<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 June 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 June 30, 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
June 30, 1995 and December 31, 1994 3
Consolidated Condensed Statements of Operations
Three and six months ended June 30, 1995 and 1994 4
Consolidated Condensed Statement of Stockholders' Deficit
Six months ended June 30, 1995 5
Consolidated Condensed Statements of Cash Flows
Six months ended June 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 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 6. Exhibits and Reports on Form 8-K 15
<PAGE>
DR PEPPER/SEVEN-UP COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
------------- -------------
(Unaudited)
ASSETS
------------------------------------------------------------
<S> <C> <C>
Current assets:
Accounts receivable, less allowance for
doubtful accounts of $1,860 in 1995 and
$1,668 in 1994 $ 105,152 80,995
Inventories 18,171 16,648
Prepaid advertising and other current assets 4,844 22,892
Deferred income taxes 5,524 23,532
------------ ------------
Total current assets 133,691 144,067
------------ ------------
Property, plant and equipment, net 17,764 18,607
Intangible assets 538,317 538,317
Less accumulated amortization 131,090 124,538
------------ ------------
Total intangible assets, net 407,227 413,779
------------ ------------
Other assets, net 14,541 32,265
------------ ------------
Total assets $ 573,223 608,718
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
------------------------------------------------------------
Current liabilities:
Accounts payable $ 28,950 19,999
Accrued expenses 100,399 81,454
Current portion of long-term debt 67 100,067
Due to Cadbury 102,445 -
------------ ------------
Total current liabilities 231,861 201,520
------------ ------------
Long-term debt, less current portion 265,935 693,159
Due to Cadbury 400,000 -
Deferred credits and other 11,102 15,178
Deferred income taxes 22,544 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 (964,988) (761,153)
Foreign currency translation adjustment 119 223
------------ ------------
Total stockholders' deficit (358,219) (344,110)
------------ ------------
Total liabilities and stockholders' deficit $ 573,223 608,718
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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DR PEPPER/SEVEN-UP COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1995 and 1994
Unaudited
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
---------------------------- -----------------------
1995 1994 1995 1994
----------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Net sales $ 207,476 197,389 403,058 383,130
Cost of sales 38,045 32,876 69,478 64,633
---------- ---------- ---------- ----------
Gross profit 169,431 164,513 333,580 318,497
---------- ---------- ---------- ----------
Operating expenses:
Marketing 104,890 98,533 339,297 192,670
General and administrative 24,411 7,933 134,747 16,316
Amortization of intangible assets 3,276 2,782 6,552 6,551
---------- ---------- ---------- ----------
Total operating expenses 132,577 109,248 480,596 215,537
---------- ---------- ---------- ----------
Operating profit (loss) 36,854 55,265 (147,016) 102,960
Other income (expense):
Interest expense (17,224) (18,283) (34,643) (36,610)
Other, net 224 (406) (10,049) (807)
---------- ---------- ---------- ----------
Income (loss) before income taxes and
extraordinary item 19,854 36,576 (191,708) 65,543
Income tax expense (benefit) (264) 12,762 (3,338) 24,033
---------- ---------- ---------- ----------
Income (loss) before extraordinary item 20,118 23,814 (188,370) 41,510
Extraordinary item - extinguishments of debt
less applicable income taxes of $0 and $4,368,
respectively - - 15,465 8,112
---------- ---------- ---------- ----------
Net income (loss) $ 20,118 23,814 (203,835) 33,398
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income (loss) per common share and share
equivalents:
Income (loss) before extraordinary item $ 0.29 0.36 (2.73) 0.62
Extraordinary item - - (.23) (0.12)
---------- ---------- ---------- ----------
Net income (loss) $ 0.29 0.36 (2.96) 0.50
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares and share
equivalents outstanding 68,924 66,937 68,924 66,958
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
DR PEPPER/SEVEN-UP COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIT
For the Six Months Ended June 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> <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 - - - (203,835) - (203,835)
Other - - (1,263) - (104) (1,367)
--------- -------- ---------- ---------- --------- ----------
Balance at June 30, 1995 61,804 $ 617 606,033 (964,988) 119 (358,219)
--------- -------- ---------- ---------- --------- ----------
--------- -------- ---------- ---------- --------- ----------
</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 Six Months Ended June 30, 1995 and 1994
Unaudited
(In thousands)
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (203,835) 33,398
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 23,198 27,433
Deferred income taxes (2,419) 11,665
Debt restructuring charge 15,465 1,305
Changes in assets and liabilities:
Accounts receivable (24,157) (22,575)
Inventories (1,523) (2,450)
Prepaid advertising and other assets 19,320 3,142
Accounts payable and accrued expenses 19,447 (18,140)
Other (5,088) 5,733
---------- ----------
Net cash provided by (used in) operating activities (159,592) 39,511
---------- ----------
Cash flows from investing activities:
Capital expenditures (600) (1,094)
Other (400) (697)
---------- ----------
Net cash used in investing activities (1,000) (1,791)
---------- ----------
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 (58,055) -
Proceeds from long-term debt 75,845 162,000
Payments on long-term debt (616,875) (151,735)
Retirement of subordinated debt - (48,445)
Increase (decrease) in cash overdraft 8,449 (1,256)
Other 202 1,716
---------- ----------
Net cash provided by (used in) financing activities 160,592 (37,720)
---------- ----------
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
JUNE 30, 1995
1. General
The accompanying consolidated condensed balance sheet as of June 30, 1995,
the consolidated condensed statements of operations for the three and six
months ended June 30, 1995 and 1994, the consolidated condensed statement
of stockholders' deficit for the six months ended June 30, 1995 and the
consolidated condensed statements of cash flows for the six months ended
June 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 six months ended June 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 66,937,000 shares for the three
months ended June 30, 1995 and 1994, respectively, and 68,924,000 and
66,958,000 shares for the six months ended June 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
7
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scheduled, at midnight on 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
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
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 (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 $102.4
million at June 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 June 30, 1995 and December 31,
1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Finished products $ 6,171 6,449
Raw materials and supplies 12,000 10,199
----------- ----------
Total inventories $ 18,171 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, the plaintiff has
amended the complaint to cure the Court's concerns. By order dated
June 28, 1995, the Court ordered the parties to mediation to determine
whether the case can be settled. Plaintiff has recently filed a motion
for summary judgment. Defendants have filed a cross-motion for
summary judgment and a response to Plaintiff's motion. 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 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 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. 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.
(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
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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 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 is reconsidering the
Company's motion for summary judgment in light of recent changes
in Texas law. Depending on the outcome of that review, the case is set
for trial on October 2, 1995. 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
11
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on June 7, 1995. The Company 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 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 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
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DR PEPPER/SEVEN-UP COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JUNE 30, 1995
RESULTS OF OPERATIONS -SIX MONTHS ENDED JUNE 30, 1995 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1994 AND THREE MONTHS ENDED JUNE 30, 1995 COMPARED TO THREE
MONTHS ENDED JUNE 30, 1994
Net sales for the six months ended June 30, 1995 increased 5% to $403.1
million compared to $383.1 million for the six months ended June 30, 1994. Net
sales for the three months ended June 30, 1995 also increased 5% to $207.5
million compared to $197.4 million in the second 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 six months ended June 30, 1995 increased 7% to $69.5
million compared to $64.6 million in the first six months of 1994. Cost of
sales for the three months ended June 30, 1995 increased 16% to $38.0
million compared to $32.9 million in the second quarter of 1994. Gross profit
as a percentage of net sales for the six months ended June 30 decreased from
83.1% in 1994 to 82.8% 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 123%
to $480.6 million in the first six months of 1995 compared to $215.5 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 June 30, 1995 increased
21% to $132.6 million from $109.2 million in the second quarter of the prior
year.
As a result of the above factors, operating loss for the six months
ended June 30, 1995 was $147.0 million compared to $103.0 million of
operating profit in the first six months of 1994. Operating profit for the
three months ended June 30, 1995 of $36.9 million was 33% lower than the
$55.3 million operating profit earned in the second quarter of 1994.
Interest expense for the six months ended June 30, 1995 decreased 5% to
$34.6 million compared to $36.6 million in the second quarter of 1994. Interest
expense for the three months ended June 30, 1995 decreased 6% to $17.2 million
compared to $18.3 million in the second quarter of 1994. These decreases were
principally due to the impact of the Company's deleveraging efforts.
Other expense for the first six months of 1995 principally reflects
investment banking and legal fees incurred in connection with the Acquisition.
The decrease in income tax expense in the first six and three months of
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
13
<PAGE>
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.
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 six 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 six months of
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 $203.8 million of
net loss in the first six months of 1995 compared to $33.4 million of net income
earned in the same period in 1994. For the three months ended June 30, 1995, the
Company earned $20.1 million of net income compared to $23.8 million of net
income earned in the second 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.
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 June 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.
14
<PAGE>
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 six months ended June 30,
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 $98.2 million at June 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 June 30, 1995 increased versus the deficit at December 31, 1994 due
to the net decrease 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.
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: August _____, 1995
/s/ NELSON A. BANGS
-------------------------------
Nelson A. Bangs
Vice President, Secretary & General Counsel
16
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