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On November 23, 1977, the Saccharin Study and Labeling Act became law. It provided for an 18 month moratorium on the FDA proposed ban of saccharin as a food ingredient, during which time, additional scientific evidence and information will be gathered to determine whether saccharin is in fact a carcinogen. in addition, the law requires that labeling of foods containing saccharin label. bear a warning Saccharin is the last known artificial sweetener approved for sale by the FDA following their ban of cyclamates in 1969. Although no artificial sweetener currently has FDA approval, the Company has an alternative formulation that is reduced in calories. On October 1, 1977, a ban on saccharin similar to that proposed by the FDA went into effect in Canada, necessitating the withdrawl of Sugar Free 7UP from all Canadian markets. In anticipation of this ban, Seven-Up Canada Limited, on August 29, 1977, introduced a reformulated, calorie reduced soft drink called Diet 7UP, containing less than half the calories of 7UP. Since its introduction, in August, Diet 7UP has achieved the number two position in the diet segment of the Canadian soft drink market. Substantially all of the Company's plants in the United States are subject to Federal, state and local laws or regulations regarding discharges into the environment. Compliance by the Company with these laws and regulations has not had, and is not expected to have, a'ilrect material effect on the 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 rv ~ -~ Company, in part because of the variation in legislative proposals m m 13 and actions in the different states and in the sizes and resources ~ ~ of the franchised bottlers.

-12- ~ ~ Several states and local jurisdictions have enacted laws designed ~ .,~ to reduce litter due to discarding of bottles, cans and other packagisi f: material, and it is likely that other jurisdictions will enact sirilAr 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., (b) Business z 4 On February 16, 1978, the Company consummated, through a wholly owned subsidiary, the acquisition of Oregon Freeze Dry Foods, Inc., ("Oregon through a merger transaction for cash of approximately $io,000,000. ~ Oregon produces a broad product line of freeze-dried and convenience foods including complete meals for industrial, geriatric, military and outdoor/sporting goods markets. The acquisition is representative of the Company's efforts to expand and broaden both markets and pro- ducts, where consistent with corporate goals and Seven-Up quality standards. This transaction was deemed not to be a material acquisition. Like- wise, Oregon was not deemed to be a significant subsidiary. The acquisition will be accounted for on the purchase method. For the year ended December 31, 1977, unaudited sales and net income of Oregon were $11,631,673 and $692,629, respectively. Item 1., Cc) (1). Information as to Lines of Business The following tables set forth the respective contributions of each of the Company's two business segments to its net sales and income before taxes for the periods shown: t 1977 1976 1975 1974 1973 (expressed in thousands of dollars) 27et Sales r•y Q 4h Qz I.- Beverages $228,840 $212,528 $198,196 $172,749 $134,471 . ~ Food Flavors & Colors 22,158 20,755 15,427 18,131 12,277 0 ~ Totals $250,998 $23,3,283 $213,623 $190,880 $146,748

-13'- 1977 1976 1975 1974 1973 (expressed in thousands of dollars) Income Before Income Tax Beverages $48,464 $46,152 $41,579 $30,017 $26,505 Food Flavors & Colors 327 1,717 433 2,850 1,695 Operating Profit $48,791 $47,869 $42,012 $32,867 $28,200 Corporate expense (3,360) (3,109) (2,834) (2,793) (2,533) Interest Income (net) 2,009 1,908 1,770 1,982 1,406 Currency gains (losses) (231) 477 (1,104) 21 32 Totals $47,209 $47,145 $39,844 $32,077 $27,105 Item 1., (c) (2). Information as to Classes of Similar Products The following table sets forth the approximately percentage contri- butions to the Company's net sales for each of the Company's principal classes of products, constituting the Beverage segment under "net sales" in the above table: 1977 1976 1975 1974 1973 Soft Drink Extracts, Certain Syrups and Flavoring Compounds 42.7% 43.3% 39.9% 37.3% 43.8% Finished Products (Canned and Bottled Soft Drinks and Fountain Syrup) 1.9% 3.3% 6.5% 1.8% 5.4% Lemon Products 15.4% 13.4% 13.6% 10.9% 10.8% Totals 100.0% 100.0% 100.0% 100.0% 100.0% Item 1., (d) Foreign Operations Reference is made to Note C - "Foreign Operations" to the Consolidated Financial Statements of The Seven-Up Company's Annual Report for 1977. J

CONSOLIDATED SUMMARY OF OPERATIONS THE SEVEN-UP COMPANY AND SUBSIDIARIES EAR ENDED DECEMBER 31 1973 1974 1975 1976 1977 Net sales $146,748,362 $190,879,628 $213,622,918 $233,282,664 $250,998,056 Cost of products sold 75,783,214 110,046,723 112,421,231 117,166,232 129,039,611 70,965,148 80,832,905 101,201,687 116,116,432 121,958,445 Selling, administrative and general expenses 45,164,104 51,212,637 61,263,716 71,482,245 76,814,537 25,801,044 29,620,268 39,937,971 44,634,187 45,143,908 Other income (deductions): Interest earned 1,844,231 2,298,505 2,025,275 2,196,870 2,344,685 Interest expense (438,406) (316,243) (255,448) (289,132) (335,487) Miscellaneous - net (101,523) 474,573 (1,863,335) 603,080 56,178 1,304,302 2,456,835 (93,508) 2,510,818 2,065,376 Income before income taxes 27,105,346 32,077,103 39,844,463 47,145,005 47,209,284 ~ r a / Income taxes 13,023,000 15,489,000 19,504,000 22,394,000 21,420,000 Net income (2) 14,082,346 16,588,103 20,340,463 24,751,005 25,789,284 Preferred dividend requirements: 67c Cumulative Preferred Stock 215,280 215,280 215,280 215,280 192,240 $5. 71 Convertible Class A Preferred Stock 284,485 269,191 114,910 499,765 484,471 330,190 215,280 192,240 Net income applicable to Common Stock $ 13,582,581 $ 16,103,632 $ 20,010,273 $ 24,535,725 $ 25,597,044 Weighted average number of shares of Common Stock outstanding (3) 10,457,812 10,467,739 10,636,841 10,741,116 10,745,100 Per share of Common Stock (3): Net income $1.30 $1.54 $1.88 $2.28 $2.38 Cash dividends declared $ .4325 $ .61 $ .75 $1.13 3 $1' 25 ~4iOT$V4}Z

-14a- I NOTES TO CONSOLIDATED SUMMARY OF OPERATIONS (1) This summary should be read in conjunction with the related financial statements and notes thereto incorporated by reference under Item 13(a)(1). (2) The Company values its inventory at the lower of cost or market. • Effective January 1, 1974, the Company changed its method of determining 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 and dividends on Preferred Stock.

-15- MANAGEMENT'S DISCUSSION 1977 Compared with 1976 Consolidated Sales, Gross Profit and Net Income. Dollar sales in 1977 increased by $17.7 million or 7.6% over 1976. In 1977, dollar sales growth was influenced more by real growth in product unit sales and tonnage shipped than increased product prices. Average 1977 selling prices were below 1976 levels, although some higher prices were experienced in the latter months of the year. In 1977 over 31% of the $17.7 million dollar annual sales increase occurred in the higher margin soft drink extract product classifi- cations which equaled 38.9% of total consolidated sales in 1977 and 39.4% in 1976. Gross profit on sales in 1977 was $121,958,445 or 48.6% compared with $116,116,432 or 49.8% of sales in 1976. In summary, net income for 1977 increased $1.0 million or 4.0% from 1976 results. Net income of the Company was 10.3% of sales in 1977 compared with 10.6% of sales in 1976. Beverage Segment Unit sales of soft drink extract (both 7UP and Sugar Free 7UP) in the United States were modestly ahead of last year. Soft drink ex- tract unit sales in international and Canadian markets grew at rates higher than those in the United States. Unit sales of lemon products primarily frozen concentrate for lemonade, reconstituted lemon juice and lemon oil, were up sharply for the vear. In addition, sales of fresh fruit processed for resale reached record levels. Food Flavor & Color Se ment Lower food flavor unit sales for 1977 were offset by significantly higher food color and specialty product sales. Dollar sales did not reflect the growth of unit sales due to lower selling prices.

-16- s . Selling, Administrative and General Expenses Selling, administrative and general expenses increased $5.3 million, totaling $76.8 million in 1977 and $71.5 million in 1976. Expendi- tures for marketing services, which include advertising and promo- tional programs, accounted for $2.0 million dollars of the annual increase. Marketing support funds have increased over the previous year as follows: 4.7 percent 1977/1976; 20.7 percent 1976/1975; and 26.1 percent 1975/1974. The relationship of advertising and promotional expense to total selling, administrative and general expenses for the last three years has been: ear 0 Advertising & Promotion Selling Administrative & General Advertising & Promotion As a Percentage of Total Selling, Administrative and General 1975 $35,859,917 $61,263,716 59% 1976 $43,306,814 $71,482,245 61% 1977 $45,328,529 $76,814,537 59% Total employment costs, payroll and fringe benefits, and travel increased only 0.6 million (or 1.2%) in 1977 as compared with 1976, reflecting primarily a decrease in personnel resulting from a change in the distribution system in the Canadian subsidiary. Also charges for outside warehousing, freight, travel and entertainment accelerated sharply in 1977 and exceeded 1976 cost by $0.8 million. Depreciation charged to operations in 1977, included in both cost of goods and selling, general and administrative expenses, was $3.7 million as compared with $3.3 million in 1976. 0 4 Expenditures for research and development in 1977 were sharply in- ~ w cn creased from previous levels. This increase was of such magnitude .a as to reduce earnin s er shar i l ~ g p e approx mate y 6 cents. -4 "0

-1T- The most significant portion of the increase represents Warner- Jenkinson's continuing participation in the development of non- absorbable food colors. These products are undergoing long-term safety tests necessary to obtain marketing approval from the Food and Drug Administration. Evaluation of these new food colors by major food companies continues to confirm their viability in food products. In addition to the development of polymer food colors, Warner- Jenkinson is engaged with other manufacturers in the retesting of all food, drug and cosmetic colors. A newly staffed Company research and development effort was initiated in 1977. A prime objective of this centralized activity is the improvement of existing product lines and the expansion into new product areas. It will also coordinate and support research and development efforts at the subsidiary company level. Interest Income Interest income (net of interest expense) increased to $2,009,198 in 1977 from $1,907,738 in 1976. Foreign source net interest ex- pense increased sharply as did domestic net interest income for year 1977. Yields on short-term U.S. investments were modestly below 1976 levels. the Other Income & Expense Miscellaneous other income totaled $1,322,932 in 1977, compared wizh $1,611,117 a year ago. These amounts are principally composed of revenues from royalties, rentals, sales of assets and currency gains. Miscellaneous deductions were $1,266,754 in 1977 and $1,008,037 in 1976. These amounts include certain non-recurring charges. Included in 1977 were non-recurring termination charges in Canada relating to changes in the distribution system and the write-off of Sugar Free 7UP containers made obsolete by the saccharin ban. The amount for 1976 included the settlement approved by the court of the Bubble Up International suit commenced in 1968.

-i8- In 1977, net translation and currency losses (net of tax) decreased net income for the year $224,189 (or approximately 2.1 cents per share), compared with net currency gains in 1976 of $297,607, which increased earnings approximately 2.8 cents per share. 1976 Compared with 1975 Consolidated Sales, Gross Profit and Net Income. 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. In 1976 over 65% of the 19.7 million dollar annual sales increase occurred in the higher margin soft drink extract product classifi- cations 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% compared with $101,201,697 or 47.4% of sales in 1975. In summary, net income for 1976 increased $4.4 million or 21.7% from 1975 results. Sales of higher marginal product classifications 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 signifi- cantly from year ago levels. Net income of the Company was 10.6% of sales in 1976 compared with 9.5% in 1975. Beverage Segment 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. Bath 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, but sales of fresh fruit and fruit processing fees were below year-ago levels. V1

-19- Food Flavor & Color Segment Combined unit sales of food flavor and color reflected a strong recovery for 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. Selling, Administrative and General Expenses. Selling, administrative and general expenses increased $10.1 million, totaling $71.4 million in 1976 and $61.3 million in 1975. Expendi- tures for marketing services, which include advertising 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.