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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. .-.