Tobacco Documents Online

m While there have been no new adverse developments of importance, our industries continue to be confronted by perennial problems, among them: the smoking and health controversy, regressive excise taxes, and con- tainer restrictions. Fifteen years elapsed between the first Report by the U.S. Surgeon General in 1964 and the Surgeon General's report in January, 1979. During those years, hundreds of millions of dollars of government and pri- vate funds have been spent on health research. Although much of the research was concentrated on finding evidence that smoking causes diseases, no conclusive medical or clinical proof has been discovered. The latest report continues to rely primarily on statisti- cal data to attempt to establish a link between smoking and health. The statistical studies themselves, virtually all of them published previously, do not establish cause and effect according to epidemiologists and statisti- cians. Independent statisticians and biometricians have questioned the validity of the statistics in a number of these studies. The tobacco industry continues to maintain that the controversy can be resolved only by medical and sci- entific knowledge. Toward that end, the industry has contributed more than $70 million for independent research into the diseases blamed on smoking. Until recently, tobacco seemed to be the only prod- uct criticized on safety and health, but now there is a growing list of products similarly criticized, Occupa- tional and environmental health hazards also have received much greater attention. During 1978, the smoking and health issue took the form of legislative attempts at the state and municipal levels to restrict or prohibit public smoking. But a grow- ing assertiveness on the part of the tobacco industry to explain its side of the issue resulted in defeats for most of the anti-smoking proposals. The most important development occurred in Califor- nia, where the first referendum to restrict smoking in most public places was soundly rejected by the voters. Similar attempts to regulate smoking by legislation were rejected in a dozen otherstates and cities. As in so many other areas, when the public under- stands the issues, the consensus favors personal free- doms and common courtesy over government control. Internationally, there is a trend toward government- imposed restrictions on cigarette marketing in a number of countries, These measures are based on the assumption that cigarette advertising and promotion contribute to higher industry sales. There is sufficient evidence in countries where there has been no such marketing support of cigarettes to refute this assump- tion. Marketing restrictions serve only to restrain com- petition and reduce or eliminate information to consumers that would enable them to make informed brand choices. For example, in Finland the country's year-old ban on tobacco advertising and two-year-old ban on alcoholic beverage advertising have had no sig- nificant effect on sales in either market. Excise taxes continue to place an unfair burden on smokers. In 1978, federal, state, and local taxes on cig- arettes amounted to $6.2 billion. In contrast, the cost of federal price guarantees for tobacco growers has averaged less than $1.25 million annually. Clearly, smokers are paying a disproportionate share of the cost of government. At the same time, it is gratifying to note that proposals to increase the federal tax have been repeatedly defeated and the number of increases in state taxes has declined in this decade. During the year, 16 out of 17 states rejected legislative proposals to increase ciga- rette taxes, and one state, Colorado, reduced the ciga- rette tax. In the states and communities with the highest tax rates, cigarette "bootlegging" has become a major operation of organized crime. This will continue to be a problem until the high tax states realize that they are losing revenue because of illicit bootlegging operations and lower their taxes accordingly. Restrictive container legislation now enacted or pro- posed in a number of states increases costs to brewers, soft drink bottlers, distributors, retailers, and consumers. Such legislation requires more energy con- sumption, adds to water pollution, and does little to reduce litter, Ultimately, it forces consumer price increases and accelerates inflation. Beverage containers play a minor part in the solid waste problem-making up only 6% of municipal solid waste in the U,S. Returnable packaging legislation thus ignores what is by far the largest part of the problem and takes a narrow approach while exacting a broad economic toll. For those reasons, although our brewing and soft drink operations are prepared to deal with any eventual- ity, with little effect on our growth, we oppose such leg- islation. We do support comprehensive solutions to the problems of resource and energy conservation, such as solid waste disposal and resource recovery systems within communities. In April, 1977, the Food and Drug Administration moved to ban the use of saccharin in consumer prod- ucts. An act of Congress postponed the ban until May 23, 1979, pending further analysis of studies said to link the sweetener with disease. In the eventuality of a ban, the "diet" segment, accounting for about 12% of the soft drink market, would be affected negatively. Two cases involving the two leading soft drink com- P'- ct C Tf Tr in

can es and questioning territorial restrictions on fran- chised soft drink bottlers are now in the United States Court of Appeals for the District of Columbia Circuit. They are the outgrowth of suits brought by the Federal Trade Commission against the major soft drink franchis- ,ng companies, including Seven-Up, in 1971, The case involving Seven-Up has been deferred pending the out- come of the appeals. We believe the current franchise system is the most efficient means of distributing our products and serves the public interest by fostering vigorous brand competition. .~.1e public Interest The low regard in which business seems to be held in nations and that our national task is to make interna- some quarters today is based largely on a perception tional trade and investment free-flowing, productive, that companies are selfish actors on the world stage. and healthy for all sides. Philip Morris strives for a performance that makes eco- Philip Morris is the largest U.S. exporter of cigarettes, nomic and sociairs but aGacotae o con ocere cnieeeship aOid beeates and manufactured Pha ets Idnter- not an afterthoug ~"Yt ng broa by 63 affi P Morris do. We believe that the company's achievements in national and its affiliates employ 27,000 people abroad. every area are founded on a corporate philosophy These are not jobs taken from the American labor mar- which highly values individual excellence and imagina- ket. We import no cigarettes for sale in the U.S. If we did tion, quality of people and products, the efficient utiliza- not operate internationally, our U.S. employment would tion of resources, and a sense of social responsibility. be reduced. The number of Philip Morris employees in This corporate philosophy has attracted outstanding the U.S. working directly in support of our international people to our ranks and is, in fact, the key to our suc- business exceeds 2,000. In 1978, Philip Morris alone cess. Our social activities are not pursued solely for the made a net positive contribution of more than $200 mil- sake of profits. They are mounted simply because that lion to the U.S. balance of trade through the export of is the kind of company Philip Morris is. cigarettes, tobacco, and other manufacturing compo- We recognize that a company in the tobacco busi- nents. Total U.S. export of tobacco and tobacco prod- ness confronts a special challenge. We make a product ucts contributed a net positive amount of $1.7 billion to that carries a health warning, that cannot be advertised the U.S. trade balance, up 31% over 1977. on television and radio in the U.S. and many other Philip Morris also contributes positively to the econo- countries, and that some people would like to legislate mies of the countries in which we operate. out of existence by reviving a form of prohibition. As a Last year, we published the results of a survey cover- corporation and as individuals, we share a serious con- ing our operations in 13 developing countries. The publi- cern about major public health problems, and we com- cation documents the activities of our affiliates in mit resources to help find the causes of diseases that relation to the economic and social objectives of host have been statistically associated with cigarette smok- countries and shows how private international invest- ing. We have no trouble accepting a world in which ment can further the interests of all concerned. there are different points of view, but we do have trouble Philip Morris in 1978 announced plans to build a new with zealots who tolerate no opinions except their own. corporate headquarters building in New York City An We believe the Administration should be commended important feature of the building will be a block-long, for its anti-inflation program and we will conscientiously enclosed pedestrian mall housing a sculpture garden make every effort to stay within the wage and price administered by the Whitney Museum of American Art. guidelines. Philip Morris will vigilantly continue to seek Our decision to keep our headquarters in New York new ways to hold down costs through greater efficiency represents an expression of confidence in the city as a and productivity. We also agree with the President that dynamic environment for business. Philip Morris head- tighter reins on government expenditures are equally quarters have been in New York since 1919, essential if inflation is to be arrested. Philip Morris played an active political role in 1978. Because the United States buys more products Our efforts in California and other states were crucial to abroad than it exports, the U.S. balance-of-payments the defeat of restrictive anti-smoking legislation. deficit currently runs to about $2 billion a month. As a The Philip Morris Political Action Committee (PHIL- result, the cry of protectionism-"Keep imports out"-is PAC) was launched in 1978. Authorized by the Federal being heard once again. As Nobel-laureate Paul Election Campaign Act, PACs enable corporations to Samuelson has said, protectionism does not provide solicit voluntary political contributions from administra- Protection but succeeds only in "making the world less tive and executive personnel as well as directors and productive." Philip Morris is convinced that we are well shareholders and to distribute these monies to candi- into an era of irrevocable interdependence among dates for federal office. More than 800 corporate PACs are now functioning.

To build a strong, modern management, it is neces- sary and productive to draw upon all elements of talent in our population. Women and minorities today repre- sent over 65% of the population of the U.S. It is our pol- icy and goal to have these groups represented adequately in the Philip Morris management structure. We are making progress toward achievement of this goal. Minorities now fill 11°% of positions classified as "officials and managers" (five years ago they held 6%). Minorities now account for 17.1% of our combined sales forces (up from 10.8°lo five years ago). In total, one out of four of our U.S. employees today is a member of a minority group. Women today account for 10% of our officials and managers (five years ago they represented 6.7%). Women today hold 22.5% of our professional jobs (compared with 14.3% five years ago). In 1978, we expanded significantly our support of minority-owned banks by establishing a multi-million- dollar credit agreement with a consortium of 28 minority banks across the country. In 1978, three governors welcomed new Philip Morris facilities to their states as boosts to the future econo- mies of their states. They were Governor James B. Hunt, Jr. of North Carolina, where Philip Morris U.S.A. is building a new cigarette manufacturing facility, and where the Miller Brewing Company has a new brewery and can manufacturing plant, and Governors George D. Busbee and Edmund G. Brown, Jr. of Georgia and California, where Miller is constructing new breweries. Our cigarette manufacturing plants and breweries are welcome because they create jobs while meeting all applicable pollution control and other environmental standards. Business activities at Philip Morris make social sense. One example is our Mission Viejo development in Orange County, California, one of the most successful planned communities in the nation, both financially and socially. Mission Viejo is planning another Orange County community, Aliso Viejo, to be developed on 6,600 acres just west of the original Mission Viejo development. For years, major developers shied away from this property because it invelved more environmental con- straints than any other piece of land in Orange County. Aliso Viejo's plans call for reserving 50% of the acreage for open space and also specify that, of the 20,000 homes expected to be built, 20% will be priced to be accessible to families with moderate incomes. Our corporate charitable contributions once again increased sharply-in fact, they have more than dou- bled in the past three years, and about tripled in the past five. Philip Morris grants assist a wide range of nonprofit organizations, with the largest category con- tinuing to be higher education. As a matter of policy, we support programs in our plant cities whenever possible. The largest single grant made by the company-31 million payable over five years-was pledged to Yale University's new Graduate School of Organization and Management for the establishment of a Philip Morris Chair in Marketing in honor of Joseph F Cullman 3rd. Since 1962, it has been our policy to match employee contributions to educational institutions (up to $10,000 per employee per year). We have enlarged this plan to cover gifts to cultural organizations (museums, libraries, orchestras, and the like), and we have now extended it again to cover contributions to hospitals with the upper limit for hospitals and cultural groups set at $500 per employee annually. During 1978, we strengthened our Vocational and Technical Scholarship Program, under which children of employees may now receive awards of up to $2,500 a year to attend accredited vocational or technical schools. Philip Morris corporate support of cultural and artistic activities continued to grow in 1978. An exhibition enti- tled "Mirrors and Windows;' focusing on American photography since 1960, opened at The Museum of Modern Art in New York, drawing record-breaking crowds. A traveling exhibition on pop and minimal art from the 1960s and 1970s will open next October in Mil- waukee, headquarters of the Miller Brewing Company. Philip Morris and Mission Viejo will be major sponsors of the "First Western States Biennial Exhibition", sched- uled to open in Denver in March, 1979, showcasing the works of contemporary Western artists. Starting in April, 1979, in New York, Philip Morris will sponsor an exhibi- tion of Michelangelo drawings never shown in this coun- try. A Philip Morris grant to the Conference of Mayors is designed to promote art and culture in U.S. cities. Our commitment to social programs extends to our international operations. We are supporting a commu- nity development project in a village in the state of Maharashtra, India, and our affiliate in the Dominican Republic is financing the construction of a student center at the Instituto Superior de Agricultura. Last year, the highly acclaimed Jasper Johns exhibition, spon- sored by Philip Morris and the National Endowment for the Arts, traveled to Cologne, Paris, London, and Tokyo. As we enter the last year of this decade, Philip Morris can look back on a period in which our corporate activ- ities in the public interest area grew as significantly as our business activities. The two go hand in hand, and this partnership helps to explain the vitality of our company.

Joseph F. Cullman 3rd Board of Directors During 1978, John C. Sawhill, President of New York University, was elected a member of our Board of Directors. Dr. Sawhill has a distinguished background in business, education, and the federal government, Looking Ahead Philip Morris operations in those businesses in which we are involved-cigarettes, beer, soft drinks, industrial products, and home building-are all successful and innovative. Our leading consumer product brands are well-positioned and growing. Our large capital expendi- ture program, designed to satisfy growing consumer demand and to improve productivity and efficiency, has We are pleased to repori that Joseph F Culiman 3rd remains active in a key leadership role in Philip Morris Incorporated. Serving as Chief Executive Officer of the corporation from 1957 until November, 1978, Mr Cullman led Philip Morris through most of its past 25 years of continuous and accelerating growth. He provided the inspiration and leadership that has made Philip Morris successful. In every way Philip Morris Incorporated today is stronger than it has ever been, and we can fee/ not only confident but positive and optimistic about the com- pany's future. Mr Cullman will continue to serve as Chairman of our Executive Committee and an active member of our Board of Directors. In the smooth and successfu/ man- agement transition that took place this year, the execu- tives whom Mr Culiman developed, with whom he worked, and upon whom he and the company relied over the past two decades have been elected to serve in the corporation's top executive positions. We are for- tunate that his wise counsel and personal involvement will continue to be readily available to us. including service as the Administrator of the Federal Energy Administration. His election will further strengthen and diversify our Board. helped to establish our company as a leader in its major businesses. Financially, Philip Morris has never been stronger. Our management is experienced, aggressive, and has exceptional depth, and our people at every level are dedicated to the company and to their work. As a result, we look forward to our 26th consecutive year of revenues and earnings growth in 1979. George Weissman Chairman of the Board and Chief Executive Officer Ross R. Millhlser Vice Chairman of the Board Clifford H. Goldsmith President

14 Philip Marris U.S.A. Operating Revenues Operating Income Officers 1978 1978 Hugh Cullman Albert J. Bissmeyer Edward M. Schaaf, Jr. $2,437,465,000 $568,145;000 Chairman and Vice President, Vice President, Production 1977 1977 Chief Executive Officer Brand and Promotion $2 160,362,000 $474,400,000 Dr. Robert B. Seligman , 1976 1976 Shepard P. Pollack Robert H. Cremin Vice President, $1,963,144,000 $401,426,000 President and Vice President, Sales Research and Development 1975 1975 Chief Operating Officer $1,721.549,000 1974 $1 502 267 000 $337,314,000 1974 S286,225,000 W, Wallace McDowell Executive Vice President, Stanley S. Scott Vice President, Public Affairs Paul Jeb Lee J Richard L. Snyder Vice President, Finance and Administration , , , Operations James J. Morgan Executive Vice President, M keti . Vice President, Marketing Services Fred J. Laux Vice President, Personnel 1 ' James L. Thompson, Jr. Vice President,_ Media Dr. Helmut R. R. Wakeham ar ng Benjamin A. Soyars Senior Vice President William G. Longest Vice President, Leaf U t GJ 0 Vice President, Science and Technology , ~ R. Nelson Beane Manufacturing Richard D. Robertson Vice President, Ecology a Ut v Controller

Phdip Piir,;rris U: perating Pe renues C,aer the last ten vears, t7hii,p Mor U SA'a cq°exating nv ren ues nave : resed at an a':eri :Ke annurai i-a",,rFjf?rS r::.ite .;i 1~ 9 Philip Morris U.S.A. CJperating In u-i- ,-.r vh~fir7 ><enr- i rq A n;r~a Pdvho Morris U S.A's operattng rncome grown at an average annual compounded risen at an averaye 4111 -, a,w1 itruu, w r;ate of 8.84; during the past ten yearss rate ot 20 5% for the list ten years. E!i,onsoft?:dlars E3iHronC.:nts~ MlflionsofDol1ars ,t.SJ 175 700 - U,S. Cigarette Indu Unit Sales i7ver the Iast ten years, total U.S, cigarette,ndustry unit sales have grown at art a4eral]e annual rate o(1.41,$, whlle out mark.et share has more than doubled , reaching atwut 28% in 1978 W U S. Cigarette Industrv t.fnit Sales - Philip Morrus Share uiU S. Industry 440 6illion Units "G 700 35 9 .'rsj i c,tr 125 --- 500 500 25 4r.?r 100 4CQ 400 20 S;) 15 300 300 15 50 200 200 t0 t} 25 1 fi0 4 0() 5 ' f) 0 0 111 .... .... ~~ ....~_ 0 .-1 -n 1 1 1. ~ 11 ".1 '!K 7 1 1 ~I 7a ~

'Enriched Flavor'tobacco proved satisfying even to high tar smokers in latest research. ..,~~,m.,,.... 1 Merit, our largest selling lowaar brand, was the fastest growing of the top ten U.S. brands in 1978. 2 Marlboro widened its lead as the larg- est selling cigarette in the U.S. and the world. 3 Benson & Hedges 100's strengthened its position as the leading 100mm cigarette in the U.S. with the highly successful introduction of Benson & Hedges 100's Lights late in 1977. 5 Point-of-sale displays at retail counters and an expanded, well-trained, and highly motivated sales force helped broaden market penetration and rein- force the already substantial sales success of Philip Morris U.S.A. 4 Virginia Slims continued to grow as the leading cigarefte designed for 6 Widely publicized and highly success- women. ful events like the Marlboro Cup race at Belmont Park in New York, spon- sored by Philip Morris U.S.A., PJ enhance the company's other efforts. CJ-f ~ Seattle Slew captured the 1978 O Marlboro Cup. C? ~ r-, t1l ~ CID

7 At our new Engineering Center in _ - York, Virginia, skilled technical person- nel rebuild and modernize cigarette making and packing equipment. This equipment, along with recently pur- chased high-speed making and pack- ing machines, will enable our factories to keep up with rising customer demand. 8 Ph Iip Morris U.S.A. emphasizes con- t nuous quality-control efforts to main- tain consistent high quality in its cigarette brands. This picture shows a sample cigarette from a production line being microscopically analyzed to nsure that our carefully prescribed standards have been met. 9 Philip Morris U.S.A. scientists con- 10 An operator makes final adjustments stantly examine tobacco leaf and its to one of the new generation, high- components in order to develop better speed cigarette packing complexes quality product for use in our cigarette that have been installed at our facto- brands. ries. The increased productivity of these machines has begun to contrib- ute to profits. 1 1 Philip Morris U.S.A.'s continuing growth requires an expansion of pro- duction capability. A new cigarette manufacturing center will be built on a portion of this 2,100-acre tract in Cabarrus County, North Carolina, near Charlotte.

Operating Revenues Operating Income Officers 1978 1978 ..._, - Hamish Maxwell Mary W. Covington $1, 810, 861, 000 5188,561,000 President and Vice President, 1977 1977 Chief Executive Officer Corporate Affairs S1,349,280,000 8153,791,000 1976 1976 R. William Murray Staffan Gunnarsson 51,083,970,000 $130,104,000 Executive.Vice President Vice President 1975 1975 Europe/Middle East/Africa $1,040,002,000 $112,975,000 Carlos E. Salguero Hamilton Hurley Vice President 1974 1974 Executive Vice President ['-J $ 887,077,000 S 94,017,000 Latin AmericalIberia Eric M. Janssen Vice President, Personnel ~ Lee Pollak ~ Vice President and Chief Administrative Officer Albert E. Bellot Thomas M. Kearns Vice President, Finance William H. Webb O r=- J C11 ~ Vice President Geoffrey C. Bible Vice President Aleardo G. Buzzi Vice President Vice President George P. Hibbard Treasurer Felix R. Sanchez Controller tl

Philip Morris International Philip Morris International Philip Morris International _ Operating Revenues Cigarette Unit Sales Operating income Coerating revenues of the consolidated a11d unconsolidated affiliates of Philip \brns International have increased at an average annual compounded rate of 22 4~y over the past ten years. ~ Clansohdated ~ unconschdated NIIIII~Illlll Total unit sales of Philip Morris International's affiliates, licensees, and exports have risen at an average compounded rate of 14.4% over the last ten years. During the last ten years, Phiiip Morris International's operating income has grown at an average annual compounded rate of 19.6%. ~ World Cigarette Industry Crt Unit Sales Excluding U.S.A. --_j Over the past ten years, worldwide cigarette industry und sales have increased at an average annual rate of 3.4% while our market share has more than doubled, reaching 5 5% in 1978. ~ World Cigarette Industry Unit Sales (Excluding U.S.A.) r Philip Morris Share of World Market (%) l~ Billion Units Millions of Dollars Billion Units % 3i 50 210 210 3850 14