Tobacco Documents Online

• • 03!26/1990 13:34 FROM IRRC/NH TO 12126871438 P.03 7: - ]~hilip 'Iorris and its c~aerations Philip Morris is the successor to a business founded in the 1$5Us as a tobacco company. For more than 100 years, the compa.ny has produced, mar,keted and sold tobacco products. Over the past two decades thc company has diversified and now encompasses the manufacture and sale of food products and beer worldwide and the ownershxp of financial services and real estate developenent. The company sells niore than 3,000 products, inclLbdLin,g cigarettes, baked good.s, barbecue sauces, beer, candy, cereals, coffee, desserts, luncheon meats, frozen foods, cheeses and pastas. In 1.989, Philz.p '.`3orris's net earnings were $2.9 billion, up 26.1 percent from $2.3 billion in 1988. The company's consolidated operating revezIues were 844.8 billion, up 41 percent from 1988 levels. The consolidatedd operating revenues included operating results from Kraft Inc. since December 1988, the Moz-zth of its acquisition. As part of its diversification efforts, Philip ;lprz-is acquired Kraft for $12.9 billion in 1988 and Genera:f, Foods Corp. for $5.7 billion in 1985. The acquisition of K-raft made Phil.ip Morris the largest consumer packagedd goods company in the world. In 1989, the compariy brought the Kraft and General roods orgaz,i.vqtions together to form Lraft General Foods Inc.--the second largest food oompany j _n t,?zc wux-l.ct. The conrpa.l~y's five yeaz- stz-ategzc plan calls for Philip Morris to ".join the top perfox-mez-s in the food industrv , in profit. margins as well as in revenue anc3d earnings gz-oh-th. " Tobacco operations: Tobacco producta continue to be the company's core business. The operatir>gprofit of the company's domestic and international toba,CCo operations---S4. 6billion--represEnted 72 percent of the company's total operating profit in 1989, com}a3red-hith 84 percent in 1988. The operating revenues of tobacco operations represented 40 percent of consolidated operating revenues in 1989 and :i2 percent in 1988. In 1989 the company' s operating revenues of tobacco operations increased $1. 3 billion from 1988 levels to $17.9 bi ll i on . 'I'he companv' s increase in tobacco operat i rsg prof i t was $1 . 2 bi l 1 i on , primarily because of price increases. Philip florris is the largest interna.tional cigarette company in the world. Its tobacco operations account for almost 11 percent of the 5.3 tril,ki.on unit global cigarette market. The company's 1989 annual report states that "our tobacco operations continued W W>'.Tl in zui outstanding performance. " Its worldwide tmi.t volwme grew by 4.7 percent in 1989 to 580 billion cigarettes, marking the 34th year in a row that the comparl5-' s volume grew in the United States. The company achieved a new record wit.h 41.9 percent of the U.S. market, up from 39.3 percent in 1988. The c';ompany' s Marlboro brand alone comanands 26 percent of the tl. S. market and has become the world's best-selling consumer packaged product. `larlbcro has ranked first in the domestic cigarette industry for 15 years and outsells the next four cigarette brands coznbXned. Philip Morris, Mer.it and :luratti in Lurope. The company's 1989 annual report " ~ says that the company is vigorously exploring possibilities of e~~pa.nding" in Eastern Europe and is "taking full advantage o.ff a number of newly openedd markets" in Asia. C?D F..-. The company's domestic cigarette brands inchxde Marlboro, Virginia Slims, Senson & Hedges, Merit, Parliament, Gaznbridge and Alpine. Philip Morris manufactures more than 40 percent of the cigarettes sold in the United States, Also the leading U.S. cigarette exporter, Philip Morris markets the following brands c;verseas: Peter Jackson in Australia, Lark in Japan, Parliament in Turkey and I

07,/26i1990 13:34 FROM IRRCiNH TO 12126871438 P.04 ~ Company )Wlicy, on smoking and health--Philip Morris mainte.ins that there is no "c:onc.t.usive proof of a caus.e-and-effect relationship between cigarette smoking and chronic dzsea.ses. " Philip Morris recogziizes "statistxce,.1 data which 5uggests a relationship betwoon ozgarette smoking and cez-t,a.an akzr onio human di.seases," but says that "scientists ackulowlcge that statistics alone do not prove eausation." J.'hilip Morris also says there is evidence, "including negative animal inhalatzon studies, that is inconsistent with the causation t'rleory. ." The company concludes that "despite years of effort and expense, mt~c3.ic-a.i science has been unable to determine the specific causes of many d-Lseases, including those which are statistically associated with cigarette smo.k:ing . " Philip Morris says that its policy on smoking and health consists of two important aspects. First, the company says it "has conducted a careful and ongoing review of the scientific literature to keep abreast af important developments." Secondl;r, the company says it "has contributed ;nz1 Jiorls of dollars in suppQrt, of relevant sciezitific resea.rch." in the early 1950s, Philip Morris and other cigarette manufacturers establishedd the Council for Tobacco Research to fund research projects. The company says that the results of the council's research "have been widely and highly regarded by the sciezltz£zc comininity . " Tobacco mar.ketxng--F'hilip Morris maintains that the purpose of its cigarette advertising and promotional activities "is to persuade smokers to purrhase our bra.nds rather than those marketed by our competitors." The company says its advertisements and promotions are not "intended to induce anyone to smoke" and that they "are not clirected to minors. " In a December 1989 letter to the Securities and Exchange Comzssxon, the company said that "decisions concerning the content and placement of adc%ertisements and t.kxe use of promotional practices are made daily by uuaragemeri,t based on the company's goals and management's knowledge of the market, prior ex-perience with advertising and promotional programs and business jud.gement." The company say-s that since 1964 it has adbered to the principles and policies of the industry's Cigarette Advertising Code, an agreement among the American cigarette ma.nufacturers. The ca;npany's 1989 marketing, administration and research budget for domestic tobacco opez'a.tions was S1.9 billion. 7he company says that in 1989 it "inc.reased the visibility and availability" of its tobacco brands at retail outlets. The company also emphasized incentive programs for wholesalers azld retailers of a.ts tobacco produets and "steppedd up our other promotional activ iti.es ." A A major initiative in this area was the expansion of its sa].es organizations in the United States and in a number of foreign msrkets. Tobacco publications--'I`he compa.r~,v has developed "an array of coffiunicatzozls 1-ehicles" in the United States "to provide infozzuata,on to consumers and to present our side of the issues. " Company publications i.riclude the Philip ?•lorris :~...agazine that reaches 12 million readers and the Snohers' Advocate national newsletter, with a readership of _ The company says these publications "heLp us marshall support for our stances against unfair tax proposals, advertising bans, and similar constraints on our consumers' rights to en.7oy our products and on our rights to marlLet tki.e;n... 7-

E+3/26/1990 13:35 FROM IRRC/NH TO 12126871438 F.05 • Sxonsorship of entertainment events--Philip Morris sponsors _,__sports events and „__ musicc events annually, inc.luda.ng the Virginia Slims women's tennis tournament and the Marlboro Grand Prix. Donald Fried, company vice }>i'esidznt a.r.d corporate secret<ary, told IRRC: that Philip Morris sponsors these events because they are "attended by young adult smokers w-ho we would like to swoke our brand." Fried said that in one or two instances the company has paid for product placements in movies. Litigation--The company has faced nkurerous produot liability suits, but to date none of the products liability eases brought against tobacco companies have been sl7cceSSf 1~ . One ind.ivzdual plaintiff, , wtio says he pcax.'chasedd cigarettes as a minor, is suing Philip Morris and retail outlets in the state of Massachusetts i'orr selling ci--arettes to aa minor in violation of state law. Fried told 1RRC that Philip Morris does not sell cigarettes vetail and that the company "cannnot police retail." -3

03i26%1959 13:36 FROM IRRC- NH TO 12126E71438 P.06 III. The C:omparl~_ws Posa.tion on Proposal #3 • The company opposes the resolution, saying it is "contr-,~z-y to the business interests of the oomparrp." Philip Morris says there "is no definitive evidence" to support the proposition that its advertising for Marlboro cigarettes induces minors to smoke. The company adds that its cigarette advertising is not intended "to induce anyone to smoke." The company says the purpose of its cigarette Advcrtzszng and promotional activities "is to persuade smokers to purchase our brands z-a.thez- than those rBar,keted by our competitors . " Donald Fried, company vzcepresident and corporate secretary, told IRRC that Philip Morris "attempts to discourage children from smokin--- We cez-tain~y do not encourage chiidren to snoke." Fried added that because the company is not involved in the sale of cigarettes at the retail level, he "is not sure what more we can be doing" about the illegal sale of cigarEttes to children. In a letter to the Securities and Exchange Comtcissxon, Philip Morris said that "decisions concerning the content and placement of advertisements and the use of pz-omot,ionaZ practices are rraid.e daily by maFZagement based on the compaziy's jeLa.ts rv-,d management`s lmo>nledge of the market, prior experience with advertisiDg and promotional programs and business judgement." The compasi5- also said in the 1 etter that "the resolution would eff ectively take from the l-,)oard its traditional role in determining how best to advert7,se and promote one of its principal product lines, cigarettes." The company further mazntains that the comrnittee called for by the proposa]. "would serve no useful purpose" and that the "proposed expenditure of company profits for aslti-slnokzng carnpaignS would be a waste of the stockholders' money. " q

03/26/1?40 13:36 FROM IRRCiNH TO 12126871438 P.07 n . T I I. The C'4Dznpany' s Position on Froposal 4 The company opiaoses the resolution, saying it is "ill-cozaceived and would be highly detri111ental to the compar>_y." The company sa4s the cigarette business "is a major contributor to the company's profitability" a.ndd that it "has been and rs enains an imporL ta.nE. and law-ful b.isiness." Donald Fried, company vxce president az-zd corporate secretary, described as "disinge,nuous" the proponent's ar~nt that the company could under'take an economic conversion over the ne-t 10 ,y-ears. "Who would we sell our tobacco operations to'?" asked Fried, zl r~ that the proponents would like all companies to phase out their toba.coo operations. Iri a letter to the Securities and F-xchange Commission, the company said that its management, supervised by the board, is responsible for "making informed and reasoned decisions about the operation, expansion or reduction of each of its businesses, including tobacco." The company adds in its prox~> statement that a decision on whether to remain in the tobacco business "must be based on detailed and complex financial, economic, technical, proprieta.ry and legal zzz£ormation." The company argues that the board and management should make this detez7nznation because they have the necessary capability and knowledge to evaluate all of the rele-rant information and data. Tn its original response to the proponents, Philip Morris said that the proposed shareki.older resolution is "premised primaxily upon a nwnber of unproven assertions about the alleged health consequences of cigarette smoking." The company rec,.=te its original response to the resolution after the proponents challenged the company to verify statements in the response and threatened to pursue legal action. Fried told IRRC that the company could verify all of the statelnents in the original response but that it "kotild be silly to take the matter to court when we will win the prox5- vote any-wa.y. .•. -6- TOTRL P.S7