Tobacco Documents Online

Operating Revenues Operating Income Officers 1978 1978 Hamish Maxwell Mary W. Covington S 1.810. 861, 000 5188.561.000 Pres dent and Vice President, 1977 1977 Chief Executive Officer Corporate Affairs $1.349.280 000 S1 53, 791.000 1976 1976 R. Wilham Murray Staftan Gunnarsson S1 .083.970.000 S130.104,000 Executive Vice Pres dent Vice President ~ 1975 1975 Europe ' Middle East Africa S1.040 002.000 $112.975.000 Carios E. Salguero Hamilton Hurley Vice President ~ 1974 1974 Execut ve Vice President S 887.077.000 S 94.017 000 Latin America lberia Eric M. Janssen ~ Lee Pollak Vice President, Personnel \ Vice President and Ch ef Admin,strat ve Officer Albert E Beliol Thomas M. Kearns Vice Presfdent. Finance \ William H. Webb \ Vice President Geoffrey C. Bible Vice President George P Hibbard \ Vice President Treasurer \ 4leardo G Buzz Vrce Presdent Felix R. Sanchez Controller TIMN 439735 \

Operating Revenues Operating Income Officers 1978 1978 Hugh Cullman Albert J, Bissmeyer Edward M. Schaat. Jr. S2.437.465.000 5568.145.000 Chairman and Vice President, Vice President. Production 1977 1977 Chief Executive Officer Brand and Promotion S2.160.362000 5474.400.000 Dr Robert B. Sel gman 1976 1976 Shepard P Pollack Robert H. Cremin Vice President. S'.963 144,000 5401,426.000 President and Vice President Sales Research and Development 1975 1975 Chief Operating Off cer S1.72? .549.000 1974 502 267 000 S1 $337.314.000 1974 5286 225 000 W. Wallace McDowell Executive Vice Pres dent. Stanley S Scott Vi ce President. Public Affa rs au Jeb Lee J Richard L Snyder Vice President Finance and Administrat on . . . . Operatrons James J. Morgan Executive Vice President. Market ng Ben amin A Soyars Senior Vice President . Vice President. Markethno Services Fred J Laux Vice President. Personnel Will am G Lorigest Vice President Leaf James L Thompson. Jr Vice President Media Dr. Helmut R. R Wakeham Vice President Science and Technology Manufacturing R chard D. Robertson Vrce Pres dent. Ecology 1 R Nelson Beane Controlier ~ ~ TIMN 439731

7 At our new Engineering Center in York. Vrg n a, skdled techn!cal oerson- nel rebuild anc modernize cigarette mak,ng ard oack,ng equipment. This equroment, aiong with recently pur- chased high-speec mak:ng and pack- ing rnachines. wdf enable our factories 'o keep uo w th r s ng customer demand. 8 Philip Morris U.S.A. emphasizes con- t!nuous quality-control efforts to main- tain consistent high quality in its agarette brands. This picture shows a sample c garette from a production I ne be ng microscopically analyzed to insure that our carefully prescribed standards have been met. 9 Ph iip Morns 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 nes. 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 Carol na. near Charlotte. TIMN 439734

Perennial Problems 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 other states 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°r'o of the soft drink market, would be affected negatively. Two cases involving the two leading soft drink com- TIMN 439727

The Miller Brewing Company had another outstanding year in 1978. Operating revenues gained 38.2°ro, 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 shipments 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 7U1?'is intended to develop a large and growing base of consumers whose primary soft drink is 7UP TIMN 439724

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 °io of our combined sales forces (up from 10.8°io five years ago). In total, one out of four of our U.S. employees today is a member of a m nority 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 involved more environmental con- stra nts 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 coroorate 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-$1 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. `TIMN 439729

Philip Morris U.S.A. Operating Revenues Over the last ten years. Philip Morris U S A s operating revenues have ncreasea at an averaoe annual compcunoed rate of t2.9°b. Philip Morris U.S.A. Cigarette Unit Sales Total unit sales of Philo Morris U.S.AA have grown at an average annual compounded rate of 8-8vo during the past ten years Mn;rons or poflars Bnlion Lo-ts 2450 t75 2'00 150 ' 750 !25 SGC t00 G50 75 50 'CG 25 35G Philip Morris U.S.A. U.S. Cigarette Industry Operating Income Unit Sales Phiho Morris U S.A: s operating income has Over the last ten years. total U SS risen at an average annual compoundeC cigarette industry unit sales have grown rate of 20.5% for the last ten years. at an average annual rate of t 4%, while our market share has more than doubled reach ng about 28% m?978. ~ u S Cigarette hdustry'Unn Sales -~hdip Morns Sha,e of U S Indusiry ;'a ) Mlllions of Dollars 3,11,01 Unas . 700 700 35 600 600 30 SOC 500 25 400 400 2C 300 300 15 200 200 'C t00 ?00 5 0 0 69 70 71 72 73 74 75 76 77 78 69 70 71 72 73 74 75 76 77 78 69 T0 71 72 73 74 75 76 77 78 TIMN 439732

panies 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- ing companies, including Seven-Up, in 1971. The case The Public Interest The low regard in which business seems to be held in some quarters today is based largely on a perception that companies are selfish actors on the world stage. Philip Morris strives for a performance that makes eco- nomic and social sense. Good corporate citizenship is not an afterthought but an active concern in everything we do. We believe that the company's achievements in every area are founded on a corporate philosophy which highly values individual excellence and imagina- tion, quality of people and products, the efficient utiliza- tion of resources, and a sense of social responsibility. This corporate philosophy has attracted outstanding people to our ranks and is, in fact, the key to our suc- cess. Our social activities are not pursued solely for the sake of profits. They are mounted simply because that is the kind of company Philip Morris is. We recognize that a company in the tobacco busi- ness confronts a special challenge. We make a product that carries a health warning, that cannot be advertised on television and radio in the U.S. and many other countries, and that some people would like to legislate out of existence by reviving a form of prohibition. As a corporation and as individuals. we share a serious con- cern about major public health problems, and we com- mit resources to help find the causes of diseases that have been statistically associated with cigarette smok- ing. We have no trouble accepting a world in which there are different points of view, but we do have trouble with zealots who tolerate no opinions except their own. We believe the Administration should be commended for its anti-inflation program and we will conscientiously make every effort to stay within the wage and price guidelines. Philip Morris will vigilantly continue to seek new ways to hold down costs through greater efficiency and productivity. We also agree with the President that tighter reins on government expenditures are equally essential if inflation is to be arrested. Because the United States buys more products abroad than it exports, the U.S. balance-of-payments deficit currently runs to about $2 billion a month. As a result, the cry of protectionism-"Keep imports out"-is being heard once again. As Nobel-laureate Paul Samuelson has said, protectionism does not provide protection but succeeds only in "making the world less productive." Philip Morris is convinced that we are well into an era of irrevocable interdependence among 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, nations and that our national task is to make interna- tional trade and investment free-flowing, productive, and healthy for all sides. Philip Morris is the largest U.S. exporter of cigarettes. Our cigarettes are also manufactured and marketed abroad by 63 affiliates and licensees. Philip Morris Inter- national and its affiliates employ 27,000 people abroad. These are not jobs taken from the American labor mar- ket. We import no cigarettes for sale in the U.S. If we did not operate internationally, our U.S. employment would be reduced. The number of Philip Morris employees in the U.S. working directly in support of our international business exceeds 2,000. In 1978, Philip Morris alone made a net positive contribution of more than S200 mil- lion to the U.S. balance of trade through the export of cigarettes, tobacco, and other manufacturing compo- nents. Total U.S. eXport of tobacco and tobacco prod- ucts contributed a net positive amount of $1.7 billion to the U.S. trade balance, up 31 % over 1977. Philip Morris also contributes positively to the econo- mies of the countries in which we operate. Last year, we published the results of a survey cover- ing our operations in 13 developing countries. The publi- cation documents the activities of our affiliates in relation to the economic and social objectives of host countries and shows how private international invest- ment can further the interests of all concerned. Philip Morris in 1978 announced plans to build a new corporate headquarters building in New York City. An important feature of the building will be a block-long, enclosed pedestrian mall housing a sculpture garden administered by the Whitney Museum of American Art. Our decision to keep our headquarters in New York represents an expression of confidence in the city as a dynamic environment for business. Philip Morris head- quarters have been in New York since 1919. Philip Morris played an active political role in 1978. Our efforts in California and other states were crucial to the defeat of restrictive anti-smoking legislation. The Philip Morris Political Action Committee (PHIL- PAC) was launched in 1978. Authorized by the Federal Election Campaign Act, PACs enable corporations to solicit voluntary political contributions from administra- tive and executive personnel as well as directors and shareholders and to distribute these monies to candi- dates for federal office. More than 800 corporate PACs are now functioning. TIMN 439728

Aw"i6IIii © INenfhol~s le t0 MadbOrO GDIl1ItTj'. ~ ® © TV ® ~ ® ® ,EF._.._ .. M RIT wrg5 &M~ Merit Taste Acclaimed. 0 National Smoker Study: Merit Taste Impresses Toughest Cntics. 1 Merit our largest selling low-tar brand, was the fastest grow ng of the top ten U S brands in 1978. 2 Marlboro widened its lead as the larg- est seli ng cigarette in the U S and the worid 3 Benson & Hedges 100's strengthened its posit on as the lead ng 100mm cigarette in the U.S with the highly successful introduction of Benson & Hedges 100's Lights late in 1977. 4 Virginia Slims continued to grow as the leading cigarette designed for women. 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. 6 W dely publ cized anC n ghly success- ful events like the Marlboro Cup race at Belmont Park in New York, spon- sored by Philip Morris U.S.A., enhance the companys other efforts Seattle Slew captured the 1978 Marlboro Cup TIMN 439733 dll' I(m I ~ll<'1r1L1~1', ~~CM~tA~ ~~11

Operating Revenues Operating Income Off cers 1978 1978 John A. Murphy Edward W. Frantel S1,834,526 , 000 $150,300.000 Chairman and Vice President, Sales 1977 1977 Chie1 Executive Officer S1.327.619.000 S106,456,000 Thomas A. Fulrath 1976 1976 William K Howell Vice President Personnel S 982810 000 056 000 S 76 President and . 1975 . . 1975 Ch,ef Operating Otficer James R Haland S 658.268.000 S 28.628.000 Lauren S Wifliams Vice President Corporate Affairs 1974 1974 Larry K Neuman S 403.551.000 S 6291.000 Executive Vice Pres,dent Vi ce Pres,dent, Mater,al Fiow Thomas B. Shropshire Sen,or Vice President and Treasurer Dr Vincent S Bawsotto Vice Pres,dent. Brewing and Pesearcn Warren H. Dunn V,ce Pres,dent and General Counsel Allen A. Schumer Vice Pres,de nt Pant Operations Georgy L Tarala Vrce President Engineering Trav s G Adler Controller Raymond E Jones. Jr Secretary TIMN A39739