<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, 1995
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, 1995 WAS AS FOLLOWS: 61,804,252 SHARES OF COMMON STOCK.
<PAGE>
DR PEPPER/SEVEN-UP COMPANIES, INC.
INDEX
PART I - FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
March 31, 1995 and December 31, 1994 3
Consolidated Condensed Statements of Operations
Three months ended March 31, 1995 and 1994 4
Consolidated Condensed Statement of Stockholders' Deficit
Three months ended March 31, 1995 5
Consolidated Condensed Statements of Cash Flows
Three months ended March 31, 1995 and 1994 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
2
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DR PEPPER/SEVEN-UP COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1994
------------- --------------
(UNAUDITED)
ASSETS
- ---------------------------------------------
<S> <C> <C>
Current assets:
Accounts receivable, less allowance for
doubtful accounts of $1,764 in 1995
and $1,668 in 1994 $ 107,407 80,995
Inventories 18,269 16,648
Prepaid advertising and other current assets 6,185 22,892
Deferred income taxes 5,480 23,532
------------ ------------
Total current assets 137,341 144,067
------------ ------------
Property, plant and equipment, net 18,242 18,607
Intangible assets 538,317 538,317
Less accumulated amortization 127,814 124,538
------------ ------------
Total intangible assets, net 410,503 413,779
------------ ------------
Other assets, net 15,246 32,265
------------ ------------
Total assets $ 581,332 608,718
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
- ---------------------------------------------
Current liabilities:
Accounts payable $ 24,710 19,999
Accrued expenses 94,246 81,454
Current portion of long-term debt 67 100,067
Due to Cadbury 41,835 -
------------ ------------
Total current liabilities 160,858 201,520
------------ ------------
Long-term debt, less current portion 258,583 693,159
Due to Cadbury 500,000 -
Deferred credits and other 16,758 15,178
Deferred income taxes 23,383 42,971
Stockholders' deficit:
Common Stock, $.01 Par value, 61,810,703 shares
in 1995 and 61,771,287 shares in 1994 issued 617 617
Additional paid-in capital 606,033 416,203
Accumulated deficit (985,106) (761,153)
Foreign currency translation adjustment 206 223
------------ ------------
Total stockholders' deficit (378,250) (344,110)
------------ ------------
Total liabilities and stockholders'
deficit $ 581,332 608,718
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
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DR PEPPER/SEVEN-UP COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Net sales $ 195,582 185,741
Cost of sales 31,433 31,757
------------ ------------
Gross profit 164,149 153,984
------------ ------------
Operating expenses:
Marketing 234,407 94,137
General and administrative 110,336 8,383
Amortization of intangible assets 3,276 3,769
------------ ------------
Total operating expenses 348,019 106,289
------------ ------------
Operating profit (loss) (183,870) 47,695
Other income (expense):
Interest expense (17,419) (18,327)
Other, net (10,273) (401)
------------ ------------
Income (loss) before income taxes and
extraordinary item (211,562) 28,967
Income tax expense (benefit) (3,074) 11,271
------------ ------------
Income (loss) before extraordinary item (208,488) 17,696
Extraordinary item - extinguishments of debt
less applicable income taxes of $0 and
$4,368, respectively 15,465 8,112
------------ ------------
Net income (loss) $ (223,953) 9,584
------------ ------------
------------ ------------
Income (loss) per common share and share
equivalents:
Income (loss) before extraordinary item $ (3.18) 0.26
Extraordinary item (.24) (0.12)
------------ ------------
Net income (loss) $ (3.42) 0.14
------------ ------------
------------ ------------
Weighted average shares and share
equivalents outstanding 65,554 66,972
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
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DR PEPPER/SEVEN-UP COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 1995
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN TOTAL
NUMBER ADDITIONAL CURRENCY STOCK-
OF COMMON PAID-IN ACCUMULATED TRANSLATION HOLDERS'
SHARES STOCK CAPITAL DEFICIT ADJUSTMENT DEFICIT
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994 61,765 $ 617 416,203 (761,153) 223 (344,110)
Capital Contribution from
Cadbury - - 190,526 - - 190,526
Exercise of employee stock
options, including
tax benefits 39 - 567 - - 567
Net loss - - - (223,953) - (223,953)
Other - - (1,263) - (17) (1,280)
----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 1995 61,804 $ 617 606,033 (985,106) 206 (378,250)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</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, 1995 AND 1994
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (223,953) 9,584
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of intangibles, debt
discounts and deferred debt issuance costs 11,684 14,423
Deferred income taxes (1,536) 9,677
Debt restructuring charge 15,465 1,305
Changes in assets and liabilities:
Accounts receivable (26,412) (20,228)
Inventories (1,621) (2,032)
Prepaid advertising and other assets 17,419 10,556
Accounts payable and accrued expenses 10,134 (17,817)
Other 668 2,419
------------ ------------
Net cash provided by (used in) operating activities (198,152) 7,887
------------ ------------
Cash flows from investing activities:
Capital expenditures (362) (589)
Other (400) (550)
------------ ------------
Net cash used in investing activities (762) (1,139)
------------ ------------
Cash flows from financing activities:
Capital contribution from cadbury for stock option payout 190,526 -
Proceeds of borrowings from cadbury 560,500 -
Payments on borrowings from cadbury (18,665) -
Proceeds from long-term debt 75,845 89,000
Payments on long-term debt (616,863) (48,115)
Retirement of subordinated debt - (48,445)
Increase in cash overdraft 7,369 184
Other 202 628
------------ ------------
Net cash provided by (used in) financing activities 198,914 (6,748)
------------ ------------
Net increase in cash and cash equivalents - -
Cash and cash equivalents at beginning of period - -
------------ ------------
Cash and cash equivalents at end of period $ - -
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
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DR PEPPER/SEVEN-UP COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
UNAUDITED
MARCH 31, 1995
1. GENERAL
The accompanying consolidated condensed balance sheet as of March 31, 1995,
the consolidated condensed statements of operations for the three months
ended March 31, 1995 and 1994, the consolidated condensed statement of
stockholders' deficit for the three months ended March 31, 1995 and the
consolidated condensed statements of cash flows for the three months ended
March 31, 1995 and 1994 are unaudited but include, in the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation. 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, 1994 included in the Company's
Annual Report on Form 10-K.
As a consequence of the acquisition of the Company by Cadbury (see Note 2
below), the results of operations for the three months ended March 31, 1995
are not necessarily indicative of the operating results that may be
expected for the full fiscal year. Included in expenses are certain
non-recurring items consequent to the acquisition.
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 (loss) per common share and share equivalents is based on the income
(loss) applicable to the fully diluted weighted average number of shares of
the Company's common stock, par value $.01 per share ("Common Stock"),
outstanding of approximately 65,554,000 and 66,972,000 shares for the
three months ended March 31, 1995 and 1994, respectively. For 1994, the
weighted average number of shares of Common Stock outstanding assumes the
exercise of dilutive stock options. Income (loss) per common share and
share equivalents is the same for primary and fully diluted per share
amounts.
2. ACQUISITION OF THE COMPANY BY CADBURY (THE "ACQUISITION")
On January 25, 1995, the Holding Company, Cadbury Schweppes plc, a company
organized under the laws of England ("Cadbury"), and DP/SU Acquisition
Inc., a Delaware corporation and an indirect wholly owned subsidiary of
Cadbury ("Purchaser"), entered into an Agreement and Plan of Merger (the
"Merger Agreement"). Pursuant to the Merger Agreement, on February 1,
1995, Purchaser commenced a tender offer (the "Offer") to acquire all
issued and outstanding shares of common stock of the Holding Company
("Common Stock") not already owned by Cadbury at a price of $33.00 per
share. The Offer expired, as scheduled, at midnight Wednesday, March 1,
1995. A total of 45,387,180 shares of Common Stock were tendered and
purchased by Purchaser pursuant to the Offer. As a result of such purchase
and the prior acquisition of shares of Common Stock, Purchaser and other
wholly owned subsidiaries of Cadbury own approximately 98.7% of the issued
and outstanding shares of Common Stock. Upon the approval and adoption of
the Merger Agreement by the affirmative vote of the stockholders of the
Company to the extent required by the laws of the State of Delaware, a
wholly owned subsidiary of Purchaser will merge
7
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(the "Merger") with and into the Company, and each share of Common Stock
(other than shares held in the treasury of the Company, or owned by Cadbury
or any of its subsidiaries or held by stockholders who have filed with the
Company a written objection to the Merger and have not voted in favor of
the Merger and who have properly demanded in writing and perfected
appraisal for such shares in accordance with the laws of the State of
Delaware) shall be automatically converted into the right to receive $33.00
in cash, without interest. A meeting of the stockholders of the Holding
Company will be held on June 5, 1995 for the purpose of obtaining such
approval.
Pursuant to the terms of the Merger Agreement, each outstanding option to
purchase shares of the Holding Company's Common Stock granted under the
Company's various stock option plans, whether or not exercisable, was
cancelled. Each holder of cancelled options received an amount in cash
equal to the product of (1) the number of shares previously subject to
such option and (2) the excess of $33 per share over the applicable
exercise price. In connection therewith, Cadbury made a
capital contribution of $190.5 million to the Company, representing the
total cash payments made to each option holder.
The foregoing description of the Merger Agreement is a summary only and is
qualified in its entirety by reference to the copy of the Merger Agreement
filed as Exhibit 2.1 to the Company's 1994 Form 10-K, which is incorporated
herein by reference in its entirety.
3. LONG-TERM DEBT/RELATED PARTY TRANSACTIONS
In connection with the Acquisition, the Company borrowed $500.0 million
from Cadbury which has been classified as a long-term payable in the
accompanying consolidated balance sheet. These borrowings bear interest at
25 basis points over the market LIBOR rate. The Company also received a
$60.5 million working capital loan from Cadbury. The balance of that loan
was $41.8 million at March 31, 1995 and is included in current
liabilities in the accompanying consolidated balance sheet.
The Company used the proceeds from Cadbury to repay its outstanding
borrowings under the Credit Agreement. In connection therewith, the
Company recorded a $15.5 million extraordinary charge reflecting write-off
of the unamortized balance of deferred debt issuance costs related to the
Credit Agreement.
4. INVENTORIES
Inventories consisted of the following at March 31, 1995 and December 31,
1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Finished products $ 6,552 6,449
Raw materials and supplies 11,717 10,199
------------ ------------
Total inventories $ 18,269 16,648
------------ ------------
------------ ------------
</TABLE>
8
<PAGE>
5. CONTINGENCIES
(a) THE COCA-COLA COMPANY ("COKE") LITIGATION
On February 26, 1992, Seven-Up filed a lawsuit in the 116th Judicial
Court, Dallas County, Texas (the "State Court Suit") against Coke
alleging, among other things, tortious interference with Seven-Up's
existing contractual relationships with those licensed bottlers who
also bottle products of Coke, and unfair competition. On July 22,
1992, Seven-Up also filed a lawsuit against Coke in the United States
District Court for the Northern District of Texas (the "Federal Court
Suit") alleging false advertising under Section 43 of the Lanham Act.
On October 3, 1994, trial before a jury commenced in the Federal Court
Suit. The jury found for Seven-Up, awarding it $2.5 million damages.
However, the federal magistrate overturned the jury's verdict, finding
that although Coke had engaged in false advertising, Seven-Up had
suffered no damages thereby. Seven-Up has appealed the magistrate's
ruling to the Fifth Circuit Court of Appeals, and Coke has filed a
cross-appeal. These appeals are in a preliminary briefing phase at
this time.
Following the magistrate's rulings in the Federal Court Suit, Coke
moved for summary judgment in the State Court Suit on procedural
grounds. The state court judge granted Coke's motion for summary
judgment on Seven-Up's claims. Coke had also filed counterclaims in
the State Court Suit alleging that Seven-Up had tortiously interfered
with Coke's existing contractual relationships with those licensed
bottlers of Coke who are also licensed to bottle Sprite products.
That counterclaim is still pending in the state court. The court has
severed the counterclaim from Seven-Up's claims and abated it, which
has enabled Seven-Up to appeal the state court's ruling on Coke's
motion for summary judgment.
The Company intends to vigorously pursue its claims on appeal, but is
presently unable to predict the outcome of these lawsuits. The
Company does not expect that the resolution of these matters will have
a material adverse effect on the Company's operating results or
financial condition.
(b) 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 was 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.
During the second quarter of 1994, the Company accepted a global tax
settlement from the IRS with respect to certain proposed adjustments
relating to the deductibility of a portion of intangible assets. As a
result of the settlement, the Company reduced its recorded deferred
tax liabilities by approximately $65.0 million. The corresponding
effect of this adjustment to deferred tax liabilities was applied as a
reduction of intangible assets for financial reporting purposes. If
the remaining proposed IRS adjustments are sustained, in whole or in
part, the Company's net operating loss carryforwards for Federal
income tax purposes would be significantly reduced. The Company is
vigorously contesting the remaining proposed adjustments. Management
of the Company believes the ultimate resolution of the remaining
proposed adjustments will not have a material adverse effect on the
Company's operating results or financial condition.
9
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(c) SHAREHOLDER LITIGATION
On October 26, 1994, a complaint styled KING V. DR PEPPER/SEVEN-UP
COMPANIES, ET AL. ("King"), was filed in the U.S. District Court for
the Northern District of Texas, Dallas Division, alleging that the
defendants violated Section 10(b) and Rule 10b-5 under the Exchange
Act by failing to reveal the true status of merger discussions between
the Company and Cadbury. The complaint alleges that the defendants
knowingly or recklessly engaged in a plan to depress the market price
of the Company's securities by misstating and concealing material
information concerning the true status of merger discussions with
Cadbury. In addition, the complaint alleges that John Albers,
formerly President and Chief Executive Officer of the Company,
violated Section 20(a) of the Exchange Act by failing to disseminate
truthful information with respect to the Company's business. Relief
requested includes unspecified damages and expenses (including
attorneys' fees). As a result of defendants' motion to dismiss based
on the plaintiff's failure to plead fraud with specificity and failure
to state a claim for securities fraud, on January 24, 1995, the judge
in the suit issued an Order to File Amended Complaint to the
plaintiff, which gave the plaintiff 20 days in which to amend her
complaint to cure the deficiencies noted in the order. Subsequently,
the plaintiff has amended the complaint to cure the Court's concerns.
The defendants believe the complaint is without merit and intend to
defend the case vigorously.
In connection with the Rights Agreement (as hereinafter defined)
and the announcement of the Merger Agreement (See Note 2), several
putative class action complaints (the "Shareholders Suits") were
filed in the Court of Chancery of the State of Delaware and the
state courts of Texas naming the Company and certain directors as
defendants and alleging that the defendants breached their fiduciary
duties to the Company and its stockholders. These suits are described
in item 8 of the Solicitation/Recommendation Statement on
schedule 14D-9 filed by the Company with the Securites and Exchange
Commission on February 1, 1995, as amended (the "14D-9"), which
information is incorporated herein by reference to Exhibit 99 of the
Company's 1994 Form 10-K.
On February 10, 1995, all of the Shareholder Suits, except for the
King case, were consolidated in IN RE: DR PEPPER/SEVEN-UP COMPANIES,
INC. SHAREHOLDERS LITIGATION, Civil Action No. 13109 (the
"Consolidated Action"), in the Court of Chancery of the State of
Delaware (the "Delaware Court"). In the Consolidated Action,
plaintiffs and defendants (through their respective counsel), have
entered into a Memorandum of Understanding, dated February 21, 1995
(the "Memorandum of Understanding"), pursuant to which the
Consolidated Action will be settled. Pursuant to the settlement
contemplated by the Memorandum of Understanding, the plaintiffs in
the suit styled SARNOFF V. DR PEPPER/SEVEN-UP COMPANIES ET AL have
non-suited the action pending before the Texas Court and refiled it
with the Delaware Court. The parties have requested that the refiled
Sarnoff case be consolidated with and become part of the Consolidated
Action. The proposed settlement is subject to, among other things,
approval of the Delaware Court and is fully described in the 14D-9.
(d) 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
10
<PAGE>
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
$24.0 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 $4.0 million related to the additional
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
$50.0 million in the aggregate. On May 4, 1994, Canco amended its
petition to add claims for negligent misrepresentation and fraud based
upon the Company's alleged failure to disclose the existence of water
leaks in the building at the time the building was sold to Steiner in
August 1985. On February 17, 1995, Canco again amended its petition,
dismissing its claims that the Company breached an alleged oral
agreement to become a tenant in a new building to be constructed by
Canco, but adding claims that the Company breached the original 1985
sale agreement by failing to disclose the presence of asbestos on the
property. Canco's amended petition seeks unspecified monetary damages
and rescission of the original transaction. By letter dated March 6,
1995, Canco now claims their monetary damages to be approximately
$35.0 million (excluding interest). The court has taken this case off
the trial docket, pending further consideration of the Company's
motion for summary judgement and in light of recent changes in Texas
law. The Company believes that this lawsuit is without merit and is
vigorously contesting the same. The Company further believes that the
resolution of this litigation will not have a material adverse effect
on its operating results or financial condition.
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 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 was
appointed. The parties conducted the arbitration hearing from June 28
through July 7, 1994. The arbitrator awarded Canco $150,000 for its
claims in the arbitration; however, because the arbitrator determined
that the Company was the prevailing party in the arbitration, the
arbitrator awarded the Company approximately $139,000 in attorneys'
fees. Therefore, the net amount paid to Canco by the Company was
approximately $11,000.
Canco has filed suit in the 68th Judicial District Court, Dallas
County, Texas, seeking to vacate the arbitration award on the grounds
that the arbitrator was not impartial. The Company believes that this
lawsuit is without merit and is vigorously contesting the same. The
Company further
11
<PAGE>
believes that the resolution of this litigation will not have a
material adverse effect on its operating results or financial
condition.
(e) RIGHTS AGREEMENT AMENDMENT
Immediately prior to the execution of the Merger Agreement, the
Company amended the Rights Agreement dated September 1, 1993,
between the Company and BankOne, Texas, N.A. (the "Rights Agreement").
This amendment (the "Amendment") provides that (A) none of the
execution or delivery of the Merger Agreement or the Stockholders
Agreement or the making of the Offer will cause (i) the Rights (as
defined under the Rights Agreement) to become exercisable under the
Rights Agreement, (ii) Cadbury or Purchaser or any of their affiliates
to be deemed an Acquiring Person (as defined in the Rights Agreement)
or (iii) the Stock Acquisition Date (as defined in the Rights
Agreement) to occur upon any such event, (B) none of the acceptance
for payment or payment for Shares by Purchaser pursuant to the Offer
or the consummation of the Merger will cause (i) the Rights to become
exercisable under the Rights Agreement or (ii) Cadbury or Purchaser or
any of their affiliates to be deemed an Acquiring Person or (iii) the
Stock Acquisition Date to occur upon any such event, and (C) the
Expiration Date (as defined in the Rights Agreement) shall occur no
later than immediately prior to the purchase of shares pursuant to the
Offer. The Expiration Date occurred on March 2, 1995, immediately
prior to Purchaser's purchase of shares pursuant to the Offer.
Accordingly, the Rights expired.
The foregoing description of the Amendment is a summary only and is
qualified in its entirety by reference to the form thereof filed as
Exhibit 3.4 to the Company's 1994 Form 10-K, which is incorporated
herein by reference in its entirety. The Rights Agreement has been
filed as Exhibit 3.3 to that Form 10-K.
(f) 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.
12
<PAGE>
DR PEPPER/SEVEN-UP COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 31, 1995
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1995 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1994
Net sales for the three months ended March 31, 1995 increased 5% to $195.6
million compared to $185.7 million in the first quarter of 1994. The increases
were primarily the result of increased sales volume for DR PEPPER brands over
the comparable periods in 1994, as well as selected price increases.
Cost of sales for the three months ended March 31, 1995 decreased 1% to
$31.4 million compared to $31.8 million in the first quarter of 1994. Gross
profit as a percentage of net sales for the three months ended March 31
increased from 82.9% in 1994 to 83.9% in 1995. These relationships primarily
reflect product mix in favor of higher-margined products.
Total operating expenses, which include marketing expense, general and
administrative expense and amortization of intangible assets, increased 227% to
$348.0 million in the first three months of 1995 compared to $106.3 million in
the same period of the prior year. These increases were primarily due to
transactions recorded as a result of the increase by Cadbury of its ownership
position of the Company's Common Stock on March 2, 1995 (See Note 2). The
significantly higher expenses (for both marketing and general and
administrative categories) principally relate to compensation expense pertaining
to the redemption of employee stock options and restricted shares. There also
was an increased provision of marketing expenses as a result of higher sales
volume.
As a result of the above factors, operating loss for the three months ended
March 31, 1995 was $183.9 million compared to $47.7 million of operating profit
in the first three months of 1994.
Interest expense for the three months ended March 31, 1995 decreased 5% to
$17.4 million compared to $18.3 million in the first quarter of 1994. These
decreases were principally due to the impact of the Company's deleveraging
efforts.
Other expense principally reflects investment banking and legal fees
incurred in connection with the Acquisition.
The decrease in income tax expense in the first three months of 1995 as
compared to the same period in 1994 is due to the impact of the loss incurred in
1995. Additionally, the Company has not fully recognized its potential tax
benefits related to its first quarter loss due primarily to uncertainty of the
Company's ability to realize such benefits as a subsidiary of Cadbury.
In connection with the repayment of the Company's credit agreement (the
"Credit Agreement"), an extraordinary charge of $15.5 million was recorded in
the first three months of 1995. The extraordinary charge reflects a write-off
of the unamortized balance of deferred debt issuance costs related to the Credit
Agreement. (See Note 3.)
In connection with the retirement of a portion of the Company's 11 1/2%
Senior Subordinated Discount Notes due 2002 (the "Discount Notes"), an
extraordinary charge of $8.1 million was recorded in the first three months of
13
<PAGE>
1994, net of a $4.4 million tax effect. The extraordinary charge reflects 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.
As a result of the above factors, the Company incurred $224.0 million of
net loss in the first three months of 1995 compared to $9.6 million of net
income earned in the same period in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that cash provided by operations, together with cash
provided by Cadbury, will be sufficient to fund its working capital
requirements, capital expenditures and principal and interest 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.
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 indenture governing
the Discount Notes 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
dividends to the Holding Company for purposes of making principal and interest
payments on the Discount Notes.
The Company's former obligations under the Credit Agreement bore interest
at floating rates making the Company sensitive to changes in prevailing interest
rates. Accordingly, in order to minimize the effect of significant changes in
prevailing interest rates, and as permitted by the Credit Agreement, the Company
has from time to time entered into interest rate swap and interest rate cap
agreements. At March 31, 1995, the Company was a counterparty to a swap
expiring December 1, 1995, based on six-month LIBOR with a notional amount of
$150 million. Interest rate cap agreements, based on six-month LIBOR capped at
6% with a total notional amount of $250 million, cover all or a portion of the
period from February 1, 1995 through February 1, 1996. Premiums for these
agreements accrue to interest expense over the life of each agreement. Any
interest rate differentials to be received or paid are recognized as adjustments
to interest expense. The net effect on interest expense from interest rate
instruments was insignificant for the quarters ended March 31, 1995 and 1994.
Market risk relating to financial instruments is evaluated periodically based on
quotes from financial institutions.
The Company had working capital deficits of $23.5 million at March 31, 1995
and $57.5 million at December 31, 1994. 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, 1995 improved from the December 31, 1994 deficit due to the
reduction in the current portion of long-term debt. The Credit Agreement (the
current portion of
14
<PAGE>
which was $100.0 million) was repaid in connection with the Acquisition and was
replaced with funds provided by Cadbury (the current portion of which was $41.8
million at March 31, 1995) (See Note 3). The Company does not believe that such
deficits will have a material adverse effect on its liquidity or operations.
The indenture governing the Discount Notes 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 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.
As a result of the Acquisition, Cadbury owns approximately 98.7% of the
outstanding Common Stock of the Company and controls the operations of the
Company. The Company is thus able to access the resources of Cadbury in
addition to cash provided by operations to fund its cash requirements. The
outstanding balance of the Credit Agreement was repaid with cash provided by
Cadbury and the Credit Agreement was terminated, effective as of March 6, 1995.
ITEM 1. LEGAL PROCEEDINGS
See Note 5 to Consolidated Condensed Financial Statements which is
hereby incorporated by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
March 31, 1995.
15
<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 12, 1995
/s/ NELSON A. BANGS
------------------------------
Nelson A. Bangs
Vice President and Secretary
16
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