<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 March 31, 1994
or
[ ]Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period _________________ to ________________
Commission file number: 1-10064
_______________________
DR PEPPER/SEVEN-UP COMPANIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 75-2233365
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8144 WALNUT HILL LANE DALLAS, TEXAS 75231-4372
(Address of principal executive offices) (Zip Code)
(214) 360-7000
(Registrant's telephone number, including area code)
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. [X] Yes [ ] No
The number of shares of each class of the Registrant's common stock
outstanding as of March 31, 1994 was as follows: 61,056,941 shares of
Common Stock.
<PAGE>
DR PEPPER/SEVEN-UP COMPANIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I - Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
March 31, 1994 and December 31, 1993 3
Consolidated Condensed Statements of Operations
Three months ended March 31, 1994 and 1993 4
Consolidated Condensed Statement of Stockholders'
Deficit 5
Three months ended March 31, 1994
Consolidated Condensed Statements of Cash Flows
Three months ended March 31, 1994 and 1993 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II - Other Information
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
2
<PAGE>
DR PEPPER/SEVEN-UP COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Accounts receivable, less
allowance for doubtful accounts
of $1,890 in 1994 and $1,737
in 1993 $ 90,483 70,255
Inventories 16,582 14,550
Prepaid advertising and other
current assets 8,467 18,480
Deferred income taxes 24,253 24,175
Total current assets 139,785 127,460
Property, plant and equipment, net 18,860 19,012
Intangible assets 602,860 602,860
Less accumulated amortization 115,204 111,434
Total intangible assets, net 487,656 491,426
Other assets, principally deferred
debt issuance costs, net 38,818 42,125
Total assets $ 685,119 680,023
</TABLE>
<TABLE>
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 20,903 25,060
Accrued expenses 70,816 84,292
Current portion of long-term debt 85,172 85,274
Total current liabilities 176,891 194,626
Long-term debt, less current portion 790,990 790,540
Deferred credits and other 28,841 28,805
Deferred income taxes 95,911 86,156
Stockholders' deficit:
Common Stock, $.01 par value,
61,059,632 shares in 1994 and
60,796,377 shares in 1993 issued 611 608
Additional paid-in capital 409,743 406,728
Accumulated deficit (818,088) (827,672)
Foreign currency translation
adjustment 220 232
Treasury stock, 2,691 shares in
1994 and 148,152 shares in 1993,
at cost - -
Total stockholders' deficit (407,514) (420,104)
Total liabilities and
stockholders' deficit $ 685,119 680,023
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
DR PEPPER/SEVEN-UP COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1994 and 1993
Unaudited
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C> <C>
Net sales $ 185,741 170,782
Cost of sales 31,757 26,216
Gross profit 153,984 144,566
Operating expenses:
Marketing 94,137 90,213
General and administrative 8,383 7,319
Amortization of intangible assets 3,769 3,789
Total operating expenses 106,289 101,321
Operating profit 47,695 43,245
Other income (expense):
Interest expense (18,327) (24,346)
Other, net (401) (280)
Income before income taxes and
extraordinary item 28,967 18,619
Income tax expense 11,271 607
Income before extraordinary item 17,696 18,012
Extraordinary item -
extinguishments of debt, less
applicable income taxes 8,112 14,901
Net income $ 9,584 3,111
Income per common share and share
equivalents:
Income before extraordinary item $ 0.26 0.31
Extraordinary item (0.12) (0.26)
Net income $ 0.14 0.05
Weighted average shares and share
equivalents outstanding 66,972 57,971
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
DR PEPPER/SEVEN-UP COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIT
For the Three Months Ended March 31, 1994
Unaudited
(In thousands)
<TABLE>
<CAPTION>
Foreign Total
Number Additional Currency Stock-
of Common Paid-in Accumulated Translation Treasury holders'
Shares Stock Capital Deficit Adjustment Stock Deficit
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993 60,648 $ 608 $ 406,728 $ (827,672) $ 232 $ - $ (420,104)
Exercise of employee
stock options,
including tax benefits 263 3 2,859 - - - 2,862
Net income - - - 9,584 - - 9,584
Other 146 - 156 - (12) - 144
------- ------ -------- -------- -------- -------- --------
Balance at March 31,
1994 61,057 $ 611 $ 409,743 $ (818,088) $ 220 $ - $ (407,514)
======= ====== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE> DR PEPPER/SEVEN-UP COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1994 and 1993
Unaudited
(In thousands)
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 9,584 3,111
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization of
intangibles, debt discounts and
deferred debt issuance costs 14,423 16,569
Deferred income taxes 9,677 -
Debt restructuring charge 1,305 6,815
Changes in assets and liabilities:
Accounts receivable (20,228) (16,493)
Inventories (2,032) (2,133)
Prepaid advertising and other 10,556 10,167
assets
Accounts payable and accrued (17,817) (12,436)
expenses
Other 2,419 88
Net cash provided by operating
activities 7,887 5,688
Cash flow from investing activities:
Capital expenditures (589) (182)
Other (550) -
Net cash used in investing
activities (1,139) (182)
Cash flows from financing activities:
Proceeds from sale of common stock - 305,873
Proceeds from long-term debt 89,000 23,000
Payments on long-term debt (48,115) (214,503)
Redemption of preferred stock - (98,383)
Retirement of subordinated debt (48,445) -
Increase (decrease) in cash
overdraft 184 (5,181)
Other 628 13
Net cash provided by (used in)
financing activities (6,748) 10,819
Net increase in cash and cash
equivalents - 16,325
Cash and cash equivalents at beginning
of period - -
Cash and cash equivalents at end of $ - 16,325
period
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
<PAGE>
DR PEPPER/SEVEN-UP COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
UNAUDITED
MARCH 31, 1994
1. General
The accompanying consolidated condensed balance sheet as of March 31,
1994, the consolidated condensed statements of operations for the three
months ended March 31, 1994 and 1993, the consolidated condensed
statement of stockholders' deficit for the three months ended March 31,
1994 and the consolidated condensed statements of cash flows for the
three months ended March 31, 1994 and 1993 are unaudited but include, in
the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation. The results of
operations for the three months ended March 31, 1994 are not necessarily
indicative of the operating results that may be expected for the full
fiscal year. These financial statements are for interim periods and do
not include all detail normally provided in annual financial
statements. They should be read in conjunction with the
consolidated financial statements of Dr Pepper/Seven-Up
Companies, Inc. and subsidiaries for the year ended December 31, 1993
included in the Company's Annual Report on Form 10-K.
As hereinafter used, unless the context requires otherwise, the "Company"
means Dr Pepper/Seven-Up Companies, Inc. together with its direct and
indirect subsidiaries, and the "Holding Company" means Dr Pepper/Seven-Up
Companies, Inc. Dr Pepper/Seven-Up Corporation ("DP/7UP") is a direct
operating subsidiary of the Holding Company.
Income per common share and share equivalents is based on the income
applicable to the fully diluted weighted average number of shares of the
Company's common stock ("Common Stock") outstanding of approximately
66,972,000 and 57,971,000 shares for the three months ended March 31,
1994 and 1993, respectively. The weighted average number of shares of
Common Stock outstanding assumes the exercise of dilutive warrants and
stock options. Income per common share and share equivalents is the same
for primary and fully diluted per share amounts.
7
<PAGE>
2. Inventories
Inventories consisted of the following at March 31, 1994 and December 31,
1993 (in thousands):
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Finished products $ 5,641 5,362
Raw materials and supplies 10,941 9,188
Total inventories $ 16,582 14,550
</TABLE>
3. Subordinated Debt Retirement
In the first quarter of 1994, the Holding Company completed an open
market purchase of a portion of its 11 1/2% Senior Subordinated Discount
Notes due 2002 (the "Discount Notes"). DP/7UP borrowed $59.6 million
under its credit agreement (the "Credit Agreement") to retire $48.4
million accreted value of the Discount Notes. In connection with this
transaction, the Company recorded an extraordinary charge of $8.1
million. The charge reflected a write-off of a portion of the
unamortized balance of deferred debt issuance costs as well as the
premium paid in excess of accreted value, net of tax.
4. Contingencies
(a) Internal Revenue Service Matter
The Internal Revenue Service has completed its examination of Federal
income tax returns of Dr Pepper Company ("Dr Pepper") and The Seven-Up
Company ("Seven-Up"), predecessors in interest to DP/7UP, for the
periods ended December 31, 1986, December 31, 1987 and May 19, 1988, and
of the Company for the period ended December 31, 1988. The Company has
been notified of proposed IRS adjustments disallowing certain
deductions, including substantially all amortization of intangible
assets related to the 1986 acquisitions of Dr Pepper and Seven-Up. If
the adjustments are sustained, in whole or in part, the Company's net
operating loss carryforwards for federal income tax purposes would be
significantly reduced or eliminated. The Company is vigorously
contesting the proposed adjustments. Management of the Company believes
the ultimate resolution of the proposed adjustments will not have a
material adverse effect on the Company's operating results or financial
condition.
8
<PAGE>
(b) Steiner Litigation
Sidney J. Steiner, the landlord under the Company's former lease
covering its former headquarters facilities, and Harbord Midtown, a
Texas partnership, filed suit against the Company in the 95th Judicial
District Court, Dallas County, Texas, on May 25, 1988 in connection with
the Company's move of its corporate headquarters. The landlord has
alleged that the Company breached an oral agreement to lease space in a
new office building the landlord planned to construct on such premises.
The landlord seeks to recover $470,000 in architectural fees and
other costs claimed to have been incurred as a result of such agreement
and the landlord claims to have suffered $24 million in other damages
as a result of the Company's alleged breach. Additionally, on October
12, 1989, the landlord amended its complaint in this cause of action to
include allegations that the Company fraudulently misrepresented the
existence of asbestos in the Company's former headquarters facilities,
which were purchased by the landlord and leased back to the Company in
1985. The landlord claims damages in excess of $4 million related to
these new allegations.
The lawsuit was dismissed without prejudice pursuant to an Agreed Order
Granting Joint Motion for Non-Suit on May 18, 1992. Subsequent to
filing the lawsuit, Steiner sold the property and the claim in
litigation to a third party, who in turn later sold the property and the
claim to another party, who became a debtor in a bankruptcy proceeding.
The trustee in bankruptcy sold the claim in the lawsuit to Canco
Properties ("Canco"), San Antonio, Texas, who refiled the lawsuit on
January 29, 1993. By letter dated September 21, 1993, Canco claimed
that additional discovery and investigation resulted in an increase in
estimated damages, and now estimates their damages to be over $31.5
million with punitive damages in excess of $50 million in the aggregate.
The court has set a trial date of June 27, 1994.
On December 4, 1990, Steiner filed a claim with the American Arbitration
Association seeking compensation for damage allegedly caused by the
Company to its former corporate headquarters building during the
Company's occupancy of such building as tenant under a lease agreement
with Steiner. This claim was subsequently sold in the same manner as
described in the immediately preceding paragraph with respect to the
litigation and is now owned by Canco. Canco presently seeks damages in
connection with this claim in the amount of approximately
$11.5 million as well as an unspecified
9
<PAGE>
amount of punitive damages and attorneys' fees. An arbitration hearing
with respect to this claim began on November 8, 1993 in Dallas, Texas;
however, due to the death of the arbitrator, a new arbitrator has been
appointed and a new arbitration hearing will have to be scheduled. The
decision of the arbitrator will be binding on the parties.
The Company believes that the claims alleged in the lawsuit and
arbitration proceeding are without merit and intends to vigorously
contest these allegations. The Company further believes that the
resolution of these matters will not have a material adverse effect on
its operating results or financial condition.
(c) Other Litigation
DP/7UP is a defendant in various other lawsuits arising out of the
ordinary conduct of its business. Management of the Company believes
the resolution of these matters will not have a material adverse effect
on the Company's operating results or financial condition.
10
<PAGE>
DR PEPPER/SEVEN-UP COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
March 31, 1994
Results of Operations - Three Months Ended March 31, 1994 Compared to Three
Months Ended March 31, 1993
Net sales for the three months ended March 31, 1994 increased 8.8% to
$185.7 million compared to $170.8 million for the three months ended
March 31, 1993. The increase was primarily the result of increased
sales volume for DR PEPPER brands over the comparable period in 1993, as
well as selected price increases.
Cost of sales for the three months ended March 31, 1994 increased 21.1%
to $31.8 million compared to $26.2 million in the first three months of
1993. This increase resulted from the increase in concentrate and syrup
sales volume. Gross profit as a percentage of net sales for the three
months ended March 31 decreased from 84.6% in 1993 to 82.9% in 1994,
primarily reflecting increased sales of IBC's lower-margin finished goods
and product mix.
Total operating expenses, which include marketing expense, general and
administrative expense and amortization of intangible assets, increased
4.9% to $106.3 million in the first three months of 1994 compared to $101.3
million in the same period of the prior year. This increase was primarily
due to increased marketing expenses in response to improved sales volume.
As a result of the above factors, operating profit for the three months
ended March 31, 1994 increased 10.3% to $47.7 million compared to $43.2
million in the first three months of 1993.
Interest expense for the three months ended March 31, 1994 decreased
24.7% to $18.3 million compared to $24.3 million in the first three months
of 1993. This decrease was principally due to the repayment of debt with
the net proceeds of the Company's public offering of its Common Stock
during the first quarter of 1993 (the "Offering") and the recent retirement
of a portion of the Discount Notes which together reduced outstanding
borrowings and resulted in lower interest rates on borrowings.
The increase in income tax expense in the first quarter of 1994 as
compared to the same period in 1993 is principally due to the utilization
of net operating loss carryforwards during the first quarter of 1993.
Income tax expense for the first quarter of 1993 consists principally of
current state tax expense.
11
<PAGE>
In connection with the retirement of a portion of the Discount Notes, an
extraordinary charge of $8.1 million was recorded in the first quarter of
1994, net of a $4.4 million tax effect. The extraordinary charge reflected
a write-off of a portion of the unamortized balance of deferred debt
issuance costs as well as the premium paid in excess of the accreted value.
In connection with the Offering, a $14.9 million extraordinary charge was
recorded in the first quarter of 1993 which included a write-off of a
portion of the unamortized balance of deferred debt issuance costs and the
payment of premiums on the redemption of a portion of the Discount Notes.
As a result of the above factors, the Company earned $9.6 million of net
income in the first three months of 1994 compared to $3.1 million of net
income earned in the same period of 1993.
Liquidity and Capital Resources
The Company believes that cash provided by operations, together with
borrowings under DP/7UP's $150.0 million revolving facility (the "Revolving
Facility"), will be sufficient to fund its working capital requirements,
capital expenditures and principal, interest and dividend requirements
described below.
The Holding Company conducts its business through DP/7UP and the primary
asset of the Holding Company is the common stock of DP/7UP. The Holding
Company has no material operations of its own. Accordingly, the Holding
Company is dependent on the cash flow of DP/7UP to meet its obligations.
The Holding Company has no material obligations other than those under the
Discount Notes and certain contingent obligations under the Holding
Company's guarantee of DP/7UP's obligations under the Credit Agreement.
Accordingly, the Holding Company is not expected to have any material need
for cash until interest on the Discount Notes becomes payable in cash on
May 1, 1998. The Holding Company will be required to make sinking fund
payments equal to 25% of the then outstanding principal amount of the
Discount Notes in each of 2000 and 2001. The Discount Notes will mature in
2002. The Credit Agreement imposes significant restrictions on the payment
of dividends and the making of loans by DP/7UP to the Holding Company. The
Credit Agreement does, however, allow DP/7UP to pay dividends to the
Holding Company in an amount necessary to make cash interest payments on
the Discount Notes, provided that such interest payments are permitted
to be made at such time in accordance
12
<PAGE>
with the subordination provisions relating to the Discount Notes and so
long as no payment default or bankruptcy default then exists under the
Credit Agreement with respect to the Holding Company or DP/7UP. The
Holding Company's access to the cash flow of DP/7UP is further restricted
because DP/7UP may not make any dividend payments to the Holding Company
unless all accumulated and unpaid dividends on the outstanding shares of
the $1.375 Senior Exchangeable Preferred Stock of DP/7UP (the "DP/7UP
Preferred Stock") (and any DP/7UP preferred stock that may be issued in the
future) are paid in full. In addition, the indenture governing the
exchange debentures into which the DP/7UP Preferred Stock is exchangeable
limits the payment of dividends and the making of loans by DP/7UP to the
Holding Company. The indenture governing the Discount Notes also imposes
limits on the payment of dividends by the Holding Company.
The operations of DP/7UP do not require significant outlays for capital
expenditures, and its working capital requirements have historically been
funded with internally generated funds. Marketing expenditures have
historically been, and are expected to remain, the principal recurring use
of funds for the foreseeable future. Such expenditures are, to an extent,
controllable by management and are generally based on a percentage of unit
sales volume. DP/7UP's other principal use of funds in the future will be
the payment of principal and interest under the Credit Agreement, the
payment of dividends on, or the repurchase or redemption of, the
outstanding shares of DP/7UP Preferred Stock and the payment of dividends
to the Holding Company for purposes of making principal and interest
payments on the Discount Notes. As of March 31, 1994, DP/7UP is
required to repay the remaining principal of $525.0 million under its term
loan facility (the "Term Loan Facility") as follows: $85.0 million in 1994,
$100.0 million in 1995, $110.0 million in 1996, and $115.0 million in each
of 1997 and 1998. The Revolving Facility includes an amount for letters of
credit in an aggregate face amount of up to $15.0 million. At March 31,
1994, the outstanding balance of revolving loans and the aggregate face
amount of letters of credit issued under the Revolving Facility were $90.0
million and $0.6 million, respectively. A total of $15.6 million of the
available credit under the Revolving Facility is reserved for use to
repurchase or redeem shares of DP/7UP Preferred Stock and, if not so used
by September 1, 1994, is required to be used to repay borrowings under the
Term Loan Facility. The Revolving Facility will mature on the earlier to
occur of (i) December 31, 1998 or (ii) the date on which there are no
amounts outstanding under the Term Loan Facility.
The Company has entered into interest rate swap and interest rate cap
agreements in part to satisfy certain terms of the Credit Agreement. At
March 31, 1994, LIBOR-based interest rate swap agreements covered notional
amounts of $350.0 million and $300.0 million expiring on December 1, 1994
and December 1, 1995, respectively. The interest rate differential to be
received or paid is recognized as an adjustment to interest expense.
13
<PAGE>
The Company had working capital deficits of $37.1 million at March 31,
1994 and $67.2 million at December 31, 1993. The Company generally operates
with a working capital deficit due to its low inventory investment and
because it has a significant amount of accrued marketing expenses in
current liabilities. The deficit at March 31, 1994 was improved from the
December 31, 1993 deficit by the net increase in working capital components
as a result of the timing of cash receipts and disbursements and the
seasonal nature of the business. The Company does not believe that such
deficits will have a material adverse effect on the liquidity or operations
of the Company.
The Credit Agreement contains numerous financial and operating covenants
and prohibitions that impose limitations on the Company's liquidity,
including the satisfaction of certain financial ratios and limitations on
the incurrence of additional indebtedness. Through March 31, 1994, the
Company has satisfied all required financial ratios. The indenture
governing the Discount Notes also contains covenants that impose
limitations on the Company's liquidity, including a limitation on the
incurrence of additional indebtedness. The ability of the Company to meet
its debt service requirements and to comply with the financial covenants in
the Credit Agreement and the indenture will be dependent upon future
performance, which is subject to financial, economic, competitive and other
factors affecting the Holding Company and DP/7UP, many of which are beyond
their control.
Item 1. Legal Proceedings
See Note 4 to Consolidated Condensed Financial Statements which is
hereby incorporated by reference.
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended
March 31, 1994.
14
<PAGE>
DR PEPPER/SEVEN-UP COMPANIES, INC.
SIGNATURE
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.
DR PEPPER/SEVEN-UP COMPANIES, INC.
Date: May 5, 1994
/s/ IRA M. ROSENSTEIN
Ira M. Rosenstein
Executive Vice President and
Chief Financial Officer
15
