of limitations is generally open from 2010 forward. In addition, a tax indemnification agreement has been executed that requires any income tax adjustment in periods through the closing of the Merger to be retained by the Seller.

13. Stock Compensation Plan

2014 Equity Incentive Plan

The DSS Group, Inc. 2014 Equity Incentive Plan (the “Plan”) was adopted by the Company’s board of directors in July 2014. The Plan permits the Company to grant stock options, restricted shares, or other share based awards to persons or entities providing services to the Company or its Affiliates. The maximum number of shares of common stock reserved and available for issuance under the Plan is 260,698. Shares that are forfeited or canceled without delivery of the full number of shares to the grantee will be available for future award.

Under the terms of the Plan, options are to be priced at or above the fair market value of DSS’s common stock on the date of the grant. Typically, the options become exercisable in five installments of 20% vesting increments starting on the initial vesting date and continuing over four years and expire on the tenth anniversary date of the grant.

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

The Company uses the Black-Scholes option pricing model to estimate the fair value of options. This model requires the inputs of highly subjective assumptions which include the expected term of the option, expected stock price volatility and expected forfeitures.

The following is a summary of assumptions for the grants in 2014:


	2014
Expected volatility		68.0	%
Expected life of options		6.1 years
Risk-free interest rate (average)		2.2	%
Expected dividend yield		0.0	%

As the Company has limited historical option exercise data, the expected term of the stock options granted to employees under the Plan was calculated based on the simplified method. Under the simplified method, the expected term is equal to the average of an option’s weighted-average vesting period and its contractual term. The Company will continue using the simplified method until sufficient information regarding exercise behavior becomes available. The Company estimates the expected volatility of its common stock on the date of grant based on the historical stock volatilities of similar publicly-traded entities over a period equal to the expected terms of the options, as the Company does not have any trading history to use the volatility of its own common stock. The Company has no history or expectations of paying a cash dividends on its common stock. The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the options in effect at the time of grant.

The following table summarizes stock options outstanding at September 26, 2014 and changes during the nine months then ended:


					Weighted
			Weighted		Average		Aggregate
	Number		Average Exercise		Remaining		Intrinsic
	of Shares		Price		Life (Years)		Value
Outstanding at December 28, 2013		—	$	—
Granted		211,426		100.00
Exercised		—		—
Forfeited or canceled		—		—

Outstanding at September 26, 2014		211,426	$	100.00		9.49	$	—

Options exercisable at September 26, 2014		42,285	$	100.00		9.49	$	—

For stock options granted by the Company, stock-based compensation cost is measured at grant date based on the fair value of the award and is expensed over the requisite service period, which equates to the vesting period of the options. The weighted-average grant date fair value of the options granted during the Year to Date Successor was $62.72. During the Quarter Successor 2014 and Year to Date Successor 2014, the Company recognized stock compensation expense of $2,701, net of 6.0% forfeiture rate. The Company reassesses its estimated forfeiture rate annually or when new information, including actual forfeitures, indicate a change is appropriate.

The total intrinsic value of options exercised during the Quarter Successor 2014 and Year to Date Successor was $0. The intrinsic value is calculated based on the exercise price of the underlying awards and the calculated fair value of such awards as of each respective period-end date.

The following table summarizes information regarding the Company’s non-vested shares as of September 26, 2014, and changes during the nine month period ended September 26, 2014:


				Weighted
	Non-Vested			Average
	Options			Grant-Date
Non-Vested Options	Outstanding			Fair Value
Non-Vested at December 28, 2013		—		$	—
Granted		211,426			62.72
Vested		(42,285	)		62.72
Forfeited or canceled		—			—

Non-Vested at September 26, 2014		169,141		$	62.72

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

The total fair value of shares vested during Quarter Successor 2014 and Year to Date Successor 2014 was $2,652.

As of September 26, 2014, the Company had $9,764 of total unrecognized compensation cost related to non-vested stock options granted under the Plan, which is expected to be recognized as stock-based compensation expense over a weighted-average period of 3.93 years. This expected cost does not include the impact of any future stock-based compensation awards.

DSWG Stock Compensation Plan

In connection with the Merger, the DSWG Stock Compensation Plan (the “DSWG Plan”) which provided that nonqualified stock options could be issued to select employees, officers and directors of the Company was accelerated and canceled with resulted in a charge of $1,616 during Year to Date Predecessor 2013. For further discussion on the Merger refer to Note – 4 “Acquisition of Predecessor.”

Under the DSWG Plan, the Company was authorized to issue a maximum of 625,000 shares to DSWG’s common stock. During Quarter Predecessor 2013 and Year to Date Predecessor 2013 the Company recognized pre-tax stock compensation expense of approximately $1,812 and $2,400, respectively. As of December 28, 2012, the Company had approximately $2,832 of total unrecognized compensation cost related to the non-vested share-based compensation arrangements granted under the DSWG Plan. This cost was expected to be recognized as stock-based compensation expense over a weighted-average period of 1.7 years in 2012. This expected cost did not include the impact of any future stock-based compensation awards.

There were no awards granted under the DSWG Plan in Year to Date Predecessor 2013. As a result of the Merger, all outstanding nonqualified stock options under the DSWG Plan were immediately vested and forfeited or canceled. As of August 30, 2013, the Company had $0 of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the DSWG Plan. The following table depicts the number of shares outstanding, weighted average exercise price, weighted average remaining life and the weighted average grand-date fair value:


			Weighted		Weighted		Weighted
			Average		Average		Average		Aggregate
	Number		Exercise		Remaining		Grant-Date		Intrinsic
Predecessor	of Shares		Price		Life (Years)		Fair Value		Value
Outstanding at December 28, 2012		484,949	$	37.70		6.19	$	23.68	$	—
Forfeited or canceled		484,949		37.70				23.68

Outstanding at August 30, 2013		—	$	—		—	$	—	$	—

Exercisable at August 30, 2013		—	$	—		—	$	—	$	—

14. Business Segment and Geographic Information

The “management approach” has been used to present the following segment information. This approach is based upon the way the management of the Company organizes segments within an enterprise for making operating decisions and assessing performance. Financial information is reported on the basis that it is used internally by the chief operating decision maker (the “CODM”) for evaluating segment performance and deciding how to allocate resources to segments. The Company’s chief executive officer has been identified as the CODM.

The Company has two operating segments and reportable segments, which are presented below:

•

Direct-to-Consumer Services consist of sales of products and equipment rental income from the Company’s Home and Office Delivery (“HOD”) bottled water services, OCS and filtration services. The Company sells bottled water, brewed beverages and ancillary products, and rents water dispensers, brewed beverage equipment and filtration equipment to residential and commercial customers. Direct-to-Consumer Services are provided through the Company’s national network of sales and distribution facilities, vehicles and routes.

•

Retail Services consist of sales of the Company’s nonreturnable branded and private label one- and two- and a half-gallon high-density polyethylene (“HDPE”) bottles, as well as branded polyethylene terephthalate (“PET”) bottles, to major retailers. These products are distributed to retailers in all 50 states.

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

These operating segments were determined based on the nature of our sales channels. The measures that are used to assess the reportable segment’s operating performance are revenues and gross profit (excluding depreciation expense). A measure of assets is not applicable, as segment assets are not regularly reviewed by the CODM for evaluating performance or allocating resources. The table below presents information about the Company’s reportable segments for Quarter Successor 2014, Quarter Successor 2013 and Quarter Predecessor 2013:


	Quarter Successor 2014		Quarter Successor 2013			Quarter Predecessor 2013
Net Revenue Components:
Direct-to-Consumer Services	$	223,741	$	64,199		$	146,944
Retail Services		36,074		9,555			22,151

Total net revenue		259,815		73,754			169,095

Gross profit (excluding depreciation expense)
Direct-to-Consumer Services		168,882		48,595			109,353
Retail Services		1,390		872			1,116

Total reportable segment profit (excluding depreciation expense)		170,272		49,467			110,469

Expenses not allocated to the reportable segments		170,005		56,654			150,648

Income before income taxes	$	267	$	(7,187	)	$	(40,179	)

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

The table below presents information about the Company’s reportable segments for Year to Date Successor 2014, Quarter Successor 2013 and Year to Date Predecessor 2013:


	Year to Date Successor 2014			Quarter Successor 2013			Year to Date Predecessor 2013
Net Revenue Components:
Direct-to-Consumer Services	$	638,025		$	64,199		$	541,490
Retail Services		103,704			9,555			85,868

Total net revenue		741,729			73,754			627,358

Gross profit (excluding depreciation expense)
Direct-to-Consumer Services		480,783			48,595			406,897
Retail Services		4,860			872			7,324

Total reportable segment profit (excluding depreciation expense)		485,643			49,467			414,221

Expenses not allocated to the reportable segments		499,436			56,654			452,190

Income (loss) before income taxes	$	(13,793	)	$	(7,187	)	$	(37,969	)

Expenses not specifically related to the reportable segments are shown separately in the above reconciliation to consolidated income (loss) before income taxes. Expenses not allocated to the reportable segments are comprised of freight charges, variable manufacturing costs, depreciation & amortization, compensation, other corporate support related costs, interest expense and other, net costs.

No customer represented more than 10% of the Company’s total revenues during Quarter Successor 2014, Quarter Successor 2013, Quarter Predecessor 2013, Year to Date Successor 2014 and Year to Date Predecessor 2013. The Company does not earn revenues or have long-lived assets located in foreign countries. In accordance with GAAP enterprise-wide disclosure requirements, the Company’s net revenues from external customers by main product lines are as follows:

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)


	Quarter Successor 2014		Quarter Successor 2013		Quarter Predecessor 2013
Water Delivery Services	$	184,182	$	51,242	$	119,419
OCS		33,452		10,986		23,731
Filtration Services		6,107		1,971		3,794
Retail Services		36,074		9,555		22,151

Total	$	259,815	$	73,754	$	169,095


	Year to Date Successor 2014		Year to Date Successor 2013		Year to Date Predecessor 2013
Water Delivery Services	$	514,921	$	51,242	$	429,945
OCS		104,847		10,986		96,748
Filtration Services		18,257		1,971		14,797
Retail Services		103,704		9,555		85,868

Total	$	741,729	$	73,754	$	627,358

The Company recognizes rental income on filtration, brewers and dispensing equipment at customer locations based on the terms of the related operating leases, which are generally on a 28-day period. Amounts billed to customers for rental in future periods are deferred and included in Accrued expenses and other current liabilities on the Unaudited Condensed Consolidated Balance Sheets. Most revenues from product sales and rentals are made on credit without collateral. Total rental income for Quarter Successor 2014, Quarter Successor 2013 and Quarter Predecessor 2013 was $25,178, $7,868 and $16,854, respectively. This consists of water dispenser rental income of $19,539, $6,019 and $13,282 for Quarter Successor 2014, Quarter Successor 2013 and Quarter Predecessor 2013, respectively, as well as filtration rental income of $5,638, $1,849 and $3,572 for Quarter Successor 2014, Quarter Successor 2013 and Quarter Predecessor 2013, respectively. Total filtration income consists of filtration rental income, as noted above, as well as filtration other income of $469, $122 and $221 for Quarter Successor 2014, Quarter Successor 2013 and Quarter Predecessor 2013, respectively. Total rental income for Year to Date Successor 2014 and Year to Date Predecessor 2013 was $75,066 and $65,214, respectively. This consists of water dispenser rental income of $58,260 and $51,296 for Year to Date Successor 2014 and Year to Date Predecessor 2013, respectively, as well as filtration rental income of $16,806 and $13,918 for Year to Date Successor 2014 and Year to Date Predecessor 2013, respectively. Total filtration income consists of filtration rental income, as noted above, as well as filtration other income of $1,452 and $880 for Year to Date Successor 2014 and Year to Date Predecessor 2013, respectively.

The Company’s Other revenues from external customers included energy surcharge fees, finance fees and the sale of three- and five-gallon polycarbonate bottles.

15. Subsequent Event

On October 16, 2014, the Company sold its 50% interest in the joint venture operating under the name Crystal Springs of Alabama for $1,977. The Company is expected to recognize a Gain on Investment of $1,595 in the fourth fiscal quarter.

In October 2014, a putative class action lawsuit was filed against the Company and a Notice of Labor Law Violations was filed with the Labor and Workforce Development Agency each alleging violations of wage and hour laws by the Company.

16. Supplemental Condensed Consolidating Financial Information

As discussed in Note —4 “Acquisition of Predecessor”, DSSA issued the Notes in connection with the Transactions (in such capacity, the “Issuer”). DSSA’s obligations with respect to the Notes are guaranteed by the Company (in such capacity, the “Parent Guarantor”) and Crystal Springs of Alabama Holdings, LLC, a Delaware limited liability company (in such capacity, the “Guarantor Subsidiary”). The Guarantor Subsidiary is a 100%-owned domestic subsidiary of the Issuer and the Issuer is a 100%-owned domestic subsidiary of the Parent Guarantor. Such guarantees are full and unconditional, to the extent allowed by law, and joint and several. The Guarantor Subsidiary’s sole asset is a 50% interest in a joint venture operating under the name Crystal Springs of Alabama (“CSAL”). CSAL is not a guarantor of the Notes and is not presented since it is not a consolidated entity.

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

The following supplemental financial information sets forth the Unaudited Condensed Consolidating Balance Sheets, the Unaudited Condensed Consolidating Statements of Income (Loss) and Comprehensive Income (Loss), and the Unaudited Condensed Consolidating Statements of Cash Flows for each of the Issuer, the Parent Guarantor and the Guarantor Subsidiary independently and on a consolidated basis.

Supplemental Unaudited Condensed Consolidating Balance Sheets

September 26, 2014


	Parent Guarantor			Issuer			Guarantor Subsidiary		Eliminations			Total
Assets
Current assets
Cash and cash equivalents	$	—		$	19,559		$	—	$	—		$	19,559
Trade accounts receivable, net of allowance for doubtful accounts of $3,545		—			109,888			—		—			109,888
Inventories		—			41,419			—		—			41,419
Prepaid and other current assets		—			8,265			—		—			8,265
Income tax receivable		—			859			—		—			859
Deferred tax assets		—			26,127			—		—			26,127

Total current assets		—			206,117			—		—			206,117
Property, plant and equipment, net		—			415,360			—		—			415,360
Intangibles, net		—			351,028			—		—			351,028
Goodwill		—			200,079			—		—			200,079
Investment in subsidiary		241,755			383			—		(242,138	)		—
Other assets		—			6,442			383		—			6,825
Deferred financing costs, net		—			24,892			—		—			24,892

Total assets	$	241,755		$	1,204,301		$	383	$	(242,138	)	$	1,204,301

Liabilities and Shareholders’ Equity
Current liabilities
Current portion of long-term debt	$	—		$	3,200		$	—	$	—		$	3,200
Accounts payable		—			41,046			—		—			41,046
Accrued expenses and other current liabilities		—			38,080			—		—			38,080
Current portion of insurance reserves		—			11,869			—		—			11,869
Customer deposits		—			32,619			—		—			32,619

Total current liabilities		—			126,814			—		—			126,814
Long-term debt, less current portion, less discounts		—			654,225			—		—			654,225
Insurance reserves, less current portion		—			16,372			—		—			16,372
Other long-term liabilities		—			3,417			—		—			3,417
Deferred tax liabilities		—			161,719			—		—			161,719

Total liabilities		—			962,547			—		—			962,547

Commitments and contingencies (Note 10)
Shareholders’ equity (deficit)
Common stock; $0.01 par value; 1,000 authorized shares;
199 shares issued and outstanding		—			—			—		—			—
Additional paid in capital		263,399			263,399			—		(263,399	)		263,399
Accumulated other comprehensive income (loss)		281			281			—		(281	)		281
Retained earnings (accumulated deficit)		(21,925	)		(21,926	)		383		21,542			(21,926	)

Total shareholders’ equity		241,755			241,754			383		(242,138	)		241,754

Total liabilities and shareholders’ equity	$	241,755		$	1,204,301		$	383	$	(242,138	)	$	1,204,301

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

Supplemental Unaudited Condensed Consolidating Balance Sheets

December 27, 2013


	Parent Guarantor			Issuer			Guarantor Subsidiary		Eliminations			Total
Assets
Current assets
Cash and cash equivalents	$	—		$	34,307		$	—	$	—		$	34,307
Trade accounts receivable, net of allowance for doubtful accounts of $4,513		—			97,179			—		—			97,179
Inventories		—			36,279			—		—			36,279
Prepaid and other current assets		—			11,401			—		—			11,401
Income tax receivable		—			1,608			—		—			1,608
Deferred tax assets		—			26,127			—		—			26,127

Total current assets		—			206,901			—		—			206,901
Property, plant and equipment, net		—			428,036			—		—			428,036
Intangibles, net		—			365,870			—		—			365,870
Goodwill		—			198,849			—		—			198,849
Investment in subsidiary		250,057			120			—		(250,177	)		—
Other assets		—			5,060			120		—			5,180
Deferred financing costs, net		—			28,855			—		—			28,855

Total assets	$	250,057		$	1,233,691		$	120	$	(250,177	)	$	1,233,691

Liabilities and Shareholders’ Equity
Current liabilities
Current portion of long-term debt	$	—		$	3,211		$	—	$	—		$	3,211
Accounts payable		—			31,172			—		—			31,172
Accrued expenses and other current liabilities		—			63,274			—		—			63,274
Current portion of insurance reserves		—			14,059			—		—			14,059
Customer deposits		—			32,408			—		—			32,408

Total current liabilities		—			144,124			—		—			144,124
Long-term debt, less current portion, less discounts		—			655,025			—		—			655,025
Insurance reserves, less current portion		—			16,401			—		—			16,401
Other long-term liabilities		—			3,032			—		—			3,032
Deferred tax liabilities		—			165,052			—		—			165,052

Total liabilities		—			983,634			—		—			983,634

Commitments and contingencies (Note 10)
Shareholders’ equity (deficit)
Common stock; $0.01 par value; 1,000 authorized shares;
199 shares issued and outstanding		—			—			—		—			—
Additional paid in capital		260,698			260,698			—		(260,698	)		260,698
Accumulated other comprehensive income (loss)		281			281			—		(281	)		281
Retained earnings (accumulated deficit)		(10,922	)		(10,922	)		120		10,802			(10,922	)

Total shareholders’ equity		250,057			250,057			120		(250,177	)		250,057

Total liabilities and shareholders’ equity	$	250,057		$	1,233,691		$	120	$	(250,177	)	$	1,233,691

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

Supplemental Unaudited Condensed Consolidating Statements of Income (Loss) and Comprehensive Income (Loss)

Quarter Successor 2014


	Parent Guarantor		Issuer			Guarantor Subsidiary			Eliminations			Total
Net product sales	$	—	$	234,637		$	—		$	—		$	234,637
Net rental income		—		25,178			—			—			25,178

Net revenue		—		259,815			—			—			259,815
Cost of products sold		—		101,681			—			—			101,681
Cost of rentals		—		3,202			—			—			3,202

Cost of revenue		—		104,883			—			—			104,883

Gross profit		—		154,932			—			—			154,932
Selling, general and administrative		—		134,394			(90	)		—			134,304
Amortization of intangible assets		—		5,090			—			—			5,090

Operating income		—		15,448			90			—			15,538

Other (expense) income
Interest expense		—		(15,021	)		—			—			(15,021	)
Net earnings of equity affiliates		6		90			—			(96	)		—
Other, net		—		(250	)		—			—			(250	)

Other (expense) income		6		(15,181	)		—			(96	)		(15,271	)

(Loss) income before income taxes		6		267			90			(96	)		267
Income tax expense		—		261			—			—			261

Net (loss) income		6		6			90			(96	)		6
Other comprehensive (loss) income, net of tax
Change in periodic pension and other postretirement costs, net of tax expense of $0		—		—			—			—			—

Comprehensive (loss) income	$	6	$	6		$	90		$	(96	)	$	6

Supplemental Unaudited Condensed Consolidating Statements of Income (Loss) and Comprehensive Income (Loss)

Quarter Successor 2013


	Parent Guarantor			Issuer			Guarantor Subsidiary			Eliminations		Total
Net product sales	$	—		$	65,886		$	—		$	—	$	65,886
Net rental income		—			7,868			—			—		7,868

Net revenue		—			73,754			—			—		73,754
Cost of products sold		—			28,146			—			—		28,146
Cost of rentals		—			792			—			—		792

Cost of revenue		—			28,938			—			—		28,938

Gross profit		—			44,816			—			—		44,816
Selling, general and administrative		—			40,170			(104	)		—		40,066
Amortization of intangible assets		—			1,690			—			—		1,690

Operating income		—			2,956			104			—		3,060

Other (expense) income
Interest expense		—			(10,247	)		—			—		(10,247	)
Net earnings of equity affiliates		(4,414	)		104			—			4,310		—

Other (expense) income		(4,414	)		(10,143	)		—			4,310		(10,247	)

(Loss) income before income taxes		(4,414	)		(7,187	)		104			4,310		(7,187	)
Income tax benefit		—			(2,773	)		—			—		(2,773	)

Net (loss) income		(4,414	)		(4,414	)		104			4,310		(4,414	)
Other comprehensive (loss) income, net of tax
Change in periodic pension and other postretirement costs, net of tax expense of $0		—			—			—			—		—

Comprehensive income (loss)	$	(4,414	)	$	(4,414	)	$	104		$	4,310	$	(4,414	)

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

Supplemental Unaudited Condensed Consolidating Statements of Income (Loss) and Comprehensive Income (Loss)

Quarter Predecessor 2013


	Parent Guarantor			Issuer			Guarantor Subsidiary			Eliminations			Total
Net product sales	$	—		$	152,241		$	—		$	—		$	152,241
Net rental income		—			16,854			—			—			16,854

Net revenue		—			169,095			—			—			169,095
Cost of products sold		—			63,321			—			—			63,321
Cost of rentals		—			2,479			—			—			2,479

Cost of revenue		—			65,800			—			—			65,800

Gross profit		—			103,295			—			—			103,295
Selling, general and administrative		—			105,347			(104	)		—			105,243
Amortization of intangible assets		—			1,456			—			—			1,456

Operating income		—			(3,508	)		104			—			(3,404	)

Other (expense) income
Interest expense		—			(36,788	)		—			—			(36,788	)
Net earnings of equity affiliates		(26,306	)		104			—			26,202			—
Other, net		—			13			—			—			13

Other (expense) income		(26,306	)		(36,671	)		—			26,202			(36,775	)

(Loss) income before income taxes		(26,306	)		(40,179	)		104			26,202			(40,179	)
Income tax benefit		—			13,873			—			—			13,873

Net (loss) income		(26,306	)		(26,306	)		104			26,202			(26,306	)
Other comprehensive (loss) income, net of tax
Change in periodic pension and other postretirement costs, net of tax expense of $461		789			789			—			(789	)		789

Comprehensive income (loss)	$	(25,517	)	$	(25,517	)	$	104		$	25,413		$	(25,517	)

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

Supplemental Unaudited Condensed Consolidating Statements of Income (Loss) and Comprehensive Income (Loss)

Year to Date Successor 2014


	Parent Guarantor			Issuer			Guarantor Subsidiary			Eliminations		Total
Net product sales	$	—		$	666,663		$	—		$	—	$	666,663
Net rental income		—			75,066			—			—		75,066

Net revenue		—			741,729			—			—		741,729
Cost of products sold		—			292,212			—			—		292,212
Cost of rentals		—			9,752			—			—		9,752

Cost of revenue		—			301,964			—			—		301,964

Gross profit		—			439,765			—			—		439,765
Selling, general and administrative		—			393,880			(262	)		—		393,618
Amortization of intangible assets		—			15,271			—			—		15,271

Operating income		—			30,614			262			—		30,876

Other (expense) income
Interest expense		—			(44,951	)		—			—		(44,951	)
Net earnings of equity affiliates		(11,004	)		262			—			10,742		—
Other, net		—			282			—			—		282

Other (expense) income		(11,004	)		(44,407	)		—			10,742		(44,669	)

(Loss) income before income taxes		(11,004	)		(13,793	)		262			10,742		(13,793	)
Income tax benefit		—			(2,789	)		—			—		(2,789	)

Net (loss) income		(11,004	)		(11,004	)		262			10,742		(11,004	)
Other comprehensive (loss) income, net of tax
Change in periodic pension and other postretirement costs, net of tax expense of $0		—			—			—			—		—

Comprehensive (loss) income	$	(11,004	)	$	(11,004	)	$	262		$	10,742	$	(11,004	)

Supplemental Unaudited Condensed Consolidating Statements of Income (Loss) and Comprehensive Income (Loss)

Year to Date Successor 2013


	Parent Guarantor			Issuer			Guarantor Subsidiary			Eliminations			Total
Net product sales	$	—		$	562,145		$	—		$	—		$	562,145
Net rental income		—			65,214			—			—			65,214

Net revenue		—			627,359			—			—			627,359
Cost of products sold		—			233,450			—			—			233,450
Cost of rentals		—			7,758			—			—			7,758

Cost of revenue		—			241,208			—			—			241,208

Gross profit		—			386,151			—			—			386,151
Selling, general and administrative		—			350,922			(276	)		—			350,646
Amortization of intangible assets		—			6,154			—			—			6,154

Operating income		—			29,075			276			—			29,351

Other (expense) income
Interest expense		—			(67,199	)		—			—			(67,199	)
Net earnings of equity affiliates		(24,800	)		276			—			24,524			—
Other, net		—			(121	)		—			—			(121	)

Other (expense) income		(24,800	)		(67,044	)		—			24,524			(67,320	)

(Loss) income before income taxes		(24,800	)		(37,969	)		276			24,524			(37,969	)
Income tax benefit		—			(13,169	)		—			—			(13,169	)

Net (loss) income		(24,800	)		(24,800	)		276			24,524			(24,800	)
Other comprehensive (loss) income, net of tax
Change in periodic pension and other postretirement costs, net of tax expense of $461		711			711			—			(711	)		711

Comprehensive income (loss)	$	(24,089	)	$	(24,089	)	$	276		$	23,813		$	(24,089	)

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

Supplemental Unaudited Condensed Consolidating Statements of Cash Flows

Year to Date Successor 2014


	Parent					Guarantor
	Guarantor		Issuer			Subsidiary		Eliminations		Total
Net cash provided by (used in) operating activities	$	—	$	57,531		$	—	$	—	$	57,531
Cash flows from investing activities
Proceeds from sales of property, plant and equipment		—		3,962			—		—		3,962
Purchases of property, plant and equipment		—		(61,883	)		—		—		(61,883	)
Purchase of business (Note 4)		—		(11,056	)		—		—		(11,056	)
Purchase of business and other intangibles (Note 5)		—		(891	)		—		—		(891	)

Net cash used in investing activities		—		(69,868	)		—		—		(69,868	)

Cash flows from financing activities
Repayments of long-term debt and capital leases		—		(2,411	)		—		—		(2,411	)

Net cash used in financing activities		—		(2,411	)		—		—		(2,411	)

Net decrease in cash and cash equivalents		—		(14,748	)		—		—		(14,748	)
Cash and cash equivalents
Beginning of period		—		34,307			—				34,307

End of period	$	—	$	19,559		$	—	$	—	$	19,559

Supplemental Condensed Consolidating Statements of Cash Flows

Quarter Successor 2013


Predecessor	Parent Guarantor		Issuer			Guarantor Subsidiary		Eliminations		Total
Net cash provided by operating activities	$	—	$	4,985		$	—	$	—	$	4,985
Cash flows from investing activities
Proceeds from sales of property, plant and equipment		—		16			—		—		16
Purchases of property, plant and equipment		—		(6,238	)		—		—		(6,238	)
Purchase of business (Note 5)		—		(874,007	)		—		—		(874,007	)

Net cash used in investing activities		—		(880,229	)		—		—		(880,229	)

Cash flows from financing activities
Repayments of long-term debt and capital leases		—		(4	)		—		—		(4	)
Borrowings of long-term debt		—		657,480			—		—		657,480
Equity contribution		—		260,698			—		—		260,698
Draw on asset based line of credit		—		4,000			—		—		4,000
Debt issuance costs		—		(30,688	)		—		—		(30,688	)

Net cash provided by financing activities		—		891,486			—		—		891,486

Net increase in cash and cash equivalents		—		16,242			—		—		16,242
Cash and cash equivalents
Beginning of period		—		—			—		—		—

End of period	$	—	$	16,242		$	—	$	—	$	16,242

DS SERVICES HOLDINGS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

Supplemental Condensed Consolidating Statements of Cash Flows

Year to Date Predecessor 2013


Predecessor	Parent Guarantor		Issuer			Guarantor Subsidiary		Eliminations		Total
Net cash provided by (used in) operating activities	$	—	$	32,220		$	—	$	—	$	32,220
Cash flows from investing activities
Proceeds from sales of property, plant and equipment		—		404			—		—		404
Purchases of property, plant and equipment		—		(56,172	)		—		—		(56,172	)
Purchase of business and other intangibles (Note 5)		—		(4,848	)		—		—		(4,848	)
Restricted cash		—		3,500			—		—		3,500

Net cash used in investing activities		—		(57,116	)		—		—		(57,116	)

Cash flows from financing activities
Repayments of long-term debt and capital leases		—		(4,169	)		—		—		(4,169	)

Net cash used in financing activities		—		(4,169	)		—		—		(4,169	)

Net decrease in cash and cash equivalents		—		(29,065	)		—		—		(29,065	)
Cash and cash equivalents
Beginning of period		—		35,524			—		—		35,524

End of period	$	—	$	6,459		$	—	$	—	$	6,459

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of our Financial Condition and Results of Operations (this “MD&A”) covers the period beginning June 29, 2013 (which is the initial date that we incurred acquisition expenses on behalf of Crestview DSW Merger Sub, Inc., a Delaware corporation (“Acquisition Sub”) in connection with the Transactions, notwithstanding the fact that Acquisition Sub was not legally formed until July 23, 2013) through and including September 26, 2014 (such period, the “Successor” period) and periods prior to the consummation of the Transactions, as defined below under Business Organization, (“Predecessor” periods). The costs reflected in the Unaudited Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss), and the Unaudited Condensed Consolidated Statements of Cash Flows for the portion of the Successor period beginning June 29,2013 through and including the date of the consummation of the Transactions consist solely of Transaction related costs. Accordingly, the discussion and analysis of historical periods prior to June 29, 2013 does not reflect the impact that the Transactions had on us. Certain amounts have been restated from previously reported within the MD& A. For purposes of this MD& A, (a) “Successor 2013” refers to the period beginning June 29, 2013 through and including September 27, 2013 and (b) “Year to Date Predecessor 2013” refers to the period beginning December 29, 2012 through and including August 30, 2013. You should read the following discussion of our results of operations and financial condition in conjunction with the Unaudited Condensed Consolidated Financial Statements and related notes thereto included in this report and the information set forth in the Registration Statement (the “Registration Statement”) filed with the Securities and Exchange Commission (“SEC”) and disclosures made in other filings with the SEC. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section of the Registration Statement. Actual results may differ materially from those contained in any forward-looking statements.

Unless otherwise indicated or the context otherwise requires, references in this MD&A to “we,” “our,” “us” and the “Company” refer to DS Services Holdings, Inc. and its consolidated subsidiaries.

Unless otherwise indicated or the context otherwise requires, references in this MD&A to dollar ($) figures are stated in thousands of dollars ($000).

Overview

We are a market leader in the direct-to-consumer beverage services industry, providing bottled water, coffee and filtration services to commercial and residential customers across the United States. We have the largest national presence in the Home and Office Delivery (“HOD) industry for bottled water and have a top five national market share position in the Office Coffee Services (“OCS”) and Filtration Services industries. We reach over 1.5 million customers (approximately 61% commercial and 39% residential) from over 2,100 routes located across our national network supported by over 200 sales and distribution facilities as well as a fleet of over 2,800 on-road vehicles. Our broad portfolio of beverage products includes bottled water, coffee, brewed tea, water dispensers, coffee and tea brewers and filtration equipment. With coverage of approximately 90% of U.S. households, we believe we have the largest distribution network in the direct-to-consumer beverage services industry which enables us to efficiently service residences and small and medium-sized businesses, as well as national corporations. Our offering of well-known regional bottled water brands, together with our comprehensive product and service offering, contributes to our market leadership. We also believe our customer-facing Route Sales Representatives (“RSRs”) personalize our service and build trusted relationships, resulting in strong customer loyalty and contributing to our stable, recurring revenue base. Superior service and longterm relationships are the foundations of our business, and we are proud that our customers stay with us for over four years on average. Combined with our ongoing focus on new products and services that enhance our value proposition and leverage our distribution capabilities, we believe we are well-positioned for continued revenue and margin growth. Our mission is to be America’s favorite water, coffee and tea service provider where consumers live, work and play.

Business Organization

Successor

On August 30, 2013, DS Services Holdings, Inc., a Delaware corporation (individually and, where appropriate in the context, collectively with its consolidated subsidiaries, the “Company”) was indirectly acquired by Crestview DSW Investors, L.P., a Delaware limited partnership and affiliate of Crestview Partners (“Parent”) and certain co-investors, including GCM Grosvenor NPS, L.P. (formerly known as CS NPS, L.P.), affiliates of StepStone LLC and various other co-investors (collectively with Parent, the “DSSG Stockholders”) in connection with their acquisition of DSS Group, Inc., a Delaware corporation and the sole shareholder of the Company (“DSSG”), pursuant to that certain Agreement and Plan of Merger dated as of July 23, 2013 (the “Merger Agreement”), by and among the DSSG Stockholders, Acquisition Sub and wholly owned subsidiary of Parent, DSSG, and DSW Group Holdings, LLC, a Delaware limited liability company (“Seller”), in a transaction hereinafter referred to as the “Merger.”

In connection with the Merger, Acquisition Sub merged with and into DSSG, with DSSG as the surviving corporation, and Crestview DS Merger Sub II, Inc., a Delaware corporation (“Merger Sub”) and wholly owned subsidiary of Acquisition Sub, merged with and into DS Services of America, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“DSSA”), with DSSA as the surviving corporation (such Merger Sub and DSSA merger, the “Issuer Merger”). The Merger, the Issuer Merger, the relating financings, the equity contributions and the payment of all costs related to these transactions are collectively referred to in this report as the “Transactions.”

Predecessor

In 2012, a majority interest in DSSG was indirectly acquired by a group of noteholders under that certain Note Purchase Agreement dated as of October 24, 2007 (the “DSSG Group Note”), by and among DSSG and such noteholders, which group was led by Solar Capital, Magnetar Capital and GoldenTree Capital. The Noteholders held their majority interest in DSSG through their ownership of Seller.

The following discussion and analysis of our results of operations and financial condition covers periods prior to and after the consummation of the Transactions. Accordingly, the discussion and analysis of historical periods does not necessarily reflect the impact that the Transactions will have on us.

Description of Reportable Segments

We operate through two reportable segments: Direct-to-Consumer Services and Retail Services. Direct-to-Consumer Services consist of sales and rental income from Water Delivery Services, OCS and Filtration Services. Products and services in this segment are delivered through our extensive home and office distribution network and include those provided through our relationship with Primo. Retail Services consist of sales of branded and private label bottled water to major retailers. Retail Services products are distributed in all 50 states and are typically delivered to our retail customers’ distribution centers by common carrier transportation.

Acquisition Activity

We have successfully completed 47 acquisitions related to Direct-to-Consumer Services since the beginning of 2007 and we intend to continue to grow our business through selective acquisitions. These transactions add new customers and related revenues in addition to enhancing our cross-selling opportunities without increasing fixed costs. Further, acquisitions of water delivery services and OCS businesses generate cost savings by increasing customer density and allowing us to combine routes to increase efficiency.

Our recent acquisitions include our 2014 purchase of the OCS business of The Coffee Pause Company, Inc. for an aggregate purchase price of $200, which includes a deferred payment liability of $40, and the purchase of the bottled water delivery, office coffee, and water filtration services business of Pine Mountain Springs, Inc. for a total purchase price of $831, which includes a deferred payment liability of $100. The acquisitions made during 2013 include the purchase of the OCS and water filtration business of Cascade Coffee, Inc. for an aggregate purchase price of $4.2 million plus 3.0% of annual revenue generated from acquired customers over a three year period from August 9, 2013.

Our Growth Strategies and Outlook

We are one of the two leading providers within the HOD bottled water market and believe that we have the strongest position within this market based on the population base we service, our nationwide distribution capabilities and the size of our sales force in this market. In addition, we believe we are one of the top five providers in OCS and a top five provider in Filtration Services based on net revenue generated during Pro Forma Fiscal 2013. We benefit from our large and efficient distribution network, our customer density, our strong sales and marketing efforts as well as our disciplined and selective approach to acquisitions. In the future, we plan to continue to invest both time and financial resources in our business to achieve the following objectives and to maintain our leading position in the industries in which we compete:

•

leverage strong distribution network and strategic partnerships to expand customer base;

•

increase revenue per customer through cross-selling and enhanced product offerings;

•

implement customer retention initiatives and invest in new technologies; and

•

pursue synergistic and complementary acquisitions.

Key Performance Indicators

Net Revenue

Direct-to-Consumer Services

In Direct-to-Consumer, we generate revenues primarily in our water delivery business from the rental of water dispensers and regularly scheduled delivery of our bottled water products, which includes three- and five-gallon returnable bottles (“3G” and “5G”), one- and two- and a half-gallon non-returnable bottles and 500 ml, one liter and other sizes of polyethylene terephthalate (“PET”) bottles, as well as ancillary products, to homes and offices. In our OCS business, we generate revenue from the delivery of brewed beverage products,

breakroom supplies and complementary products such as cups and flavored beverages and brewer rentals to our office coffee customers. Our Water Delivery Services and OCS revenues are driven by the combination of the number of customers, the consumption per customer and the price each customer pays. In Filtration Services, we generate revenue from the rental and routine maintenance of filtration equipment. Our filtration revenues are driven by the number of customers and the price each customer pays. We generate additional revenue from filtration and brewer installation, repair, de-installation service. We charge certain fees to our customers in connection with such sales and rentals, including energy surcharge fees and finance charges.

Retail Services

We generate revenue from the retail sale of one- and two- and a half-gallon non-returnable bottles and PET bottles to retailers, which are often delivered directly to their distribution centers for redistribution to their outlets for resale to the public. Our retail revenues are driven by the number of customers, the sales of our products by such customers to consumers and the price each customer pays.

Cost of Revenue

Our cost of revenue primarily consists of:

•

cost of raw materials, including non-returnable bottles, and cost of products for resale;

•

production expenses related to the purification process and bottling operations;

•

maintenance and repair of rental equipment;

•

cost of freight (including fuel costs) to transport product from our production facilities to our distribution centers and retailers’ distribution centers; and

•

depreciation of our production equipment, returnable bottles and water dispensers and other rental equipment.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses primarily consist of expenses relating to our loading and distribution activities, selling and advertising expenses and general and administrative expenses. Operating expenses with respect to our loading and distribution activities primarily consist of labor, commissions received by our Route Sales Representatives (“RSRs”), fleet maintenance, fuel and propane costs. Selling and advertising costs include labor, commissions and outside marketing related expenditures. Our general and administrative expenses include costs related to customer service, billing and collection functions, executive, finance, engineering, legal, risk management, human resources and information technology functions.

Adjusted EBITDA

Our management uses earnings before interest, taxes, depreciation and amortization (“EBITDA”), a non-GAAP measure, and Adjusted EBITDA, a non-GAAP measure, to compare our performance to that of prior periods for trend analyses, for purposes of determining management incentive compensation and for budgeting and planning purposes. We believe that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors in evaluating ongoing operating results and trends and in comparing our financial measures with other distribution and retail companies, many of which present similar non-GAAP financial measures to investors. For additional information about Adjusted EBITDA, please see “—Net Income Reconciliation to EBITDA and Adjusted EBITDA.”

Other Key Performance Indicators

As previously indicated, our net revenue is primarily driven by the number of customers, consumption per customer and price. While we use a number of internal metrics to analyze net revenue, our key internal metrics are total Direct-to-Consumer customers, average Direct-to-Consumer net revenue per customer, Water Delivery Services returnable sales volume, total Water Delivery Services customers, and total Water Delivery Services net revenue per customer. We define (i) total Direct-to- Consumer customers as the total number of Direct-to-Consumer customers at the end of the period, (ii) Direct-to-Consumer net revenue per customer as total Direct-to-Consumer revenue (excluding retail revenue) divided by the number of Direct-to-Consumer customers at the end of the period, (iii) total Water Delivery Services customers as the total number of Water Delivery Services customers at the end of the period, (iv) Water Delivery Services returnable sales volume as the number of 3G and 5G bottles sold during the period (excluding bottles sold through distributors), and (v) Water Delivery Services net revenue per customer as total Water Delivery Services revenue (excluding retail revenue) divided by the number of Water Delivery Services customers at the end of the period. These key performance indicators help us measure our operating performance, evaluate growth trends, establish budgets and financial projections and formulate strategic plans.

The following table provides more detail of our key performance indicators:


	Successor		Successor		Predecessor		Successor		Predecessor
	June 28, 2014 to September 26, 2014		June 29, 2013 to September 27, 2013		June 29, 2013 to August 30, 2013		December 28, 2013 to September 26, 2014		December 29, 2012 to August 30, 2013
Total Direct-to-Consumer customers (a)		1,520		1,490		1,486		1,520		1,486
Direct-to-Consumer net revenue per customer (b)	$	148	$	55	$	87	$	428	$	358
Total Water Delivery Services customers (c)		1,343		1,318		1,315		1,343		1,315
Water Delivery Services returnable sales volume (bottles) (d)		18,967		6,384		10,259		52,149		40,464
Water Delivery Services net revenue per customer (e)	$	137	$	50	$	80	$	389	$	370
Adjusted EBITDA (f)	$	50,376	$	13,819	$	31,131	$	129,814	$	108,911

(a)	The growth in our total Direct-to Consumer customer base in the fiscal three and nine months ended September 26, 2014 compared to Successor 2013, Quarter and Year to Date Predecessor 2013 was primarily driven by our strategic alliances with each of Costco and Primo.

(b)

The fiscal three and nine months ended September 26, 2014 included the impact of customer price increases due to a competitive assessment of the marketplace and consideration of our competitors pricing to determine appropriate prices for our customers, however, mitigating this was the Primo strategic alliance which decreased Direct-to-Consumer net revenue per customer as compared to Successor 2013 and Quarter and Year to Date Predecessor 2013.

(c)	The growth in our total Water Delivery Services customer base in the fiscal three and nine months ended September 26, 2014 compared to the Successor 2013 and Quarter and Year to Date Predecessor 2013 was primarily driven by our strategic alliances with each of Costco and Primo.

(d)

Our increase in Direct-to-Consumer 3G and 5G returnable sales volume was primarily driven by an increase in our commercial customer base consumption, specifically our large national key account customers, in the fiscal three and nine months ended September 26, 2014 as compared to Successor 2013 and Quarter and Year to Date Predecessor 2013. In addition, our residential customer consumption increased in the fiscal three and nine months ended September 26, 2014 compared to Successor 2013 and Quarter and Year to Date Predecessor 2013 driving a further increase in Direct-to-Consumer 3G and 5G returnable sales volume.

(e)

(f)	Due to the growth in our revenues driven by our increasing customer base and average price per bottle, coupled with improvements in production efficiencies and controlling SG&A, Adjusted EBITDA has grown period over period.

Consolidated Results of Operations

The following table sets forth, for the periods indicated, amounts derived from our Unaudited Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss), related percentages of total net revenues and an analysis of variances in these results:

Fiscal Three Months Ended September 26, 2014 Compared With Successor 2013 and Quarter Predecessor 2013


Income Statement Data:	Successor					Successor					Predecessor
Income Statement Data:	June 28, 2014 to September 26, 2014					June 29, 2013 to September 27, 2013					June 29, 2013 to August 30, 2013
Net revenue	$	259,815		100	%	$	73,754		100	%	$	169,095		100	%
Cost of revenue		104,883		40.4			28,938		39.2			65,800		38.9

Gross profit		154,932		59.6			44,816		60.8			103,295		61.1
Selling, general and administrative		134,304		51.7			40,066		54.3			105,243		62.2
Amortization of intangible assets		5,090		2.0			1,690		2.3			1,456		0.9

Operating income (loss)		15,538		6.0			3,060		4.2			(3,404	)	(2.0	)

Other expenses:
Interest expense		(15,021	)	(5.8	)		(10,247	)	(13.9	)		(36,788	)	(21.8	)
Other, net		(250	)	(0.1	)		—		0.0			13		0.0

Other expense		(15,271	)	(5.9	)		(10,247	)	(13.9	)		(36,775	)	(21.7	)

Income (loss) before income taxes		267		0.1			(7,187	)	(9.7	)		(40,179	)	(23.8	)
Income tax (expense) benefit		(261	)	0.1			2,773		(3.8	)		13,873		(8.2	)

Net income (loss)	$	6		0.0	%	$	(4,414	)	(6.0	%)	$	(26,306	)	(15.6	%)

Fiscal Nine Months Ended September 26, 2014 Compared With Successor 2013 and Year to Date Predecessor 2013


Income Statement Data:	Successor					Successor					Predecessor
Income Statement Data:	December 28, 2013 to September 26, 2014					June 29, 2013 to September 27, 2013					December 29, 2012 to August 30, 2013
Net revenue	$	741,729		100	%	$	73,754		100	%	$	627,359		100	%
Cost of revenue		301,964		40.7			28,938		39.2			241,208		38.4

Gross profit		439,765		59.3			44,816		60.8			386,151		61.6
Selling, general and administrative		393,618		53.1			40,066		54.3			350,646		55.9
Amortization of intangible assets		15,271		2.1			1,690		2.3			6,154		1.0

Operating income		30,876		4.1			3,060		4.2			29,351		4.7

Other expenses:
Interest expense		(44,951	)	(6.1	)		(10,247	)	(13.9	)		(67,199	)	(10.7	)
Other, net		282		0.0			—		0.0			(121	)	(0.0	)

Other expense		(44,669	)	(6.1	)		(10,247	)	(13.9	)		(67,320	)	(10.7	)

Loss before income taxes		(13,793	)	(2.0	)		(7,187	)	(9.7	)		(37,969	)	(6.1	)
Income tax benefit		(2,789	)	(0.4	)		(2,773	)	(3.8	)		(13,169	)	(2.1	)

Net loss	$	(11,004	)	(1.6	%)	$	(4,414	)	(5.9	%)	$	(24,800	)	(4.0	%)

Net Revenue

Net revenues for the fiscal three months ended September 26, 2014 was $259.8 million compared to $73.8 million in Successor 2013 and $169.1 million in Quarter Predecessor 2013.

Net revenues for the fiscal nine months ended September 26, 2014 was $741.7 million compared to $73.8 million in Successor 2013 and $627.4 million in Year to Date Predecessor 2013.

The following table provides more detail of our net revenue breakdown for the fiscal three months ended September 26, 2014, Successor 2013 and Quarter Predecessor 2013, respectively:


	Successor		Successor		Predecessor
Net Revenue Components:	June 28, 2014 to September 26, 2014		June 29, 2013 to September 27, 2013		June 29, 2013 to August 30, 2013
Water Delivery Services	$	184,182	$	51,242	$	119,419
OCS		33,452		10,986		23,731
Filtration Services		6,107		1,971		3,794
Retail Services		36,074		9,555		22,151

Total	$	259,815	$	73,754	$	169,095

The following table provides more detail of our net revenue breakdown for the fiscal nine months ended September 26, 2014, Successor 2013 and Year to Date Predecessor 2013, respectively:


	Successor		Successor		Predecessor
Net Revenue Components:	December 28, 2013 to September 26, 2014		June 29, 2013 to September 27, 2013		December 29, 2012 to August 30, 2012
Water Delivery Services	$	514,921	$	51,242	$	429,945
OCS		104,847		10,986		96,748
Filtration Services		18,257		1,971		14,797
Retail Services		103,704		9,555		85,868

Total	$	741,729	$	73,754	$	627,358

Water Delivery Services

Water Delivery Services revenue for the fiscal three months ended September 26, 2014 was $184.2 million compared to $51.2 million for Successor 2013 and $119.4 million for Quarter Predecessor 2013. Revenue generated from sales of our 3G and 5G products were $120.2 million in the fiscal three months ended September 26, 2014 as compared to $32.9 million and $75.9 million for Successor 2013 and Quarter Predecessor 2013, respectively. The 21-day average customer consumption, the number of 3G and 5G bottles sold per customer during a 21-day period, was 5.8 bottles per customer in the fiscal three months ended September 26, 2014, 5.2 bottles per customer in Successor 2013 and 5.2 bottles per customer in Quarter Predecessor 2013. 3G and 5G volumes were 19.0 million units in the fiscal three months ended September 26, 2014, 6.4 million units in Successor 2013 and 10.3 million units in Quarter Predecessor 2013. Sales of 3G and 5G polycarbonate bottles were $2.1 million in the fiscal three months ended September 26, 2014, $0.5 million in Successor 2013 and $0.9 million in Quarter Predecessor 2013. Bottle forfeiture charges were $2.3 million in the three months ended September 26, 2014, $1.1 million in Successor 2013 and $0.8 million in Quarter Predecessor 2013.

Water Delivery Services revenue for the fiscal nine months ended September 26, 2014 was $514.9 million compared to $51.2 million for Successor 2013 and $429.9 million for Year to Date Predecessor 2013. During November 2013, we entered into a strategic alliance with Primo, which generated $8.4 million of revenue in the fiscal nine months ended September 26, 2014. The 21-day average customer consumption, the number of 3G and 5G bottles sold per customer during a 21-day period, was 5.3 bottles per customer in the fiscal nine months ended September 26, 2014, 5.2 bottles per customer in Successor 2013 and 4.8 bottles per customer in Year to Date Predecessor 2013. 3G and 5G volumes were 52.1 million units in the fiscal nine months ended September 26, 2014, 6.4 million units in Successor 2013 and 40.5 million units in Year to Date Predecessor 2013. Sales of 3G and 5G polycarbonate bottles were $6.2 million in the fiscal nine months ended September 26, 2014, $0.5 million in Successor 2013 and $3.2 million in Year to Date Predecessor 2013.

OCS

OCS revenue for the fiscal three months ended September 26, 2014 was $33.5 million compared to $11.0 million and $23.7 million for Successor 2013 and Quarter Predecessor 2013, respectively. In the fiscal three months ended September 26, 2014, our strategic focus for RSRs has shifted away from selling our complimentary product lines to servicing our growing returnable water customer base.

OCS revenue for the fiscal nine months ended September 26, 2014 was $104.8 million compared to $11.0 million for Successor 2013 and $96.7 million in Year to Date Predecessor 2013, respectively. In the fiscal nine months ended September 26, 2014, our strategic focus for RSRs has shifted away from selling our complimentary product lines to servicing our growing returnable water customer base.

Filtration Services

Filtration Services revenue for the fiscal three months ended September 26, 2014 was $6.1 million compared to $2.0 million for Successor 2013 and $3.8 million in Quarter Predecessor 2013. During the fiscal three months ended September 26, 2014 our filtration customer base grew by almost 5%.

Filtration Services revenue for the fiscal nine months ended September 26, 2014 was $18.3 million compared to $2.0 million for Successor 2013 and $14.8 million in Year to Date Predecessor 2013. During the fiscal nine months ended September 26, 2014 our filtration customer base has increased over 8%, driving $0.5 million of incremental revenue.

Retail Services

Revenue generated from Retail Services for the fiscal three months ended September 26, 2014 was $36.1 million compared to $9.6 million for Successor 2013 and $22.2 million for Quarter Predecessor 2013. Sales of private label (store brand) nonreturnable one- and two- and a half-gallon high-density polyethylene (“HDPE”) bottles were $15.0 million, $4.3 million and $7.5 million in the fiscal three months ended September 26, 2014, Successor 2013 and Quarter Predecessor 2013, respectively. HDPE private label volume was 4.9 million units in the fiscal three months ended September 26, 2014 compared to 1.4 million units in Successor 2013 and 2.4 million units in Quarter Predecessor 2013.

Revenue generated from Retail Services for the fiscal nine months ended September 26, 2014 was $103.7 million compared to $9.6 million for Successor 2013 and $85.9 million in Year to Date Predecessor 2013. Sales of HDPE private label was $42.3 million in the fiscal nine months ended September 26, 2014, $4.3 million in Successor 2013 and $29.5 million in Year to Date Predecessor 2013. HDPE private label volume was 13.7 million units in the fiscal nine months ended September 26, 2014 compared to 1.4 million units in Successor 2013 and 9.5 million units in Year to Date Predecessor 2013.

Cost of Revenue

Cost of revenue was $104.9 million for the fiscal three months ended September 26, 2014, $28.9 million for Successor 2013 and $65.8 million in Quarter Predecessor 2013. Cost of revenue is composed of Cost of products sold and Cost of rentals. Cost of products sold was $101.7 million and Cost of rentals was $3.2 million for the fiscal three months ended September 26, 2014. In relation to the Cost of products sold, the increase was primarily due to:

•

depreciation costs on new plant capital expenditures and increased basis of assets revalued as part of purchase accounting of $15.3 million in the fiscal three months ended September 26, 2014 and $4.7 million in Successor 2013 compared to $7.2 million of depreciation expense in Quarter Predecessor 2013;

•

production costs of returnable and HDPE products of $23.8 million in the fiscal three months ended September 26, 2014, $8.5 million in Successor 2013 and $13.1 million in Quarter Predecessor 2013;

•

freight charges resulting from an increase in deliveries to our customer base of $8.5 million in the fiscal three months ended September 26, 2014, $2.9 million in Successor 2013 and $4.3 million in Quarter Predecessor 2013; and

•

Retail Services costs resulting primarily from an increase in private label revenues and associated freight charges of $34.7 million in the fiscal three months ended September 26, 2014, $10.8 million in Successor 2013 and $18.9 million in Quarter Predecessor 2013; offset by,

•

the decrease in costs of sales related to lower OCS revenues of $15.8 million in the fiscal three months ended September 26, 2014, $6.8 million in Successor 2013 and $10.3 million in Quarter Predecessor 2013.

The Cost of rentals is driven by the number of equipment rental customers in a fiscal period, which is directly tied to the cooler and brewer sanitization costs. Cost of rentals contributed $3.2 million for the fiscal three months ended September 26, 2014, $0.8 million for Successor 2013 and $2.5 million for Quarter Predecessor 2013 to Cost of revenue.

Cost of revenue was $302.0 million for the fiscal nine months ended September 26, 2014, $28.9 million for Successor 2013 and $241.2 million in Year to Date Predecessor 2013. Cost of revenue is composed of Cost of products sold and Cost of rentals. Cost of products sold was $292.2 million and Cost of rentals was $9.8 million for the fiscal nine months ended September 26, 2014. In relation to the cost of products sold, the increase was primarily due to a:

•

depreciation costs on new plant capital expenditures and increased basis of assets revalued as part of purchase accounting of $45.9 million in the fiscal nine months ended September 26, 2014 and $4.7 million in Successor 2013 compared to $28.1 million of depreciation expense in Year to Date Predecessor 2013;

•

production costs of returnable and HDPE products of $64.4 million in the fiscal nine months ended September 26, 2014, $8.5 million in Successor 2013 and $49.7 million Year to Date Predecessor 2013;

•

freight charges resulting from an increase in deliveries to our customer base of $22.5 million in the fiscal nine months ended September 26, 2014, $2.9 million in Successor 2013 and $16.7 million in Year to Date Predecessor 2013; and

•

Retail Services costs resulting primarily from an increase in private label revenues and associated freight charges of $98.8 million in the fiscal nine months ended September 26, 2014, $10.8 million in Successor 2013 and $76.4 million in Year to Date Predecessor 2013; offset by

•

the decrease in cost of sales related to lower OCS revenues and a reduction of costs based on more vendor rebates received of $49.4 million in the fiscal nine months ended September 26, 2014, $6.8 million in Successor 2013 and $45.3 million in Year to Date Predecessor 2013.

The Cost of rentals is driven by the number of equipment rental customers in a fiscal period, which is directly tied to the cooler and brewer sanitization costs. Cost of rentals contributed $9.8 million for the fiscal nine months ended September 26, 2014, $0.8 million for Successor 2013 and $7.8 million for Year to Date Predecessor 2013 to Cost of revenue.

Gross Profit

Gross profit for the fiscal three months ended September 26, 2014 was $154.9 million, or 59.6% of net revenues, $44.8 million, or 60.8% of net revenues, for Successor 2013 and $103.3 million, or 61.1% of net revenues, in Quarter Predecessor 2013. The increase in gross profit was generated primarily by higher water customer base coupled with higher returnable water consumption offset by increased depreciation costs and an increase in HDPE costs.

Gross profit for the fiscal nine months ended September 26, 2014 was $439.8 million, or 59.3% of net revenues, $44.8 million, or 60.8% of net revenues, for Successor 2013 and $386.2 million, for 61.6% of net revenues, in Year to Date Predecessor 2013. The increase in gross profit was generated primarily by higher water customer base coupled with higher returnable water consumption offset by increased depreciation costs and an increase in HDPE costs.

SG&A Expenses

Total SG&A expenses were $134.3 million, or 51.7% of net revenues, in the fiscal three months ended September 26, 2014 as compared to $40.1 million, or 54.3% of net revenues in Successor 2013 and $105.2 million, or 62.2% of net revenues, in Quarter Predecessor 2013. Drivers of this expense include:

•

depreciation on new assets acquired and the increased basis of assets revalued as part of purchase accounting of $8.2 million in the fiscal three months ended September 26, 2014 and $2.2 million in Successor 2013, and $4.2 million of depreciation expense in Quarter Predecessor 2013;

•

legal and other professional service transactional costs related to the Acquisition Transactions were $0.2 million in the fiscal three months ended September 26, 2014, $1.8 million in Successor 2013 and $15.1 million in Quarter Predecessor 2013;

•

RSR wages, commissions, and fringes to support our growing customer base of $36.8 million in the fiscal three months ended September 26, 2014, $10.5 million in Successor 2013 and $23.6 million in Quarter Predecessor 2013; and

•

health and welfare benefit costs of $3.9 million in the fiscal three months ended September 26, 2014, $2.3 million in Successor 2013 and $3.2 million in Quarter Predecessor 2013.

Total SG&A expenses were $393.6 million, or 53.1% of net revenues, in the fiscal nine months ended September 26, 2014, $40.1 million, or 54.3% of net revenues, in Successor 2013 and $350.6 million, or 55.9% of net revenues, in Year to Date Predecessor 2013. Drivers of this expense include:

•

depreciation on new assets acquired and the increased basis of assets revalued as part of purchase accounting of $23.7 million in the fiscal nine months ended September 26, 2014 and $2.2 million in Successor 2013, and $16.2 million of depreciation expense in Year to Date Predecessor 2013;

•

legal and other professional service transactional costs related to the Acquisition Transactions were $1.3 million in the fiscal nine months ended September 26, 2014, $1.8 million in Successor 2013 and $15.4 million in Year to Date Predecessor 2013;

•

RSR wages, commissions, and fringes to support our growing customer base of $103.6 million in the fiscal nine months ended September 26, 2014, $10.5 million in Successor 2013 and $87.8 million in Year to Date Predecessor 2013;

•

gas, diesel, and propane costs were $22.8 million in the fiscal nine months ended September 26, 2014, $2.5 million in Successor 2013 and $18.0 million in Year to Date Predecessor 2013. Predecessor 2013 included propane tax credits taken that were not allowable during the fiscal nine months ended September 26, 2014;

•

our continued investment in marketing program spend, including our Costco marketing initiative, of $20.6 million in the fiscal nine months ended September 26, 2014, $2.2 million in Successor 2013 and $16.2 million in Year to Date Predecessor 2013;

•

$1.5 million monitoring fees paid to an affiliate of Parent under the Monitoring Agreement, entered into August 30, 2013, in the fiscal nine months ended September 26, 2014; and

•

$1.2 million of expenses related to a union strike in the fiscal nine months ended September 26, 2014.

Amortization Expenses

Amortization expenses were $5.1 million in the fiscal three months ended September 26, 2014, $1.7 million in Successor 2013 and $1.5 million in Quarter Predecessor 2013. Amortization expenses were $15.3 million in the fiscal nine months ended September 26, 2014, $1.7 million in Successor 2013 and $6.2 million in Year to Date Predecessor 2013. The increase in fiscal year 2014 and Successor 2013 primarily reflected an increase in amortization on the intangible assets allocated as part of the Merger.

Interest Expense, Net

Interest expense in the fiscal three months ended September 26, 2014 was $15.0 million as compared to $10.2 million in Successor 2013 and $36.8 million in Quarter Predecessor 2013. Interest expense in the fiscal nine months ended September 26, 2014 was $45.0 million as compared to $10.2 million in Successor 2013 and $67.2 million in Year to Date Predecessor 2013. Quarter and Year to Date Predecessor 2013 included a $15.2 million write-off of deferred financing costs associated with Predecessor debt prior to the Acquisition Transactions, and an $11.4 million pre-payment penalty on Predecessor debt prior to the Acquisition Transactions. In addition, we incurred $5.3 million in bridge commitment fees during Quarter and Year to Date Predecessor 2013. The difference in principal loan balances and associated interest rates of debt instruments accounts for the balance of interest expense.

Other, Net

Other, net, in the fiscal three months ended September 26, 2014 was an expense of $0.3 million primarily due to the fair value loss recorded on warrants with $0.0 million in each of Successor 2013 and Quarter Predecessor 2013. Other, net, in the fiscal nine months ended September 26, 2014 was a benefit of $0.3 million due to the fair value gain recorded on warrants as compared to $0.0 million in Successor 2013 and $0.1 million of expense Year to Date Predecessor 2013, primarily related to losses on coffee hedges.

Provision for Income Taxes

The provision for income taxes was an expense of $0.3 million in the fiscal three months ended September 26, 2014, a benefit of $2.8 million in Successor 2013 and a benefit of $13.9 million in Quarter Predecessor 2013. The provision for income taxes was a benefit of $2.8 million in the fiscal nine months ended September 26, 2014, $2.8 million in Successor 2013 and $13.2 million in Year to Date Predecessor 2013. Income taxes were recorded based on book pretax income (loss).

We account for income taxes under ASC 740 – Accounting for Income Taxes, whereby deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or income tax returns. Deferred tax assets and liabilities are determined based on differences between financial statement carrying amounts of existing assets and their respective tax bases 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. Our Deferred tax positions were impacted by the Merger and the resulting step up fair value of the assets, which are disallowed for tax purposes.

The effective tax rate was 98.1% in the fiscal three months ended September 26, 2014, 38.6% in Successor 2013 and 34.5% in Quarter Predecessor 2013. In the fiscal three months ended September 26, 2014, return to provision differences and a nominal change in pre-tax income drove the change in the effective tax rate as compared to Successor 2013 and Quarter Predecessor 2013.

The effective tax rate was 20.2% in the fiscal nine months ended September 26, 2014, 38.6% in Successor 2013 and 34.7% in Year to Date Predecessor 2013. In the fiscal nine months ended September 26, 2014, permanent return to provision differences, $0.9 million tax refund receivable deemed uncollectible and the write-off of a $1.2 million deferred tax asset decreased the effective tax rate due to the Company’s year-to-date loss. In Successor 2013, permanent differences and state taxes increased the effective rate above the statutory rate due to the Company’s forecasted pre-tax income. In Year to Date Predecessor 2013, permanent differences and state taxes, which were offset by 2013 tax credits and the retroactive application of the 2012 tax credits, caused a minimal difference between the statutory and effective tax rates for the period.

Net Income (Loss)

As a result of the foregoing, Net income was $0.0 million in the fiscal three months ended September 26, 2014 as compared to a Net loss of $4.4 million and $26.3 million in Successor 2013 and Quarter Predecessor 2013, respectively. Net loss was $11.0 million, $4.4 million and $24.8 million in the fiscal nine months ended September 26, 2014, Successor 2013 and Year to Date Predecessor 2013, respectively.

Net Income (Loss) Reconciliation to EBITDA and Adjusted EBITDA

EBITDA, used by management to assess operating performance, is defined as net income, interest, income tax, depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted to exclude unusual items and other adjustments as permitted in calculating covenant compliance under the agreements governing the Senior Facilities and the Notes.

Each of the above described EBITDA-based measures is not a recognized term under GAAP and does not purport to be an alternative to income from continuing operations as a measure of operating performance or to cash flows from operations as a measure of liquidity. Additionally, each such measure is not intended to be a measure of free cash flows available for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Such measures have limitations as analytical tools, and you should not consider such measures in isolation or as substitutes for our results as reported under GAAP. Management compensates for the limitations of using non-GAAP financial measures by using them to supplement GAAP results to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. Because not all companies use identical calculations, these EBITDA-based measures may not be comparable to other similarly titled measures of other companies.

Management uses these non-GAAP measures to compare our performance to that of prior periods for trend analyses, for purposes of determining management incentive compensation and for budgeting and planning purposes. We believe that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors in evaluating ongoing operating results and trends and in comparing our financial measures with other distribution and retail companies, many of which present similar non-GAAP financial measures to investors.

Management believes EBITDA is helpful in highlighting trends because EBITDA excludes the results of decisions that are outside the control of operating management and can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. In addition, EBITDA provides more comparability between the historical operating results and operating results that reflect purchase accounting and the new capital structure.

Management believes that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA are appropriate to provide additional information to investors about certain non-cash items and about unusual items that we do not expect to continue at the same level in the future.


	Successor			Successor			Predecessor
	June 28, 2014 to September 26, 2014			June 29, 2013 to September 27, 2013			June 29, 2013 to August 30, 2013
Net income (loss)	$	6		$	(4,414	)	$	(26,306	)
Income tax expense (benefit)		261			(2,773	)		(13,873	)
Interest expense and financing costs (a)		15,021			10,247			36,788
Depreciation and amortization		28,617			8,512			12,843

EBITDA	$	43,905		$	11,572		$	9,452

Other expense (b)		776			366			2,608
Stock option compensation expense (c)		2,701			—			1,812
Acquisition adjustments (d)		(215	)		458			2,117
Refinance and transaction expense (e)		194			1,423			15,142
Other adjustments (f)		2,515			—			—
Monitoring expense to Crestview (g)		500			—			—

Adjusted EBITDA	$	50,376		$	13,819		$	31,131



	Successor			Successor			Predecessor
	December 28, 2013 to September 26, 2014			June 29, 2013 to September 27, 2013			December 29, 2012 to August 30, 2013
Net loss	$	(11,004	)	$	(4,414	)	$	(24,800	)
Income tax benefit		(2,789	)		(2,773	)		(13,169	)
Interest expense and financing costs (a)		44,951			10,247			67,199
Depreciation and amortization		84,862			8,512			50,453

EBITDA	$	116,020		$	11,572		$	79,683

Other expense (b)		2,031			366			3,619
Stock option compensation expense (c)		2,701			—			2,400
Acquisition adjustments (d)		872			458			3,668
Refinance and transaction expense (e)		1,339			1,423			15,416
Other adjustments (f)		5,351			—			4,125
Monitoring expense to Crestview (g)		1,500			—			—

Adjusted EBITDA	$	129,814		$	13,819		$	108,911

(a)	The Quarter and Year to Date Predecessor 2013 periods include a prepayment penalty of $11.4 million and the write-off of deferred financing fees of $15.2 million.

(b)	Includes income or expenses from non-operating related activities, including asset disposition, rating agency fees, and hedge and warranty gains and losses.

(c)	Represents non-cash stock based compensation expenses recorded for non-qualified stock options issued to select employees, officers and directors.

(d)

Includes acquisition expenses incurred and pro forma adjustments for our two acquisitions during 2013. Represents management’s estimate of the pro forma impact on EBITDA as if the acquired businesses had been owned and operated by us for the full year in the period in which they were acquired. Also includes deferred payouts of acquired companies.

(e)	Includes fees associated with the Transactions as in effect at such time in the fiscal three and nine months ended September 26, 2014, Successor 2013 and Quarter and Year to Date Predecessor 2013 periods, including third party professional fees.

(f)

Includes adjustments in respect of (i) legal costs in 2013 associated with recording of phone calls in California and legal costs in 2014 associated with federal wage and hour laws in California, (ii) a payment made to our former Chief Executive Officer in connection with his retirement, (iii) revenue resulting from customers’ forfeitures of deposits on 5G bottles, which deposits secure the return of such bottles and are forfeited by customers upon failure to return (iv) costs incurred related to union strike and (v) various adjustments that are not expected to be recurring during our normal course of business.

(g)	Represents management fees payable to Sponsor pursuant to the Monitoring Agreement.

Results of Operations by Reportable Segments

Fiscal Three Months Ended September 26, 2014 Compared With Successor 2013 and Quarter Predecessor 2013


	Successor				Successor				Predecessor
	June 28, 2014				June 29, 2013				June 29, 2013
	to				to				to
	September 26, 2014				September 27, 2013				August 30, 2013
Direct-to-Consumer Services
Net Revenue	$	223,742	100.0	%	$	64,199	100.0	%	$	146,943	100.0	%
Cost of Revenue (excluding depreciation expense)		54,860	24.5	%		15,604	24.3			37,591	25.6

Segment Gross Profit	$	168,882	75.5	%	$	48,595	75.7	%	$	109,352	74.4	%

Retail Services
Net Revenue	$	36,073	100.0	%	$	9,555	100.0	%	$	22,152	100.0	%
Cost of Revenue (excluding depreciation expense)		34,683	96.1			8,683	90.9			21,036	95.0

Segment Gross Profit	$	1,390	3.9	%	$	872	9.1	%	$	1,116	5.0	%

Fiscal Nine Months Ended September 26, 2014 Compared With Successor 2013 and Year to Date Predecessor 2013


	Successor				Successor				Predecessor
	December 28, 2013				June 29, 2013				December 29, 2012
	to				to				to
	September 26, 2014				September 27, 2013				August 30, 2013
Direct-to-Consumer Services
Net Revenue	$	638,025	100.0	%	$	64,199	100.0	%	$	541,490	100.0	%
Cost of Revenue (excluding depreciation expense)		157,242	24.6			15,604	24.3			134,593	24.9

Segment Gross Profit	$	480,783	75.4	%	$	48,595	75.7	%	$	406,897	75.1	%

Retail Services
Net Revenue	$	103,704	100.0	%	$	9,555	100.0	%	$	85,868	100.0	%
Cost of Revenue (excluding depreciation expense)		98,844	95.3			8,683	90.9			78,544	91.5

Segment Gross Profit	$	4,860	4.7	%	$	872	9.1	%	$	7,324	8.5	%

Revenues for Direct-to-Consumer Services were $223.7 million in the fiscal three months ended September 26, 2014, $64.2 million in Successor 2013 and $146.9 million in Quarter Predecessor 2013. Revenue in Direct-to-Consumer Services was impacted by growth in our returnable water as our dispenser customer base increased, increased average customer consumption and rising average selling prices. Retail Services segment gross profit was 3.9% of net revenues in the fiscal three months ended September 26, 2014, 9.1% in Successor 2013 and 5.0% in Quarter Predecessor 2013. Increased commodity costs of resin and corrugate used in HDPE products, coupled with a larger mix of lower margin private label products, negatively impacted margins in the fiscal three months ended September 26, 2014. Direct-to-Consumer Services cost of revenue and segment gross profit as a percent of net revenue remained flat in the fiscal three months ended September 26, 2014 as compared to Successor 2013 and Quarter Predecessor 2013 as an increase in freight charges was mitigated by decrease in lower margin OCS sales.

Revenues for Direct-to-Consumer Services were $638.0 million in the fiscal nine months ended September 26, 2014, $64.2 million in Successor 2013 and $541.5 million in Year to Date Predecessor 2013. Revenue in Direct-to-Consumer Services was impacted by growth in our returnable water as our dispenser customer base increased, increased average customer consumption and rising average selling prices. Retail Services segment gross profit was 4.7% of net revenues in the fiscal nine months ended September 26, 2014, 9.1% in Successor 2013 and 8.5% in Year to Date Predecessor 2013. Increased commodity costs of resin and corrugate used in HDPE products, coupled with a larger mix on lower margin private label products, negatively impacted margins in the fiscal nine months ended September 26, 2014. Direct-to-Consumer Services cost of revenue and segment gross profit as a percent of net revenue remained flat in the fiscal nine months ended September 26, 2014 as compared to Successor 2013 and Year to Date Predecessor 2013 as an increase in freight charges was mitigated by decrease in lower margin OCS sales.

Liquidity and Capital Resources

Our primary sources of liquidity are cash generated from operating activities and debt financing. Our primary uses of cash are for working capital, capital expenditures, potential acquisitions, interest and tax payments and other general corporate expenditures.

Overview

As of September 26, 2014 and September 27, 2013, we had cash and cash equivalents of $19.6 million and $16.2 million, respectively.

Our long-term debt is comprised of the Notes, the ABL Facility, which has a five-year maturity, and the Term Loan Facility, which has a seven-year maturity. As of September 26, 2014, our balance on the Term Loan Facility was $317.6 million, and we had no borrowings drawn under our ABL Facility and we had approximately $45.8 million available for borrowing under the ABL Facility, subject to customary borrowing conditions, including a borrowing base test, after giving effect to approximately $29.2 million of outstanding letters of credit. Our interest expense for the three and nine month periods ended September 26, 2014 was $15.0 million and $45.0 million, respectively.

Our primary sources of liquidity are cash generated by operations and borrowings under the ABL Facility. Our primary uses of cash are working capital requirements, debt service requirements, capital expenditures and selling, general and administrative expenses. Based on our current level of operations and available cash, we believe our cash flows from operations, combined with availability under the ABL Facility, will provide sufficient liquidity to fund our obligations, projected working capital requirements, debt service requirements and capital spending requirements for the next 12 months.

Cash Flows

The table below shows our net cash flows from operating, investing and financing activities for the fiscal nine months ended September 26, 2014 compared with Successor 2013 and Year to Date Predecessor 2013:


	Successor			Successor			Predecessor
	December 28, 2013 to September 26, 2014			June 29, 2013 to September 27, 2013			December 29, 2012 to August 30, 2013
Net cash (used in) provided by:
Operating activities	$	57,531		$	4,985		$	32,220
Investing activities		(69,868	)		(880,229	)		(57,116	)
Financing activities		(2,411	)		891,486			(4,169	)

Net (decrease) increase in cash and cash equivalents	$	(14,748	)	$	16,242		$	(29,065	)

Operating Activities

Net cash provided by operating activities was $57.5 million for the fiscal nine months ended September 26, 2014, $5.0 million in Successor 2013 and $32.2 million in Year to Date Predecessor 2013. Drivers of the increased cash provided by operations in the fiscal nine months ended September 26, 2014 as compared to Successor 2013 and Year to Date Predecessor 2013 were a net loss of $11.0 million in the fiscal nine month ended September 26, 2014 as compared to a net loss of $4.4 million in Successor 2013 and a net loss of $24.8 million in Year to Date Predecessor 2013, which was primarily due to expenses incurred related to the Acquisition Transactions and extinguishment of prior debt. Depreciation and amortization expense were $84.9 million in the fiscal nine months ended September 26, 2014 and $8.5 million in Successor 2013, which included depreciation on the revalued assets and intangibles acquired during the Merger, and $50.4 million in Year to Date Predecessor 2013. Year to Date Predecessor 2013 had a $12.9 million change in deferred income taxes due to the large taxable loss generated compared to $4.0 million in the fiscal nine months ended September 26, 2014 and $2.7 million in Successor 2013. Offsetting this increase were net payables and accrued expense decrease of $5.8 million in the fiscal nine months ended September 26, 2014, a decrease of $1.6 million in Successor 2013 compared to an increase of $3.0 million in Year to Date Predecessor 2013 due to timing of invoice payments. Additionally, Year to Date Predecessor 2013 included a $25.6 million write-off of old deferred financing costs and debt prepayment penalty.

Investing Activities

Net cash used in investing activities amounted to $69.9 million for the fiscal nine months ended September 26, 2014 as compared with $880.2 million in Successor 2013 and $57.1 million in Year to Date Predecessor 2013. Activities ended September 26, 2014 included $61.9 million of property, plant and equipment purchases combined with an $11.1 million working capital settlement related to the Transaction paid to Sellers. Activities in Successor 2013 included $874.0 million for the Acquisition Transactions, of which $459.1 million was used to pay off Predecessor debt, as well as $21.8 million of related interest and prepayment penalty, incurred prior to the Acquisition Transactions. Activities in Year to Date Predecessor 2013 included $56.2 million of property, plant and equipment purchases.

Our purchases of property and equipment may vary from period to period due to the timing of the expansion of our business and the investment required providing us with the technology that allows us to better serve our customers.

Financing Activities

Net cash used in financing activities for the fiscal nine months ended September 26, 2014 was $2.4 million for repayments on the Successor Term Loan Facility. Net cash provided by financing activities in Successor 2013 included $657.5 million of new debt borrowings and $260.7 million in equity contributions by Parent and certain co-investors; this was offset by $30.7 million used to pay off costs incurred in the Acquisition Transactions. Net cash used in financing activities in Year to Date Predecessor 2013 was $4.2 million for repayments on Predecessor Term Loan Facility.

Term Loan Facility

In connection with the Transactions, we entered into the Term Loan Facility, a $320.0 million senior secured term loan facility, all of which was borrowed at the closing of the Transactions. The Term Loan Facility has a seven-year term. The proceeds of the Term Loan Facility were used to fund a portion of the Merger Consideration and to pay fees and expenses in connection with the Transactions. Holdings and all of the Issuer’s wholly-owned material domestic restricted subsidiaries guarantee the Term Loan Facility. The Term Loan Facility contains customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on indebtedness, investments, asset sales, mergers and consolidations, prepayments of subordinated indebtedness, liens, transactions with affiliates, and dividends and other distributions.

ABL Facility

In connection with the Transactions, we entered into the ABL Facility, a senior secured asset-based revolving facility, which provides borrowing availability (subject to certain eligibility conditions) equal to the lesser of (a) $75.0 million or (b) a borrowing base described below. Holdings and all of the Issuer’s wholly-owned material domestic restricted subsidiaries guarantee the ABL Facility. The ABL Facility has a five-year term.

The borrowing base is, at any time of determination, an amount (net of reserves) equal to the sum of:

•

85% of the net amount of eligible accounts; plus

•

90% of the net amount of eligible credit card accounts; plus

•

85% of the net orderly liquidation value of eligible inventory; plus

•

60% of the appraised value of eligible real property; provided, that the value of such eligible real property shall not exceed an amount equal to the lesser of (i) 25% of the borrowing base and (ii) $17.5 million; provided further, that the value of such eligible real property shall reduce at a rate of 1% per quarter on the last day of each fiscal quarter; minus

•

reserves against the borrowing base as established by the ABL agent in its reasonable credit judgment.

The ABL Facility includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as swingline loans.

The ABL Facility contains customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on indebtedness, investments, asset sales, mergers and consolidations, prepayments of subordinated indebtedness, liens, transactions with affiliates, and dividends and other distributions.

The total loans outstanding under the ABL Facility may not exceed $75.0 million net of any outstanding letters of credit. At September 26, 2014, we had undrawn letters of credit outstanding, primarily to collateralize certain insurance deductibles, of approximately $29.2 million. Funds available under the ABL Facility at September 26, 2014 totaled $45.8 million.

The Notes

In connection with the Merger, on August 30, 2013, DSSA issued $350.0 million in principal amount of the Notes in a private placement. The Notes were issued under an indenture with Wilmington Trust, National Association as trustee. The Notes bear interest at a rate of 10.000% per annum, payable semi-annually in arrears on March 1 and September 1 of each year, commencing on March 1, 2014. The Notes were issued at a discount of 2.663%.

In August 2014, the Company successfully exchanged all outstanding $350.0 million of unregistered Second-Priority Senior Secured Notes for $350.0 million of new senior secured notes with substantially identical terms that are registered under the Securities Act of 1933, as amended. The Company did not receive any additional proceeds from the exchange offer.

The indenture governing the Notes contains covenants that, among other things, limit the Issuer’s ability, and the ability of the Issuer’s restricted subsidiaries to (i) incur additional debt or issue certain preferred shares; (ii) create liens on certain assets; (iii) make certain loans or investments (including acquisitions); (iv) pay dividends on or make distributions in respect of their capital stock or make other restricted payments; (v) consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; (vi) enter into certain transactions with their affiliates; and (vii) restrict dividends from subsidiaries. These limitations are subject to a number of qualifications and exceptions that will be set forth in the indenture governing the Notes.

Realizability of Deferred Tax Assets

The Company regularly reviews its deferred tax assets for recoverability, taking into consideration such factors as historical losses, projected future taxable income, and the expected timing of the reversals of existing taxable temporary differences. The Company has sufficient taxable temporary differences, exclusive of indefinite lived intangibles, that are expected to reverse prior to the expiration of the deferred tax assets, to be able to fully realize its existing deferred tax assets.

Capital Expenditures

We primarily incur capital expenditures to invest in our production facilities, distribution systems, customer equipment and information technology. Our capital expenditures for the fiscal nine months ended September 26, 2014 was $61.9 million as compared with $6.2 million in Successor 2013 and $56.2 million Year to Date Predecessor 2013. We expect our capital expenditures to be approximately $72.5 million for 2014.

Off Balance Sheet Arrangements

Other than operating leases for a portion of our real estate and vehicles, we currently do not have any other material off balance sheet arrangements.

Contractual Obligations

We have future obligations under various contracts relating to debt and interest payments, capital and operating leases, and pension obligations. There have been no material changes to the conditions disclosed in the most recently filed Registration Statement on Form S-4 by the Company with the SEC.

Critical Accounting Policies

During the fiscal nine months ended September 26, 2014, there were no significant changes to our critical accounting policies and estimates as disclosed in the most recently filed Registration Statement on Form S-4 by the Company with the SEC.

Recently Issued Accounting Pronouncements

For a list of recently issued accounting pronouncements and their potential impact on the Company, see Note 2 – “Recent Accounting Pronouncements” in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

Item 3. Qualitative and Quantitative Disclosures about Market Risk

We are exposed to a variety of market risks, including the effects of changes in commodity prices, interest rates and economic conditions such as unemployment.

Market risk is the potential loss arising from adverse changes in market rates and prices. Our risk management strategy includes the use of financial instruments to reduce the effects on our operating results and cash flows from fluctuations caused by volatility in interest rates and commodity prices. We are exclusively an end-user of these financial instruments and we do not engage in trading, market-making or other speculative activities in the derivative markets.

We have commodity price exposure related to fluctuations in the price of diesel fuel, polycarbonate, HDPE and PET resin, all of which are important ingredients in the packaging of our water bottles. We anticipate that such commodity risk will remain a market risk for the foreseeable future. We use a variability-reduction model in determining the correlation of the changes in prices of the commodities used to hedge diesel fuel to the change in the price of diesel fuel. To quantify our exposure to diesel fuel prices, a $0.10 increase in diesel prices would, holding all other variables constant, have an approximate $0.3 million impact on our operating income. To quantify our exposure to resin prices, a $0.01 increase in HPDE prices would, holding all other variables constant, have an approximate $0.3 million impact on our operating income.

In addition to the commodities we use in bottled water, we are also exposed to risk associated with the fluctuations in the price of green coffee beans. The supply and price of green coffee beans may be affected by weather, international conditions, consumer demand and access to transportation. To quantify our exposure to green coffee beans, a $0.25 per pound increase in price would, holding all other variables constant, have an approximate $0.4 million impact on our operating income.

We have historically been exposed to interest rate risk primarily through our prior term loan, which bore interest at variable rates. We are currently exposed to interest rate risk through our variable-rate borrowings under the Term Loan Facility and ABL Facility. Borrowings under the Term Loan Facility and ABL Facility each bear interest at a variable rate, based on an adjusted LIBOR rate plus an applicable interest margin. To quantify our exposure to interest rate risk, a 100 basis point increase or decrease in interest rates would change our annual interest expense by approximately $3.7 million per year based on the borrowings outstanding under the Term Loan Facility and assuming that the ABL Facility is fully drawn. The calculation does not account for the differences in the market rates upon which the interest rates applicable to the Term Loan Facility and ABL Facility are based, our option to elect the lower of the two different rates under our borrowings or other possible actions, such as prepayment, that we might take in response to any rate increase. Actual changes in interest rates may differ materially from the hypothetical assumptions used in computing this exposure. In the future, we may enter into interest rate swaps, involving exchange of floating for fixed rate interest payments, to reduce our exposure to interest rate volatility.

Adverse economic conditions, including high levels of unemployment or underemployment, or the effects of higher fuel and food prices on our customers’ budgets, could have a number of different effects on our business, including: a reduction in consumer spending, which could result in a reduction in our sales volumes; a reduction in headcount at our commercial customers, resulting in decreased consumption; and lower customer retention rates. A 1% reduction in bottled water consumption would, holding all other variables constant, have an approximate $1.5 million impact on our operating income.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 26, 2014. Based on this evaluation, as of the end of the period covered by this Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were not effective because of the material weakness in our internal control over financial reporting described below.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

We did not maintain effective controls over the presentation of the statement of cash flows. Specifically, effective controls did not exist to ensure the accurate presentation of investing cash flows related to business combinations. This control deficiency resulted in the restatement of the Company’s interim consolidated financial statements for the six months ended June 27, 2014. Additionally, until remediated, this control deficiency could result in misstatements of the aforementioned accounts and related disclosures that would result in a material misstatement of the consolidated financial statements that would not be prevented or detected. Accordingly, our management has determined that this control deficiency constitutes a material weakness.

Remediation of Material Weakness

In connection with our identification of this matter, we have been evaluating, designing and implementing controls and procedures to address and remediate this control deficiency. These measures included, among other things, additional staffing and the establishment of a comprehensive review process with respect to the presentation of investing cash flows related to business combinations and associated disclosures in the statement of cash flows.

As of September 26, 2014, Management believes it has strengthened its internal controls in response to the material weakness. However, it has yet to endure sufficient time and events to fully test the additional internal controls to determine the effectiveness at preventing and detecting a material misstatement of the Company’s consolidated financial statements.

Changes in Internal Control Over Financial Reporting

During the quarter ended September 26, 2014, we have hired additional staffing and established a comprehensive review process with respect to the presentation of investing cash flows related to business combinations. These changes have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting during the quarter ended September 26, 2014.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to and otherwise involved in legal proceedings in the ordinary course of our business. While all legal proceedings contain an element of uncertainty, we do not believe that any legal proceedings pending or threatened at this time are likely to have a material impact on the Company.

Item 1A. Risk Factors

The risk factors disclosed in our annual report included in our Registration Statement, in addition to the other disclosures made in other filings with the SEC and other information set forth in this report, could materially affect our business, financial condition, or results of operations. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect its business, financial condition, or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits listed on the accompanying Exhibit Index are filed, furnished or incorporated by reference (as stated therein) as part of this Quarterly Report on Form 10-Q.

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.


		DS SERVICES HOLDINGS, INC.

Date: November 4, 2014		/s/ Thomas J. Harrington
		Thomas J. Harrington
		Director, President and Chief Executive Officer (Principal Executive Officer)

Date: November 4, 2014		/s/ Ron Z. Frieman
		Ron Z. Frieman
		Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)

EXHIBIT INDEX


Exhibit Number		Description

31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(d) of the Securities Exchange Act, as amended.

31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(d) of the Securities Exchange Act, as amended.

32.1**		Certification of Chief Executive Officer pursuant to Section 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Certification of Chief Financial Officer pursuant to Section 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS^±		XBRL Instance Document.

101.SCH^±		XBRL Schema Document.

101.CAL^±		XBRL Calculation Linkbase Document.

101.DEF^±		XBRL Definition Linkbase Document.

101.LAB^±		XBRL Labels Linkbase Document.

101.PRE^±		XBRL Presentation Linkbase Document.

*	Filed herewith.

**	Furnished herewith.

^±

XBRL information is deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under such sections.

Large accelerated filer

Accelerated filer

Non-accelerated filer

x (do not check if a smaller reporting company)

Smaller reporting company