Tobacco Documents Online

Company's financial position or its results of operations. Although the Company has not been appreciably affected by the applicability of such laws and regulations to its franchised bottlers, it is impossible to ascertain any future effect on the Company, in part because of the variation in legislative proposals and actions in the different states and in the sizes and resources of the franchised bottlers. Several states and local jurisdictions have enacted laws designed to reduce litter due to discarding of bottles, cans and other packaging material, and it is likely that other jurisdictions will enact similar laws. The Company is unable at this time to determine what impact, if any, such laws will have in the future on the Company or its franchised Developers. ITEM 1., (c) (1). Information as to Lines of Business (See ITEM 1, (c)(2), below.) ITEM 1., (c)(2) Information as to Classes of Similar Products or Services: The following table sets forth the approximate percentage contributions of each of the Company's principal classes of products to its net sales and income before income taxes for the periods shown: Year Ended December 31 1972 1973 1974 1975 1976 Net Sales Soft Drink Extracts, Flavorings, Compounds, and Finished Products 82.7% 81.8% 80.6% 80.2% 78.9% Flavors, Colors, Fragrances and Other Specialty Products 6.9 7.5 8.9 6.9 8.5 Lemon Products 10.4 10.7 10.5 12.9 12.6 100.0% 100.0% 100.0% 100.0% 100.0%

Year Ended December 31 1972 1973 1974 1975 1976 Income Before Income Taxes Soft Drink Extracts, Flavorings, Compounds and Finished Products 85.5% 86.2% 84.5% 89.5% 89.5% Flavors, Colors, Fragrances and Other Specialty Products 10.7 11.0 13.5 4.9 8.0 Lemon Products 3.8 2.8 2.0 5.6 2.5 100.0% 100.0% 100.0% 100.0% 100.0% In 1976, the percentage contribution of the Company's international operations to net sales was approximately 19%. Net income was modestly less than the percentage contribution of such operations to net sales. The following table sets forth the approximate percentage contributions to the Company's net sales for each of the Company's principal classes of products, constituting the first category under "Net_Sales" in the above table: Year Ended December 31 1972 1973 1974 1975 1976 Soft Drink Extracts, Flavoring Compounds and Certian Syrups 39.6% 40.1% 33.7% 37.0% 39.4% Finished Products (Canned and Bottled Soft Drinks and Fountain Syrup)* 3.1% 1.7% 6.9% 3.2% 9.5% *Includes vending equipment sales, which constituted less than 1.0% of the Company's net sales in each year. ITEM 2. The Summary of Operations: MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE SUMMARY OF OPERATIONS Among the Company's lines of business and classes of products, the Company has experienced variations in sales trends and profit margins as well as the effect of a changing sales and profit mix during the periods shown in the Summary of Operations. -12-

i ITEM 2. The Summary of Operations: CONSOLIDATED SUMMARY OF OPERATIONS THE SEVEN-UP COMPANY AND SUBSIDIARIES YEAR ENDED DECEMBER 31 1972 1973 1974 1975 1976 Net sales $132, 519, 867 $146, 748, 362 $190, 879, 628 $213, 622, 918 $233, 282, 664 Cost of products sold 69,722,488 75,783,214 110,046,723 112,421,231 117,166,232 62, 797, 379 70, 965, 148 80, 832, 905 101, 201, 687 116, 116, 432 Selling, administrative and general expenses 40, 153, 791 45, 164, 104 51, 212, 637 61, 263, 716 71, 482, 245 22,643,588 25,801,044 29,620,268 39,937,971 44,634,187 Other income (deduction): Interest earned 1,069,297 1,844,231 2,298,505 2,025,275 2,196,870 Interest expense (293,604) (438,406) (316,243) (255,448) (289,132) Miscellaneous - net (169,496) (101,523) 474,573 (1,863,335) 603,080 606,197 1,304,302 2,456,835 (93,508) 2,510,818 Income before income taxes 23, 249, 785 27, 105, 346 32, 077, 103 39, 844, 463 47, 145, 005 Income taxes 11, 205, 265 13, 023, 000 15, 489, 000 19, 504, 000 22, 394, 000 Net income (2) 12,044,520 14,082,346 16,588,103 20,340,463 24,751,005 Preferred dividend requirements: 67c Cumulative Preferred Stock 215,280 215,280 215,280 215,280 215,280 55.71 Convertible Class A Preferred Stock 398,521 284,485 269,191 114,910 613,801 499,765 484,471 330,190 215,280 Net income applicable to Common Stock $ 11,430,719 $ 13,582,581 $ 16,103,632 $ 20 010 273 $ 24 535 725 , , ~ , , W eighted average num ber of shares of Common Stock outstanding (3) 10,378,538 10,457,812 10,467 739 636 841 10 10 741 116 , , , ~ , , Per share of Common Stock (3): Net income $ 1.10 $ 1.30 $ 1.54 $ 1.88 $ 2 28 ~ . Cash dividends declared $ $ .4325 $ .61 $ .75 $ 1.13 See notes on following page.

NOTES TO CONSOLIDATED SUMMARY OF OPERATIONS (1) This summary should be read in conjunction with the related finan- cial statement and notes thereto incorporated by reference under Item 10(a). (2) The Company values its inventory at the lower of cost or market. Effective January 1, 1974, the Company changed its method of de- termining cost of sugar inventories from the first-in, first-out (FIFO) method to the last-in, first-out (LIFO) method. The change had the effect of reducing net income by $ 582 , 000 ($ . 056 per share) for the year ended December 31, 1974. (3) Net income per share of Common Stock is based on the weighted average number of shares outstanding during each year adjusted for dilutive stock options. Dividend requirements of the Preferred Stock are deducted from net income in computing net income per share of Common Stock.

1976 Compared with 1975 Dollar sales in 1976 increased by $19.7 million or 9.2% over 1975. In 1976, dollar sales growth was influenced more by real growth in product unit sales and tonnage shipped than increased product prices. Average 1976 selling prices of finished goods, which comprise almost 50% of total sales - particularly soft drinks and frozen concentrate for lemonade, were below 1975 levels. Unit sales of regular 7UP extract were modestly ahead of year-ago levels in both U.S. and Canadian markets and at 1975 levels in the international markets. Both Sugar Free and Fountain 7UP extract sales were up sharply in both the U.S. and Canadian markets. Unit sales of lemon products, primarily frozen concentrate for lemonade and lemon oil, were up significantly for the year, sales of fresh fruit and fruit processing fees were below year-ago levels. but Combined unit sales of food flavor and color reflected a strong recovery from the depressed 1975 levels with significantly higher product tonnages shipped in 1976. Unit sales of FD&C Red #40, a food color replacing FD&C Red #2, were particularly significant during the first and second quarters, although these levels were not sustained in the second half of the year. In 1976 over 65% of the 19.7 million dollar annual sales increase occurred in the higher margin soft drink extract product classifications which equaled 39.4% of total consolidated sales in 1976 and 37.0% in 1975. Gross profit on sales in 1976 was $116,116,432 or 49.8 percent compared with $101,201,697 or 47.4% of sales in 1975.

Selling, administrative and general expenses increased $10.1 million, totaling $71.4 million in 1976 and $61.3 million in 1975. Expenditures for marketing services, which include adver- tising and promotional programs, accounted for $7.4 million dollars of the annual increase. Marketing support funds have increased over the previous year as follows: 20.7 percent 1976/1975; 26.1 percent 1975/1974; and 12.9 percent 1974/1973. The relationship of advertising and promotional expense to total selling, administrative and general expenses for the last three years has been: ear Advertising & Promotion Selling Administrative & General Advertising & Promotion As A Percentage of Total Selling, Administrative And General 1974 $28,440,023 $51,212,637 56% 1975 $35,859,917 $61,263,716 59% 1976 $43,306,814 $71,482,245 61% Total employment costs, payroll and fringe benefits, and travel increased $1.8 million in 1976 as compared with 1975, reflecting salary adjustments, increased personnel and higher travel costs. Higher warehouse charges, freight expense, local taxes and utility costs reflected the most significant remaining increased dollar expenses. Depreciation charged to operations in 1976, included in both cost of goods and selling, general and administrative expenses, was $3.3 million as compared with $2.9 million in 1975. Interest income (net of interest expense) increased to $1,907,738 from $1,769,827. Foreign source net interest income declined, with domestic income increasing over the previous year on a larger volume of dollar investments. Yields on short-term U.S. investments trended lower throughout the year, with the exception of a brief strengthening during June and July. Miscellaneous other income totaled $1,611,117 in 1976, compared with $690,961 a year ago. These amounts are principally -15-

composed of revenues from royalties, rentals, sales of assets and currency gains. Miscellaneous deductions were $1,008,037 in 1976 and $2,554,296 in 1975. These amounts include certain non recurring charges. Included in 1976, is the settlement approved by the court of the Bubble Up International suit commenced in 1968. The year 1975 included fees paid, in settle- ment of legal action with respect to the production of food color, adjustments made in connection with the Food and Drug Administration's ban on FD&C Red #2, and foreign currency losses. In 1976, net translation and currency gains net of tax increased net income for the year $297,607 or approximately 2.8 cents per share, compared with net currency losses in 1975 of $1,146,574, which reduced earnings per share 10.8 cents. In summary, net income for 1976 increased $4.4 million or 21.7% from 1975 results. Sales of higher marginal product classifica- tions with resulting improved gross profit offset increased dollar operating expense. Increased interest and miscellaneous income not impacted in 1976 by unfavorable foreign currency adjustments was up significantly from year ago levels. Net income of the Company was 10.6% of sales in 1976 compared with 9.5% in 1975. 1975 Compared with 1974. Dollar sales in 1975 increased 22.7 million or 11.9% over 1974. The 1975 net dollar sales increased at more modest rates of gains over 1974 than in the previous year as inflation rates moderated and the prices of many finished goods products manufactured by the Company were reduced below year ago levels. Modest unit growth was achieved in the sale of soft drink extracts, with unit sales of lemon products up sharply. Unit sales of food flavor and color in 1975 were significantly below peak 1974 levels.

In.1975, over 64% of the 22.7 million dollar increase in sales accrued in higher margin product classifications, with the balance of the sales increase being reflected in lower margin product classifications whose margins were improved over those experienced in 1974. See "Business-General". Gross profit on sales in 1975 was $101.2 million or 47.4% and increased 25.2% from the gross profit of 80.8 million or 42.3% of sales in 1974. Selling, administrative and general expenses increased $10.1 million in 1975 as compared with 1974, an increase of 19.6%. Of the total dollar increase of $10.1 million, consolidated expenditures for marketing services, including advertising and promotional programs, increased $7.4 million or 26.1%. The dollar expenditures for marketing programs were at significantly higher rates of increase during the last six months of the fiscal year - particularly the fourth quarter. The relationships of advertising and promotion expenses to total selling, administrative and general expenses for the last three years has been: ear Advertising & Promotion Selling Administrative & General Advertising & Promotion As a Percentage of Total Selling, Administrative And General 1973 $25,173,727 $45,164,104 56% 1974 $28,440,023 $51,212,637 56% 1975 $35,859,917 $61,263,716 59% Total employment costs, payroll and fringe benefits, and travel costs increased $1.7 million over 1974, reflecting salary adjustments and higher travel and entertainment costs. Depreciation charged to operations in 1975, included in both cost of goods and selling, general and administrative expenses, was $2,.9 million as compared with $2.3 in 1974 reflecting increased additions for plant expansion. -17-

i Short term investment income, before taxes, was $2.0 million in 1975 as compared with $2.3 million in 1974. Yields on short-term investments were significantly below the previous year, particularly in the third and fourth quarters. Interest expense was $255,448 in 1975 as compared with $316,243 in 1974, with most of the 1975 interest expense occurring outside of the United States. While the effects of foreign currency adjustments were not material in 1974, these losses were significant in 1975 and reduced net income for the year $1,146,574 or approximately 10.8 cents per share. In summary, net income for 1975 increased $3.8 million or 22.6% reflecting increased sales of higher margin product classifications and lower raw materials costs. Operating expenses and foreign currency adjustments were up significantly, with interest income below year ago levels. Net income of the Company was 9.5% of sales in 1975 as compared with 8.7% in 1974. ITEM 3. Properties. The principal United States and Canadian properties of the Company are the following: Location Facility St. Louis . . . . . . . . . . . . . World headquarters; W-J's offices; extract and color manufacturing plant; and warehouses Los Angeles . . . . . . . . . . . . Flavor manufacturing plant Ventura County, California. .... Ventura's offices; lemon groves*; and lemon product manufacturing plant Phoenix . . . . . . . . . . . . . . Offices and bottling plant Toronto . . . . . . . . . . . . . . Canadian headquarters Ontario . . . . . . . .. . . . . . . Bottling plant; and warehouses (six locations)** *Approximately 50% of Ventura's lemon groves are leased. ~Y **Two of the warehouses are leased. ~ 4* Q0 ~ r-~ -18- ~

In addition to the properties included in the above table, the Company owns extract manufacturing plants in Brazil, Ireland and Argentina, and the Company owns extract manufacturing equipment and leases offices in Japan, Mexico and the Republic of South Africa. The Company maintains offices in Great Britain, Egypt, the Netherlands and the Philippines. It is anticipated that an increasing percentage of the extract manufactured by the Company outside the United States will be manufactured at the Ireland facility in the future. The Company also owns or leases warehouse space in various locations in the United States, Canada and a number of other countries. With the exception of W-J's color manufacturing facilities, the Company's facilities are generally operated on a one- shift basis. W-J has completed expanding its color manufacturing facilities, which are presently operated in part on a two shift basis and in part on a three shift basis. The expansion, which will significantly increase the size of such facilities, was completed in April, 1976, at a total cost of approximately $1,600,000. The Company also owns a five-story commercial office building next to its World Headquarters, acquired in February 1974 for $1,550,000 in cash, which is approximately 70% leased to a number of tenants for terms of up to five years. ITEM 4. Parents and Subsidiaries The registrant is the parent company of the subsidiaries indicated below. Various descendants of C. L. Grigg, E. G. Ridgway and Frank Y. Gladney, who founded the Company and trusts in which they -19-