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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 SEPTEMBER 30, 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 September 30, 1995 was as follows: 61,810,703 shares of
Common Stock.
1
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DR PEPPER/SEVEN-UP COMPAN IES, INC.
INDEX
PART I-FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
September 30, 1995 and December 31, 1994 3
Consolidated Condensed Statements of Operations
Three and nine months ended September 30, 1995 and 1994 4
Consolidated Condensed Statement of Stockholders' Deficit
Nine months ended September 30, 1995 5
Consolidated Condensed Statements of Cash Flows
Nine months ended September 30, 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 14
PART II-OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
2
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DR PEPPER/SEVEN-UP COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
(UNAUDITED)
ASSETS
- ---------------------------------------------------
<S> <C> <C>
Current assets:
Accounts receivable, less allowance for
doubtful accounts of $1,956 in 1995 and
$1,668 in 1994 $ 90,735 80,995
Inventories 16,960 16,648
Prepaid advertising and other current assets 4,689 22,892
Deferred income taxes 8,198 23,532
--------- --------
Total current assets 120,582 144,067
--------- --------
Property, plant and equipment, net 18,244 18,607
Intangible assets 538,317 538,317
Less accumulated amortization 134,365 124,538
--------- --------
Total intangible assets, net 403,952 413,779
--------- --------
Other assets, net 13,843 32,265
--------- --------
Total assets $ 556,621 608,718
========== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -----------------------------------------------------
Current liabilities:
Accounts payable $ 30,398 19,999
Accrued expenses 102,948 81,454
Current portion of long-term debt 67 100,067
Due to Cadbury 36,663 -
--------- --------
Total current liabilities 170,076 201,520
--------- --------
Long-term debt, less current portion 273,422 693,159
Due to Cadbury 400,000 -
Deferred credits and other 9,720 15,178
Deferred income taxes 26,433 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 (929,858) (761,153)
Foreign currency translation adjustment 178 223
--------- --------
Total stockholders' deficit (323,030) (344,110)
--------- --------
Total liabilities and stockholders' deficit $ 556,621 608,718
========== ========
</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 AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------------- --------------------
1995 1994 1995 1994
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales $208,678 $201,928 $ 611,736 $585,058
Cost of sales 34,838 34,122 104,316 98,755
-------- -------- --------- --------
Gross profit 173,840 167,806 507,420 486,303
-------- -------- --------- --------
Operating expenses:
Marketing 104,743 103,819 444,040 296,489
General and administrative 9,407 7,871 144,154 24,187
Amortization of intangible assets 3,276 3,277 9,828 9,828
-------- -------- --------- --------
Total operating expenses 117,426 114,967 598,022 330,504
-------- -------- --------- --------
Operating profit (loss) 56,414 52,839 (90,602) 155,799
Other income (expense):
Interest expense (18,431) (18,550) (53,074) (55,160)
Other, net (116) (273) (10,165) (1,080)
-------- -------- --------- --------
Income (loss) before income
taxes and extraordinary item 37,867 34,016 (153,841) 99,559
Income tax expense (benefit) 2,737 12,040 (601) 36,073
-------- -------- --------- --------
Income (loss) before
extraordinary item 35,130 21,976 (153,240) 63,486
Extraordinary item - extinguishments
of debt less applicable income
taxes of $0 and $5,030,
respectively - 1,229 15,465 9,341
-------- -------- --------- --------
Net income (loss) $ 35,130 $ 20,747 $(168,705) $ 54,145
======== ======== ========= ========
Income (loss) per common share
and share equivalents:
Income (loss) before
extraordinary item $ 0.51 $ 0.30 $ (2.22) $ 0.92
Extraordinary item - (0.02) (.23) (0.14)
-------- -------- --------- --------
Net income (loss) $ 0.51 $ 0.28 $ (2.45) $ 0.78
======== ======== ========= ========
Weighted average shares and
share equivalents outstanding 68,924 66,913 68,924 66,949
======== ======== ========= ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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DR PEPPER/SEVEN-UP COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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>
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 - - - (168,705) - (168,705)
Other - - (1,263) - (45) (1,308)
------ ---- -------- --------- ---- ---------
Balance at September 30, 1995 61,804 $617 $606,033 $(929,858) $178 $(323,030)
====== ==== ======== ========= ==== =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
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DR PEPPER/SEVEN-UP COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(168,705) 54,145
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 34,858 40,820
Deferred income taxes (1,204) 17,416
Debt restructuring charge 15,465 1,603
Changes in assets and liabilities:
Accounts receivable (9,740) (13,156)
Inventories (312) (2,469)
Prepaid advertising and other assets 20,013 (5,100)
Accounts payable and accrued expenses 26,772 (17,868)
Other (6,117) 7,750
--------- ---------
Net cash provided by (used in)
operating activities (88,970) 83,141
--------- ---------
Cash flows from investing activities:
Capital expenditures (2,098) (1,591)
Other (400) (697)
--------- ---------
Net cash used in investing activities (2,498) (2,288)
--------- ---------
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 (123,837) -
Proceeds from long-term debt 75,845 207,000
Payments on long-term debt (616,889) (276,335)
Retirement of subordinated debt - (13,902)
Increase in cash overdraft 5,121 139
Other 202 2,245
--------- ---------
Net cash provided by (used in)
financing activities 91,468 (80,853)
--------- ---------
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
SEPTEMBER 30, 1995
1. GENERAL
The accompanying consolidated condensed balance sheet
as of September 30, 1995, the consolidated condensed
statements of operations for the three and nine months
ended September 30, 1995 and 1994, the consolidated
condensed statement of stockholders' deficit for the
nine months ended September 30, 1995 and the
consolidated condensed statements of cash flows for the
nine months ended September 30, 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 nine months ended September 30, 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
68,924,000 and 66,913,000 shares for the three months
ended September 30, 1995 and 1994, respectively, and
68,924,000 and 66,949,000 shares for the nine months
ended September 30, 1995 and 1994, respectively.
Shares issuable upon exercise of stock options and
warrants are excluded from the 1995 calculation because
they are antidilutive. 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 on
Wednesday, March 1, 1995. A total of 45,387,180 shares
of Common Stock
7
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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 owned
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 at a meeting of the
stockholders of the Holding Company held on June 5,
1995, a wholly owned subsidiary of Purchaser was merged
(the "Merger") with and into the Company. As a result
of the Merger, 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 filed with the Company a written
objection to the Merger and had 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), was
automatically converted into the right to receive
$33.00 in cash, without interest. Accordingly,
Purchaser and other wholly owned subsidiaries of
Cadbury now own 100% of the issued and outstanding
shares of Common Stock.
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 canceled. Each holder of canceled 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
all option holders.
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 (reduced to $400.0
million on May 19, 1995) which has been classified as a
long-term payable in the accompanying consolidated
balance sheet. These borrowings bear interest at 9.5%.
The Company also received a working capital loan from
Cadbury. The balance of that loan was $36.7 million at
September 30, 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 September 30,
1995 and December 31, 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
--------- -------
<S> <C> <C>
Finished products $ 6,121 6,449
Raw materials and supplies 10,839 10,199
--------- -------
Total inventories $ 16,960 16,648
========= =======
</TABLE>
8
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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, Plaintiff amended the complaint to
cure the Court's concerns. After conducting
discovery on the merits, Plaintiff filed a motion
for summary judgment. Defendants filed a cross
motion for summary judgment and a response to
Plaintiff's motion. By order dated June 28, 1995,
the Court ordered the parties to mediation to
determine whether the case could be settled.
At mediation, the parties reached a tentative
settlement agreement, which is memorialized in
Stipulation of Settlement, dated September 14,
1995 (the "Stipulation"). The Stipulation
provides for a settlement of the King litigation
and includes the following general terms: (i) the
certification of the King litigation as a class
action under Federal Rule of Civil Procedure 23,
which class will consist of persons who sold the
Company's common stock or call options to acquire
the Company's stock (as defined in the Stipulation)
during the period on and between September 30,
1994 and October 25, 1994; (ii) the release of all
claims, rights, causes of action, suits, matters,
and issues, whether known or unknown, that could
have been or in the future might be asserted in
the King litigation or any court or proceeding, by
any member of the proposed settlement class
against Defendants and their respective past or
present directors, officers, employees, partners,
members, principals, agents, underwriters,
issuers, co-insurers, reinsurers, controlling
shareholders, attorneys, accountants, auditors,
investment bankers, advisors, personal
representatives, predecessors, successors,
parents, subsidiaries, divisions, assigns,
spouses, heirs, executors, administrators,
associates (as defined in SEC Rule 12b-2
promulgated pursuant to the Securities Exchange
Act of 1934), related or affiliated entities, any
members of their immediate families, or any trust
of which any defendant is the settlor or which is
for the benefit of any defendant and/or member(s)
of his family arising out of, relating to, or in
connection with (1) a potential transaction
involving the acquisition of the Company or
transactions or events arising out of the
acquisition of the Company; (2) transactions or
events described in any of the complaints filed in
the King litigation; (3) disclosures (including
any failure to make disclosures) relating to a
potential acquisition of the Company or disclosures
(including any failure to make disclosures)
described in any of the complaints filed in the
King litigation; or (4) the sale of the Company
common stock or call options (as defined in the
Stipulation) during the proposed class period;
(iii) Defendants have denied, and continue to deny,
that any of them have committed or threatened to
commit any violations of law or breaches of duty
to Plaintiff or any members of the proposed class;
and (iv) Defendants are entering into the
Stipulation solely because the proposed settlement
would eliminate the burden and expense of further
litigation, which they believe to be in the best
interest of the Company and all of its
stockholders. In addition, Defendants have
deposited $4,200,000 into an interest-bearing
escrow
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account (the "Settlement Fund"). If the
settlement is approved by the Court, the
Settlement Fund will be used to pay, among other
things, Plaintiff's attorneys' fees and claims
submitted by settlement class members. The
parties have requested that the Court grant
preliminary approval of the proposed settlement
and set a hearing to consider final approval of
the settlement.
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 a state court 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
Securities 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. non-suited the action pending
before the Texas Court and refiled it with the
Delaware Court. By order dated April 29, 1995, the
refiled Sarnoff case was consolidated with and
became 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.
Pursuant to the terms of the Memorandum of
Understanding, the parties entered into a
Stipulation of Compromise and Settlement, which
was filed with the Court on August 28, 1995. The
Court has set a settlement hearing for November
29, 1995, to determine whether, among other
things, the terms of the proposed settlement are
fair, reasonable, adequate, and in the best
interests of the proposed class, to determine
whether the consolidated action should be
certified as a class action, and to hear and
determine any objections to the proposed
settlement. The Company believes that the
resolution of this litigation will not have a
material adverse effect on its operating results
or financial condition.
(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
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
11
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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 granted the Company's motion
for summary judgment on August 23, 1995. It is
unclear at this time whether Canco will appeal.
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
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. Canco dismissed
that suit on June 7, 1995.
(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 Bank One, 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
12
<PAGE>
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.
13
<PAGE>
DR PEPPER/SEVEN-UP COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1995
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1995
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1994 AND THREE MONTHS ENDED SEPTEMBER 30,
1995 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1994
Net sales for the nine months ended September 30, 1995
increased 5% to $611.7 million compared to $585.1 million
for the nine months ended September 30, 1994. Net sales for
the three months ended September 30, 1995 increased 3% to
$208.7 million compared to $201.9 million in the third
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 nine months ended September 30,
1995 increased 6% to $104.3 million compared to $98.8
million in the first nine months of 1994. Cost of sales for
the three months ended September 30, 1995 increased 2% to
$34.8 million compared to $34.1 million in the third quarter
of 1994. Gross profit as a percentage of net sales for the
nine months ended September 30, 1995 decreased from 83.1% in
1994 to 82.9% in 1995. These relationships primarily
reflect product mix.
Total operating expenses, which include marketing
expense, general and administrative expense and amortization
of intangible assets, increased 81% to $598.0 million in the
first nine months of 1995 compared to $330.5 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, restricted shares, and severance
costs incurred as a result of the Acquisition. There also
was an increased provision of marketing expenses as a result
of higher sales volume. Total operating expenses for the
three months ended September 30, 1995 increased 2% to $117.4
million from $115.0 million in the third quarter of the
prior year.
As a result of the above factors, operating loss for the
nine months ended September 30, 1995 was $90.6 million
compared to $155.8 million of operating profit in the first
nine months of 1994. Operating profit for the three months
ended September 30, 1995 of $56.4 million was 7% higher than
the $52.8 million operating profit earned in the third
quarter of 1994.
Interest expense for the nine months ended September 30,
1995 decreased 4% to $53.1 million compared to $55.2 million
in the third quarter of 1994. Interest expense for the
three months ended September 30, 1995 decreased 1% to $18.4
million compared to $18.6 million in the third quarter of
1994.
Other expense for the first nine months of 1995
principally reflects investment banking and legal fees
incurred in connection with the Acquisition.
The decrease in income tax expense in the nine months
and three months ending September 30, 1995 as compared to
the same periods 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 1995
loss due primarily to uncertainty of the Company's ability
to realize such benefits as a subsidiary of Cadbury.
14
<PAGE>
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 nine 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 $9.3
million was recorded in the first nine months of 1994, net
of a $5.0 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
$168.7 million of net loss in the first nine months of 1995
compared to $54.1 million of net income earned in the same
period in 1994. For the three months ended September 30,
1995, the Company earned $35.1 million of net income
compared to $20.7 million of net income earned in the third
quarter of 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.
Due to the former Credit Agreement, the Company has from
time to time entered into interest rate swap and interest
rate cap agreements. At September 30, 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 nine months ended September 30,
1995 and 1994. Market risk relating to financial
instruments is evaluated periodically based on quotes from
financial institutions.
15
<PAGE>
The Company had working capital deficits of
$49.5 million at September 30, 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 September
30, 1995 was improved from the December 31, 1994 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 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 and the consummation of
the Merger, Cadbury owns 100% 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
A report on Form 8-K was filed by the Company
on June 5, 1995 regarding the Company's change
in Certifying Accountants from KPMG Peat
Marwick to Arthur Andersen LLP.
16
<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: November 13, 1995
/s/ NELSON A. BANGS
-----------------------------
Nelson A. Bangs
Vice President, Secretary
& General Counsel
17
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