Tobacco Documents Online

Philip Morris Incorporated is now a leading company in three large industries-cigarettes, beer, and soft drinks-that provide simple pleasures to tens of millions of people every day. Over the past six years, Philip Morris has been the fastest growing U.S. company in both the cigarette and beer industries. In 1978, the company registered its 25th consecutive year of growth in operating revenues, net earnings, and earnings per share. Founded more than a century ago and incorporated in Virginia in 1919, the company has long been a major cigarette manufacturer. Today, it is the second-largest cigarette company in the U.S. market and the largest U.S.-based international cigarette company, selling its 160 brands in more than 170 countries and territories. The corporation acquired full control of the Miller Brewing Company in 1970. At that time, Miller was the seventh-largest brewer in the U.S. Today, Miller is the second-largest. In 1978, the company expanded its operations with the purchase of The Seven-Up Company, the third-largest soft drink producer in the U.S. Philip Morris has also diversified into the manufacture of specialty papers, flexible packaging materials, and specialty chemicals as well as into community development and homebuilding. These businesses are conducted by six operating companies: Philip Morris U.S.A., Philip Morris International, Miller Brewing Company, The Seven-Up Company, Philip Morris Industrial, and Mission Viejo Company. 25 Consecutive Years of Growth 1953-1978 Operating Revenues Milfions of Dollars Net Earnings Millions of Dollars 6800 425 6400 400 6000 375 5600 350 5200 325 4800 300 4400 275 i 4000 250 ~ 3600 - - 225 ~ 3200 200 2800 175 2400 150 i r 2000 125 1600 100 1200 75 800 50 400 0 25 0 l 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 Table of Contents 1 Financial Highlights 4 Review of the Year 14 Philip Morris U.S.A. RJ CJ7 18 Philip Morris International O 22 Miller Brewing Company O 26 The Seven-Up Company O ~ 30 Philip Morris Industrial O 32 Mission Viejo Company ON 34 Financial Review I" CP1 38 Fifteen-Year Financial Review 52 Directors and Officers

. , , 1978 1977 1976 1975 1974 (dollar amounts except per-share amounts expressed in thousands) * operating Revenues $6,632,463 S5,201,977 $4,293,782 53,642,414 53,010,961 Net Earnings 408,581 334,926 265,675 211,638 175,516 Primary Earnings Per Common Share 6.77 5.60 4.47 3.62 3.15 Dividends Declared Per Common Share 2.05 1.563 1.150 .925 .775 - Percent Increase Over Prior Year Operating Revenues 27.5% 21.2% 17.9% 21.0% 15.7% Net Earnings 22.0% 26.1 % 25.5% 20.6% 18.1 % Primary Earnings Per Common Share 20.9% 25.3% 23.5% 14.9% 16.2% Dividends Declared Per Common Share 31.2% 35.9% 24.3% 19.4% 15.0% Operating Companies Revenues Philip Morris U.S.A. $2,437,465 $2,160,362 $1,963,144 $1,721,549 $1,502,267 Philip Morris International 1,810,861 1,349,280 1,083,970 1,040,002 887,077 Miller Brewing Company 1,834,526 1,327,619 982,810 658,268 403,551 The Seven-Up Company 186,494 Philip Morris Industrial 237,165 216,699 169,096 151,960 155,390 Mission Viejo Company 125,952 148,017 94,762 70,635 62,676 Consolidated Operating Revenues $6,632,463 $5,201,977 $4,293,782 53,642,414 $3,010,961 Operating Companies Income Philip Morris U.S.A. $ 568,145 $ 474,400 $ 401,426 $ 337,314 $ 286,225 Philip Morris International 188,561 153,791 130,104 112,975 94,017 Miller Brewing Company 150,300 106,456 76,056 28,628 6,291 The Seven-Up Company 26,291 Philip Morris Industrial 15,024 14,860 10,620 8,052 12,280 Mission Viejo Company 19,761 33,225 16,333 5,875 4,772 Consolidated Operating Income $ 968,082 $ 782,732 $ 634,539 $ 492,844 $ 403,585 J ~ ~~ : Y r z._ . _ . - ~ Com unded Aver e Annual Growth Rate po a9---- 1978-i973 19 78-i96$ 1978-f963 1978-1953 ~ Operating Revenues _ 20_e <3 17.6% ~~ f3,Elnla , _ 4 I Net Earnings 224- . 23-70/n 21.5_:0 _ . 15.4~0 ,.-- -i Primary Earnings Per Share 20-1 ~iQ 20.0~0 19.1% _ 12.1°l0 Consolidated operating revenues and operating income include the results of the company and all wholly-owned subsidiaries (The Seven-Up Company and its subsidiaries since June 1, 1978). Operating revenues and operating income of The Seven-Up Company and its subsidianes for the entire year 1978 were $300,521,000 and $45,652,000, respectively. Corporate expenses, interest expense, and items which are not directly attributable to the operating companies are not allocated.to them. In the opinion of management, any allocation thereof would be arbitrary and would diminish the accuracy of measurement of their performances.

Operating Revenues Operating Income Net Earnings f by Operating Company by Operating Company f Millions of Dollars Millions of Dollars Millions of Dollars 7200 1080 __ 450 _ 6800 - - 1020 425 _ 6000 900 375 5600 5200 4800 4400 4000 3600 3200 2800 2400 2000 1600 1200 800 400 ~ Philip Morris U.S.A. ~ Philip Morris International ~ Miller Brewing Company IlllllllllllllllllllllllllIThe Seven-Up Company 111111111111111111111111111Philip Morris Industrial _ Mission Viejo Company 300 240 180 120 60 350 300 275 225 150 125 100 75 50 25

Primary Earnings Dividends Declared Capital Expenditures Per Share Per Share Dollars 74 , 75 76 77 78 Dollars 74 75 76 77 78 Millions of Doll_ars 74 75 76 77 78 PJ C11 O 0 0 ,..: O m N cb

Philip Morris Incorporated This year has been one of continued substantial prog- ress and significant activity to maintain our growth in the future. In 1978, we achieved new records in operating reve- nues, net earnings, and earnings per share for the 25th consecutive year, continued our enlarged facilities expansion program, raised the dividend on the com- mon stock, completed two significant acquisitions, and realigned our executive management. Operating revenues increased 27.5%, reaching $6.6 billion, net earnings grew 22.0% to $409 million, and earnings per share rose 20.9% to $6.77. Our major businesses in cigarettes and beer continued their growth in units, revenues, and income. Philip Morris U.S.A.'s unit sales increase of 5.3% again led the U.S. industry in 1978. Our U.S. cigarette sales totaled 168 billion units, about 28% of the industry. Our market share in the U.S. has more than doubled in the past ten years. Philip Morris International's cigarette sales reached 201 billion units, a gain of 7.8% over sales in 1977. Our share of the estimated 3.6 trillion unit market outside of the U_S. rose to about 5.5%, also more than double our share ten years ago. Miller Brewing Company barrel shipments were up 29.1 % over 1977 to a total of 31.3 million barrels. Miller's market share grew to about 19%, almost five times its 1972 level of 4.1 %. To meet demand and prepare for future growth in all of our businesses, we have invested more than $1.5 billion in capital expenditures over the five-year period from 1974 through 1978, of which $566 million was spent in 1978. The anticipated continued growth of the company, our constant emphasis on the high quality of all our products, and our efforts to maximize our pro- duction efficiency will require an even larger capital investment program over the next five years. For the period from 1979 through 1983, we estimate total capital expenditures will be somewhat in excess of $3.0 billion. More than 90% of this amount will be used to increase capacity and productivity to meet expected demand. In 1979, in the U.S. we-will-begin construction of a new cigarette manufacturing plant in North Carolina and add new, more advanced equipment to our current facilities. Internationally, we will expand and modernize our cigarette production facilities in several markets, including the factories in West Berlin and Bergen op Zoom, the Netherlands. At the same time, almost all of Miller's breweries will be expanded and work will con- tinue toward the completion of two new ones in Califor- nia and Georgia. Expenditures on these and other capital expansion and modernization projects will total about $775 million in 1979. The dividend on our common stock was increased again in 1978. The Philip Morris dividend has been raised 13 times and has grown at an annual rate of 17% over the last 11 years. In 1978, dividend payments on the common stock were made for the 51 st consecutive year. in June, we acquired The Seven-Up Company, the third-largest soft drink producer in the U.S. We believe the soft drink industry could provide a significant growth area for Philip Morris in the future. We are confident about Seven-Up, but we realize that the soft drink industry is intensely competitive. Successful develop- ment of cur position in this industry will require the care- ful planning of strategies for long-term growth. Also in June, we acquired the rights to existing Lig- gett Group cigarette trademarks outside the U.S. and related assets. These trademarks have considerable potential within Philip Morris International's large and growing worldwide tobacco operations. During the year, in a move dictated by the growth of the company since our last executive changes in 1973 and the retirement from line management of Joseph F Cullman 3rd, Chief Executive Officer for the past 21 years, Philip Morris underwent a broad executive realignment. George Weissman was elected Chairman of the Board and Chief Executive Officer; Ross R. Millhiser, Vice Chairman of the Board; and Clifford H. Goldsmith, President. An Office of the Chief Executive consisting of these three top officers has been established and is responsible for overall corporate matters. Responsibility for all functions of the corporate staff lies with Mr. Milihiser. Philip Morris U.S.A., Philip Morris International, and Philip Morris Industrial are assigned to Mr. Goldsmith. Mr. Millhiser and Mr. Goldsmith report to Mr. Weissman.

9mm In addition, the Board of Directors elected two Group Executive Vice Presidents of Philip Morris Incorporated: Hugh Cullman, Chairman and Chief Executive Officer, Philip Morris U.S.A., reporting to Mr. Goldsmith; and John A. Murphy, Chairman and Chief Executive Officer, Miller Brewing Company, with responsibility for Miller, The Seven-Up Company, and Mission Viejo Company, reporting to Mr. Weissman. Joseph F Cullman 3rd remains active as Chairman of the Executive Committee of the Board of Directors, a post he has held for 11 years. Other major promotions were: Hamish Maxwell to Executive Vice President, Philip Morris Incorporated Philip Morris U.S.A. Again in 1978, Philip Morris U.S.A. substantially out- performed its competitors in the U.S. cigarette industry and achieved new records. Operating revenues grew 12.8%, while operating income rose at an even faster rate, 19.8%. Cigarette industry sales in the U.S. reached about 605 billion units in 1978. Philip Morris U.S.A.'s volume grew to 168 billion units, up 5.3% or 8 billion units over last year. For the 12th consecutive year, we registered the industry's largest increase in unit sales, as Marlboro and Merit were the two largest unit volume gainers in the industry. Our share of the U.S. market increased to about 28% from 26.5% in 1977. A consistent marketing strategy and the highest qual- ity cigarettes in the industry have given Philip Morris U.S.A. well-positioned brands in important segments of the market. Marlboro's growth in both unit volume and market share led the industry in 1978, aided by the introduction of Marlboro Lights 100's early in the year. Marlboro, the largest selling cigarette in the U.S. and the world, widened its lead over the next largest selling brand and became the first filter cigarette brand ever to sell more than 100 billion units in the U.S. in one year. Benson & Hedges 100's Lights, introduced late in 1977, was an outstanding success in 1978 and strengthened the brand's position as the leading 100mm cigarette in the U.S:- - Merit continued its rapid growth. Introduced only three years ago, Merit has become our largest selling low-tar brand and in 1978 was the fastest growing of the, top ten brands in the U.S. Ldw-tar Virginia Slims also continued to grow as the leading cigarette designed for women. and President and Chief Executive Officer, Philip Morris International; John T Landry to Senior Vice President and Director of Marketing, Philip Morris Incorporated; Shepard P. Pollack to President and Chief Operating Officer, Philip Morris U.S.A.; and William K. Howell to President and Chief Operating Officer, Miller Brewing Company. The new management team, which includes other management promotions at both corporate staff and operating company levels, has moved into place effi- ciently and smoothly. Almost the entire senior manage- ment group has worked closely together for 20 years or more. Although the pace of new brand introductions in the low-tar category slowed in 1978, as compared with 1976 and 1977, the category as a whole grew rapidly. Philip Morris U.S.A. is well-positioned to participate in the expected continued growth of this segment of the market with Merit, Marlboro Lights, Virginia Slims, Parliament, and Benson & Hedges 100's Lights. Within Philip Morris, the research and development function has grown increasingly. sophisticated. Our advanced technological knowledge and expertise has made possible the creation of cigarette products that meet consumer demands for taste in low-tar products. -Today our research and development facilities in Rich- mond employ a staff numbering more than 480 people, including more than 60 with PhDs. We believe that Philip Morris is in an excellent posture for further scien- tific breakthroughs. Our manufacturing center in Richmond, Virginia, which entered its sixth year of production during 1978, employs the latest technology in the making and pack- ing of cigarettes. We have been steadily increasing the productivity of our facilities primarily through the installa- tion of the latest available high-speed equipment. How- ever, it has become clear that the growing demand for our cigarettes in the U.S. and in export markets will sur- pass the production capacity of our facilities within the next few years. We are starting construction of a new cigarette manufacturing plant in Cabarrus County, North Carolina. This large investment demonstrates our confidence in the future vitality of the cigarette industry and in our ability to continue to grow and increase our market share.

Operating revenues and operating income of Philip Morris International advanced to record highs, increas- ing by 34.2% and 22.6%, respectively, in 1978. The world cigarette market outside of the U.S. increased 2.7% to an estimated 3.6 trillion units. Our cigarette unit volume reached 201 billion, up 7.8%, and our share of the international market excluding the U.S. rose to about 5.5%. Philip Morris International export sales from the U.S. were up 15.7%,and we continued to be the leading U.S. cigarette exporter. In 1978, we accomplished a significant expansion of our growing international operations through the pur- chase of the overseas cigarette business of the Liggett Group. This acquisition by Fabriques de Tabac Reunies S.A., our Swiss affiliate, included the rights to existing Liggett trademarks outside the U.S., as well as related rights, patents, and technical data. Liggett international brands covered by the purchase include Lark, L&M, Chesterfield, Eve, and Decade. In a related transaction, Philip Morris Incorporated bought from the Liggett Group international inventories, receivables, and other assets. Internationally, as in the U.S., Philip Morris is commit- ted to a multi-brand strategy. We sell over 160 brands in more than 170 countries and territories through 25 manufacturing and marketing affiliates, 38 licensees, and regional export sales organizations. Marlboro sales continued to grow, strengthening the brand's position as the world's best-selling cigarette. In 1978, Marlboro accounted for over one-third of Philip Morris International's volume. Merit, introduced in sev- erai international markets in 1977, posted a 70% sales increase in 1978. We also offer a broad range of regional and national brands, tailored to differing taste preferences around the world. The Europe/Middle East/Africa region achieved rec- ord unit sales and operating income. Marlboro regis- tered strong growth in many markets in this region, including Belgium, France, Italy, the Netherlands, Swit- zerland, the United Kingdom, Eastern Europe, and sev- eral Middle Eastern countries. In West Germany, Philip Morris G.m.b.H. continued to outperform the industry. Marlboro moved up to third position in the market and was the fastest growing brand in that country. To meet growing demand for its products, Philip Morris Europe is modernizing and expanding its manufacturing facilities in West Berlin and Bergen op Zoom, the Netherlands. In the Australia/New Zealand region, sales of Philip Morris (Australia) Limited were adversely affected by competitive price cutting and a significant increase in the Australian excise tax. New marketin.g strategies and the introduction of new brands and line extensions have been implemented to counteract price competition. Lindeman (Holdings) Limited, the wine-making sub- sidiary of Philip Morris (Australia) Limited, again increased sales volume, and strengthened its position as Australia's leading wine company. In the Latin America/Iberia region, unit sales and operating income continued to grow in 1978. Marlboro had strong unit gains in Argentina, the Dominican Republic, Mexico, Panama, and Spain, and the Lark brand continued its strong growth in Ecuador. Our affiliate in Brazil again incurred a significant loss due to substantial investments in marketing. Philip Morris Brasileira is improving its position in the higher price, higher margin segment of the market, with cur- rent strong growth trends for Galaxy, Shelton, Monterey, and Benson & Hedges 100's. We remain confident that profitability will be achieved over the long term in Brazil, the second-largest market in the world, after the U,S., excluding government monopolies and state enterprises. Benson & Hedges (Canada) Limited's sales were lower in 1978 due to increased competitive activities in the low-tar segment of the Canadian market. Two line extensions, Benson & Hedges Lights and Mark Ten Legere, have been introduced in the mild market seg- ment, which offers the greatest growth opportunity. In Asia, Philip Morris International posted record unit sales and operating income. Strong growth in U.S. export sales to Asian markets included substantial vol- ume increases by Marlboro in Hong Kong and Singa- pore, and by Lark and Parliament in Japan. Sales of our affiliates in India and Pakistan increased in 1978 on the growth of local brands, Cavander's and Red & White in India and K-2 and Red & White in Pakis- tan. Our licensee in the Philippines again posted record sales for Marlboro. With experienced management and geographically diversified operations, Philip Morris International is well- positioned to take further advantage of the significant potential for expansion of our business in international markets.

Mlper Brewing Company The Miller Brewing Company had another outstanding year in 1978. Operating revenues gained 38.2%, and operating income grew 41.2%. The U.S. brewing industry, including imported brands, sold about 166 million barrels of beer in 1978, an increase of 4% over 1977. Miller's barrel shiprnents rose 29.1%, reaching 31.3 million barrels, up 7.1 million bar- rels over shipments in 1977. In 1972, Miller sold 5.4 million barrels. Since then Miller's volume has risen 25.9 million barrels, or 482%. In 1978, Miller's share of the U.S. beer market increased to about 19% from 15.2% in 1977, and Miller strengthened its position as the second-largest U.S. brewer. Again in 1978, Miller pursued its marketing strategy, which positions its brands in the fast-growing, higher priced segments of the industry. Miller High Life, Miller's largest selling brand, continued to be the fastest grow- ing premium brand in the U.S., and strengthened its position as the second-largest selling brand. Lite is well established as the leading brand in the rapidly growing lowered calorie segment of the U.S. beer industry. Lite has continued to grow and to main- tain a dominant share of this segment. In the relatively small but rapidly growing super- premium segment, domestically brewed Lowenbrau was introduced nationally by Miller in late 1977. In 1978, Lowenbrau's sales exceeded original expectations and gave Miller a solid position in this developing portion of the business. Again in 1978, Miller was unable to meet fully the strong consumer demand for its three brands. Plant The Seven-Up Company The newest member of the Philip Morris family, The Seven-Up Company, increased its operating revenues and operating income in 1978. For the full year, operating revenues grew 19.5%, and operating income was up 0.3%. Seven-Up experienced unit growth with all its soft drink products-7UP, Sugar Free 7UP Fountain 7UP, and Sugar Free Fountain 7UP-and 7UP maintained its position as the third-largest selling soft drink in the world and the largest selling lemon-lime flavored soft drink in the U.S. and Canada. 7UP is also sold in 87 other coun- tries around the world. Philip Morris acquired Seven-Up last June following extensive study of the soft drink industry as well as Seven-Up's position and potential. 7UP is a high-quality product with excellent consumer acceptance and an internationally known trademark. expansion in Milwaukee, Fort Worth, and Fulton, New York, and new brewery construction continued at an accelerated pace. The new brewery in Eden, North Carolina, with an annual capacity of 8.8 million barrels commenced production during 1978. Construction pro- ceeded on two additional new breweries, one, a 5 mil- lion barrel capacity brewery in Irwindale, California, and the other, a 10 million barrel brewery in Albany, Georgia. Both are scheduled to start production by 1980. Miller continued its program to ensure that its quality- control efforts match its rapidly growing production. Skilled personnel and sophisticated equipment test Miller's products at all stages of the brewing process to ensure that Miller's brands maintain their quality leadership. Miller increased the capacity of its facilities to self- manufacture containers. The glass bottle plant in upstate New York began production during the latter part of the year. Construction progressed on a new can manufacturing plant in North Carolina to be completed in 1979, which will be capable of producing aluminum or steel cans. In 1978, Miller operated three can plants located near its breweries in Milwaukee, Fort Worth, and_ Fulton. During 1978, Miller invested $357 million in the con- struction and modernization of its breweries and con- tainer facilities, bringing the total of such expenditures to nearly $1 billion since 1972. These ultramodern facili- ties outfitted with the latest technology available have enabled us to increase production of the highest quality beer while improving profits. Many of the characteristics of the soft drink industry are similar to those of our other businesses. Essentially, soft drinks-like cigarettes and beer-are reasonably priced, relatively low-cost, consumer items that give pleasure to users, who repeat their purchases often when the quality of the product satisfies their expectations. Our major priority in soft drinks will be the 7UP brand in the U.S. The first move to improve the position of the brand was the appointment by Seven-Up management of a new advertising agency and the creation of a new advertising campaign and marketing program for the 7UP brand. The campaign, introduced early in 1979, is designed to capitalize on the national trend to more active outdoor lifestyles. The theme, "America's Turning 7UF" is intended to develop a large and growing base of consumers whose primary soft drink is 7UPR 0

Innovative packaging continued to play a strategic role in soft drink sales growth in 1978 with the introduc- tion in April of 7UP and Sugar Free 7UP in new, all- plastic two-liter bottfes. Seven-Up Enterprises, a canning and services orga- nization, increased its contribution to Seven-Up in 1978. Seven-Up Enterprises, through a network of approxi- mately three dozen production centers, produces foun- tain syrups and supplements production of canned and bottled 7UP products in a variety of packages for 7UP developers who are unable to manufacture them within their own production facilities. During the year, Seven-Up acquired bottling compa- nies in Houston, Texas, and Norfolk, Virginia. Seven-Up now operates three company-owned bottling opera- tions in the U.S. and one in Canada. In Canada, 7UP's market share reached its highest Philip Morris Industrial Philip Morris Industrial registered a 9.4% gain in operat- ing revenues while operating income was up 1.1%. Philip Morris Industrial comprises four groups-Chemi- cal, Paper, Tissue, and Packaging. Again this year, each group increased its revenues over 1977 and operated profitably. The Chemical Group, which makes specialty chemi- cals for the packaging and textile industries, increased its income, despite softness in segments of the textile industry it supplies. New customers and the develop- ment of new products position the group well for 1979. The Paper Group produces glassine, printing, and technical specialty papers. This group increased its income despite a decline in demand for glassine paper products in general, while demand for the group's high- quality printing papers as well as for its technical papers increased in 1978. During the year, the Surtech Coating Division located in Nicholasville, Kentucky, was closed Mission Viejo Company In 1978, Mission Viejo Company results declined from 1977, but still reached -fF-ie second highest annual level of performance in the company's history. Following a year of extraordinary demand in 1977, California hous- ing market conditions returned closer to historic norms as tighter credit and higher mortgage rates tempered demand. Operating revenues and operating income decreased 14.9% and 40.5%, respectively, from the records achieved in 1977. In Orange County, California, Mission Viejo's sales of 1,127 homes maintained the company's position as the largest single home builder in the county. Lake Mission Viejo, a 124-acre recreational lake, was opened in June level ever, in an environment of heavy price competition. In 1978, Seven-Up International achieved the best year in its history. One major objective in 1978 was to broaden worldwide coverage for the 7UP brand, and introductions were made in several major new markets. In addition to expansion into new countries, Seven-Up International is continuing market penetration into pre- viously unfranchised areas of countries that presently have only partial distribution. We are confident about Seven-Up's prospects, but, as in the case of Miller and our other U.S. and interna- tional acquisitions, we are approaching the soft drink business with a long-term plan and commitment. Our objective is to build on the solid base of consumer awareness and 7UP's established quality image.. after several years of unsatisfactory performance. This division had been engaged in the specialty coating ' business for the food packaging industry. The Tissue Group had another outstanding year in 1978, achieving new records in revenue and income. Profit margins were at record levels. Capital investment in prior years began to pay off in improved efficiencies. The Tissue Group increased its penetration of the rap- idly growing food service industry. It began expansion of its de-inking facility which will enable the company to continue to use recycled paper in lieu of virgin pulp as the principal raw material in its papermaking operation. The Packaging Group, which principally makes com- posite flexible packaging materials, experienced an increase in demand. However, continued severe pricing pressures and start-up costs at two new facilities resulted in lower income in 1978. and added a major new amenity for the residents and future home buyers in the community. The company's newest planned community, Aliso Viejo, also in Orange County, has submitted its master plan for the 6,600-acre area for governmental approval. In Colorado, new records were set in the Mission Viejo/Aurora community, a suburb of Denver, with sales of 294 homes, up 40.7% over 1977. Mission Viejo entered into an option to purchase the 22,000-acre Highlands Ranch just south of Denver. Preliminary plans have been completed. The option has been extended for one year in order to refine the mas- ter plan.

EXp ctalions oi Excellence Excellence is a'human value and achievement. Our . more than 60,000 employees are responsible for the superior quality, reliability, and integrity of our products. The success of our company is a tribute to the knowl- edge, skill, and energy with which they use the most advanced facilities and techniques to produce and mar- ket these products in our various industries. Our own experience has unmistakably established that among consumers there is a broader demand for and growing responsiveness to high quality-quality in the products we make, in their packaging, and in their advertising and marketing. With each of our tens of millions of consumers, sev- eral times a day and day after day, our products must fulfill expectations of consistent quality. Taste, the cardinal satisfaction offered by our ciga- rettes, beer, and soft drinks, is the result of a myriad of ingredients, processes, and other factors. Because taste can be affected by a slight deviation from a recipe,a minor inconsistency in a process, or external influences, our quality-control tests and monitoring start with the purchase of premium ingredients and continue through the manufacturing and distribution process to the point of sale. In our cigarette operations, quality-control programs analyze tobacco, filters, papers, flavorings, and packag- ing materials before production. During production, blends, moisture, tobacco weights, and other factors are monitored by advanced new equipment. Many of the instruments interface with computers which permit greater uniformity of product than was possible with the manual methods of the past. After production, random samples of packaged cigarettes are "torn down" for further tests involving 30 factors in the cigarettes and their packages. In our breweries we adhere to the principle Frederic Miller enunciated a century and a quarter ago:"Qual- ity-uncompromising and unchanging" From the time basic ingredients reach the brewery until the packaged beer is shipped to distributors, well over 150 individual tests are performed on product, packages, and pro- cesses by a highly qualified staff at each brewery using the finest analytical equipment. More than 500 people work in quality control throughout the Miller organiza- tion. In a pioneering practice for the brewing industry, every bottle, can, carton, case, and keg of Miller's beer is stamped with a product freshness "pull date," easily readable by the consumer. These efforts have made Miller's quality-control program the most stringent in the industry and result in the freshest, most consistent product in the industry. Quality has been a hallmark of The Seven-Up Com- pany, and it was a factor in our acquisition of the firm. In addition to quality controls in its own operations, it main- tains a highly professional field service organization that works closely with all 7UP developers. In all our operations quality-control departments report their findings directly to senior management at headquarters. While taste is the chief satisfaction provided by ciga- rettes, beer, and soft drinks, many other factors are involved in the total enjoyment of our products, and they, too, are subject to meticulous quality controls. They include, for example, the visual or tactile satisfac- tions derived from the perfect cylindrical configuration of a cigarette, the clarity of a beer, and the carbonation of a soft drink. The clean, pleasing design of the Marlboro package and the precise placement of the label on a Miller bottle bespeak the quality of the products. This same principle of total compatibility applies to advertising, promotions, and other marketing functions. For example, only advertising that is engaging, cre- ative, ative, and respectful of the sensibilities of consumers is consonant with the superior character of our products. Such advertising encourages consumers to switch to our brands and reinforces the loyalty of our established customers. Our commitment to excellence in all aspects of our business-the quality of our people and the quality of our products-has been a major reason our company has been so successful for such a long period of time.