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the Seven-Up Company 770000 Annual Report

Date: 19780221/Y
Length: 40 pages
2048189238-2048189277
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THE SEVEN-UP COMPANY 1977ANNUAL REPORT
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"Back To Basics" for 1978 "Back to basics," a return to proven 7UP marketing methods, was an important part of the message to 7UP Developers in the United States during a series of October regional marketing conferences in 1977. The design of The Seven-Up Company's 1977 annual report reflects that principle, utilizing an understated, nostalgic approach in the portrayal of Seven-Up products and uses. Commissioned to provide original artwork for the annual report was Walter Spitzmiller, St. Louis-born artist currently working in New York. His medium is oil on Gesso. His message is "back to basics"- the key to The Seven-Up Company marketing thrust in 1978. Reproduced for the annual report, Mr. Spitzmiller's original artwork has become the property of The Seven-Up Company and will be displayed at the Company's World Headquarters in St. Louis, Missouri. Metric Report For the third consecutive year, The Seven-Up Company annual report has been produced in metric measure, 20 by 30 centimeters, instead of the standard 81/z by 11 inches. In 1975, Seven-Up introduced its metrification program of half-liter (16.9 -ounce), liter (33.8 -ounce) and two-liter (67.6- ounce) bottles. 7UP and Sugar Free 7UP were the first internationally marketed soft drinks made available in metric sizes in the United States. Printscent=' Fragrance Printscent lemon fragrance is one of many aromas and fragrances produced for commercial use by Warner-Jenkinson Company, a Seven-Up subsidiary. The pages of the Company's 1977 annual report have been treated with this subtle, enduring and natural fragrance -representative of The Seven-Up Company's broadening markets and product lines. Form 1 O-K Availability 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, required 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 contain ten pages. Notice of Annual Meeting The Annual Meeting of Shareholders will be held at 10 a.m. on Monday, April 10, 1978, at the World Headquarters of the Company, 121 South Meramec Avenue, St. Louis, Missouri. All shareholders are invited to attend. t
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H. C. GRIGG (1905-1977) H.C. Grigg, Chairman Emeritus of the Board of The Seven-Up Company and son of its co-founder and first president, died on Monday, October 24, 1977, following a prolonged illness. Mr. Grigg, known to friends and colleagues simply as "Ham," was a major force in the growth of The Seven-Up Company. Between 1929 and his retirement in 1972, Mr. Grigg served as advertising manager, general manager, president and board chairman of the company co-founded in 1920 by his father, C.L. Grigg. His death has saddened the thousands of 7UPpers and soft drink industry associates who knew "Ham" and who were privileged to work with him during his long and distinguished career. As a soft drink executive, Mr. Grigg had a simple method of untying the knots of many critical business decisions. "What is best for 7UP?" he would ask, and the decision would become clear. In this spirit, the Board of Directors wishes to dedicate the 1977 annual report of The Seven-Up Company to the memory of H. C. Grigg. 2 Contents Financial Highlights 3 Letter to Shareholders 6 Beverages 14 Food Flavors and Colors 16 Financial Review 24 Consolidated Balance Sheets 26 Consolidated Statements of Income 27 Consolidated Statements of Changes in 28 Financial Position Consolidated Statements of Shareholders' 29 Equity Notes to Consolidated Financial Statements 32 Report of Ernst & Ernst, 33 Independent Auditors The Seven-Up Company Directors and Officers 34 Seven-Year Statistical Summary 36 Foreign and Domestic Subsidiaries .~ 37 Transfer Agents and Registrars eo ~ ~ ta ~ c:y
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lne oeven-up Uompany anu auosiaiarnes a COMPARATIVE FINANCIAL HIGHLIGHTS 1977 1976 Percent Change Net Sales .... . ............... . . ................. $250,998,056 $233,282,664 + 7.6 Income Before Income Taxes .................... 47,209,284 47,145,005 + 0.1 Net Income .................................... 25,789,284 24,751,005 + 4.2 Percent of sales .............................. 10.3% 10.6% Earnings on Common Stock ..................... . 25,597,044 24,535,725 + 4.3 Per Share of Common Stock Net income* ................................. __ $ 2.38 $2.28 + 4.4 Dividends .................................. 1.25 1.13 + 10.6 Book value ................................. 10.29 9.14 + 12.6 Total Dividends Paid Preferred stock ............................. 192,240 215,280 Common stock .............................. 13,400,766 12,106,244 Common Shareholders' Equity ................... 110,357,419 97,963,436 Working Capital ................................ . 67,561,927 60,601,600 Capital Expenditures ........................... 9,864,627 8,449,923 Depreciation and Amortization .................. 3,683,304 3,263,252 Long-Term Debt-less current maturities ......... 688,481 942,603 Net Investment in Property, Plant and Equipment .. 42,200,035 37,581,529 Number of Shareholder Accounts ................ 5,824 5,565 Average Number of Common Shares Outstanding .. 10,745,100 10,741,116 Number of Employees at December 31 Serving U.S. markets ......................... 1,183 1,132 Serving Canadian markets .................... 231 303 Serving international markets ................ 207 187 1,621 1,622 *Based on weighted average number of shares outstanding during the year 2
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TO OUR SHAREHOLDERS: 1977 was another year of record sales and net income for The Seven-Up Company. This was the 11th consecutive year of record growth since the Company went public in 1967. For the 12-month period ending December 31, 1977, the Company achieved consolidated net sales in excess of $250 million. This is the first time in the history of The Seven-Up Company that sales topped the quarter-billion dollar mark. Consolidated net sales for 1977 were $250,998,056, a 7.6 percent increase over 1976 consolidated net sales of $233,282,664. Consolidated net income for the year was $25,789,284, an increase of 4.2 percent, compared with 1976 consolidated net income of $24,751,005. After payment of preferred dividends, 1977 earnings per share of common stock were $2.38, a 4.4 percent increase over 1976 earnings of $2.28 per share. Cash dividend payments on common stock during the year totalled $1.25, compared with $1.13 in 1976. In November, the quarterly dividend payable on common stock was increased from 30 to 35 cents per share. Current quarterly dividends are at an annual rate of $1.40. A dividend of 12 cents was paid in 1967 and dividends have been increased every year. Our principal objective for 1977 was to maintain the Company's solid sales and profit base. That objective was met. Additionally, significant progress was achieved within the Company's long-range growth plans, particularly through unit sales growth and improved market share in existing markets, but also through the investigation of new products and markets and the introduction of Seven-Up products into new international markets. Fueled by an improved economic environment, unseasonably warm summer weather and a program of highly successful promotional activities, soft drink extract sales in the United States showed modest gains for the year. The total 7UP brand (regular, sugar- free and fountain) contributed to this growth trend. During 1977, Seven-Up Enterprises achieved record unit sales of finished soft drink products, meeting a heavy demand for both canned soft drinks and family-size packages, especially the two-liter convenience bottle. During the period of uncertainty concerning saccharin and Sugar Free 7UP, Seven-Up Enterprises provided a number of 7UP Developers (bottlers) with a significant volume of sugar-free packaged goods. 7UP performance in international markets in 1977 was again marked by record sales volumes. Seven-Up International, Inc. exceeded objectives for the year and introduced 7UP in ten new international markets. During 1977, the 1976 introduction of 7UP in London was extended to include distribution into all of the United Kingdom. Seven-Up Canada Limited, despite a con- tinuation of heavy price competition and restrictive packaging legislative setbacks, again reported record sales. 7UP continues to lead the soft drink market in the Province of British Columbia, occupies the number two position in Manitoba-Saskatchewan and has achieved a significant market share increase in Toronto, Canada's most populous metro- politan market. On October 1, a government ban on saccharin was implemented, resulting in withdrawal of Sugar Free 7UP from Canadian markets. Diet 7UP, a newly formulated calorie- reduced soft drink, was successfully introduced in August in all Canadian markets. Aided by the second largest lemon harvest in history, Ventura Coastal Corporation achieved record sales and income levels for 1977. Particularly strong growth was reported in Ventura Coastal sales of lemon oil and frozen concentrate for lemonade. During the year, a 20,000-square-foot frozen storage warehouse was completed at the Ventura Coastal complex. This new facility will result in significant savings in outside storage and freight costs. Golden Crown Citrus Corporation, which produces reconstituted lemon and lime juices, achieved significant increases in sales volume during 1977. Part of this success was attribut- able to the successful introduction of Golden Crown's expanded line of flavored soft drink mixes, beginning with the powdered lemonade mix introduced in 1976 but strengthened in 1977 by the addition of cherry, grape, orange and tropical fruit punch flavors. 3
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Warner-Jenkinson Company, producers of food flavors and colors, continued to operate profitably but did not experience the high levels of net income reported in 1976. Problems within the industry, impacting on Warner- Jenkinson during 1977, included extreme price competition coupled with low margins, rising costs and a growing concern over flavor and color additives. The 1977 announcement of the Warner- Jenkinson agreement with Dynapol of Palo Alto, California, to participate in the develop- ment of non-absorbable food colors, is evidence of the Company's commitment to the food flavor and color market for the future. During 1977, Warner-Jenkinson also continued to participate in industry safety testing programs. In September, The Seven-Up Company and Oregon Freeze Dry Foods, Inc., of Albany, Oregon, signed a letter of intent for the acquisition of Oregon Freeze Dry Foods by the Company. A definitive merger agreement was completed in November, and full share- holder approval of the acquisition was secured on February 15, 1978. Oregon Freeze Dry Foods 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 products, where consistent with corporate goals and Seven-Up quality standards. The Company's overall research and development was increased sharply in 1977. Research and development expenditures reduced 1977 earnings by approximately 6 cents per share over 1976. Dr. B. C. Cole, vice president and technical director, was named senior vice president, corporate technical director. Dr. John Bujake, formerly research and development director for a major U.S. food processor, has joined the Company in the newly created position of director, research and development. Clark W. Russell has been assigned to the new position of director, business development. These actions reflect your management's objectives and plans to improve existing product lines and expand the product "mix" for the future. 4 Three new directors were elected at a meeting of the board of directors held January 25, 1978. Elected to the board were Robert A. Malin, senior vice president and director, The First Boston Corporation, New York, New York, Robert C. West, chairman and president, Sverdrup Corporation, St. Louis, Missouri; and Ted C. Wetterau, president and chairman, Wetterau Incorporated, St. Louis, Missouri. At this same meeting, the board accepted the resignations of Messrs. Maurice R. Chambers, Fred L. Kuhlmann and Fred W. Wenzel. These resignations were voluntarily submitted and resulted from a decision made by the board of directors of Anheuser-Busch, Inc. to develop and test market a new beverage product which might be in competition with soft drinks. It is the understanding of The Seven-Up Company that the proposed new product will not fall directly into the lemon- lime beverage segment. Chambers, Kuhlmann and Wenzel are also members of the Anheuser- Busch board. Despite a high degree of price competition, restrictive government regulations concerning packaging and threatened regulations in product formulation, The Seven-Up Company in 1977 achieved increased sales, market expansion and net income growth. The Company's success was the result of strong performance by the operating heads of subsidiary companies. It was also the result of continued development of a strong, working relationship with the 7UP Developer organization, and a reorganized marketing department, restructured and restaffed to produce a more professional, more disciplined approach to Seven-Up market- ing in the U.S. The year just past required our best efforts in terms of energetic marketing and 7UP Developer support. Our success throughout 1977 is evidence that we have the necessary combination of products and people to continue that success. During 1978, the Company expects to con- tinue to solidify its sales and profit growth trends while moving to reinforce the sales volumes and market share positions historically held by 7UP in the United States. 2C}48189243
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The next year, then, will be one of challenge and opportunity. It will require continued emphasis on the basic marketing strengths of the Seven-Up business. It will require a con- tinuation of the strong support historically provided by the 7UP Developer organization. It will require constant attention to domestic and international economic environments and to opportunities which present themselves in the form of expanded product lines and expanded market penetration. Our outlook for 1978 is one of confidence in ourselves, our products, and the energy and dedication of you, our shareholders, 7UP Developers, and all of the people of The Seven-Up Company. Sincerely, bvvv H.IJA Ben H. Wells Chairman of the Board William E. Winter President and Chief Executive Officer February 21, 1978 Top William E. Winter Bottom Ben H. Wells 5
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BEVERAGES Soft Drinks Marketing of the 7UP brand (regular, sugar- free and fountain) was directed in 1977 toward key market segments and designed to take advantage of traditional high soft drink consumption periods. The strong, effective support of 7UP Developers made possible aggressive programs of brand development with particular emphasis on a return to the basics of soft drink marketing. 7UP continued as the third largest-selling soft drink and the largest-selling lemon-lime flavored soft drink in the United States and Canada. During 1977, 7UP built on its position as a major factor in many international markets. The 7UP brand is marketed currently by 473 7UP Developers in the United States, 75 in Canada and 195 in 85 nations overseas. Seven-Up United States The first full-year performance of a restructured marketing department, initiated in 1976 by John R. Kidwell, senior vice president and director of marketing, was of key importance to the Company's U.S. soft drink operations in 1977. Internally, the marketing department was reorganized to bring a greater degree of professionalism to the marketing function. Externally, a vigorous thrust was launched toward new media and advertising programs and the development of a strengthened relationship between 7UP Developers and the Company. During a series of regional meetings held in October, 7UP Developers were presented with 1978 plans for stronger support of 7UP at the local market level and for increased exposure nationally via a precedent-setting new media program. Brand development funds were established for 7UP and Fountain 7UP. The objective is to increase local flexibility and facilitate 7UP Developer planning during periods of peak market or seasonal demand. Similarly, a promotional fund was established to benefit marketing efforts behind Sugar Free 7UP. This new plan for brand support, like other elements of the overall marketing plan announced in October, was the result in part of improved communications with 7UP Developers. It particularly reflected responsible input from the Marketing Committee of the Association of 7UP Developers. Also announced during the October meetings was a media plan described as a "first" in the industry. The plan was designed to provide more national television support for 7UP and features a co-operative funding approach to network television. The new program will bring several strong advantages to the 7UP marketing effort-the most important being significant cost efficiency. The purchase locally by individual markets of the same prime time would require nearly double the advertising investment. Additionally, the program will assure less commercial clutter, increased product protection and competitive separation, improved program environment and control of commercial placement, and the opportunity for "in-program" scheduling in lieu of the less effective "station break" message placement. A new creative advertising strategy for 7UP was also introduced to 7UP Developers during the October meetings. An extension of the "UNdo it!" concept launched in 1976, the new "message" was formulated with an important shift in execution. It takes advantage of the high level of consumer awareness established by "UNdo it!" and extends that concept to communicate a "call to action" on the part of the soft drink consumer. During 1977, a study of all aspects of the fountain soft drink market was completed by a management consulting firm retained by the Company. The study, conducted to identify opportunities and to map directions for the continued growth of Fountain 7UP, resulted in the establishment of a National Account Program to serve national fountain soft drink 6
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BEVERAGES (continued) Soft Drinks accounts. It also resulted in increased and improved local promotional activities to support local and regional fountain outlets. A major 1978 Fountain 7UP promotional effort for fast food outlets will be based on a drinking glass premium featuring the "Ziggy" character of newspaper cartoons and greeting cards. In 1977, 7UP Developers and The Seven-Up Company participated for the fourth year in the Muscular Dystrophy Association campaign. Highlighting this continued commitment to MDA was the appointment of William R. Howell, general manager of the Seven-Up Bottling Company of Denver, Colorado, as national chairman for the Company's 1978 MDA campaign. Mr. Howell will represent the 7UP Developer organizations at all MDA activities, including the annual Jerry Lewis Labor Day Telethon. He will also participate in planning activities with MDA officials on the national level. Seven-Up Enterprises The mission of Seven-Up Enterprises is to provide 7UP canned or bottled products for those 7UP Developers who are unable to meet consumer demand from their own production facilities. All 7UP Developers are therefore assured a continuing, ample supply of 7UP products with which to serve their franchise territories. Seven-Up Enterprises reported record sales in 1977. Through its network of nearly three dozen production centers nationwide, it assisted 7UP Developers in meeting the heavy demand for 7UP in a variety of packages, particularly cans and the two-liter, non-returnable bottle. Additionally, during the initial period of uncertainty surrounding the proposed saccharin ban, Seven-Up Enterprises was successful in maintaining needed supplies of Sugar Free 7UP packaged goods to Developers. In 1977, Seven-Up Enterprises continued to supply 7UP and Sugar Free 7UP for consumption by U.S. military personnel stationed overseas. Seven-Up Bottling Company of Phoenix In March, the Seven-Up Bottling Company of Phoenix, the only Company-owned bottling operation in the U.S., brought its new bottling and canning complex on stream and moved to full production. The plant, located in southeast Phoenix, includes 80,000 square feet of production and warehouse space and is designed to accom- modate future expansion at minimal cost. Sales of 7UP and Sugar Free 7UP in liter packages, together with the more than 20 percent sales growth of 7UP and Sugar Free 7UP in cans, enabled the Phoenix 7UP operation to post record volume and dollar sales for the year. Phoenix introduced 7UP and Sugar Free 7UP in 8-ounce aluminum cans in November. The introduction is planned to meet increasing consumer demand for 7UP in a "single serving" can package. With the new facility fully operational, the Seven-Up Bottling Company of Phoenix is now capable of producing 7UP in cans for its own use as well as for other 7UP Developers in Arizona and Nevada. The increased production capabilities of the new installation also place it in an excellent position to meet future demands of one of the fastest-growing soft drink markets in the nation, the 1.3 million consumers in the Greater Phoenix Area. Seven-Up Canada Limited In 1977, the Franchise Division of Seven-Up Canada Limited achieved record sales volume for 7UP. The strong 7UP performance resulted in the recapturing of market share levels achieved prior to the 1976 77 Canadian soft drink price war. The 7UP market share in Canada has traditionally been higher than in the U.S. Seven-Up Canada's 1977 performance included the highest volume of 7UP Extract sales ever recorded. That performance also reflected six consecutive survey periods during which both volume and market share increases were reported. ' 8

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