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For our real estate operations, 1983 was a year of recovery. Housing starts, sales, andprofits were all up strongly. Operating revenues at$258:5 mjllionand operating income at $40.5 million were the highest in the company's history. During the year. Philip Morris made a number of strategic changes in its real estate operations designed to expandprof- @s in both the short andthe long term by fortning Mission Viejo Realty Group Inc. ("Realty Group"), a whoUy-owned sub- sidiary of Philip Morris Incorporated. Realty Group will have its own subsidi- aries:, Mission Viejo Company, which will continue to be responsible for devel- opment, residentialtonstruction, and sales at Mission Viejo and Aliso Viejo in California„and Mission Viejo and High- lands Ranch in Colorado; and Continental Equityinvestments Inc., a new corpora- tion responsible for the development and operation of investment properties. When mortgage rates declined and buyers returned to the marketplace in 1983, the Realty Group hadhomes thati were ready to be occupied. Residential closings were strong throughout the year. The Realty Group continues to meet the changing needs of the housing market with a variety of new housing plans. In re- cent years, dramatic shifts have occurred in the housing market. As interest rates climbed, demand shifted from larger to smaller houses. The Realty Group re- sponded by offering new houses designed to appeal to first-time home buyers. For example, Mission Viejo, California, opened its Evergreen program, which featured moderatelypriced, single-family, detached homes designed for young fami- lies. At nearby Aliso Viejo, there are now four lower-priced'programs„ while at our Highlands Ranch just south of Denver, Colorado, we are offering competitively priced housing in all of the major market segments. Highlands Ranch is a planned community that will 'eventually supply some 30,000 housing units on 22,000 acres for the burgeoning Denver market. In Colorado, as in Southern California, we offer a total living environment where families can take advantage of plannedi communities built around high-quality housing, schools, parks, recreational facilities, and commercial and industrial parks.The Realty Group continues to be a leader in building communities that are in balance with the environmental, social, and economic needs of our society. Photo Captions: 1 Olympic Swim Team Coach, Mark Schubert, prepares Mission Viejo swimmers for1984! The U.S. National Swim Team will tnin at Mission Viejo,, which will also be the site of thefirstOlympic event:long-distancecycling road races. 2 The new Stratton Ridge homes in Highlands Ranch; ,Colorado~ offer elegant, spacious living: 3 Residentsgather for the annual Highlands Ranch Spring Roundup and barbecue. 4 Lake Mission Viejo, California.

Management Succession In November, George Weissman, who will l step aside on August 1, 1984, as Chair- man and Chief: Executive Officer upon reaching age 65, announced that at that time the Board of Directors intends for him to be succeeded in those positions by Hamish Maxwell, age 57, formerly Presi- dent of Philip Morris Internationall As the first in several moves to imple- ment the plan of orderly succession, the Board elected~Mr. Maxwell President and' Chief Operating-0tficer of Philip Morris Incorporated effective December 1, 1981 The Board also stated its intention to elect as ofthe August 1, 1984, date John A. Murphy, age 54, President and Chief Operating Officer of the Corporation with all 'operating companies reporting to him. Until August, Mr. Murphy will continue as Group Executive Vice Presidenti with the Miller Brewing Company„The Seven- Up Company, andthe Mission Viejo Realty Group Inc. reportingto him. The Board alto plans to elect Hugh Cullman, age 61i as a Vice Chairman effective August 1,1984. Mr. Culltnan is Group Executive Vice President and Chairman and Chief Executive Officer of Philip Morris U.S,A. To facilitate the transition, the Board elected Clifford H. Goldsmith, President since 1978, Vice Chairman and Chairman of the Corporate Products Committee. Ross R. Mililriser continues as Vice Chairman andChairman of the Finance Committee. The Office of the Chief Executive now consists ofGeorge Weissman, Chairman of the Board and Chief Executive Officer; Hamish Maxwell, President and Chief Uperating Officer; and John A. Murphy„ Group Executive Vice President. It was also announcedthat the Board intends to elect Mr. Weissman, who has been Chairman andChief Executive Offl- eer since 1998, Chairman ofthe Execu- tive Committee o0the Board on April 25, 1984, succeeding Joseph.F. Cullman 3rd, who in turn will become Chairman Emeritus of the company. Another major promotion was that of R. William Murray, formerly Executive Vice President of Philip Morris Interna- tional, to President and Chief Executive Officer, Philip Morris International, replacing Mr. Maxwell. The new management team, which in- eludes other management promotions on both corporate staff and operating com- pany levels, is moving into place eNec- u tively and smoothly. Almost the entire senior management team has worked closely together for 20 years or more. Board of Directors At the annual meeting in 1983, Dr. Harold Brown, Visiting Professor at The Johns Hopkins University, was elected a mem- ber of our Board of Directors. Dr. Brown has an outstanding background in busi- ness, government, and education, includ. ing service as Secretary of Defense and' President of the California Institute of Technology. H. Robert &tarschalk, a diiector of Richardson-Vicks Inc., has retired after serving as a director for 17 years. We deep1y appreciate the value of his counsel and guidance, and~are pleased that he continues as a Director Emeritus. The Public Interest As the leading U.S. exporter of tobacco products, and with interests in~the inter- national beer and'softdrink industries, Philip Morris supports policies designed to promote free and fair trade. In 1983, Philip Morris made a netposi+ tive contribution of$1.1 billion to the U.S, balance of trade through the export of cigdrettes, tobacco, beer, soft drink ex- tract, and other products. Our products are manufactured and marketed abroad by more than 300 affili- ates; licensees, and franchised bottlers. Philip Morris contributes positively to the economies of the countries in which we operate by purchasing materials and ser- vices locally and by generating large tax revenues, and by training thousands of, employees. Together, Philip Morris and its affiliates employ nearly 28,000 people abroad. Our involvement overseas significantly helps the U.S. economy in addition to the local economies in which we operate. About 17% of all the jobs in our domestic ciga- rette operations are di'rectly linked to our foreign business. Moreover, our exports increase employmenGamong our domes- tic suppliers. At Philip Morris, good~corporate citi- zenship is not an afterthought but an active concern in everything we do. Our achievements grow out of a corporate philosophy that values quality people and quality products, individual excellence and achievement, efficient use of re- sources, and a sense of sociallresponsibil+ ity. At all times, our business activities must makeaociaLsense, and our social activities must make business sense. We make this commitment for a variety of reasons: We want others to think well

ates i. Our ielps local out ciga- to our ports smes- Our te e and ice onsibil- ties cial' variety c well -fus as a company and of all our employ- ~es. We believe a company should return ometliing to the society which gives so much. Ultimately, we believe any ,rporation-to survive-must interact in responsible manner with the society am which it draws its charter and rengths. .ie primary foeus of ourphilanthropic :ing historically has been in the area education, which in 1983 accounted for er a third of our overall contributions dget. We donate money to various indepen- nt college funds and make direct grants educational institutions located in ose communities in which we maintain ajor operations. In addition, we have an tive and extensive program of, matching nployee gifts to institutions through- at the country. In other words, our em- toyees helped shape our overall contribu- .!ons policy. We also establish and fund innovative programs that address the specialized needs of both the traditional and non- traditional student. Children of our em- ployees benefit both from our College Scholarship Program and our ten-year-old Vocational/Technical Scholarship Award Program which provides scholarship grants to post-secondary students. In major plant communities, our Career Scholarship Program for men and women returning to college and our Vocational/Technical Career Scholarship Program for adults completing high school or vocational training have been successful. In April; `Agriculture in the Twenty-First Century," the third symposium in a series funded by Philip Morris„was held at the Manufacturing Center in Rietimondi Vir- ginia. Arturo R: Tanco, Jr., Minister of Agriculture for the Republic of the Philip. pines, was the keynote speaker at the two-day event. The aational tour of "The Vatican Collec- tions: The Papacy and Art;' sponsoredby Philip Morris,.was a major event as it moved from New Yorkto Chicago and San Francisco: By the end of the tour in Feb- ruary 1984, more than 2 million people had seen the exhibition. Our involvement with the arts con- tinues to be eclectic, ranging from "The Precious Legacy: Judaic Treasures From the Czechoslovak State Collections" to 17 "Painting in the South;' a comprehensive study of Southern painting. to "Dimen- sion IV," a competition for young West German artists, to an exhibition of Guate- malan Indian textiles. We renewed a five-year grant to sup- port innovative Australian artists, and helped fund the Alvin Ailey 25th Anniver- sary NationalTour; the Joffrey Ballet Nationat Tour, and a 28-citgtour for chamber music groups from the Marlboro School of Music in Vermont. In April, we opened the Whitney Museum of American Art at Philip Morris in our New York World Headquarters. Philip Morris received The Architectural League's award for our 25-year support of the arts and architecture. To date, in ex- cess of 300,000 people have visited the Museum. Our social commitment is equally broad. As lead company for the New York City Partnership's Summer Jobs '83 Program, we helped find work in the private sector for 19,798 disadvantaged youngsters. . Alongside these activities, Philip Morris continued to deposit funds in minority-owned banks, award numerous contracts to minority-ownedbusinesses; and underwrite and publish directories and other aids for black, Hispanic, and women's organizations. Perennial Problems Government taxation and restrictions designed to limit consumer usage of our main products continue to increase. In 1983, consumers in our most impor- tant cigarette market, the iJnited'States, facedthe largest federal cigarette tax in- crease in the history of the country. In addition, some 27 states, cities, and counties also increased their cigarette taxes. Taxes have also increased in many of our major international markets. Since 1979, taxes imposed by all levels of government have risen over 50%. To- day, nearly half of the price.of a pack of cigarettes in major localities such as New York and Chicago is attributable to taxa- tion. These are regressive taxes which unfairly penalize consumers with lower in- comes. All told, federal, state, and local governments in the United States collect about $10 billion annually from smokers. The 1983 federal excise tax increase is due to be rescinded in October 1985 under 3 sunset provisiomenacted by Congress. In the p,ast„governments facing un- funded budgets have imposed taxes with rel9tive ease on the products we produce. Today;however, governments that heavily , .

tax cigarettes and beer are finding that extra taxes do not yield as much revenue as anticipatedi Governments abroadi too, are begin- ning to reconsider the efficacy ofsky-high taxation. In Uruguay, the fiscal authorities re- duced the excise tax on a trial basis in an effort both to stimulate sales and increase government revenues. Similarly in Argen- tina„the government agreedito eliminate a 5% cigarette excise tax surcharge. In two of Canada's provinces, Ontario and New Brunswick, taxes have been reduced. At the same time, anti-smoking forces are gaining in influence. Virtually everywhere we do business, we are challenged by restrictive legislation. Last year in the United States alone, nearly 400 pieces of anti-smoking legislation were proposed' at the state and local levels, however, most were defeated when logic prevailedi More are expeoted in 1984. In Australia, legislation to ban ciga- rette advertising andsports promotion failed to pass in Western Australia follow- ing an intense media campaign publicizing the detrimental repercussions the bill would cause. The rights of smokers to smoke in government offices in Canada were defended by the industry through, research which illustrated the unfeasibil- ity and costliness of such restrictions. -- Smoking aboard aircraft is yet another . area subject to government intrusion. The Civil Aeronautics Board is currently seeking a complete ban on smoking on flights lasting two hours or less. Nearly one-third of all U.S. airline passengers will be affected. Yet an independent study shows that 83% of surveyed airline pas- . sengers are satisfied with the present smoking regulations. The Scandinavian Airlines System abandoned its trial non-smoking flights between Oslo and'Stockholm after a pas- senger survey showedthat smoking on aitcraff was not a serious enough matter . of public concern to warrant such a ban. Philip Morris continues to challenge the assertion that there is conclusive proof of - a cause-and-effect relationship between cigarette smoking and chronic diseases. •. We remind our stockholders that: No one knows what causes cancer or other chronic diseases claimed to be related to smoking; Numerous factors, including occupa- tionalenvironments, industrial'pollution, toxic waste. heredity, and stress, seem to affect the frequency ofbccurrence of these compiex diseases,according to sci- entific studies; There is no scientific proof that the healthy non-smoker is harmed by his neighbor's smoking; Only further research can provide valid answers about the effects of smoking. The tobacco industry has contributed almost$111 million to fund independent research on smoking and health. We will continue to fund such research. Government issues also affect our bever- age operations. There has been an in- crease at the state level in forced-deposit legislation, and the possibility exists ofa federal forced-deposit law. Miller and Seven-Up have encouraged'recycling by choice. Miller distributors operate alumi- num reclamation centers, which last year paid the public more than $11.4 million for 46 million pounds of aluminum cans. We also support "Keep America Beautiful;' a: non.profit organization devoted to educat- ing the public about litter problems. The problems associated with alcohol abuse at all ages are gaining national at- tention. For many years, Miller has sup- porteda number of alcohol education programs and works closely with BACCHUS (Boost Alcohol Consciousness Concerning the Health of University Stu- dents). AIM (Alcohol Information from Miller) is the latest extension of the Miller Brewing Company's commitment to alcotiol'edUcationand to the promotion of responsible use of its products. We can help solve the problems of alcohol abuse by fostering responsible attitudes in our homes, businesses, andthroughout our communities about drinking. Philip Morris, working directly and' through its trade associations. will con- tinue to urge governments, wherever we do business, to lower the unfair and dis- criminatory tax burden on our products, and reduce unnecessary , and restrictive legislation. The political!action committee of the people ofiPhilip Morris is PHIL-PAC. Our nonpartisan, issue-oriented PAC con- tinues to play an important role in our Voter Involvement Program and an ~impor- tant role in our ongoing government rela- tions. PHIL-PAC's theme is "Democracy is not a spectator sport_" In 1983, more than 2,000 employees and:stockholders agreed with thaCmessage and supported corporate PHIL-PAC. A survey showed that our contributors are better citizens- they register, they vote, and they give of their personal time to civic interests.

The Outlook We operate in highly competitive indus- tries-as we have historically-at a time when many of the worldls economies are still struggling out of recession. We make products whose use gives pleasure to 90 million people every day. It is evident that our cigarettes and beverages serve a basic need acknowl+ edged by mankind for thousands ofyears. The record is clear. The people who enjoy smoking and drinking have prevailed over those who oppose these customs. The industries which serve them have grown and prospered. We are realistic about the problems our industries face, but we look forward to the continued growth ofour companies within those industries. The challenges are opportunities. From a strong domestic market where we face little foreign competitionj we reach out into 170 countries and territo- ries. Outside the United States, our share of the world"s cigarette market is still only$:2%u+ and we are only just start- ffig to tap many of the major foreign mar- kets for our beverages. Ftnancially and ptiysically; Philip Morris has never been in better shape. Our current and projected cash flow is sufficient to meet our needs and to main- tain our plants as the most efficient in the world. .. 3- 5 .~'~ ~ . "• ` -• •. :~' S . ..'._ t~ Vt•:~'•L ~ ~>/ - . .. But our greatest resource is our peo- ple. Thanks to the skill, productivity, dedication, and continued loyalty of our 68,000 employees around the world, we have produeedan unbroken record of 30 years of growth and can face the future with optimism. George Weissman Chairman of the Board and Chief Executive Officer Ross R. Millhiser Vice Chairman of the Board Clifford H. Goldsmith Vice Chairman of the Board George Weissman, chairman of the board andebiet executive officer(front)• meets with other members of be Office of he Ch'aiiman 4lefrto right): John A. Murphy, group execuuvevice president: Hugh CuWman. group executive vice president; Hamish Maxwell. president and chief openting officer; Ross R. tvtillhisepvioe chairman of the board; ,ClYftord'H1 Goldsmith,vice chairman of the board.

Nineteen eighty-three marked'the 30th consecutive year of growth for Philip Morris. Operating revenues were $13':0 billion; an increase of 12.0% from 1982. Net earnings rose 15.6% to $903.5 million. Earnings per share reached $7.17„a gain of 15.1% (Chart 1). During1983, the company's real estate operations were reorganized under Mission Viejo Realty Group Inc.,and are accountedfor on the equity method. Real estate operations were previously consolidated. Prior-year amounts have been restated+ where applicable. In February, 1983, the Board of Directors declareda 20.8% increase inrthe common stock dividend to an~annual rate ofiS2.90 per share. 7Jhis represented the 16th consecutive year of increase an&our 56th consecutive year of dividend payments. Over the last decade, dividends per share increased 24.0% annually, while net earnings per share increased118.2% (Chart 2). In 1983, capital expenditures totaled $566 million. Over the past five years, we have spenLnearJy $3.9 billion on additions to our fixed assets compared to $1.5 billion spent during the previous five years. A third of theamounU spent over the past five years was for .4filler Brewing and most of the remainder for our domestie andiinternational tobacco operations. At year-end 1983, approxi- mately 90%u ofour fixed assets wereiess than ten years old. We estimate capital expenditures of $500 million in 1984: and approximately $2.1 billion in the five-year period 1984 through 1988: Over 80% of these expenditures will be for forecasted capacity needs and productivity improvements. They will be con- tinually monitored to insure high returns and a elose correlation with demand for our products. In 1983; our funds from operations increased 16;3%a toS1.3bil- lion(Chart 3). Over the last ten years, internal'funds generation increased 22.4% annually. During the same period, net earnings advanced 19.8% annually (Chart 4). Approximately 35%a of 1983 funds from operations are represented by depreciation and deferred income taxes which are primarily related to our fsxed - asset base. Total assets were $9.7 billion at year-end 1983.This was nearly five times greater thanour asset base ten years earlier. Our net return on average total assets was 10.6%, which was the highest in the company's tiistory , (Chart, 5). Stockholders' equity has increased nearly five times during the past decade, reaching $4.0 billion at the end of4983. Our net return onaverage stockholders' equity was 23;5% in 1983, up from 22.7% in 1982 and set a new high (Chart6). Total debt at year-end 1983 was $3.1 billion, a $671 million decrease from a year earlier: Our debt-to.equity ratio improved to .76 to 1„compared with 1.02 to 1 in 4982 and an average 1.05 to 1 over the last ten years (Chart 7): During the year, we prepaid three Swiss franc loans amounting to $132 million, and repurchased $56 million of 14%, 141/s%I and 151/4%d notes. We expecYa further decline in our debt over the next five years. On December 9, 1983; Philip Morris began a 4,000;000 share common stock repurchase program. By year-end, approximately Vrlmfry Errnlnpf Per S1,vm OIVIA~nCfOfG~rW Pfe Sn~n~

1.4 million shares were accumulated. The repurchase program was completed in February, 1984. The reacquiied shares are to be usediforthe exercise of employee stock options and4ar other corporate purposes. At year-end'1983, fixed-rate obligations were approximately 87%a of total debt compared with 68% in 1978. The fixed-interest portion of our debt, totaling $23 billion at year-end, carries an average annual interest rate of approximately 9.5%. Currently, Philip Morris has short-term creditfacilities with a number of financial institutions totaling approximately $1.4 billion. Of this amount, approximately $350 million is in revolving credit agreements and other arrangements with both U.S. and Euro- pean banks. These facilities, which comfortably exceed our expected needs in 1984, provide support for our commercial paper borrowings and other credit activities. Philip Morris con- tinues to maintain the highest ratings in the commercialipaper market and a solid 'X' credit rating for longer-term obligations. Interest expense in 1983 totaled 5233.9'million, compared! with 8267.2million in 1982 (Chart 8). The decrease was due prin- cipally to lower outstandingdebtL Interest capitalized in 1983 was 3128.8million compared with $162.6 million in 1982. The reduc- tion of interest capitalized in 1983 was attributable to lower inter- estrates and reduced plant construction. Earnings coverage of interest expense continued to improve during the past year reaching 7.78 times interest expense for 1983eompared with 5.87 for 1982. Our effective income tax rate was 43.0%u in 1983and 39.9% in 1982. Lower investment tax credits during 1983were the primary reason for the higher effective tax rate. In summary, 1983 was a good year for Philip Morris. Strong earnings gains and cash flow momentum providea solid basis for continued growth. We believe this growth can be accommodated through internal cash generation and prudent use of credit facili- ties. Our financial condition is stronger than ever and is expected to remain strong in 1984 and beyond. Total YN..1. (YoM.EnG) N.I Ralurn an •r.189. Total A...1. B !.ons Cl Lbn3,s .. ,PSn ea !~~ ~ ,. / 4x ':P all.-53•'a1 4 4 2t SIOe.Ab4d.n'EquNyq.qn•EnOl N O R .lurn Cl •v.r.9.94acknaw.n• Equity To1.FO.b1(Y.ar-Ena) iR.AIo. at To4al D.bl to sluckFold•n' Eqult9ry e e«,: ol 0Cl1d1s

Selected Financial Data (in millions of dollars, except per share data) for years ended December 31 1983 1982 1981 1980 1979 Operating Revenues $12,975.9 S111,586:0 510,7223 59,649.5 $8.149.1 United States Export Sales 969.5 978:0 833.5 702:4 521.2 Interest Expense 233.9 267.2 258.5 215.0 205.5 Depreciation Expense Net Earnings Earnings Per Common Share Total Assets Long-Term Debt Total Debt Deferred Income Taxes Stockholders' Equity Dividends Declared Per Common Share The atioveselected financial dAta of the company and consolidated subsidiaries for the five years ended December314 1983, should!be read in conjunction with the consolidated financial statementsandnotes thereta included in this report. During 1983 the company's real estate operations were reorganized under Mission ~Viejo Realty Group dnc.,and are accounted foron the equity method. Real estate operationswere previously consolidated. Prior•year amounts have been restated, where applicable. The company believes theequity metAodbf accounting forthe reorganized real estateoperattonsprovtdes a more meaning- fiil presentation of financial results. In addition to cigarettes. Philip Morris International iexports tobacco and 293.8 249.9 210.5 178.0 132.6 903.5 781.8 659.7 549.1 507.9 7.17 9,667.0 2,514.7 3,074.9 737.3 4,033.7 2.90 1,348.4 566.2 6.23 5.28' 4.41 4.08 9,622.1 9,1115.1 7,301.7 6,322.1 3,745.8 3,498.2 2,597.2 2,446.7 3,745.8 3,804.2 2.800.1 564.5 41iL.3 302.9 3,662.9 3,233.7 2,837.0 2.40 2.00, P.60 1,159.8 976.3 784.2 918.2 1,0114.5 750.8 2,507.1 219.6 2,471.0 1.25 702.9 629.4 tobacco-related products„softdrink ingredients and beer, and subsidiaries and affi4iacespurchase tobacco grown in the United States. In1983;the value of all exports from the United States by Philip MorrisIh~ternational amounted to, $~1.084 billion. E ffective in 1980, the company adopted the last-inj first-out (LIFO) imethod of costing the leaf tobacco components of inventories used in itsU.S. and U.S. export operations. Effective in 1981,use of the LIFO method'was extendedto cover additional inventories. The 1980 change to LIFO decreased 1980 net earn- ingsand earnings pershare by $61.8 million and $.49:pershare. respectively; and in 198Pby $14.4 million and 5.12per share, respectively.

I 979 49.1 21.2 5.5 32.6, 7.9 .O8 22^1 i6`7 )7.1 19.6 ~1.0 1.25 )2.9 >9.4 Management Discussion and Analysis of Financial Condition and Results of Operations In 1983, funds from operations of $1.3 billion exceeded total funds used by $179':5 million. This compares with a funds requirement ifter funds from operations of $156.3 miltion and 31.3 billion for 1982 and 1981, respectively, The increase in funds from opera- tions of $188.6 ,million (16.3%)in 1983over 1982 was due to)igher earnings coupled with increases in depreciation and ieferred taxes. Of the totalYundh used, capital expenditures accounted for tpproximately 48'io in 1983, compared'with 70~"o in 1982'and 44% n 1981. Capital expenditures of $566 million for 1983 were below he previous two years and are estimated at S500 million in 1984 md $2:11 billion~for the years 1984 through 1988. Total debt at December 31, 1983, was 53.1 billion, a $671 mil+ .iondecrease from a year earlier. At year-end 1983, the com- ?any's debt-to-equity ratio was .76 to 1, compared withi1.02to 1 at December 31, 1982. The decrease was mainly attributable to increased earnings for 1983 coupied with a reduction in capitalI expenditures and working capital. The company anticipates that funds from operations will exceed the needs of the business in 1984. However, credit facili- ties maintained througH revolvingcredibagreements and bank lines ofcredit will provide extensive credit should the need arise. Longer-term financing needs are expected to be met through long-term debt and other financing as required. During1983, the company prepaid three Swiss franc loans aggregating $132 million and repurchased J56 million of bank term notes bearing interest at 14"5 to 151141/B, After these and other transactions; fixed-interest debt at December 31, 1983, was 87% ofYotal debt compared with 78% and71%d,at December 31, 1982 and 1981, respectively. This d'ebt, had~an average interest rate of approximately 9!5% at December 31, 1983. InDecember, 1983, the company purchased 1.4 million sharesof its common stock under an announced program to reacquire up to 4' million shares for, treasury. The repurchase program was completed in February, 1984. The treasury shares are to be used for the exercise of employee stock options and other corporate purposes. In 1983. interest expense was 8233.9 million, a decrease of S33,3 million (12:5°'oYover 1982 due principally to a decrease in average borrowings resulting from lower capital expenditures and an increase ininternally generatedfunds. Interest capitalized in 1983 was $128.8 million, compared with $162.6 million and 5110:0 million for 1982 and1981, respectively. The reduction of interest capitalized in 1983 was attributable to lower interest rates and reduced plant construction. During 1983, the company's real estate operations were reorganizedunder Mission Viejo Realty Group Inc., and are accounted for on the equity, methodi Real estate operations were previously consolidiVted. Prior-year amounts have been restated, where applicable. . Operating revenues, net earnings and learnings per share for 1983 increased 12.0%, 15.6%, and 15.1"0, respectively, over 1982. In 1983: consolidated operating revenues of S13!0 billion were $1.4 billion or 12.0% higher than in 1982, attributable principally to increased revenues of 513 billion from tobacco, and $119 mil- lion from Seven-Up. Beer revenues decreased by S6million. The increase in tobacco revenues was attributable to increases in excise taxes and'selling prices redueed by S179 million due to cur- rency translation: cigarette unit volume of both Philip Morris U.S.A. and Philip Morris International was virtually unchanged from 1982. The decrease in beer revenues was attributable to a decrease in volume partially offsa by price increases. As a resulb of lack of growth in the beer industry, Miller has delayed produc- tion at its Trenton, 6hio, brewery. In 1983, operating income of consolidated companies was $231, million (14.0%) higher than in 1982, due mainly to domestic tobacco products. Tobacco products operating income increased $171 million (11.6%) from 1982dueto price increases offset by currency, translation ofS59million. Philip Morris U.S:A. operat- ing income was up S236 million (21.4%) while Philip Morris lnter~ national was down $65 million (17.3070). Despite a reported 4.5% domestic cigarette industry decline, Philip Morris U.S.A. increased its unit volume marginally and its market share signifi- cantly. In addition~to the adverse effect of currency translation, Philip Morris International operating income was affected by price competition in a number of markets and reduced exports due to a stronger U.S; dollOr. Beer, operating income increased $68 million (42:97b)',over 1982 due to price increases and'cost savings. Seven-Up's 1983 operating loss of $10.8 million was attributable to increased marketing expenditures. Tobacco prod- ucts contributed 88% and beer 12170 of consolidated operating income for 1983. Equity in net earnings of unconsolidated subsidiaries and affili- ates in 1983increased $11.4million over 1982: The increase was attributable principally to inereased'earnings from real estate operations. In 1982, consolidated operating revenues were 5864 million (8:1%) higher than in 1981, attributable principally to increased revenues of $740 million from~tobacco, $91 milllondrom beer, and $99 million from Seven-Up:The increase in tobacco revenues was attributable toincreases in selling prices and cigarette unit vol- ume, redueed!bv $230 million attributable to currency translation. The increase in beer revenues was attributable to price increases, partially offset by a decrease in volume. In 1982; operating income of consolidated companies was $256 million(18.5'?'0) higherthan~in 1981, due principally to tobacco products. Tobacco products operating income increasedl$221

million (17.6%) from 1981 due to volume and price increases off- set by unfavorable currency translation of $60 million. Beer operating income increased $45 million (39:2%)over 19811due to price increases and cost savings. Seven-Up's 1982 operating loss of $1.2million was principally attributable to increased marketing expenditures. Tobacco products contributed 90% and beer10% The following current cost information is presentedinaccordance with the requirements of the Financial Accounting Standardk Board (FASB). The currenCcost method reflects the effect of changes imthe specific prices of the resources used in the company's operations. This method measures the resources and their consumption based on the current cost of replacing them with like resources, rather than in terms of the historical cosCamounts actually ex- pended to acquire them. These values do not consider technolog- ical improvements and efficiencies associated'with the normal replacement of productive capacity. Adjustments for changes in specific prices of property, plant, and equipment are principally based on externallprice indexes specifically or closely related to the resources being measured, or internally developed indexes and, in the case of inventories and cost of sales, on recent purchases and production costs. The U1S. Consumer Price Index is used to measure the effects of general inflation for the (in millions of dbllars„except per share data) Deductions from operating revenues: Cost of sales, excluding depreciation expense Earnings per common share of consolidated operating income for the year. Equity in net earnings of unconsolidated'subsidiaries and affiliates in 1982 increased $13':1 million over 198ll The increase was attributable principally to increased earnings from the Rothmans investment offset byprotit declines incurred by real estate operations: translated'current cost information. The current cost method involves the use of assumptions, ap- proximations, and estimates and, therefore, the resulting mea- surements should be viewed in~that context and not as precise indicators of the effects of inflation. The results do not neeessar- jly represent amounts for which the assets could be sold!or costs which will be incurred in future periods, or the manner in which actual replacement of assets will occur. Schedule I presents earnings and other: data for 1983 as re- ported and as adjusted for current cost. Schedule ll covers the five-year period to show the trends inkey financial data restated in terms oNaverage 1983 constanudollars measured by the U.S. Consumer Price Ihdex. During 1983. the company's real estate operations were reorganized and are accounted for on the equity method. Realestate operations were previously consoiida- tedi Prior-year amounts have been restated, where applicable. As Reported in the Adjusted:for Changes Primary Statements in Specific Prices (Historical Cost) (Current Cost)', $12,975.9 S Gain from decline in purchasing power of net amounts owed Inventories and property, plant„and equipment: Increase in specific prices (current cost)i°" Increase in general price level Excess of increase in specific prices over increase in~general price level, Translation adjustment 7.17 Q_S 771.0 S 6.12 ~,173.9 }i $ 430.4 356.3' ----~~ J 74.1 -----.-~~.) Stockholders' equity $ 4,033.7 y 5,826.4 (A)In accordance with FASB requirements, im0ation-adjusted amounts do (B) AUDecember 31. 1983. the current cost of inventories was53.460.6 not7eflect any adjustments in the provision for income taxes:Conseqytentfy, miWion, and thecurrent cosFof property: plant:and equipment, net of effective tax rates are: accumulated depreaation, was$5.412:1million. _ As reported in~ the Primary Statements 43.0'yo Current Cost ~ 46'.9 ,o