Tobacco Documents Online

From year to year, legislation has been proposed in the United States Congress which, if passed, would be detrimental to the tobacco industry. The most significant bills relating to cigarettes which have been introduced would do'the following: Prohibit smoking aboard common carriers except in areas designated for the purpose; tax cigarettes on the basis of their "tar" and nicotine content; require the Federal Trade Commission to establish maximum levels of "tar" and nicotine in cigarettes; pro- vide that cigarette advertising is not a deductible business expense for income tax purposes; prohibit the mailing of un- solicited samples of cigarettes; impose an additional excise tax on cigarettes with proceeds to be used for cancer research and eliminate all forms of Federal financial support of tobacco as administered through the U.S. Department of Agriculture. Legislation potentially detrimental to the tobacco industry has been introduced from time to time in various state and local legislative bodies. Such measures usually relate to the taxa- tion of cigarettes and regulation of the advertising, labeling, promotion, sale and smoking of cigarettes. It is impossible to predict the duration and extent of the effect which the foregoing may have on the industry's sales or on the Company's sales and earnings. Smoking tobacco sales accounted for less than 1% of Philip Morris U.S.A.'s operating revenues in 1972. The principal brands are' Eeyelation, Bond Street and Field & Stream. The Company is building a new cigarette factory in Richmond, ~ Virginia. When fully operational in 1977 the total cost including land, buildings, equipment and machinery will exceed $200,000,000. In 1973, the first cigarc•ttes were produced in this facility, and it is anticipated that con- struction will be completed in 1974. Other Products Philip Morris U.S.A. manufactures and sells razor blades, principally under the brand names of Personna and Gem. The blades include double edge, single edge and injector types. The Company believes that in 1972 Philip Morris U.S.A. had approximately 12.7% of the domestic market in razor blades. PHILIP MORRIS INTERNATIONAL 1 Philip Morris International has responsibility outside the United States for the marketing of most of the consumer products of Philip - Morris and for the Company's international subsidiaries, affiliates and licensees engaged.in the manufacture and marketing thereof as well as certain other products. Cigarettes are exported to over 150 countries and territories throughout the world from the United States and from countries where subsidiaries and affiliates are engaged in the manufacture and sale of tobacco products. Regional headquarters are located in Lausanne, Switzerland for

the Europe/Middle-East and Africa region; Madrid, Spain for the Latin America/Iberia region; Melbourne, Australia for the Asia/ Pacific region; and Toronto, Canada for the Canadian region. Tobacco manufacturing 2r .marketing subsidiaries and affiliates include the following companies: Argentina............ Massalin y Celasco S.A.C. e I; Buenos Aires Australia............ Philip Morris (Australia) Limited; Melbourne Belgium .............. Weltab S.A.; Brussels Canada ............... Benson & Hedges (Canada) Limited; Toronto Dominican Republic.E. Leon Jimines, C. por A.; Santiago de los Caballeros Ecuador .............. Proveedora Ecuatoriana S.A.; Quito France ............... Philip Morris France S.A.; Paris Guatemala............ Tabacalera Centroamericana, S.A.; Guatemala India .................Godfrey Phillips, India, Limited; Bombay Indonesia............ P.T. Philip Morris Indonesia; Malang Mexico ............... Cigarrera Nacional, S.A.; Mexico City Netherlands ......... Philip Morris Holland B.V.; Eindhoven New Zealand......... Philip Morris (New Zealand) Limited; Wellington Nigeria .............. Philip Morris Nigeria Limited; Lagos Pakistan ............. Premier Tobacco Industries Limited; Karachi Panama,,,,,,,,,,,,,,,Tabacalera Nacional, S.A.; Panama City Puerto Rico,,..,,,,,Philip Morris de Puerto Rico; Caparra Heights Spain ................ Philip Morris,Espana, S.A.; Philip Morris Iberica, S.A.; Santa.Cruz de Tenerife Sweden ............... Philip Morris Sweden A.B.; Stockholm Switzerland ......... Fabriques de Tabac Reunies, S.A.; Neuchatel Venezuela............ C.A. Tabacalera Nacional; Caracas West Germany ........ Philip Morris Germany GmbH; Frankfurt am Main. Manufacturers have been licensed to manufacture and sell one or more of the Company's cigarette brands in Austria, Bolivia,Colorbia, Fin- land, Hong Kong, Italy, Japan, the Netherlands Antilles, the Philippines and Yugoslavia. The Europe/Middle-East and Africa region is Philip Morris Inter- national's largest region in terms of unit sales. Factories are located in Holland, Belgium and Switzerland for marketing cigarettes in the EEC and EFTA countries. In June, 1972, Philip Morris Germany GmbH opened a factory in Berlin (West) for the purpose of manufacturing cigarettes for sale in the Federal Republic of Germany and other markets. In recent years, a number of countries have taken steps to restrict cigarette advertising and to discourage cigarette smoking. Non-tobacco subsidiaries of the Company brew beer in Canada and are active in the greeting card and printing businesses in the United Kingdom. In 1971, Philip Morris (Australia) Limited acquired all of the outstanding shares of Lindeman (Holdings) Ltd., a leading Australian wine maker. t~t .ta _ as 0 ... i ~ _.. . , ~ - 22

PHILIP MORRIS INDUSTRIAL Philip Morris Industrial has responsibility for the development, manufacture and marketing of the Company's industrial products both within the United States and abroad. The principal companies included in Philip Morris Industrial are: Milprint, Inc., a flexible packaging converting company; Nicolet Paper Company, a maker of glassine and specialty papers and Polymer Industries, Inc., a manufacturer of specialty adhesive and textile chemicals. MILLER BREWING COMPANY Miller Brewing Company was reported to be the seventh largest brewing company in the United States in 1972. The major brand distributed by Miller is Miller High Life, which is believed to be the sixth largest selling brand in the United States. The following table (based on an industry publication) sets forth the industry's sales of barrels of beer in the United States, Miller's sales and Miller's share of the industry: Miller Years Ended Percent December 31 Industry . Miller of Industry (000 omitted) 1972 131,812 5,337 4.0 1971 1~'T'S 5,085 4. 0 1970 121,859 5,003 4.1 1969 116,271 4,889 4.2 1968 111,415 4,684 4.2 Operating revenues of Miller were $211,262,000 in 1972, $204,134,000 in 1971, $198,479,000 in 1970 and $193,541,000 in 1969. Operating income was $228,000 in 1972, $1,300,000 in 1971, $11,409,000 in 1970 and $15,374,000 in 1969. ~

In 1973, the Company authorized an expenditure of $25,000,000 for the modernization and expansion of capacity by 35% in Miller's present three breweries. r-\ 1 Although Miller experienced increases in operating revenues in recent years, operating income has declined sharply. The Company believes this decline was due.to a combination of factors, includ- ing heavy increases in packaging and raw material costs without significant compensating price increases and the effects of price promotions by competitors. See "1973 Results" herein. Miller Brewing Company is not expected to make an important contribution to the Company's profits for several,years. MISSION VIEJO COMPANY The Company, which in January 1970 had obtained voting control of Mission Viejo Company, acquired ownership on September 29, 1972 of all the outstanding stock of that corporation. The maximum purchase price to be paid to the former stockholders by the Company is approximately $48,500,000. Of this amount approximately $27,500,000 represents fixed payments already made; payment of the balance will be based upon Mission Viejo Company's earnings over the five-year period ending December 31, 1977. In 1972, the Company also converted $13,750,000 aggregate principal amount of convertible subordinated notes of Mission Viejo Company which had been purchased by the Company in 1970. Mission Viejo Company is a new community, land development and home building corporation. Its principal activity at present is the development of a new, completely pre-planned town named Mission Viejo, on approximately 11,000 acres (approximately 4,500 hectares) located in Orange County, California, between Los Angeles and San Diego. In addition, Mission Viejo Company is developing ' three smaller residential areas, located near Phoenix, Arizona I, Denver, Colorado and Fresno, California. Operating revenues of Mission Viejo Company were $60,824,000 in 1972, $37,812,000 in 1971 and $26,834,000 in 1970. Net income was $1,273,000 in 1972, $650,000 in 1971 and $3,000 in 1970. Such operating revenues and net income are included in the consolidated statements of earnings of the Company from September 30, 1972. 1973 RESULTS Unaudited consolidated results for the nine months ended September 30, 1973 and September 30, 1972, respectively, are as follows: Nine Months Ended September 30 1973 1972 Aperating revenues .................. $ Net earnings ........................ Earnings per common share: $ , Primary ........................... $ $ Fully diluted ..................... $ $

Althour,h the above figures are unaudited, it is the opinion of the Comnany's management that all adjustments, consisting only of normal recurring accruals, necessary for a fair statement of the results have been refl.ected therein. Operating revenues and net earninEr, for any interim period are not necessarily indica- tive of results for a full year, and results for the same periods of different years may not be comparable. The Company's manage- ment believes that no conclusions should be drawn from the results of the above interim periods. The Company believes that earnings in 1973 have been affected by higher overall costs, start-up expenses in the new Richmond factory (see "Philip Morris USA" herein")and by some dislocation of Philip Morris International's European cigarette business caused by international monetary problems. Both Philip Morris Industrial and Miller Brewing Company, while reporting increases in sales, have experienced rising costs without the benefit of increased selling prices. Mission Viejo's operating revenues and income have been affected by increased costs and high inter- est rates. The Company anticipates the continuation of the above factors for some time in the future. Under the United States Economic Stabilization Program, the Company was prevented from raising its prices in the United States from August 15, 1971 to January 11, 1973. In accord- ance with revised regulations issued on January 11, 1973, the Company, effective February 5, 1973, raised the list price for cigarettes sold for consumption within the United States by 20~ per thousand. Effective February 12, 1973, Philip i;orris Internatior.al raised U.S. export list prices for most cigarettes manufactured in the United States by 35e per thousand. The Company understands that the regulations under Phase 4 of the Program effective August 12, 1973 will effectively prohibit for the immediate future any price increases on cigarettes sold for consumption in the United States. Price increases on other products sold within the United States will be permissible only if "cost justified" and if within the overall profit margin limitations imposed by the regulations. Accordingly, with respect to non- tobacco products, the Company may be able to offset a portion of increased costs with higher prices. Very truly yours, PHILIP MORRIS INCORPORATED By 4 I