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PART I EXHIBIT 3 Quarterly Report to Shareholders ••.•.••.•.• ••• •.•••.• ::::::~ ;::: :::•';t•: ... ... ••• ••• •. ... ... ... ... ••' :.:' ... ... ••.••;•: .•.. ••• •.•:f•• ... •• ••. ... ~; :••••~: ::: '•:::~• ••• ~ THE SEVEN-UP COMPANY d FINANCIAL REPORT PERIOD ENDING MARCH 31, 1978 .......;... •.....r..., i:J. :i: .• ..• •.. ..• ~~. .. ..• ... ... ~~. •.. ... •.. ... ~.. ... ... .....l.: ..• •.. ... THE SEVEN•UP COMPANY, 121 SOUTH MERAMEC, ST. LOUIS, MO. 63105 -11-

TO OUR SHAREHOLDERS: First quarter 1978 consolidated sales and net income of The Seven-Up Company were the largest first quarter results in Company history. These results incorporate for the first time the operations of our newly acquired sub- sidiary, Oregon Freeze Dry Foods, Inc., Albany, Ore. Oregon Freeze Dry Foods became a part of the 7UP family on February 16, 1978. Net sales were $60,271,221, an increase of 19.5 percent over first quarter 1977 sales of $50,416,083. Net income was $5,770,703, an increase of 18.6 percent over the previous year's re- sult of $4,864,263. Earnings per share of 53 cents were 17.8 percent larger than the 45 cents earned in 1977. Both sales and net in- come results exceeded your management's ob- jectives for the first quarter. Soft drink consolidated unit sales of both regular and Sugar Free 7UP extract and fin- ished goods were up sharply from the de- pressed first quarter of 1977. 1978 unit sales also exceeded significantly the previous record first quarter results of 1976, which had been inflated by an anticipated transportation strike. In the U.S., although severe winter weather affected some major markets, soft drink ex- tract unit sales were up sharply. This reflected not only more normal bottler inventory levels but also improved consumer sales of both 7UP and Sugar Free 7UP. In Canada, unit sales of 7UP continued to accelerate, but first quarter sales of DIET 7UP-the replacement for sac- charin-sweetened Sugar Free 7UP-were below year-earlier levels. Unit sales in international markets were influenced favorably by initial in- ventory requirements for the new Cairo, Egypt 7UP operation scheduled to begin operation in late May. In other international markets, impressive unit sales were achieved, with sales in Central and South America significantly higher than the previous year. Unit sales of lemon products, which con- stitute the balance of the beverage product segment, were up modestly for the quarter. Dollar sales were influenced favorably by in- creased selling prices and expanded production capacity, resulting in a record contribution to reported net income. First quarter unit sales of food flavor, color and specialty products were modestly below 1977 results, but average selling prices in- creased for the period. Improved productivity and operations contributed to sharply higher net income for the quarter. Gross profit on sales for the period ending March 31, 1978, was $30,393,552, increasing 18.9 percent from the first quarter of 1977. During the current quarter, product prices were increased to offset rising raw material and container costs. These increases were primarily in the finished soft drink, lemon and food flavor product groups. Quarterly gross profit for 1978 was 50.4 percent of sales, compared with 50.7 percent in 1977. Operating expenses for the quarter were $20,004,395 in 1978. This is a 16.4 percent increase over 1977 operating expenses of $17,184,255. Increased expenditures accrued for marketing support, higher research and development costs, and employment costs (re- flecting additional personnel) accounted for approximately 85 percent of the $2,820,140 increase in operating expenses. Current quarter operating expenses were 33.2 percent of sales, compared with 34.1 percent in 1977.

Operating profits in 1978 were $10,389,157 or 17.2 percent of sales. This compared with $8,369,046 or 16.6 percent in 1977. The 24.1 percent increase in operating profits reflected not only sales of higher margined soft drink units but also carefully controlled operating expenditures. Net other income for the quarter was $659,348 in 1978, compared with $541,727 in 1977. Both interest income, net of interest expense, and royalty income were sharply higher for the current quarter. This reflected improved investment yields as well as royalties from international business. Adjustments for translation and foreign exchange transactions were not material in either 1978 or 1977. Income before taxes was $11,048,505, an increase of 24.0 percent over the $8,910,773 in 1977. The Company's provision for taxes in the first quarter of 1978, while higher than 1977, is expected to be maintained at these levels for the current 1978 fiscal year. In 1979, we will celebrate the 50th an- niversary of 7UP. In these 50 years, The Seven- Up Company has focused all of its efforts on one soft drink brand, 7UP. We will be breaking from tradition this year ... with the introduction of a new soft drink brand that will meet all of the high standards of quality, flavor and taste appeal that con- sumers expect from products of The Seven-Up Company. This new soft drink brand from The Seven- Up Company is QUIRST. It is a lemonade. It has been developed by our recently created New Products group . . . headed by key people from our marketing and research and development departments. Our taste test work shows that QUIRST meets and exceeds all of the attributes consumers are looking for iA a lemonade ... good-tasting, flavorful, thirst- quenching, less filling and made with natural flavor. QUIRST will be test-marketed beginning in late May in a number of selected markets representing approximately 20% of the U.S. We will be making a public announcement on our marketing plans for the brand only after we have disclosed full details to 7UP Devel- opers. It is our understanding that the Squirt Company has filed a lawsuit alleging that the trademark for our lemonade infringes their trademark Squirt, a grapefruit flavored drink. The Seven-Up Company believes these charges to be untenable and will fully defend its position. After a delay of several years, the Federal Trade Commission has finally decided the Coca- Cola and Pepsi-Cola cases. These are the first in a group of eight soft drink franchising com- pany cases in which the soft drink industry's territorial distribution system is questioned. After presiding over the trial of the Coca-Cola case, Judge DuFresne, the Administrative Law Judge, decided that the system of restricting territories in the soft drink industry-does not violate antitrust laws. The government lawyers appealed Judge DuFresne's opinion to the FTC. The FTC has just overruled Judge DuFresne's opinion indicating that, except for returnable bottles, the territorial system is in violation of the antitrust laws.

I The case has been appealed by Coca-Cola to the U.S. Court of Appeals in Washington, D.C. Pepsi-Cola has appealed to the U.S. Court of Appeals in New York City. The losing side in each Court of Appeals will no doubt try to obtain review of the case by the U.S. Supreme Court. The entire appeal process could take several more years. It is the opinion of The Seven-Up Company that this decision is wrong as a matter of law and not supportable by the record. For these reasons, we are optimistic that it will be set aside on appeal and the Administrative Law Judge's opinion reinstated. In the meantime, The Seven-Up Company intends, for sound business and legal reasons, to continue to comply with its contractual obligations and en- force the territorial restrictions of our franchise agreements. We are gratified to be able to report the solid growth achieved in the first quarter. We regard the balance of 1978 as a year of chal- lenge and opportunity. It will require emphasis on the basic marketing strengths and expertise of The Seven-Up Company. It will require a con- tinuation of the strong support historically pro- vided by 7UP Developers, the people of The Seven-Up Company and you, our shareholders. That is why we are confident about the future. Z_, ., N. W Ben H. Wells Chairman of the Board LJWA. er 0 Z=::~ William E. Winter President and Chief Executive Officer STATEMENT OF INCOME THE SEVEN-UP COMPANY AND SUBSIDIARIES Net sales .................... Cost of sales ................. Gross profit .................. Selling, administrative and general expense .......... Operating profit .............. Net other income ............. Income before taxes ........... Provision for taxes ............ Net income .................. Net income per share of common stock ......... Common shares outstanding based on weighted average.. Net sales .................... Net income .................. Net income per share of common stock ........... $ 60,271,221 $ 50,416,083 29,877,669 24,862,782 30,393,552 25,553,301 20,004,395 17,184,255 10,389,157 8,369,046 659,348 541,727 11,048,505 8,910,773 5,277,802 4,046,510 S 5,770,703 $ 4,864,263 $0.53 $0.45 10,738,719 Twelve Months Ended March 31 1978 1 1977 $260,853,193 26,695,724 $234,669,062 24,717,105 ;2.46 $2.28 In the opinion of management, this information includes aIi adjustments which are necessary for the fair presentation of the results of operations for these periods. .-.

PART II OTHER INFORMATION 1 i2 )5 Item 1. Legal Proceedings (a) On April 7, 1978, The Squirt Company filed suit against The Seven-Up Company and one of its wholly-owned subsidiaries in the United States District Court of the Eastern District of Missouri in St. Louis. This civil action Is filed as No. 78-0375-C (4) and is a trade name and trademark infringement suit alleging unfair competition. The Squirt Company seeks a preliminary and permanent injunction against defendants from introducing a non-carbonated lemonade soft drink by the name "Quirst" into the marketplace. In addition to ifijunctive relief, the plaintiff is seeking unspecified monitary damages and costs. The Registrant believes that the basis for this lawsuit is untenable and based on the opinion of counsel believes it will prevail in this action. The Registrant concludes that this litigation, even if successful, will not materially affect the operations of Registrant. Item 2. Changes in the Rights of the Company's Security Holders On April 10, 1978, at the, Registrant's Annual Meeting of Shareholders, the Shareholders adopted an amendment to the Restated Articles of Incorporation of the Registrant. The effect of this amendment was to provide that the number and manner in which Directors shall be elected shall be provided by the By-Laws of the corporation. Prior to this amendment, the number of Directors of the corporation was specifically set at eleven (11) by the Articles of Incorporation. Exhibit 1 of part 11 attached hereto is a copy of the amendment to the Article FOURTH of the Restated Articles of Incorporation. Item 7. Results of Votes by Security Holders On April 10, 1978, the Annual Meeting of Shareholders of Registrant was held at the World Headquarters of The Seven-Up Company, 121 South Meramec, St. Louis, Missouri 63105. At the Annual Meeting of Shareholders, the Share- holders approved an amendment to' the Article FOURTH of the Company's Restated Articles of Incorporation and elected eleven (11) Classified Board of Directors. Registrant solicited proxies under regulation 14A in the SEC Proxy Rules and incorporates herein by reference Exhibit 2 of Part II as to all proceedings trans- piring at the Annual Meeting of Shareholders. Item 8. Other Material and Important Events On May 1, 1978, PMI, Inc., a wholly owned subsidiary of Hhilip Morris, Inc., filed with the Securities and Exchange Commission schedule 14D-1 regarding its cash tender offer for all the outstanding common stock of The Seven-Up Company. On May 3, 1978, the Registrant filed with the Securities and Exchange Commission form 14-D with respLct to the public tender offer by PMI, Inc. Registrant attaches as exhibits to Part II hereof the following press releases as issued by Registrant with respect to the tender offer by PMI, Inc.: Txhibit 3 Press Release dated May 1, 1978 I3xhihit 4 Press Release dated May 2, 1978 l:xhibit 5 Press Relea:.o dated May 6, 1978 -12-

Item 8 - cont'd On May 10, 1978, The Seven-Up Company filed a lawsuit in the United States District Court, Eastern District of Missouri in St. Louis, against Philip Morris and its wholly owned subsidiary, PMI, Inc., asking the court to order Tfiilip Morris to publish notice of Philip Morris' tender offer to buy Seven-Up Common Stock in complete form as required under the Securities Laws of the United States. On May 11, 1978, The Seven-Up Company, Philip Morris and its wholly owned subsidiary, PMI, Inc. , entered into an agreement of stipulation in lieu of the court entering a temporary restraining order. The agreement of stipulation is as follows: (1) Philip Morris w ill publish the full revised text of its offer no later than Saturday, May 13, 1978, in the New York Times and not later than Saturday, May 13, 1978, in one of the St. Louis newspapaers and not later than Sunday, May 14, 1978, in the other St. Louis newspaper. (2) The revised offer will state that it expires at 5:00 p. m. , Eastern Daylight Time, Monday, May 22, 1978. (3) The revised published offer will state further that any Seven-Up stockholders who have previously tendered the ir Seven-Up common stock in response to Philip Morris' offer or any stockholders who tender their stock in response to the revised offer may withdraw their tendered shares by 5:00 p.m., Eastern Daylight Time, May 22, 1978. (4) If Philip Morris complies with these conditions, The Seven-Up Company will dismiss its lawsuit against Philip Morris. There will be a hearing before the judge to determ ine whether there has been compliance at 9:30 a. m. , Wednesday, May 24, 1978.

Item 9. Exhibits to Part II and Reports on Form 8-K (a) Exhibits 1. Amendment to Article FOURTH of Restated Articles of Incorporation. 2. Proxy Statement dated March 16, 1978 3. Press Release - May 1, 1978 4. Press Release - May 2, 1978 5. Press Release - May 6, 1978 (b) Reports on Form 8-K. There were no reports on Form 8-K filed for the three months ended March 31, 1978.

State of Misrouri ... 0', f ficc o fSccrctary of State JAMES C. KIRKI'ATEtICK., Secretary of State Amendment of Articles of Incorporation (To be submittod in duplicate by an attorney) HONORABLE JAMES C. KIRIfl'ATIiICK SECRETARY OF STATE STATE OF MISSOURI E~ ~ RSON CITY, MO. 65101 Pursuant to the provisions of The General and Business Corporation Law of Missouri, the undersigned Corporation certifies the following: (1) The name of the Corporation is THE SEVEN-UP COMPANY The name under which it was originally organized was THE HOI+IDY COMPANY (2) An amendment to ti,.e Corporation's Articles of Incorporation was adopted by the shareholders on April 10, ig78 . (3) Article r OURTH is amended to read as follows: "FOURTH. The number of Directors of this Corporation shall be fixed by, or in the manner provided in, the By-Laws of the Corporation. Any changes in the number of Directors shall be reported to the Secretary of State of Missouri within thirty (30) days of such change." Ni.ED n1ylD CErzT11Frcf1lE tS~Ij L') ~. . ~c~,~crct:ca Copf. r'^C: r.• q'j -14_, (if nuoro ll1.cii c1itc• tu lic tc• ix Icc l,o :nnc•nclrcl or iiturc. r;ic,crc• is nc•c•cic•d a1ttarit fly ~;hc rt) I

PART II EXHIBIT 2 The Seven-Up Company NOTICE OF ANNUAL MEETING OF SHAREHOLDERS April 10, 1978 TO THE SHAREHOLDERS OF THE SEVEN-UP COMPANY: The annual meeting of shareholders of The Seven-Up Company will be held at the World Head- quarters of the Company at 121 South Meramec, St. Louis, Missouri 63105 on Monday, April 10, 1978 at 10:00 a.m., St. Louis time for the following purposes: 1. To adopt a proposed amendment to Article FOURTH of the Company's Restated Articles of Incorporation as set forth in Exhibit A to the attached Proxy Statement (and corresponding By-Law amendments, as set forth in Exhibit B to the attached Proxy Statement) which in ef- fect will provide that the By-Laws of the Corporation shall determine the number of and manner in which the members of the Board of Directors are to be elected. Furthermore, such By-Law amendments provide that the number of Directors of this Corporation shall be eleven (11) clas- sified into three (3) classes of Directors with one class (Class I) having three (3) members and two classes (Class II and Class III) having four (4) members each. Each member of each class of Directors shall be elected to a term of three (3) years with the election of the respec- tive classes of Directors being staggered so that the term of the members of one of the three classes of Directors shall expire at each annual meeting of shareholders; provided, however, that with respect to the initial election of Directors on April 10, 1978, all eleven (11) Directors shall be elected by class for specific initial terms. (See paragraph 2 below) 2. To elect a Board of Directors, consisting of: (a) Eleven (11) members. If the proposed amendment to Article FOURTH of the Company's Restated Articles of Incorporation, as described in paragraph 1 above, is approved, the eleven (11) Directors shall be elected to their respective classes as shown on page 6 of the accom- panying Proxy Statement with each serving for an initial term as follows: Class I - until the 1979 Annual Meeting of Shareholders Class II - until the 1980 Annual Meeting of Shareholders Class III - until the 1981 Annual Meeting of Shareholders OR (b) Eleven (11) members. If the proposed amendment to Article FOURTH of the Company's Restated Articles of Incorporation, as described in paragraph 1 above, is not approved, the eleven (11) Directors as shown on page 6 of the accompanying Proxy Statement shall be elected to serve until the 1979 Annual Meeting of Shareholders. 3. To elect Auditors. 4. To transact such other business as may properly come before the meeting or any adjourn- ment thereof. Holders of Common Stock of record at the close of business March 1, 1978, will be entitled to vote at the meeting. By Order of the Board of Directors March 16, 1978 ROBERT W. SIMPSON St. Louis, Missouri Secretary If you do not expect to be present personally at the meeting, please sign and date the accompany- ing proxy and return it promptly in the enclosed business reply envelope, which requires no postage if mailed in the United States. It will assist us in preparing for the meeting if shareholders who do not plan to attend in person return their proxies promptly.

PROXY STATEMENT This statement is furnished in connection with a solicitation of proxies by the management of The Seven-Up Company (herein called the "Company") to be used at the annual meeting of share- holders of the Company to be held on April 10, 1978 for the purposes set forth in the accompanying notice of annual meeting of shareholders. If the enclosed form of proxy is executed and returned, it may be revoked at any time by attending the meeting and voting in person or by filing with the Secre- tary of the Company a written notice withdrawing the proxy or by giving a proxy bearing a later date. The Annual Report for the twelve months ending December 31, 1977 is enclosed herewith. Shareholders may receive without charge, upon written request to the Secretary of the Company, a copy of its Form 10-K Annual Report, including the financial statements and schedules thereto, re- quired to be filed with the Securities and Exchange Commission. Copies of the exhibits to the report will be provided upon the payment of a fee of five cents for each page copied. It is estimated that the exhibits to the Form 10-K will approximate ten pages. The only class of voting securities of the Company entitled to vote at the annual meeting is its $1.00 par value Common Stock. Each share is entitled to one vote. Cumulative voting for Directors is required by the laws of Missouri; consequently, each shareholder is entitled to cast as many votes in the aggregate as shall equal the number of voting shares held by him, multiplied by the number of directors to be elected, and he may cast the whole number of votes for one candidate or distribute them among two or more candidates. The record date for determining common shareholders entitled to vote at the annual meeting is March 1, 1978 at which time there were 10,724,151 shares outstanding. Various descendants and relatives (including Margaret B. Grigg, widow of H. C. Grigg, Douglas W. Grigg, Robert A. Ridgway and Katherine G. Wells, wife of Ben H. Wells) of C. L. Grigg, E. G. Ridgway and Frank Y. Gladney, who founded the Company, and trusts in which the foregoing have interests, owned on March 1, 1978 approximately 48% of the Company's outstanding Common Stock. See footnotes, 1, 4, 5, 6 and 8 on pages 8 and 9. No person owns of record, or is known by the Company to own beneficially, more than 10 percent of the Company's outstanding Common Stock. Some or all of the descendants and trusts may be deemed "parents" of the Company under the rules and regulations of the Securities and Exchange Commission. SOLICITATION OF PROXIES Proxies will be solicited by mail. They may also be solicited by officers and regular employees of the Company personally or by telephone or telegraph, but such persons will not be specifically com- pensated for such services. Banks, brokers, nominees and other custodians and fiduciaries may be re- imbursed for their reasonable out-of-pocket expenses in forwarding soliciting material to their princi- pals, the beneficial owners of stock of the Company. The cost of soliciting proxies will be borne by the Company. ADOPTION OF AMENDMENT TO THE COMPANY'S RESTATED ARTICLES OF INCORPORATION - Item 1 At present, Article FOURTH of the Company's Restated Articles of Incorporation sets the num- ber of Directors at eleven (11). In addition, the present By-Laws of the Company provide for the 3