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Philip Morris Incorporated Annual Report 1977 @MIll6 YORR~S

Philip Morris Incorporated 1977 wssion Viejo Company vhiiip rnorns rndustriai In 1977, operating revenues of Philip Morris Incorporated grew 21.2% and surpassed the $5 billion mark for the first time. Each of our five operating companies contributed to our record performance. The cover of this report is a graphic represen- tation of that accomplishment and of the contribution of each operating company to the total operating revenues of Philip Morris. Philip Morris U.S A.'s operating revenues increased 10.0%, topped the $2 billion mark for the first time, and accounted for 41.5% of total Philip Morris Incorporated operating revenues. Philip Morris International's operating revenues grew 24.5%0, reaching $1,349,280,000, or 25.9% of total company revenues. Miller Brewing Company's operating revenues, up 35.1%, totaled $1,327,619,000, or 25.5% of the total. Philip Morris Industrial's operating revenues rose 28.2% and topped $200 million, for 4.2% of the total. Mission Viejo Company's operating revenues were up 56.2%, totaling $148,017,000, or 2.9% of the total. Table of Contents 1 Financial Highlights 4 Review of the Year 12 Philip Morris U.S.A. 16 Philip Morris International 20 Miller Brewing Company 24 Philip Morris Industrial 26 Mission Viejo Company 28 Financial Review 32 Fifteen-Year Financial Review 48 Directors and Officers Philip Morris Incorporated is a leading company in two large industries-cigarettes and beer- that provide simple pleasures to tens of millions of people every day. Over the past five years, Philip Morris has been the fastest-growing U.S. company in each of those industries. Founded more than a century ago and incor- porated in Virginia in 1919, the company has long been a major cigarette manufacturer. Today, it is the second-largest cigarette com- pany 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 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. The company has also diversified into the manufacture of specialty papers, flexible pack- aging materials, and specialty chemicals as well as into community development and homebuilding. These businesses are conducted by five operating companies: Philip Morris U.S.A., Philip Morris International, Miller Brewing Company, Philip Morris Industrial, and Mission Viejo Company. I

Financial Highlights 1 1977 1976 1975 1974 1973 (dollar amounts except per-share amounts expressed in thousands) perating Revenues $5,201,977 $4,293,782 $3,642,414 $3,010,961 $2,602,498 I ~t Earnings 334,926 265,675 211.638 175,516 148,632 Earnings Per Common Share: - - Primary 5.60 4.47 3.62 3.15 2.71 Fully Diluted 5.60 4.47 3.62 3.07 2.61 Dividends Declared Per Common Share 1.563 1.150 .925 .775 .674 Percent Increase Over Prior Year Operating Revenues 21.2% 17.9% 21.0% 15.7% 22.1 % Net Earnings 26.1% 25.5% 20.6% 18.1% 19.4% Earnings Per Common Share: Primary 25.3% 23.5% 14.9% 16.2% 15.8% Fully Diluted 25.3% 23.5% 17.9% 17.6% 19.7% Operating Companies Revenues Philip Morris U.S.A. $2,160,362 $1,963,144 $1,721,549 $1,502,267 $1,303,629 Philip Morris International 1,349,280 1,083,970 1,040,002 887,077 822,907 Miller Brewing Company 1,327,619 982,810 658,268 403,551 275,860 ~hilip Morris Industrial 216,699 169,096 151,960 155,390 132,126 Iission Viejo Company 148,017 94,762 70,635 62,676 67,976 ~onsolidated Operating Revenues $5,201,977 $4,293,782 $3,642,414 $3,010,961 $2,602,498 Operating Companies Income Philip Morris U.S.A. $ 474,400 $ 401,426 $ 337,314 $ 286,225 $ 227,282 Philip Morris International 153,791 130,104 112,975 94,017 92,150 Miller Brewing Company 106,456 76,056 28,628 6,291 (2,371) Philip Morris Industrial 14,860 10,620 8,052 12,280 8,300 Mission Viejo Company 33,225 16,333 5,875 4,772 - 4,122 Consolidated Operating Income $ 782,732 $ 634,539 $ 492,844 $ 403,585 $ 329,483 Tobacco (Phil p Morris U.S.A. and Philip Morris International) and beer (Miller Brewin_g Company) represent the company's significant industry segments. Other industry segments include industrial products (Philip Morris Industrial), land development operations (Mission V eio Company) and non- tobacco operat ons (pr nt ng and greet ng cards) of Philip Morris International. Operating revenues and operating profit of the company's industry segments for 1977. together w th a reconciliation to consolidated operating income of operating companies (set forth below) in thousands of dollars are as follows: Operating Operating Revenues Profit bacco 83.493,443 8 615.253 eer 1,327,619 106.456 Other 380,915 49,329 $5,201,977 771,038 Equity in unconsolidated subsidiaries and affiliates 11,694 Consolidated operating income _ $ 782,732 Tobacco products accounted for 67°o of consolidated operating revenues in 1977. 70°o in 1976. 74°o in 1975. 77°o in 1974, and 79°-o in 1973, and 80°o of consoli- dated operating income in 1977. 83ao in 1976. 91 °ro in 1975. 94% in 1974. and 97°o in 1973. Sales of beer by Miller Brew ng Company accounted for 26°0 of consoli- dated operating revenues in 1977, 23°o in 1976. 180o in 1975. 13°a in 1974. and 11 °v in 1973. and 14°o of con- soI dated operat ng income in 1977. 12°o in 1976. 6°o in 1975, 2°o in 1974, and (10,6) in 1973. No other class of products accounted for as much as 10°-0 of consoli- dated operating revenues or operating income in any year Corporate expenses, interest expense, and items which are not directly attributable to industry segments or operat ng 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.

2 Financial Highlights Operating Revenues Operating Income Net Earnings by Operating Company by Operating Company Mdlions of Dollars 5400 5100 4800 4500 ~_~7-~ 4200 Miliions of Doliars Miliions ot Dollars 900 360 850 340 800 320 750 _ - ~ 300 700 280 ~ Philip Morris U.S.A. ~ Philip Morris International Miller Brewing Company ~ Philip Morris Industrial ~ Mission Viejo Company q

I Fully Diluted Earnings Per Share oonars 6 30 5 95 5 60 5 25 4 90 4 55 4 20 Dividends Declared Per Share Dollars 1 80 270 1 70 255 1 60 240 150 ~ 225 1 40 ~ 210 1 30 - 195 1 20 - 180 3 85 ~® 1 10 -i~ 165 3 50 3 15 I 80 1 00 -- 150 90 ~-- 135 80 --- 120 70 ---- 105 2 10 1 75 1 40 1 05 70 35 73 I 74 75 76 77 60 90 50 75 40 60 30 45 20 ----- 30 10 15 73 74 75 76 77 Capital Expenditures Millions ot OOllars 73 74 75 76 77

I 4 Review of the Year We are pleased to report that 1977 was another outstanding year for our company. Revenues and earn ngs reached new records for the 24th consecut ve year. Operating revenues increased 21.2% and surpassed the $5 billion rnark, net earnings rose 26.1 %, and earnings per share were up 25.3°ro. AII five of our operating compa- n es contributed to this growth. We paid dividends on the common stock for the 50th consecutive year. The dividend, increased for the twelfth time in the last ten years, has grown at a 16% annual rate in this period. Our latest dividend payment marked the 200th consecutive quarter of such payments. Our company has achieved compounded annual growth rates over the past ten years of 19.1 % in operating revenues and 19.2 % in fully diluted earnings per share. This record of growth attests to the ability of the company's people, in the U.S. and interna- tionally, to develop, manufacture, and market products that meet the changing preferences of consumers around the world. In meeting this demand, our company has grown to be the second-largest publicly held cigarette company in the world. Marlboro, our leading cigarette brand, is the largest-selling brand in the U.S. and internationally, and the largest ever in history. The Miller Brewing Company is now the second-largest brewer in the U.S. In 1977, the cigarette and beer industries mainta ned the traditional stability of their growth patterns. Within both product categories,, our company again substantially exceeded the industry rate of gain. Sales of cigarettes in the U.S. industry increased 0.8% in 1977 to approximately 611 billion units. Cigarette sales of Philip Morris Philip Morris U.S.A. Operating revenues of Philip Morris U.S.A. increased 10.0% and topped the $2 billion mark for the first time. Operating income rose 18.2%. Our share of the U.S. cigarette market rose from 25.1 % in 1976 to 26.2% last year as we registered the industry's largest gain in unit sales for the 11 th straight year. Marlboro strengthened its hold as the largest- selling brand in the U.S. The most significant growth was achieved by Marlboro 100's and Lights. In the full-flavor field, Marlboro Red out- performed competing full-flavor products. U.S.A. increased 5.2% to 160 billion units, and accounted for 26.2% of the industry. In the past ten years, our share of the U.S. cigarette market has almost doubled. The cigarette market outside the U.S. expanded at more than four times the rate of the U.S. market. Cigarette sales in the international market increased 3.7% to an estimated 3.6 tril- lion units. Philip Morris International's unit sales outpaced that growth with a gain of 9.3% and totaled 186 billion units. We enlarged our share of the international market to 5.2%. The U.S. brewing industry sold a record total of approximately 157 million barrels, a gain of 4.4% over sales in 1976. Miller Brewing Company was again the fastest-growing major brewer in the U.S. Miller's barrel shipments totaled 24.2 million, a 31.6% increase over 1976, and its market share reached 15.4%. Since 1973, when Miller's resurgence began, the company's market share has nearly quadrupled. Increasingly, corporate earnings are reflecting the capacity additions and production efficien- cies made possible by our investment in the most advanced technology for new plants and equipment for both cigarettes and beer. In 1977, our capital expenditures totaled $280 million. Our upward momentum in sales and profit now leads us to increase our plans for capital expenditures for the 1978 through 1982 period to over $2.25 billion. Of this amount, some $500 million is expected to be spent in 1978. These plans are a further indication of our confidence in the future of the cigarette, beer, and our other businesses and in our determina- tion to maintain growth and technological leadership. - Benson & Hedges 100's improved its position as the leading 100 millimeter brand with the suc- cessful introduction of Benson & Hedges 100's Lights in September, 1977. The growth of Merit continued in 1977. Since its introduction in early 1976, Merit has moved into the rank of the top ten brands in the industry. During 1977, Virginia Slims grew and consoli- dated its position as the leading cigarette for women. Parliament was more aggressively posi- tioned last year as a leading low-tar entry. With Marlboro Lights, Benson & Hedges 100's I,

i Lights, Merit, and Parliament. Philip Morris has chieved broad and substantial representation 9 the fast-growing low-tar segment of the arket. Vital to our 1977 market ng effort were our enlarged sales force. our expanded merchan- dising programs, and our unique advertising. Consumer satisfact on w th the taste of our brands, espec ally our new low-tar brands, is a tribute to our extensive research and develop- ment capabilities and to our research scientists, who have achieved a breakthrough in the ability to deliver flavor at low-tar levels. Our Operations Center in Richmond has Philip Morris International Philip Morr s International attained a 24 5°o increase in operat ng revenues last year and an 18.2°'o increase in operating income. Our 9.3°% gain in unit volume was two and one-half times the growth rate of the cigarette industry outside the U.S., and our share of the international cigarette market rose to about 5.2% last year. Our 1976 share was adjusted to 4.9% following a revision of estimated total orld industry sales by the U.S. Department :)f Agriculture. We sell more than 160 brands in more than 170 countries and terr tories through 25 manu- facturing and marketing affiliates. 19 licensees, and regional export sales organizations. Regional and national brands, ta lored to the many different preferences around the world, contributed significantly to our growth and account for more than one-half of our unit vol- ume. Marlboro continues to grow and accounts for more than one-third of our units. Our exports of c garettes from the U.S. and elsewhere, led by Marlboro, increased sharply last year. The Europe%Middle East; Africa region achieved record unit sales and market share despite excise tax increases and expanding restrictions on the marketing of cigarettes. Sales of Marlboro rose sharply in many mar- kets, including Italy, Switzerland, France, Poland, the United Kingdom, the Benelux, and the Mid- dle East. In the important West German market, where total industry sales declined, Marlboro ales and market share continued to increase. Merit was introduced in a number of markets, d low-tar line extensions of existing brands were launched in several countries. In the Australia/New Zealand region, Philip Morris Limited continued as one of the leading cigarette companies in Australia with its steadily increased its daily production rate. The efficiencies inherent in the Operat ons Center, which opened in 1973. made a s gnif cant contr but on to ga ns in prof tab l ty for Phil p Morr s U.S_A Further eff c enc es are antic pated w th the replacement of some of the initial equip- ment w th the newest. most advanced cigarette- making and pack ng mach nes. In accord with our prolected long-term needs and our confidence in our future in the cigarette business, we are now in the planning stages for another major new cigarette manufacturing facility. successful Marlboro and Alpine brands. T ghter cost controls helped offset continuing effects of the Austral an currency devaluat on and a cor- porate tax ncrease. New marketing strateg,es were implemented to counteract significant competitive price-cutting, Our wine affiliate, Lindeman (Holdings) Lirnited, posted new sales records and aga n increased its share of the Austral an market In the Asia Canada region. Benson & Hedges (Canada) Limited's sales were lower last year than in 1976 but recovered in the latter half of 1977. The company's leading low-tar product. V scount. again recorded higher sales. In Asia, our affiliate in Pakistan achieved improved sales. and our licensee in the Ph l p- p nes posted record sales for Marlboro. a lead- ing brand in this large market. Our U.S. exports to Asia also made strong sales gains. The Latin America Iberia reg on again increased unit sales to record levels and enlarged its share of the market. In Argentina, Venezuela, and El Salvador. new brands and line extensions were introduced successfully. Marlboro increased its market share in Mexico, the Dominican Republic. Pan- ama, and Spain. Our affiliate in Brazil, established in 1973, again recorded a significant loss as substantial marketing investment was provided to exist ng and new brands in this important and highly competitive market. We continue to be confident that profitability will be achieved over the long term. Geographic diversity is a continuing strength of our international operations. It enables us to maintain overall stability and growth in times of fluctuating currencies and at diverse levels of economic activity. 5

6 Miller Brewing Company Operating revenues of the Miller Brewing Company increased 35.1 % in 1977. Operating income rose 40.0%, continuing the upward momentum of the past few years. Our shipments of 24.2 million barrels of beer represented an increase of 5,8 million barrels, or 31.6% over 1976, and maintained the growth that has been leading the brewing industry. Miller's gain greatly exceeded the industry increase of 4.4% last year, and the company moved into second place in the U.S. industry. Our share of the market in the U.S. increased to about 15.4% from 12.2% in 1976. Strong gains were posted by premium-priced Miller High Life, Miller's largest-selling brand, and Lite, by far the country's leading low-calorie beer. Lite continued its impressive growth despite heavily promoted low-calorie entries by a number of our competitors. In September, 1977, Miller introduced domes- tically brewed Lowenbrau with a substantial advertas ng program. Its encouragirrg early reception indicates that Miller may have a potentially strong entry in the expanding super- premium segment of the market. Despite the accelerated capital expansion program, Miller's brands continue to be on allo- cation. Since 1973, Miller has invested more than $500 million in expansion and moderniza- tion. The modernized brewery in Milwaukee is now the largest in that brewing capital of the world. Philip Morris Industrial In 1977, Philip Morris Industrial achieved a 28.2% increase in operating revenues and a 39.9% increase in operating income. These increases were due to the acquisition of Wisconsin Tissue Mills in February, 1977, and its outstanding performance since then. The company produces disposable napkins for the institutional food market and generated a 37.3% increase in profits over 1976. Despite a difficult year in their respective The new brewery in Fulton, in upstate New York, which began commercial production in April, 1976, has been expanded to a capacity of 8 million barrels a year. Annual capacity in the Fort Worth, Texas, brewery was increased to 7 million barrels by year-end and will reach 8 million by 1979. In 1977, it was decided to increase the planned annual capacity of the new Eden, North Carolina, brewery, which will begin production early this year, from 3 million to 8.8 million barrels. In November, construction began on a new $170 million brewery in Irwindale, Southern Cali- fornia. When in operation in early 1980, it will have a capacity of 5 million barrels a year and will replace the production capacity of the smaller Azusa, California, brewery nearby. Philip Morris began construction of a $34.1 million glass bottle manufacturing plant in Sen- nett, in upstate New York, to supply Miller's Ful- ton brewery with some of its glass bottle needs. The new headquarters office building in Milwaukee is now occupied. Projections of Miller's growth indicate that it may well be required to invest more than S1 bil- lion to expand the company's facilities over the next five years. The present facilities are the most modern in the brewing industry, and their efficiency in producing high-quality beer will increasingly become a factor in Miller's operat- ing performance. markets, the Chemical, Paper, and Packaging Groups were profitable and increased their revenues over 1976. The Chemical Group makes specialty chemi- cals for the textile and packaging industries. The Paper Group produces specialty and technical papers. The Packaging Group makes flexible packag- ing materials primarily for the food industry. ~ ~ .a

Mission Viejo Company Operating revenues at Mission Viejo Company, r community development and homebuilding pany, increased 56.2% in 1977, while rating income more than doubled over the exceptionally y high 1976 level. In Orange County, California, Mission Viejo's record sales of 1,649 homes represented an increase of 30.5% over1976. The company's increased sales volume in California was co- incident with unusually strong demand for its homes in all price ranges. A record was also achieved in Denver, Colorado, where in 1977 its unit sales of 209 homes resulted in a 67.2% increase over 1976. Housing sales surrounding Lake Mission Viejo Cigarette and Beer Excise Taxes Consumers of cigarettes and beer have been increasingly required to bear an excessive tax burden. Excise taxes placed on these products are regressive and discriminate directly against lower- income consumers. Total excise taxes on cigarettes in the U.S. amounted to $6.0 billion last year. These excise taxes accounted for 37% of the average retail I ce of a pack of cigarettes on a national basis. Total excise taxes on beer in the U.S. in 1977 re $2.2 billion and accounted for about 15% of the retail price. Cigarette bootlegging has become a wide- spread crime in states with the highest taxes, and there is mounting pressure for corrective action. There has been growing sympathy, particu- larly in New York, for a reduction in state and local taxes to reduce tax disparities and thus the profit margin for bootleggers. This is a reason- Smoking and Health In the 14 years since the U.S. Surgeon General's report, the activities of anti-cigarette groups have not encouraged efforts in the area of sci- entific research. Although there is no conclusive clinical evidence that cigarettes cause disease in smokers, or nonsmokers, some volunteer health agencies are proceeding as if the case were closed. This attitude discourages further research and is a disservice to science. Major new anti-cigarette publicity efforts, sup- :~rted by multimillion-dollar budgets, have been nched by Joseph A. Califano, Secretary of e e Department of Health, Education, and Wel- fare, and the American Cancer Society. At the same time, the federal health agencies are devoting more attention to the broad spec- have proceeded at a strong pace and will accel- erate with the completion of programs currently in design. As development of the 10.000-acre Mission Viejo project nears the halfway mark, master planning for the newly acquired 6.700-acre Aliso Viejo property has proceeded on schedule with the recent completion of the preliminary design. At its Mission Viejo-Aurora prolect in Colo- rado, Mission Viejo Company has an option for additional land in the Denver area that could provide the basis for long-term major participa- tion in this growing market. able approach because it would increase the amount of taxes collected while relieving the smokers of legally taxed cigarettes of an unfair tax burden. Another proposal is for a uniform rate, imposed nationally. In effect, that would mean higher taxes in many states, including tobacco- growing states, where the proposal has met strong resistance, just as Maine farmers would resist taxes on potatoes and Texas ranchers, taxes on beef. - The U.S. Treasury Department, the agency that would administer such a uniform tax, has said: "We have serious reservations about sup- porting legislation which would be aimed at rec- tifying a regional problem. It is our belief that federal intrusion into traditional state areas of responsibility can only be justified if the problem is national in scope: " trum of possible carcinogens in the environ- ment. In November, Dr. Peter G. Bourne, Special Assistant to the President for Health Issues, said that federal efforts should be concentrated "on the acquisition of basic knowledge" concerning disease and research "should not be centered on tobacco alone." We believe the President's top health advisor has taken a sensible and realistic approach to the government's dealing with tobacco prod- ucts. His advocacy of basic research parallels the position long held by the tobacco industry, which itself has granted more than $70 million for independent scientific investigation into the diseases blamed on smoking. 7

a The Public Interest We expect our bus ness activities to make social sense and our social act vities to make business sense. - Our company has enjoyed extraordinary growth A respons ble corporation must manage such growth in a manner responsive to the needs of soc ety That mandate has become ncreas ngly urgent because we live in a time when fa th in all inst tutions has declined and when the bus ness sector in particular is regarded by many as a rig d relic of a bygone era. Sensitivity to change is a hallmark of our company. We need to be as responsive in the soc al arena as we are in our corporate deci- sions, and we are wili ng to undergo social scrutiny Our cigarettes are manufactured and mar- keted today by affiliates in 25 countries and licensees in 19 countries and territories. We employ 27,000 persons in the U.S., and Philip Morris International and its affiliates now employ 26,000 persons abroad. These are not jobs taken from the American labor market. We do not manufacture c garettes abroad for import into the U S. If we did not manufacture abroad for sale abroad, that demand would be met by competit ve companies of other nations. The cont nuing growth of our exports of ciga- rettes from the U.S. generates higher export income and strengthens employment in our U.S. manufacturing locations and in supplier indus- tries. The continued sales growth of cigarettes produced by our l censees and affiliates also contr butes to larger exports of U.S. cigarettes. tobacco. and other manufacturing components produced in the U.S. Philip Morr s U.S A.'s pulverized coal-fired boiler at the Operat ons Center in R chmond. Virg nia, saves oil while it meets all appl cable air pollut on standards. Proposals to lower or eliminate U.S. tax cred- its and tax deferrals affecting foreign-source income will receive greater attention this year when the U.S. government considers changes in the federal tax laws. As most other countries provide these or similar benefits to their multi- national companies, an additional tax burden on overseas income would seriously restrict the ability of U.S. companies to compete effectively overseas and would therefore jeopardize the jobs created by the production of U.S. exports, including the jobs of the production workers in U.S. plants, jobs of suppliers, and jobs of those in service industries. Through the export of cigarettes and tobacco, Philip Morris and the other tobacco companies make a substantial favorable contribution to the balance of trade for the U.S. Total U.S. exports of tobacco and tobacco products in 1977 accounted for a net positive contribution of more than $1.3 billion to the U.S. trade balance, an increase of 19% over 1976. A major factor in the record trade deficit experienced by the U.S. in 1977 was the high price of imported oil. In comparison with many other industries, the production of cigarettes and beer consumes remarkably little energy. Never- theless, we have in place an intensive, cor- porate-wide program of energy conservation. Philip Morris engineers at our cigarette plants are constantly exploring ways to conserve energy. We receive a monthly computer printout of energy consumption in every phase of our U.S. cigarette operations. We therefore have a good reading on our conservation efforts. Since Wisconsin Tissue Mills waste water treatment facility returns cleaner water to the river than the water already present in the river. k-7

1974, energy units per c garette produced have creased by 12°0, Energy conservation is a rfect example of how social act v ties make s ness sense, tMiller Brewing's hewest facility at Fulton. New York, and the brewery under construction at Eden, North Carol na. include energy conserva- tion as an integral part of the production proc- ess. Coal is the primary fuel supply, and many energy-saving features of the latest technology have been incorporated into the design of the breweries. Miller is the only brewer w th a nationw de aluminum can recycling program M Iler's dis- tributors pay up to 17 cents_a pound for alumi- num cans brought to reclamat on centers. In 1977, 10 million pounds of aluminum were reclaimed. the equivalent of 240 m ll on cans, up from 7.8 million pounds in 1976. Recycling recovers 95°0 of the_energy that vvent into the production of the orig nal can The Milprint plant of Ph l p Morris Industrial at Downingtown. Pennsyvan a. is installing a pilot heat recuperator that w ll save 97.500 gallons of fuel oil a year and a polluUon-free incinerator that will convert the plant's own wastes into ergy. Wisconsin Tissue M Ils installed a heat s hanger system that recovers latent heat from charged water. sav ng 1,050.000 gallons of oil a year. Mission V ejo Company has helped fund the first phase of a comprehensive water reclama- tion program wh ch is designed to reuse all the waste water in the community. The initial 2-mil- lion-gallons-per-day pilot reclamation plant is scheduled to begin operation in early 1978. Mission Viejo has loined with the Energy Research and Development Administration of the federal government to research methods of reducing energy consumption in residential dwellings. It has built two experimental "Mini- mum Energy Dwellings" that employ solar energy and are designed to reduce energy con- sumption by as much as 50°%. Through a grant from the Housing and Urban Development Department, the company is building seven additional solar-assisted homes. The company again demonstrated its ability to blend public purpose with business endeavors when it complied with a state requirement to cease filling Lake Mission Viejo during the drought conditions that prevailed during 1977 in California. Mission Viejo proposed an innovative plan to substitute water from the San Juan Basin, which had been abandoned when new drinking water standards were adopted several years ago. The water is suitable for recreational purposes and will be used to help fill the lake. The company agreed to spend S4 million to build an 11-mde pipeline that will bring this water to Mission Viejo. Our plan was unanimously approved by the State Water Board, since the transfer of water represents a first step toward the state's goal to reclaim the San Juan Basin. According to one member of that board, "Mis- sion Viejo Company's plan is the one good thing to come out of the drought condition," In cigarette and beer production, air pollution is a minor factor. With electrostatic precipitators, and other control devices, we meet or better all emission standards. Miller Brewing Company aluminum Philip Morris supports higher educa- The Jasper Johns art exhibition sponsored can reclamat on centers recla med ten t on w th direct grants to independent by Philip Morris opened at the Whitney million pounds of aluminum in 19777 private colleges and college funds. Museum of American Art in New York City 9

10 In the mak ng of paper and beer, discharged water must be treated. Our Wisconsin Tissue Mills and Plainwell paper companies adhere to a pol cy of d scharg ng cleaner water than the water already present in the rivers. In 1977, Wis- consin Tissue received the Izaak Walton League of Amer ca's "Clean Water Award" for pollution control efforts "above and beyond the call of duty" At a cost of almost $30 million, Miller Brewing has installed the most sophisticated water treat- ment facilities in the nation at its breweries in Fulton, New York. and Eden. North Carolina. One of Philip Morr s's objectives is to promote women and minority group members into higher level positions. We are mak ng progress on this front. Minor t es now f ll 10 2°'0 of positions clas- sified as "officials and managers":. five years ago they held 5.7°-0. M norities now account for 15.6°o of our sales force. up from 9.0% five years ago. Women today account for 9.1 °io of our off cials and managers: five years ago they accounted for 6.6°/b. Women today hold 22.3°'0 of our professional jobs. compared with 13.3% five years ago. Ph Hp Morr s and Miller each maintain exten- sive minority bank deposit programs. At year- end, our program involved 44 minority-owned banks. Miller Brewing, as a part of its facilities expansion, has awarded minority vendors con- tracts totaling more than S25 million since January, 1975. During the year it received the National Award of Excellence from the U.S. Department of Commerce's Office of Minority Business Enterprise. A survey conducted by Philip Morris Interna- tional last year covering our affiliates in the developing countries indicated a close relation- ship between the development of our business and the economic and social objectives of host countries. The areas in which we confirmed a positive role included transfer of production technology and management know-how, train- ing and promotion of local nationals, local equity participation, and stimulation of local commerce and export trade. In addition to functioning as positive eco- nomic forces in the countries in which they operate, Philip Morris International's affiliate companies respond to plant community and host country needs through a variety of educa- tional, community, health, and cultural programs. Our affiliate in Switzerland has established an ecological foundation to protect rare Alpine ani- mals from extinction. A corporate grant is supporting a pilot pro- gram providing basic health services to resi- dents of our affiliate plant community in Guatemala. We and our affiliates have responded to the special needs created by devastating natural disasters which have occurred in Guatemala, Nigeria, Argentina, India, and elsewhere. People in plant communities also benefit from such projects as the opening of company- operated facilities for public recreation centers, and the donation of the use of land for a commu- nity~sports facility in Ontario, Canada. In addition. Philip Morris International provides direct assistance to international organizations specializing in grass roots educational and eco- nomic projects in the developing world. We continue to monitor the business conduct of our operations around the world, taking into account the voluntary business guidelines rec- ommended to multinational enterprises by the Organization of Economic Cooperation and Development. Our operating policies remain consistent with these guidelines. Our charitable contributions in the U.S. increased sharply in 1977. As the company con- tinues to grow, we have expanded our pro- grams. indicating the company's dedication to improving the quality of life, with particular emphasis in those communities where we operate. We have also increased our support of international organizations to reflect our stature as a multinational corporation. Again this year, our largest category of contributions was sup- port to higher education with direct grants to independent private colleges and through dol- lege scholarship awards to the children of our employees. Grants from the company also help support institutions active in the areas of health, welfare, culture and the humanities. Philip Morris marked its 15th year of sponsor- ship of the arts with the opening of a spectacular Jasper Johns retrospective at the Whitney Museum of American Art in New York. The col- lection of 201 paintings, drawings, and litho- graphs prompted Newsweek to call Johns "the pre-eminent American artist of this generation." The Jasper Johns exhibit will tour in Europe and Japan in 1978. [S ha ~ y

The Philip Morris Arts Grant program in Aus- lia continues to support innovative Australian sts, and an urban beautification program in nada made billboards available for large- ifale paintings. National artists. dance groups, orchestras, and cultural centers throughout the world receive continuing assistance from Philip Morris affiliates. As part of its support of the arts in the U.S., Philip Morris is extending its matching gift pro- gram to include contributions to cultural institu- tions. The company, within certain limitations, will match, dollar for dollar, any contribution made by an employee to a cultural organization, just as it does in the field of education. Board of Directors John E. Cookman, a member of our Board of Directors s nce 1963, retired in 1977 as a direc- tor. He will continue to provide his counsel to the Looking Ahead We have never been more optimistic about the future outlook for Philip Morris. We expect con- iued growth in both of our largest industrles. garettes and beer, and in our other fields. In e U.S. as well as internationally, our growing brands are well positioned, and we have moved quickly to provide products to meet the chang- ing consumer preferences around the world_ Our company is only beginning to realize the benefits of large investments in increased capacity and new technology in both cigarettes These are just some examples that illustrate our actions and our conviction that our business activities rrmake social sense and our social activ- ities make business sense. Public interest pro- grams undertaken by a corporation represent a positive step in the equity interest of stockhold- ers. This is no time for corporate isolation. Social, political, and economic problems are to be ignored only at our own peril. Our sensitivity to these problems may be one of the reasons that we have performed so well as a corporation. company in his role as Director Emeritus and as Chairman of the Finance Comm ttee of the Board of Directors. and beer. With experienced management in depth and with a strong sense of confidence, we look forward to our 25th consecutive year of increases in revenues and earnings in 1978. We are proud to acknowledge that our past record is a result of the continuing dedication, cooperation, and contribution of our 53,000 employees around the world. We thank them for their outstanding performance and thank our 28,000 stockholders for their continuing support. Joseph F. Culiman 3rd Cha rman of the Board and Chief Execut ve off cer George We ssman Vi ce Chairman of the Board Ross R. Milihiser President w.o~...._ 11

2 Philip Morris U.S.A. ~ ® ® .+Gl~~~ /'~ ~~~ sr: tV . . r~• ® ~~ .~..:.,. .. .~, :i cfr,+s-p ~ frTr~ x IR OWE ar FILTER CIGARETTES Oft-ice?s Clifford H Gofdsmith Pres dent John T. Landry Execut ve Vice President and Director of Marketing Beniamin A. Soyars Senior Vice President. Manufacturnng ~ Robert H Cremin Vice Pres,dent. Sales Edward A Grefe Vi ce Pres dent, Public Affairs J. Paul Jeb Lee Vice President. M,arket ng Servi ces Fred J. Laux Vice President, Personnel William G Longest Vice President, Leaf W. Wallace McOowell Vice President. Operations James J. Morgan Vice President and Assistant Director of Marketing Frank E. Resnik Vice President. Operations Administration Richard D. Robertson Vice President, Ecology and Director of Energy Resources Edward M. Schaaf, Jr. Vice President, Production Dr. Robert B. Seligman Vice President, Research and Development Richard L. Snyder Vice President. Finance and Administrat on Dr. Helmut R. R. Wakeham Vice President. Science and Technology R. Nelson Beane Controller Operating Revenues 1977 Operating Income $2,160,362,000 $474,400,000 1976 $1,963,144,000 $401,426,000 1975 $1,721,549,000 $337,31E 1974 $1,502,267,000 $286,225,000 1973 $1,303,629,000 $227,282,000 24480it}2i9

13 Philip Morris U.S.A. Operating Revenues _ Philip Morris U.S.A. Cigarette Unit Sales Philip Morris U.SA. Operating Income U.S. Cigarette Industry Unit Sa1es Sinoe 1968, Philip Morris U S.A s ooerating Total unit sales of Philip Morris U.S A have Phihp Morris U.S A's operating irtcome has Over the tast ten years, total U.S. cigarette revenues have increased at an average grown at an average annual compounded risen at an average annual compounded rate industry unit sales have grown at an average annual compounded rate of 12 7% rate of 9.2% since 1968. of 20.9% since 1968 annual rate of 1.6%, while our market share has increased from 13,6% to 26 2% = Total Filter Crgarettes t• Total Non-Filter Cgarefles - Philip Morri,s Share of U.S. Industry (%) Millions of Dollars Billion Units Millions of Dollars Billion Unlts % 2450 175 525 700 35 68 69 70 71 72 73 74 75 76 77 68 69 70 71 72 73 74 75 76 77 _ 68 69 70 71 72 73 74 75 76 77 68 69 70 71 72 73 74 75 76 77 2048010220

14 Philip Morris U.S.A. 'Enriched Flavor' Tobacco! MERIT technology making °good taste a reality for low tar smoking, ~ i1r rt•u4 ... EM.~.kJ ~... nlrim i, ~ ia,.e4mim Hn ..~ -~w,.~...,..m,. .nN m.Im1 ~ ~.mr.m.d •IuuuwNm,Y,wWlla MERIT Kings & 1001i 2 1 Straightforward, informative advertis- Ing has heralded the 'Enriched Flavor' breakthrough of Merit. and growing consumer acceptance since its introduction in January. 1976, has made Merit one of the top ten brands in the U S. 2 Marlboro's distinctive and continuous advertising theme helped widen its lead as the top cigarette brand in the U.S. a 3 Bold advertisements like this success- fully introduced Benson & Hedges t00's Lights as another Philip Morris entry in the low-tar cigarette market. 4 Virginia Slims continued to grow as the leading women's brand, sup- ported by smartly contemporary advertising. 6 w,t rv ~at~ sr.'r~: •a, wr .,r,,,wvvro. 1,~a u..',»!~t Iw v ~'sb+.+x rtr we+4 .•-,.at t~trc, eaa t ~n~te w rro w e~ao r* m n.xnna N.r ~ s,:ere, n~ fser teeeeK4' ip»uRnntlMUrv.f4fL'mne• tNt 5 To achieve and maintain full distribu- tion and visibility of our brands at the retail level, particularly new products like Merit 100's, has required an expanded, well-trained, and highly motivated sales force. 6 Parliament, introduced 45 years ago as the first national filter-tip brand and still a major brand has been aggres- sively repositioned as a low-tar brand, 7 7 Technicians in our quality control laboratories carefully test finished cig- arettes and their packaging to insure that our rigid quality standards are maintained. Production employees and sophisticated quality control devices on the cigarette-making lines assist in this effort, I.-

G 8 Efficiencies achieved at the Richmond Operations Center, one of the world's largest and most modern c garette manufacturing facilities. contributed importantly to the 1977 profit increase. 9 Frequent and close collaboration among manufacturing, marketing, research, and leaf execut ves keeps them abreast of internal and external developments and brings their com- bined talents to bear on new ' opportunities. 10 In 1977, our company began install- 1 1 Our Research Center in Richmond ng still another new generation of cig- keeps Philip Morris in the forefront arette making and packing machines with scientific knowledge of tobacco in Richmond. leaf, smoke, filtration, flavorings, and other factors involved in meeting changes in consumer tastes and pref- erences. Among its notable achieve- ments is the breakthrough in 'Enriched Flavor' that has made Merit a success. 4

1 s Philip Morris International w P 0 © le (Q X, P w Off cers Albert E, Bellot Eric M Janssen Vtce Pres dent Vi ce Pres dent Personnel Hugh Cullman . President Aieardo G Buzzi Hans G Storr Vice Pres dent Vice Pres dent Finance Ham sh Maxweli . Execut ve Vi ce Prestdent. Staffan Gunnarsson William H. Webb Europe Middle East Vrce Pres dent Vi ce Pres dent Africa ana Asia C;anada Hamilton Hurley George P H bbard R William Murray Vice President Treasurer Vice Pres dent Europe M ddle East Africa Mary W, Covington Thomas M Kearns Vi ce Pres dent. Financial and Systems Carlos E Sa guero - Corporate Affairs Controller Vi ce Pres den t. Latin America lbena Fel x R. Sanchez , Operations Controller William J O'Connor . Vi ce Pres dent Australia New Zeatand and Chief Administrative Off cer Gv ~,I~~\1,:. C1 © ® ® ;e Operating Revenues Operating Income 1977 S1.349,280.000 5153,791,0JC 1976 S1.083,970,000 5130,104,0u0 1975 S 887,077,000 1973 S 94,017,000 S 822,907,000 $ 92,150,000

17 Philip Morris Internatlonal Philip Morris International Philip Morris International Operating Revenues Cigarette Unit Sales Operating Income Operating revenues of the consolidated and unconsolidated affdiates of Phnip Morris international have increased at an average annual compounded rate ot 21.9%since 1968. III Consolidated ~ Unconsolidated Millions of Dollars 2450 350 1750 iii ,So 100 ..iii 120 so iiiii 90 700 iiiiiii 60 Total unit sales of Philip Morris International's affiliates, licensees and exports have risen at an average annual compounded rate of 15 5% since 1968. Since 1968. Phdip Morris InternatFonaPs operating income has grown at an average annual compounded rate of 19.5% World Cigarette Industry Unit Sales Excluding Us a. Since 1968. wortd cigarette industry unit 9ales have increased at an average annual rate of 3.6% Our share of ths market has grown from 2 0% to 52'1'e ta = - Total Filter C!garettes Total NornF lter Cigarettes Phahp Moms Share of World Market (%) B,Ilion Units Mdlions of Doflars Biltan Units % 2 10 ~ • 175 3850 14 30 125 -i 2750 10 too 2200 75 50 25 73 74 75 76 77 68 69 70 71 72 73 74 75 76 77 68 69 70 71 72 73 74 75 76 77 68 69 70 71 72 t65o 11~ SSO 0 68 69 70 71 72 73 74 75 76 77 204801 iJ2?4'

1a Philip Morris International 1 Our affd ate in Ecuador. Tabacalera Andina, S.A . produces several popular cigarette brands in its modern manufacturing facility in Outo. Marlboro is one of the leading brands in this market. 2 Our long-t me pol cy of decentral zed management has enabled us to build experienced teams of national and regional managers who are best qualified to ant cipate changing condit ons in their markets and adapt our bus ness strateg es accord ngly 3 In Sw tzerland. the success of Fl nt. a low-tar, low-n cot ne brand introduced in 1976. and Muratti 2000, a low- delivery line extens on launched in 1977. helped us achieve a h gher market share last year. 4 Benson & Hedges (Canada) Limited's leading low-tar brand, Viscount, continued to record higher sales last year. and an extra mild version of the company's best-selling Belvedere brand was successfully Introduced, 5 Marlboro continued to increase market share in Germany last year Philip Morris G m,b,H. modernized and expanded its factory in Munich to meet strong demand for our brands in the European Common Market 6 Lindeman (Holdings) Limited achieved record sales volume and increased its share of the Australian wine market. Ben Ean Moselle, the number-one•selting bottled wine in Austrai a, made a malor contribution to sales growth.

7 Agronomists at our affiliates prov de technolog cal and scientif c assistance to tobacco farmers in a cont nuing effort to assure availab lity of the high- est quality tobacco for our c garette brands. , 8 Our exports of c garettes from the U.S., led by Marlboro. reached record levels last year, ranking Phd p Morr s as the leading U S exporter of cigarettes. 9 U.S.-sourced exports of Marlboro and Parliament showed record increases in Hong Kong and Japan. respect vely 10 The Marlboro Cup Race is a maior attraction on the Austral an racing cal- endar. Sponsorship of sporting events is an integral part of our commun ty relations and promot onal activit es 19

ito 20 Miller Brewing Company Officers John A Murphy Pres dent Wilham K Howell Execut ve Vice President Lauren S Wdl ams Vrce Pres dent. Marketing V ncent S. Bavisotto Vice Pres dent. Brewng and Research Warren H. Dunn Vice Pres dent, General Counsel and Secretary Edward W Frantel Vice President, Sales Thomas A. Fulrath Vice Presldent. Personnel_ James R Holland Vice President. Corporate Affairs Larry K, Neuman Vice Pres dent. Plant Operations Operating Revenues Allen A. Schumer Vice Pres dent. Matenal Flow Thomas B. Shropshire Vice Pres dent. Market Planning 1977 Operating Income $1,327,619.000 $106,456,000 Georgy L. Tarala VicePresdent. Engineering Travis G, Adler Controller 1976 $ 982,810,000 $ 76,056,000 1975 8 658,268,000 $ 28,628, 1974 ~ S 403,551,000 S 6,291,000 1973 $ 275,860,000 $ (2,371,000) zQ480;, 02'.-.1.7

2} Miller Brewing Company Mlller Brewing Company Miller Brewing Company Operating Revenues Barrel Shipments Operating Income Since 1968. Millers operating revenues . Miner's barrel volume since 1968 nas Operating income oi Miller has grown at have increased at an average annual ~ grorm at an average compounded rate an average annual compounded rate of Compounded rate of 23 0'0 of 18 6°v annuafly - 19 3%6 since 1968- U.S. Beer Industry Barrel Shipments S+nce 1968_ total U S beer industry barrel sales have risen at an average annual rate of 3 9'ue Mrtter s share of the man<et has increased from 4 2% in 1968 to 15 4% rn 1977 ~ Nat'onafly Distnbutetl Premium Beer (est.) Regional ano NomPremium Beer (est ) - M,Iler Share of U S Industry (%) Millions of Dollars Flillrons ol Barrels - -- Miltions of Dollars Mtl6ons of Barrels °6 1400 2g 105 175 21 0 ^ h3 _ 68 69 70 71 72 73 74 75 76 77 68 69 70 71 72 73 74 75 76 77 - 68 69 70 71 72 73 74 75 76 77 -68 69 70 71 72 73 74 75 76 77 (,} Go Ali

22 Mi11er Brewing Company 1 The bre,ver,, - Futton New York now has an annual capacitv of 8 mdlion barrels Th s breweN began produc- tion in April 1976 2 M uer s new and modern zed brewer es have been equ pped with ,ne most technologically advanced - equ pment available H gh-speed can and bottle fillers and bottle iabe,ers enaDle Miller to meet the increasing demand for its products 3 Miller operates aluminum can manu- facturing plants located near its brewer es in M Iwaukee. W scons n: Fort Worth. Texas, and Fulton, New , York Th s year, construct on began on a new can manufactur ng facil ty to supply the Eden, North Carolina. brewery Seff-manufacturing of cans results in substantial cost savings for Miller 4 Qual tv control personnel test the beer at every step of the brewing and pack- ag ng processes Th s constant check ng assures consistent uniform- ity in product quality and helps to improve operat onal efficiencies. I

23 6 8 9 5 Miller's new brewery n Eden, North Carolina. is be ng expanded to an annual capacity of 8 8 m ll on barrels This facil ty w ll beg n product on th s year, 6 tn all of M Iler s breweries, h ghly auto- mated equ pment controls all phases of the brewing and ag ng process 7 Lite cont nued its impressive growth in 1977. M Iler has successfully used former sports stars and celebrities in a humorous, imag nat ve and highly effective advertising campaign for L te. wh ch is by far the leading tow-calor e beer in the country 8 Domest cally brewed Lowenbrau was 9 The rap d growth of Miller H gh Life introduced nationally in late 1977 w th s nce 1973, supported by the cont nu- the "Tonight. let it be Lowenbrau ity of the ' M Iler T me ' theme, helped advertising campaign that pos tions it M Iler Brewing to capture second in the super-premium segment of the place in the U S industry in 1977, market

24 Philip Morris Industrial Off cers W Iliam D McCoy President James B Kurtzweii Executive Vice Pres dent Operat ons James E" Asmutn Vice Pres dent Ralph J Becker_ Vice Pres,dent Purchas ng R chard W Detrick Vi ce President Robert G. Etter Vice Pres dent. New Business Development Edward B Kime Vice President George R. Lewis . oce.Pres dent. Financial and Planning and Treasurer Alan G Wernick Vi ce President. Administration I W scons n Tissue Mills, the newest addition to Philip Morris Industrial, makes disposable tissue products for the rapidly growing fast-food industry They produce 8 b llion napk ns annually 2 Wikolin Polymer Chemie has devel- oped coat ngs wh ch are cured by ultraviolet hght, eliminating the use of solvents and the high-energy usage. heat-drying systems needed to cure them. The use of UV curing systems will result in significant energy savings and the elimination of pollut on caused by solvents. 3 Pla nwell Paper Company produces a variety of the finest quality technical, specialty, and premium printing papers on the market-including its Kashm r and Mich gan grades. 4 Milprint has installed blown film exir, sion mach nery to take advantage 0' raw material cost trends in the flex b packaging industry 5 Milprrnt's new plant in Colonial Heights. Virginia, has begun shipp« commercial product-Marlboro so" packs and cork tipping paper 6 Electron beam curable adhes ves a coatings are developed and testeo Polymer Industries' research labor- atory Like ultraviolet curing system~ th s curing method eliminates th r of solvents and the high-energy }!, requirements and pollution of si

25 7 William D McCoy Philip Morris Industrial's president 8 Koch Label Company s new plant is under construction in Fort Atkinson. Wisconsin S x and e ght pack bottle carriers for the beer industry will be produced at this plant beginning in _ 1978. 9 Nicolet Paper Company*s ability to produce papers with exacting technr cal applications leads it to both :;gr,owing and changing markets At Operating Operating Philip Morris Industrial Philip Morris Industrial Revenues Income . Operating Revenues Operating Income Since 1968. Phihp Morris Industnai s Operatuig uicome of Phi'ip Morris Industriat operating revenues have increased at an has grown at an average annual . average annual compounded rate of t t 8% compounded rate of 12 2% since 1968. 1977 S216,699,000 $14.860,000 1976 S 169.096.000 Mdlions of DOllars 245 18 S151 960 000 S 8 052 000 . . . , ac 2 t+.y O 1974 105 y ~ 5155.390.000 512,280,000 d 70 6 ~rb ~ 1973 35 L3 r~ ~ S132,126,000 $ 8,300,000 0 0 ~ 68 69 70 71 72 73 74 75 76 77 68 69 70 71 72 73 74 75 76 77 Millions o1 Dollars 21

*• 26 Mission Viejo Company Officers Philip J Reilly Pres dent James G. Gdleran Executive Vi ce Pres dent James G Toepfer Execut ve Vice President Geurt Henri Lodder Senior Vi ce Pres dent Marvin E, Lawrence. Vice Pres dent Robert M. Rodman, Vice Pres dent and Treasurer Donald B. Schulz, Vice Pres dent Harvey Stearn. Vice President Paul Van Stevens, Vice President Walter F. Niemann, Jr., Controller 1 American Youth Soccer Organization membership grew to 134 teams in M ssion Viejo during 1977. Soccer is lust one of a wide variety of sports and recreational activities offered within Mission Viejo. 2 B II Cosby and Farrah Fawcett-Majors have participated in the CBS sports' Celebrity Challenge of the Sexes taped at Mission Viejo. The show has received top national ratings 3 M ss on Viejo Company new home construction and sales reached record levels during 1977. Updated designs were incorporated into the popular Castille and Cordova product lines during 1977. 4 The Mission Viejo International Swim Complex hosted the t977 AAU National Senior Swimming Champion- ships and the annual Miss on Vielo Invitational swim meet. 5 The recently acqu red 6,700-acre Moulton Ranch, renamed Ahso V elo. located two miles west of Mission Viejo, entered into the final stages of master plan des gn. The h ghly inno- vative plan will be submitted for public agency review in 1978. 6 "Day of the Fiesta" was M ssion Viejo community's entry into the 1978 Tour- nament of Roses Parade. The float won the Sweepstakes award. which is the most coveted prize for noncom- mercial entries. It was the Mission Viejo community's second entry into the parade, 7 Demand for homes in Mission Viejo Colorado, reached an all-time h gh r .1977. 8 Mission Viejo Company's newest product line, the Montiel Patio Horne had a highly successful opening in 1977. With the addition of the Mor, • homes, the company offered five distinctive product lines. 9 Philip J. Reilly, president, Mission Viejo Company. 10 Mission Viejo Company's succ ' rests strongly in the hands of experienced management tean , ~ shown here reviewing plans for. ,,,~, company's Aliso Viejo prolect, tk7 O -p W O

Operating Revenues Operating Income Mission Viejo Company Operating Revenues Since 1968. Mission veto Company's operating revenues have grown at an average annual compounded rate ot 28.6% 1977 $148,017,000 $33,225,000 1976 Miuions ot Donars 175 $ 94, 762 000 516 000 333 . . . I50 Mission Viejo Company Operating Income Operating income of Mission v.eto has ncreased at an average annual compounded rateof 521% since 1968 'Fiscal years ended September 30 Mission Viejo Company Share of Orange County Market sa!es of Mission Vieto Company accounted for 9 6% of the new homes sold in Orarttge County, Catifornia, in 1977. Millions of Dollars % 35 105 30 90 1975 125 25 7 5 ~ 70.635.000 $ 5,875,000 too 20 60 974 75 5 4 5 $ 62,676,000 $ 4,772,000 l so 10 30 1973 25 Jil s 1.5 $ 67,976 000 $ 4 122 000 ® ~ , , , 0 o~ o 27 68 69 70 71 72 73 74 75 76 77 68'69'70 71 72 73 74 75 76 77 68 69 70 71 72 73 74 75-76 77

28 Financial Review Philip Morris's record-setting performance last year was largely attributable to volume gains in cigarettes and beer, price increases necessary to offset higher costs, and production efficien- cies. Our pre-tax profit margin reached 12.0% in 1977, the highest level in over 25 years (Chart 1). In August, 1977, the price of our domestically produced cigarettes was increased 30.85 per thousand. Additionally, we effected cigarette price increases in several other coun- tries. Miller benefited principally from volume gains.Also, Philip Morris Industrial and Mission Viejo registered more profitable performances. In April, 1977, the common stock dividend was increased to an annual rate of $1.65 per share. This marked the tenth consecutive year of increase. Total dividends declared in 1977 rose to $1.56 per share, a 36% increase from 1976. Dividends declared as a percent of net earnings have been necessarily conservative due to the rapid growth of our company, but the 1977 payout of 27.9% was the highest level since 1971 (Chart 2). Our funds from operations, after deducting dividend payments, exceeded capital expendi- tures for the second consecutive year. This was not the case from 1972 through 1975 (Chart 3). We expect that funds from operations less divi- dends will, in the aggregate, exceed capital expenditures over the next five years. Our capi- tal expenditures are estimated to be 8500 million in 1978 and over two and one-quarter billion dol- lars from 1978 through 1982. -- Actual expenditures under this plan will con- tinue to be carefully monitored to ensure that the rate of capacity growth is closely correlated to our forecasts of marketplace demands. As in the past, specific projects encompassed within our overall projections will move from planning to construction only if detailed study indicates a high probability of an acceptable return on the funds invested. Over one-half of planned investment in the next five years will be in Miller Brewing Com- pany. Miller's operating profit represented a 23.3% return on its average operating assets (excluding construction in progress) in 1977, and the after-tax return on Philip Morris's invest- ment in Miller increased to 13.0% in 1977. Miller is steadily generating a larger proportion of funds required for its growth. Philip Morris's total assets have increased from $786.6 million ten years ago to 54.0 billion in 1977. Our net return on this enlarged asset base remained relatively stable through 1975 and has shown good growth over the last two years (Chart 4). Stockholders' equity increased sixfold in the last decade and reached $1.7 billion in 1977. Net return on average stockholders' equity climbed to 21.5% in 1977, the highest level in many years (Chart 5). Operating Revenues Primary Earnings Per Share Funds from Operations Pre Tax Margins Dividends Declared Per Share after Dnndends Capital Expenditures Chart 1 Charf 2 Chan 3 i Operating Revenues t• Prmary Earnings Per Share M Funds Irom Operatrons after Dividends ~ Pre-Tax Margins (%) -- Dividends Declared Per Share - Capital Experltlitures A

0V Despite heavy external borrow ngs to finance ur growth, Ph l p Morr s has maintained prime ~ tings in the credit markets. This is due to our ventories which have exceeded debt every ar since 1970 (Chart 6), strong earnings growth and an expand ng equity base. The ratio of our total debt to stockholders' equity, after peaking at 1.27 to 1 in 1974, has declined steadily, reaching 0.93 to 1 at year-end 1977. During the second quarter of 1977, our debt position was restructured to take advantage of favorable long-term interest rates. In April, we borrowed $100 m llion at an interest rate of 81/4% for 20 years. The terms of this issue, negotiated privately with a large institution, were more attractive than any of our long-term domestic financ ngs s nce 1968. Proceeds were utilized to reduce short-term obligations. In May, we negotiated a 850 million five-year bank term loan agreement at a rate approximat- ing 8%. These funds were utilized to prepay the 10% subord nated notes wh ch were due in 1982. The interest sav ngs over the term of the subordinated notes w ll approximate $5 million. On December 1, 1977, Philip Morris nego- tiated a $250 million Eurodollar revolving credit reement w th 23 banks. This agreement placed an existing 8180 million Eurodollar volvng credit which was due to expire in 1979. The terms of the new agreement, which extends through 1982, are more attractive and provide us considerable flexib Iity. In 1977, our income tax rate increased to 46.5% from 43.7% in 1976. The increase pn marily reflected a reduction in the investment tax credit and a larger percentage of our income being derived from U.S. sources. Currency exchange rates continued to show wide fluctuations in 1977. A major concern last year was the decline of the dollar relative to most major world currencies, particularly the Swiss franc and the West German mark. We reduced the disruptive effects of these fluctua- tions through a carefully structured hedging pro- gram focused on total management of the company's financial resources to minimize the effect of currency fluctuations on net income. As we enter 1978, Philip Morris's financial position is stronger than ever. Expected growth in all of our businesses will require a continually growing asset base. Despite all the attention given to the real problem of capital formation, an equalfy severe problem is a shortage of oppor- tunities for business to invest in attractive proj- ects. This is restricting growth not only for companies but also for many national econo- mies. We are fortunate to have capital demands that promise to yield high returns. We remain confident that our financial resources will permit us to provide the tools to capture the potential for each of our operating companies. Average Total Assets Average Stockholders' Equity Total Debt Net Return on Average Net Return on Average Total Inventory Total Assets Stockholders' Equity Chart 4 Chart 5 Chart 6 ~ Average Total Assets ~ Net Return on Average rotal Assets ( wo) e• Average Stockholders Equity - Net Return on Average StockholdersEquity (%) -- 3.6 12 t 50 ~ 3.0 t 0 1.25 I _ ~S. 4 ® 8 i 00 1.2 75 50 25 0 68 69 70 71 72 73 74 75 76 77 111111111 Total Debt - Total Inventory 18 150 15 125 12 1.00 25 29

I 30 Management's Discussion and Analysis of the Summary of Operations The five-year summary of operations appears in bold face type on page 32 of the company's fif- Operating Revenues Consol dated operating revenues in 1977 were S908 million (21.2%) higher than in 1976. Reve- nues from worldwide sales of tobacco products were up S505 million (16.9%), of which S230 million is attributable to increased cigarette un t sales, S237 million to increases in selling prices (including increases in certain foreign excise tax rates), and 338 million to translation of foreign currencies at average rates in effect during 1977. Operating revenues from beer sales were up S345 million (35.1%), with S309 million of the increase coming from greater volume and $36 million from price increases, In 1976, consolidated operat ng revenues Cost and Expenses Cost of sales, which includes cost of products sold and federal and foreign excise taxes on products sold, increased S628 mill on (20.1 %) in 1977 over 1976 and S391 million (14.3%) in 1976 over 1975. Cost of tobacco products accounted for S291 million of the 1977 increase. of which 5161 mill on is attributable to volume, S102 million to cost increases (including increases in certain foreign excise tax rates) and S28 million to translation of foreign currencies. The 1977 5-10-15-Year Growth Record (thousands except per share amounts) Operating Revenues Pre-Tax Income teen-year financial review The following analysis pertains to the latest two years of the summary, were S651 million (17.9%) higher than in 1975. Revenues from worldwide sales of tobacco products were up $284 million (10.5%). with increases of S193 million from higher unit sales and S206 million from increases in selling prices (including increases in certain foreign excise tax rates) being partially offset by translation of foreign currencies, $40 million, and deconsoli- _ dation of a foreign subsidiary, S75 million. Operating revenues from beer sales in 1976 exceeded 1975 by $325 million (49.3 °%) with S282 million attributable to volume and $43 mil- lion to price increases. increase in cost of beer products sold was S287 million with S262 million from greater volume and S25 million of cost increases. The increase in 1976 over 1975 includes cost increases of S113 million for tobacco products and S256 mil- lion for beer. Increases in the cost of tobacco products of $112 million from higher unit volume and S87 million of cost increases (including increases in certain foreign excise tax rates) 1977 1972 1967 1962 $5,201,977 $2,131,224 $904,841 $550,624 625,516 229,634 81,317 47,464 Net Earnings 334,926 124,466 43,601 21,946 Earnings Per Share: Primary 5.60 2.34 .98 .49 Fully Diluted 5.60 2.18 .97 .49 Compounded Average Annual Growth Rate 5 Years 10 Years 15 Years Operating.Revenues 19.5% 19.1 °10 16.2% r t ~ Pre-Tax Income 22.2% 22.6% 18.8% fti ~~ .~. ~ I Net Earnings 21.9% 22.6% 19.9% ~ p Earnings Per Share: 19.1 % 19.0% Primary 0 t+t - 17.6 % ~ Fully Diluted. _ . 20.8% 19.2% 17.6%

yt were reduced by translation of foreign curren- es, $14 million, and by deconsolidation of a reign subs diary $72 million. The $256 million 'gher cost of beer products sold, included 247 million from higher volume and $9 million of cost increases. Market ng, adm n strat ve and research costs in 1977 were $129 mfll on (23.7%) higher than in 1976 and $110 million (25.2°%) higher in 1976 than in 1975, reflecting new cigarette and beer brand introductions, increases from growth in operations, and inflation. Currency translation and hedging costs of S12 million in 1977 were $4 million (25%) less than in 1976. Such costs were first stated in the state- ment of earnings in 1976 in compliance with a pronouncement of the Financial Accounting Standards Board. Equity in Unconsolidated Subsidiaries and Affiliates The decrease in 1977 compared to 1976 of $2.5 million (17.7°io ) in equity in net earnings of partly owned unconsolidated subsidiaries and affiliates was principally attributable to the impact on cur- - rency translat on of the Australian dollar de- valuation in late 1976, a retroactive Australian corporate income tax increase in 1977, and an increase in losses from Brazil an operations, all Income Taxes The $84 million increase in income taxes in 1977 and $57 million increase in 1976 reflect the applicable tax on the increased income for the of which were partially offset by improved results in certain other subsidiaries and affiliates. Equity in net earnings of partly owned uncon- solidated subsidiaries and affiliates decreased $8.7 million (37.9%) in 1976 from 1975 mainly due to the devaluation of the Australian dollar and the Mexican peso. years. Reference is made to the Notes to Con- solidated Financial Statements for additional information. Quarterly Results (millions except per share amounts) Per Share of Common Stock Quarters Operating Revenues Gross Profit Net Earnings Earnings' Dividends Paid Market Price2 (High-Low) 1977 Year $5,202.0 $1,447.8 $334.9 $5.60 $1.475 $64'/a-51 Yz IV 1,354.0 375.1 84.2 1.41 .4125 647/a-59'/a III 1,376.1 388.3 94.2 1.57 .4125 64-543/ II 1,329.3 365.0 85.1 1.42 .325 573/s-51 %z I 1,142.6 319.4 71.4 1.19 .325 613ia-523/s 976 Year $4,293.8 $1,167.6 $265.7 $4 47 $1 075 $63'/~-493/ k, - 0 . . . ~ .a IV 1,158.5 319.4 67.0 1.13 .325 63'/a-56'/a co 0 .. ~ III 1,122.6 302.6 74.6 1.25 .25 5 5/a 623/-51 a / 0 ha II 1,069.9 291.9 67.2 1.13 .25 58'/a-493/a w ~ ~ I 942.8 253.7 56.9 .96 .25 59'/a-50'/a ~:'The sum of quarterly amounts may not equal the yearly amount due to rounding. 2 New York Stock Exchange

32 Fifteen-Year Financial Review (dopar amounts except per-share amounts expressed in thousands) 1977 1976 1975 1974 1973 Summary of Operations: Operating Revenues $ 5,201,977 4,293,782 3,642,414 3,010,961 2,602,498jR Cost of Sales: Cost of Products Sold 2,401,680 1,966,871 1,656,839 1,290,319 1,060,777 Federal Excise Taxes 862,115 778,161 686,276 619,504 558,947 Foreign Excise Taxes 490,372 381,125 392,127 349,363 334,512 Operating Income 782,732 634,539 492,844 403,585 329,483 Interest Expense 101,584 102,834 99,045 82,741 50,993 Eamings Before Income Taxes 625,516 471,928 360,810 297,502 255,609 Pre-Tax Profit Margins 12.0% 11.0% 9.9% 9.9% 9.8% Provision for Income Taxes 290,590 206,253 149,172 121,986 106,977 Net Earnings 334,926 265,675 211,638 175,516 148,632 Primary Eamings Per Common Share 5.60 4.47 3.62 3.15 2.71 Fully Diluted Earnings Per Common Share 5.60 4.47 3.62 3.07 2.61 Dividends Declared Per Common Share 1.563 1.150 .925 .775 .674 Weighted Average Shares-Primary 59,822,487 59,408,484 58,442,362 55,649,417 54,804,174 Weighted Average Shares-Fully Diluted 59,822,487 59,408,484 58,442,362 57,339,255 57,315,784 Capital Expenditures $ 279,818 220,173 244,477 215,770 174,665 Annual Depreciation 78,466 64,856 49,853 38,006 30,245 Property, Plant & Equipment (Gross) 1,594,910 1,323,923 1,129,838 899,810 728,726 Property, Plant & Equipment (Net) 1,202,432 993,879 851,103 659,520 510,286 Inventories 1,817,561 1,657,504 1,448,428 1,269,212 1,009,414 Current Assets 2,221,020 2,005,745 1,788,085 1,557,908 1,245,934 Working Capital 1,415,867 1,202,224 890,797 725,000 515,347 Total Assets 4,048,039 3,582,209 3,134,326 2,653,263 2,108,403 Total Debt 1,563,498 1,525,638 1,443,270 1,239,312 947,364 Stockholders' Equity 1,690,066 1,429,982 1,227,781 974,673 815,028 Net Earnings Reinvested 253,661 197,195 157,102 131,890 111,376 Common Dividends Declared as % of Net Earnings 27.9% 25.7% 25.7% 24.8% 25.0% Book Value Per Common Share $ 28.16 23.99 20.63 16.97 14.66 Market Price of Common Share High-Low 64'/e-51 Y2 63'/4-493/4 59'/4-40'/e 61%-34'/e 683/a-483/ Closing Price Year-End 61'/s 613/~ 53 48 573/a Price/Earnings Ratio 1 1 13 14 15 21 No. of Common Shares-Actual Year-End 59,919,917 59,487,393 59,357,236 57,264,586 55,378,434 ~`~~

~~j~p Moms Incorporated and Consolidated Subsidiaries - 33 ~ 1972 1971 1970 1969 1968 1967 1966 1965 1964 1963 ~-- ~ 131,224 1,852,495 1,509,540 1,142,373 1,019,846 904,841 771,975 704,544 641,439 585,059 ~ 832,890 700,021 577,106 454,718 409,912 363,115 311,784 292,588 277,522 244,540 _----- ~j_ 494,778 441,143 372,092 319,086 295,903 271,073 234,975 214,128 194,312 193,768 228,151 201,386 147,124 54,247 41,841 39,658 30,057 27,780 22,462 8,276 287,461 241,137 203,180 153,237 - 126,159 101,838 81,867 65,128 55,568 56,634 ...--- ~ 37,870 35,472 35,425 28,640 15,949 10,205 8,094 6,098 5,919 4,814 ~ 229,634 189,800 150,008 115,613 100,107 81,317 65,144 52,423 44,466 46,729 ~ 10.8% 10.2% 9.9% 10.1 % 9.8% 9.0% 8.4% 7.4% 6.9% 8.0% 105,168 88,302 72,510 57,273 51,241 37,716 30,961 25,914 21,852 24,677 124,466 101,498 77,498 58,340 48,866 43,601 34,183 26,509 22,614 22,052 2.34 2.01 1.68 1.29 1.09 .98 .77 .59 .50 .49 2.18 1.82 1,43 1.20 1.07 .97 .77 .59 .50 .49 .631 .605 .525 .488 .425 .35 .35 .30 .30 .30 , 52,999,338 50,126,614 45.613,196 44,538,922 43,857,780 43,349,768 ~ 57,265,432 56,556,948 56,596,566 49,558,612 45,069,770 43,982,508 ~. 120,034 - 68,001 39,595 23,636 26,373 25,688 17,089 12,078 19,366 26,243 ~ 1~4 26,576 21,500 17,658 13,512 12,139 10,903 9,532 8,857 8,316 6,765 571,148 447,075 394,088 236,962 219,346 193,656 172,593 159,759 153,224 139,595 373,372 274,070 236,697 147,354 138,704 123,555 110,157 104,044 102,417 93,150 801,145 670,244 568,428 447,319 451,922 386,576 297,761 271,823 257,256 235,375 989,708 826,453 728,837 574,988 561,685 485,908 372,895 339,082 318,978 297,295 524,791 417,591 347,682 315,871 312,406 306,172 253,257 213,826 202,810 190,982 1,701,494 1,392,035 1,239,424 976,489 786,578 648,994 512,549 466,277 443,438 412,543 681,000 553,900 557,700 490,400 354,800 256,400 161,000 158,100 159,000 145,200 695,549 579,114 452,849 355,808 314,496 280,186 249,821 230,677 217,783 208,711 t 89,894 69,666 52,176 35,659 29,189 27,453 18,159 12,670 8,794 8,244 27.2% 30.6% 31.6% 37.4% 38.4% 34.9% 44.2% 48.6% 56.9% 58.3% 12.55 10.72 8.93 7.39 6.56 5.88 5.24 4.81 4.51 4.31 t 59'/e-33'/a 35%z-233/s 25'/a-14 18Ya-12Yz 17Ya-11 143/a-7'/a 9-6'/a 8'/a-6'/a 7'/a-55/a 7Y2-5~/s a 59'/a 35 Ya 243/a - 17'/a 16 1 1'/a 8'/2 731e 61/8 6'/a 25 17 14 13 14 11 11 12 12 12 ~ ,444,090 ~, 52,338,908 48,317,680 45,130,668 44,400,616 43,661,748 43,226,688 43,043,460 42,916,956 42,858,88 8 Q ~ -A- CA 0 CI hJ -A 0

34 Consolidated Balance Sheets Phsiip Morris incorporated and Consolidated Substdiaries December 31 1977 and 1976 1977 1976 Assets Cash and cash equivalents S 72,231,000 $ 64,353,000 4 Receivables 316, 723,000 267,943,000 Inventories, Leaf tobacco 1,271,235,000 1,089,301,000 Other raw mater als 142.231.000 125,620,000 Work in process and f n shed goods 314,519,000 379,446,000 Housing programs under construction 89,576,000 63,137,000 1,817,561,000 1,657,504,000 Prepa d expenses - 14,505,000 15,945,000 Total current assets 2,221,020,000 2,005,745,000 Investments in and advances to unconsolidated fore gn subs d ar es and affil ates 229.508.000 220,147,000 Land and offtract improvements - 69,576,000 58,766,000 Property, plant and equipment, at cost joi Land and land improvements 65,246,000 53,230,000 s Buildings and building equipment 398,479,000 391,341,000 Machinery and equipment 931,042,000 755,310,000 Construction in progress 210,143,000 124,042,000 1,594,910,000 1,323,923,000 Less. Accumulated depreciation 392,478.000 330,044,000 1,202,432,000 993,879,000 Brands, trademarks, patents and goodwill 222,492.000 21 1,570,000 Long-term receivables 64,762.000 66,463,000 Other assets 38,249,000 25,639,000 $4,048,039,000 $3,582,209,000 See notes to consohdated financiai statements. /

35 1977 1976 Liabilities lotes payable _ S 121.139.000 S 260.131,000 urrent port on of long-term debt 15.740.000 17.729.000 3 Accounts payable and accrued I ab l t es 503.767.000 402.775.000 - Federal and other income taxes 139.766.000 103.527,000 Dividends payable - - 24.741.000 - 19.359.000 Total current I ab l t es 805,153,000 803,521,000 ~ Long-term debt - 1.426.619.000 1,247,778,000 Deferred income taxes 104,429.000 77.714.000 Other I ab l t es = 21.772.000 23.214.000 Total i ab l t es 2,357,973,000 2,152,227,000 r Stockholders' Equity -- Cumulative preferred stock, par value S100 per share 8.262.000 8.812.000_ Common stock, par value S1 per share 59.922.000 - 59.490.000 Additional pa d- n capital 300,538.000 294,225,000 - Earnings re nvested in the business -- 1.325.149.000 1.071.488.000 1,693,871,000 1,434,015,000 Less, Cost of treasury stock - 3,805,000 4.033.000 1,690,066,000 1,429,982,,000 $4,048,039,000 $3,582,209,000 I: ~ .~ ~

36 Consotidated Statements of Eamings Philip Morris Incorporated and Consolidated Subsidianes for the years ended December 31, 1977 and 1976 1977 1976 Operating revenues - $5,201,977,000 $4,293,782,000 Cost of sales Cost of products sold 2,401,680,000 1,966,871,000 Federal and foreign excise taxes on products sold 1,352,487,000 1,159,286,000 Gross profit 1,447,810,000 1,167,625,000 Marketing, administration and research costs 676,772,000 547,287,000 771,038,000 620,338,000 Equity in net earnings of unconsolidated foreign subsidiaries and affiliates 11,694,000 14,201,000 Operating income of operating companies 782,732,000 634,539,000 Corporate expense 38,523,000 35,229,000 Interest expense (excluding interest capitalized of $7,163,000 in 1977 and $6,424,000 in 1976) 101,584,000 102,834,000 Currency translation and hedging costs, net 11,633,000 15,520,000 Other deductions, net 5,476,000 9,028,000 Earnings before income taxes 625,516,000 471,928,000 Provisions for federal and other income taxes C urrent 262,575,000 185,947,000 Deferred - 28,015,000 20,306,000 290,590,000 206,253,000 Net earnings $ 334,926,000 $ 265,675,000 Earnings per common share $ 5.60 $ 4.47 See notes to consolidated financial statements. ! i CA

~g_ Consoiidated Statements of Stockholders' Equity Phihp Morr s Incorporated and Consolidated Subs+diarles 37 1___~_for the years ended December 31, 1977 and 1976 Preferred Stock, S100 Par Value lance, Jan. 1, 1976 $9,187.000 rpet earnings for the year 1976 ~ Proceeds from common ~ ~ stock issued upon exercise of stock options ~. Preferred stock purchased for treasury ~ Preferred stock retired (375,000) Cash dividends declared: Preferred stock Common stock, $1.15 per share Increase (decrease) 1976 (375,000) Balance, Dec. 31, 1976 8,812,000 Net earnings for the year 1977 Y Proceeds from common ~.~ stock issued upon exercise of stock options = Common stock issued for acquisition _. Preferred stock purchased for treasury =. Preferred stock retired (550,000) Cash dividends declared: Preferred stock Common stock, $1.56 per share Increase (decrease) 1977 (550,000) Balance, Dec. 31, 1977 $8,262,000 Common Stock, 5 1 Par Value Additional Paid-in Capital Earnings Reinvested in the Business Cost of Treasury Stock Total Stockholders' Equity $59,360.000 S289,106,000 S 874,293,000 ($4,165,000) $1,227,781,000 265,675,000 265,675,000 130,000 4,997,000 5,127,000 (121,000) (121,000) 122,000 253,000 (114,000) (114,000) (68,366,000) (68,366,000) 130,000 5,119,000 197,195,000 132,000 202,201,000 59,490,000 294,225,000 1,071,488,000 (4,033,000) 1,429,982,000 334,926,000 334,926,000 117,000 6,138,000 6,255,000 315,000 12,368,000 12,683,000 (147,000) (147,000) 175,000 375,000 (104,000) (104,000) (93,529,000) (93,529,000) 432,000 6,313,000 253,661,000 228,000 260,084,000 $59,922,000 $300,538,000 $1,325,149,000 ($3,805,000) $1,690,066,000 ; ( ) Denotes deduction. See notes to consolidated financial statements.

aa Consolidated Statements of Changes in Financial Position Philip Morris Incorporated and Consolidated Subsidiaries for the years ended December 31, 1977 and 1976 1977 1976 Sources of Working Capital Net earnings S334,926.000 $265,675,000 Add (deduct) items not requiring current use of working capital: t Depreciation and amortization 81,604,000 67,663,000 Deferred income taxes - 28,015,000 20,306,000 Equity in net earnings of unconsolidated foreign subsidiaries and affiliates (11,694,000) (14,201,000) Dividends from unconsolidated fore gn subsidiaries and affiliates 10,985,000 8,636,000 From operations 443,836,000 348,079,000 Long-term debt issued 258,550,000 340,000,000 Common stock issued under stock options 6,255,000 5,127,000 Land and offtract improvements transferred to housing programs under construction 3,822,000 9,226,000 Disposal of property, plant and equipment 9,563,000 4,266,000 Additions to working capital 722,026,000 706,698,000 Uses of Working Capital Dividends 93,633,000 68,480,000 Expansion and modernization of property, plant and equipment 279,818,000 220,173,000 Capitalized lease obligations 6,260,000 Land and offtract improvements 14,632,000 21,769,000 Long-term receivables - (4,61 1,000) 34,045,000 Investments in and advances to unconsolidated foreign subsidiaries and affiliates 8,652,000 25,059,000 Investment in consolidated subsidiary 11,884,000 6,415,000 Decrease in long-term debt 92,647,000 18,267,000 Other, net 5,468,000 1,063,000 Working capital used 508,383,000 395,271,000 Increase in working capital $213,643,000 $311,427,000 Changes in Components of Working Capital Cash and receivables $ 56,658,000 $ 544,000 Inventories 160,057,000 209,076,000 Notes payable and long-term debt currently payable 140,981,000 247,540,000 Accrued liabilities and other payables (137,231,000) (149,282,000) Other, net (6,822,000) 3,549,000 ti $213,643,000 , $311,427,000 ~ 4:~ r,O qaa nntac in cnncnliriatoli financial ctatcmantc 0 i.. ~ h? -b CR

7_Notes to Consolidated Financial Statements x ~Summary of Significant Accounting Policies .~ #-Consolidation I e e consolidated financial statements include accounts of the Company and all wholly ned subsidiaries. Investments in and advances to unconsolidated subsidiaries and Foreign operations ~_ Foreign currency accounts are translated into U.S. dollars as follows: (1) current assets (except inventories), current liabilities, long-term receiv- ables and long-term debt at year-end rates; (2) inventories, other assets and liabilities generally at historical rates; and (3) revenues, costs and expenses at average rates during the year except for the cost of inventories sold and Receivables Current earnings are charged and an allowance is credited with a provision for doubtful accounts based on experience and on any unusual circumstances which may affect the ability of Inventories , ventories are valued at the lower of cost or (arket. The cost of leaf tobacco is determined n an average cost basis, and the cost of other inventories is determined generally on a first-in, first-out basis. It is a generally recognized industry practice to classify the total amount of leaf tobacco inventory as a current asset although part of such inventory, because of the = Real estate operations The cost of land, including offtract improve- ments, interest and property taxes, is reported as a noncurrent asset until a designated area is placed into development. Interest is capitalized in accordance with the general industry prac- tice. The amount of interest capitalized is deter- mined by the average short- and long-term borrowing rates applicable to loans incurred for use in these operations. Offtract improvements are access roads, Brands, trademarks, patents and goodwill _r ost in excess of net assets of companies 'quired after November 1, 1970 is being amor- ~ed over a period of no more than 40 years. affiliates are stated at cost adjusted for equity in unclistributed earnings or losses since the dates of acquisition. depreciation and amortization which are based upon the historical dollar cost. The Company enters into forward exchange contracts and other hedging activities to minimize the effect of currency fluctuations on net earnings. Gains and losses on such transactions and other cur- rency gains and losses are included in income in the period in which they occur. customers to meet their obligations. Accounts deemed uncoliectible are charged against this allowance. Receivables are reported in the bal- ance sheet net of such accumulated allowances. duration of the aging process, ordinarily would not be utilized within one year. The cost of housing programs under construction represents the cost of land, including offtract improvements, interest and property taxes and housing construction costs on sites currently under development. utilities, etc., which are essential to the develop- ment of a community, but which are not directly attributable to the development of a particular tract or area. The cost of these improvements is allocated to the salable acreage remaining in each project and is charged to cost of sales when such acreage is sold. Revenue and profit from real estate sales are recognized only as cash is received. Other goodwill is not amortized unless there has been a diminution in its value. 39 ~.. ~ -~ o`

4o Notes, Continued lncome taxes The provisions for federal and foreign income taxes are calculated on reported pre-tax earn- ings. Certain items of income and expense included in the financial statements, such as depreciation, are reported in different years in the tax returns in accordance with applicable income tax laws. The resulting difference between the financial statement income tax pro- vision and income taxes currently payable Property, plant and equipment Maintenance and repairs are charged to income, and expenditures for renewals and improvements are capitalized. In order to pre- sent more realistically the economic cost of a constructed facility, whenever the construction period of a facility exceeds one year, the capital- ized cost of the facility includes interest and real estate taxes incurred during the construction period. The interest capitalized on consfruction Pension plans The Company and certain of its subsidiaries have pension plans covering substantially all their employees. Prior service costs, which Brands, Trademarks, Patents and Goodwill At December 31, 1977, this account included approximately $35,000,000 of goodwill which is being amortized. Cost in excess of net assets of companies acquired prior to November 1, 1970 Short-Term Borrowing Arrangements In addition to the domestic and foreign bank loans and commercial paper obligations included in current liabilities, the information pre- sented below also includes short-term notes payable classified as long-term debt in accord- ance with Financial Accounting Standards Board Statement No. 6. At December 31, 1977, $500,000,000 of short-term notes were included in long-term debt. Average bank loans and commercial paper obligations outstanding during 1977 were $127,049,000 and $401,612,000, respectively, on which the weighted average interest rates were 7.5% and 5.6%, respectively. At December is reported in the financial statements as deferred income taxes. Investment tax credits are recognized currently as a red4ction in the provision for income taxes. Provision is also made for federal income taxes on the portion of undistributed earnings of foreign subsidiaries and affiliates that is expected to be remitted to the United States. of facilities is determined by applying the Company's average short-term borrowing rates to the outstanding construction balance. Provision for depreciation of assets is recorded by a charge against income at rates considered adequate to amortize the cost of such assets over their useful lives computed on the straight-line method. are being amortized over periods of up to 30 years, and accrued pension costs are funded with independent trustees. is not being amortized because; in the opinion of management, the related investments have not experienced any diminution in value. 31, 1977, short-term notes payable consisted of bank loans of $309,967,000 and commercial paper obligations of $311,172,000 on which the average rates of interest were 8.1 % and 6.a, %respectively. At that date, lines of credit amounted to approximately $1,200,000,000, of which $600,000,000 remained unused. During 1977, the Company and its consolidated subsid- iaries maintained average demand deposit book balances of approximately $54,000,000 with a number of banks, principally in the United States, to compensate the banks for account handling and other important services and to support lines of credit. w a to ~ -4

41 Foreign Subsidiaries Principal financial data of foreign subsidiaries and affiliates are as follows: 4177 sets bilities Net assets Company's equity and advances Operating revenues Net earnings Company's equity 1976 Assets Liabilities Net assets Company's equity and advances Operating revenues Net earnings Company's equity At December 31, 1977, investments in uncon- solidated foreign subsidiaries and affiliates exceeded equity in net assets by approximately $16,000,000, including $1 1,000,000 which arose subsequent to November 1, 1970 and is being amortized. apitalized Interest I effect of the poli to major facil ting y to capitalize interest c ities was an increase in pre-tax income of $513,000 in 1977 and $643,000 in 1976; the effect relating to real estate operations was an increase in pre-tax Consolidated (Wholly Owned) Unconsolidated (Partially Owned) $ 741,761,000 $ 602,603,000 430,976,000 298,100,000 310,785,000 304,503,000 310,785,000 213,227,000 1,017,780,000 965,391,000 37,723,000 25,280,000 37,723,000 11,694,000 635,715,000 561,327,000 359,102,000 295,244,000 276,613,000 266,083,000 276,613,000 202,946,000 860,011,000 1,027,622,000 33,095,000 13,566,000 33,095,000 14,201,000 Federal income tax has not been provided on approximately $360,000,000 of undistributed earnings of foreign subsidiaries and affiliates, accumulated since inception of such invest- ments, which are expected to be permanently invested abroad, income of $2,037,000 in 1977 and $1,959,000 in 1976. The combined effect on net income was an increase of $1,228,000 in 1977 and $1,257,000 in 1976. Capital Shares Authorized Issued Treasury Outstanding Preferred: At December 31, 1976 88,119 88,119 (60,159) 27,960 Purchased (2,019) (2,019) Retired (5,503) (5,503) 5,503 At December 31, 1977 82,616 82,616 (56,675) 25,941 Common, $1 par value: At December 31, 1976 100,000,000 59,489,617 (2,224) 59,487,393 Shares issued for acquisition 314,984 314,984 Exercise of stock options 117,540 117,540 At December 31, 1977 100,000,000 59,922,141 (2,224) 59,919,917 As of December 31,1977, 1,672,775 shares tion with the acquisition of Wisconsin Tissue are reserved for the exercise of stock options Mills, a transaction accounted for as a pooling of and units. interests. Financial statements for periods prior On February 2,1977, the Company issued to January 1, 1977 have not been restated due 314,984 shares of its common stock in connec- to the immateriality of the amounts involved. .

42 Notes, Continued Long-Term Debt Outstanding at December 31, exclusive of amounts due within one year: 1977 8'/4% Notes, payable $6,665,000 annually from 1983 to 1996 and $6,690,000 in 1997 $ 100,000,000 Bank Term Loan Agreement, payable $33,000,000 in 1981 and $17,000,000 in 1982. Interest is at 7'/a% to April 30, 1979 and 8'/2% thereafter 50,000,000 Notes payable (see below) 500,000,000 8Yz% Notes, payable in 1985 150,000,000 8'/a% Sinking Fund Debentures, payable $6,250,000 annually from 1984 to 2003 and $25,000,000 in 2004 150,000,000 Bank Term Loan Agreement, payable in 1980. Interest is at'/z% above the bank prime rate, but not more than an average effective rate of 7.9% per annum if outstanding to maturity 50,000,000 65/a% Sinking Fund Debentures, payable $3,500,000 annually from 1978 to 1992 and $15,500,000 in 1993 64,500,000 8.85% Notes, payable in 1982 50,000,000 4.90% Notes, payable $2,600,000 annually to 1988 and $16,000,000 in 1989 42,000,000 63/4°to Loan, 100,000,000 German marks, payable from 1978 to 1987 41,861,000 6'h% Loan, 80,000,000 Swiss francs, payable 1988 39,024,000 Purchase money obligations 62,306,000 Other notes and debentures 22,496,000 Capitalized lease obligations 4,432,000 10% Subordinated Notes The Company has entered into a $250,000,000 revolving credit and term loan agreement, maturing in 1984, and a $250,000,000 Eurodol- lar revolving credit agreement maturing in 1982, both of which can be used to refinance short- term notes payable. Management intends to exercise its rights under these agreements in the event that it becomes advisable. Accordingly, at December 31, 1977, $500,000,000 of short-term notes payable have been classified as long-term debt in accordance with Financial Accounting Standards Board Statement No. 6. $1,426,619,000 Generally, long-term debt is callable, at annually decreasing premiums. Expenses incurred in securing long-term loans are included in other assets and are being amortized on the straight-line method over the respective lives of the issues giving rise thereto. Aggregate maturities of long-term debt in each of the following years are: 1978, $15,740,000; 1979, $16,162,000; 1980, $166,276,000; 1981, $48,964,000; 1982, $330,326,000. 1976 $ 430,000,000 150,000,000 150,000,000 150,000,000 68,000,000 50,000,000 44,600,000 41,667,000 32,653,000 32,847,000 42,571,000 55,440,000 $1,247,778,000

43 Provision tor Federal and Other Income Taxes e 1977 prov s on ~ncludes: ~ Currently payable ~ eferred The 1976 provision ncludes: Currently payable Deferred Deferred tax expense results from timing differ- ences in the recognition of certain items of reve- nue and expense for tax and financial statement purposes. The source of such differences and the tax effect of each are as follows: Excess of tax over book depreciation Provisions charged to expense, deduct ble in other years for tax purposes, net Additional taxes provided on unremitted earnings of fore gn subs diar es and affiliates Carrying costs of real estate operations deferred which are deductible currently for tax purposes Other The effective income tax rate on consolidated F re-tax earnings differs from the U.S. federal 4come tax rate of 48% for the following reasons: Provision computed at 48% of reported pre-tax earnings Increases (decreases) in the provision resulting from: Inclusion of equ ty in net earnings of unconsolidated subsidiaries and affiliates in pre-tax earnings Investment tax credit Foreign income taxed at other than 48% and not expected to be subject to U.S. tax in the foreseeable future State and local income taxes, net of federal tax benefit Other Provision as reported Federal Forei n State and Local Total S21 1,620,000 S16.591.000 534,364,000 S262.575,000 18,513,000 9,502.000 28,015,000 $230,133,000 $26,093,000 $34,364,000 $290,590,000 $143,383,000 518,196,000 S24,368,000 $185,947,000 18,060,000 2,246.000 20,306,000 $161,443,000 $20,442,000 $24,368,000 $206,253,000 1977 1976 S 24,597,000 S 22,444,000 1,187,000 (4,352,000) 1,600,000 2,133,000 855,000 884,000 (224,000) (803,000) $ 28,015,000 $ 20,306,000 Amount Per Cent to Pre-tax Amount Per Cent to Pre-tax $300,248,000 48.0% $226,525,000 48.0% (5,613,000) (.9) (6,816,000) (1.5) (16,768,000) (2.7) (18,756,000) (4.0) (5,257,000) (.8) (3,423,000) (.7) 17,872,000 2.9 12,671,000 2.7 108,000 (3,948,000) (.8) $290,590,000 46.5% $206,253,000 43.7%

44 Notes, Continued Segment Reporting Worldwide tobacco and domestic beer repre- . sent the primary segments of the Company's operations. Other products include industrial products and land development operations. The Company's foreign operations which are pre- dominantly in the tobacco business are orga- nized into geographical regions for management responsibility with Europe being the most signifi- cant. Intersegment transactions are not reported separately since they are not material. Operating profit is total operating revenues less operating expenses. In computing oper- ating profit, none of the following has been allocated: equity in net earnings of unconsoli- dated foreign subsidiaries and affiliates, corporate expense, interest expense and mis- cellaneous income and expense items, including currency translation and hedging costs. Identifiable assets by segment are those assets that are used in the Company's operations in each segment. Corporate assets consist primarily of long-term receivables and fixed assets. The reportable segments together with a rec- onciliation to the consolidated statements are presented below. Data by Product Line for the year ended December 31. 1977 Consolidated Operating Revenues: Tobacco 83,493,443,000 Beer 1,327,619,000 Other Products 380,915,000 $5,201,977,000 Operating Profit: Tobacco $ 615,253,000 Beer 106,456,000 Other Products 49,329,000 771,038,000 Equity in net earnings of unconsolidated foreign subsidiaries and affiliates 11,694,000 Operating Income of Operating Companies $ 782,732,000 Depreciation Expense: Tobacco $ 42,442,000 Beer 27,299,000 Identifiable Assets: Tobacco $2,509,878,000 Beer 819,413,000 Other Products 406,837,000 3,736,128,000 Investments in and advances to unconsolidated foreign subsidiaries and affiliates 229,508,000 Corporate Assets 82,403,000 Total Assets $4,048,039,000 Capital Expenditures: Tobacco $ 77,568,000 Beer 182,899,000

Data by Geographical Region for the year ended December 31. 1977 Consolidated g peratrn Revenues: ~. United States 54,184,197,000 Europe 893,600.000 Other Foreign 124.180,000 $5,201,977,000 Operating Profit: United States S 71 1,549,000 Europe - 49,681,000 Other Foreign 9,808,000 771,038,000 Equity in net earnings of unconsolidated foreign subsidiaries and affiliates 11,694,000 Operating Income of Operating Companies $ 782,732,000 Identifiable Assets: United States 53,061.761,000 Europe 579.674,000 Other Foreign 94,693,000 3,736,128,000 Investments in and advances to unconsolidated foreign subsidiaries and affiliates 229,508,000 Corporate Assets 82,403,000 Total Assets $4,048,039,000 Stock Plans Under the stockholder-approved 1977 Stock Unit Plan, units with respect to 1,000,000 shares of common stock of the Company may be granted to employees of the Company or its affiliates. A stock unit entitles the holder to pur- chase one share of common stock at the market price at the date of grant, or to receive the appreciation value (the excess of the market price at the date of exercise over the market price at the date of grant) in the form of stock or stock and cash. Appreciation value may be received with respect to no more than 50% of the units granted. At December 31, 1977, units Shares under option, beginning of year Options granted Options exercised Options canceled Shares under option, end of year hares available for option, end of year t pnces ranging from $44,44 to $61.94 with respect to 298,700 shares have been granted at a price of $60.06 per share and remain unexercised at year-end. Appropriate appreciation value is recognized currently as compensation expense. With the adoption of the 1977 Stock Unit Plan, options no longer can be granted under any previously approved stock option plan. Pursuanf to previously approved stock option plans, common stock of the Company has been made available for option to officers and other key employees at market prices on the dates granted. 1977 1976 825,376 811,291 4,000 171,800 (117,540) (130,157) ( 39,061) ( 27,558) 672,775" 825,376 101,023

46 Notes, Continued Restrictions Certain of the agreements covering long-term debt contain restrictions with respect to the payment of cash dividends on common stock and to the purchase, redemption or retirement of capital shares. At December 31, 1977, approximately $400,000,000 of consolidated earnings reinvested in the business was free Earnings Per Share Earnings per common share for 1977 and 1976 are calculated on the weighted average number of shares of common stock outstanding for each Incentive Compensation Plan In accordance with the stockholder-approved Incentive Compensation Plan, a provision of $5,612,000 was made against 1977 earnings for Quarterly Financial Results (Unaudited) The 1977 and 1976 unaudited quarterly financial results are presented on page 31 of this annual report. Additional Information Working capital at year-end Depreciation expense' Rental expense Pension expense of such restrictions. Other debt agreements specify minimum amounts of working capital and limit the amount of senior debt which may be issued. At Decem- ber 31, 1977, the Company was in compliance with these agreements. year, which was 59,822,487 and 59,408,484, respectively. awards that may be made to officers and other key employees. A provision of $3,940,000 was made against 1976 earnings. 1977 1976 $1,415,867,000 $1,202,224,000 $ 78,466,000 $ 64,856,000 $ 24,678,000 $ 20,639,000 $ 34,015,000 $ 29,739,000

47 Replacement Cost (Unaudited) The current replacement cost of the Company's roperty, plant and equipment, and inventories nd the consequent cost of sales nclud ng eprec at on expense} is h gher than the omparable h storical cost values for those assets Replacement of property, plant and equipment would permit manufacturing efficiencies. Higher replacement cost values for inventories reflect economic trends of higher prices for materials which the Company has traditionally offset through increased selling prices: Further information regarding the effects of current replacement cost will be presented in the Company's Form 10-K for the year 1977 which will be filed with the Securities and Exchange Commission. Litigation Three purported class actions by tobacco grow- ers are pending against the six major United States cigarette manufacturers, including the Company, and others alleging violations of the United States antitrust laws. In two of the actions, the plaintiffs or ginally sought damages for the years 1970-1974 of approximately $2,500,000,000 in the aggregate. ln April 1976, plaint ffs in one of these cases f led a proposed amended complaint wh ch would reduce the size of the purported class, so that the aggre- gate damages claimed in both act ons would be approximately $400,000,000. No specific amount of damages is claimed in the third action. The Company has denied any violation 9 f the law, is vigorously contesting the actions and has been advised by counsel that in their opin- ion the actions are not proper class actions. Fur- thermore, based on the investigation made to date, counsel is of the opinion that the Company has substantial factual and legal defenses to each of the alleged charges. The District Court in one of the three actions determined that the action could not be maintained as a class action, and on October 11, 1977, the Fourth Cir- cuit Court of Appeals affirmed that decision. The pla ntiffs are asking for review by the United States Supreme-Court. The District Courts in the other two cases have not as yet determined whether those cases may be maintained as class actions. No adjustments or provisions have been made on account of the litigation. Report of Independent Certified Public Accountants To the Board of Directors and Stockholders of Philip Morris Incorporated: We have examined the consolidated balance sheets of PHILIP MORRIS INCORPORATED and Consolidated Subsidiaries as of December 31, 1977 and 1976, and the related consolidated statements of earnings, stockholders' equity and changes in financial position for the years then ended. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests f the accounting records and such other uditing procedures as we considered cessary in the circumstances. In our opinion, the financial statements mentioned above present fairly the financial position of Philip Morris Incorporated and consolidated subsidiaries at December 31, 1977 and 1976, and the results of their operations and the changes in their financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis. Coopers & Lybrand New York, January 24,1978

48 Directors and Officers Off cers Joseph F Cullman 3rd Cha rman of the Board and Chief Executive Officer George Weissman Vice Chairman of the Board Ross R Mdlh ser Pres dent Hugh Cullman Executive Vice Pres dent and President. Philip Morris - internatronal Clifford H Goldsmith Executive Vi ce President and President. Ph lp Morris U.S.A John A Murphy Execut ve Vi ce President and President. Miller Brewing Company Thomas F Ahrensfeld Sen or Vi ce President and General Counsel James C Bowi ng Sen or Vi ce Pres dent. Ass!stant to the Cha rman ot the Board, and D rector of Corporate Affa rs John T Landry Sen or Vi ce Pres dent and Executive Vi ce Pres dent. Philip Morris U S.A Hamish Maxwell Sen or Vice President and Execut ve Vi ce President. Phil p Morris International Albert E. Bellot Vice President and Vice Preside_ nt. Philip Morris Internat onal Russell N Freund Vice President, Personnel Directors Thomas F. Ahrensfeld Senior Vice President and General Counsel James C. Bowling Senior Vice President. Assistant to the Chairman of the Board, and Director of Corporate Affairs Alfred Brittain III Chairman of Bankers Trust Company. New York, NY George V. Comfort Chairman of George Comfort & Sons. Inc., New York, NY, real estate management William K Howell Vice President and Execut ve Vice Preside_nt. Miller Brewing Company Jetson E L ncoln Vi ce Pres!dent. Planning W Iliam D McCoy Vi ce Pres dent and Pres dent. Phrlrp Morris Industrial W Wallace McDowell Vice President and Vice Pres dent. Philip Mor_ns U.S_A. James J Morgan Vi ce President and Vice Pres dent. Ph l p Morr s U. S.A R. William Murray Vi ce Pres dent and Vice President. Phrl p Morris International William J O'Connor Vi ce Pres dent and Vice President, Ph l p Morns lnternat onal Shepard P Pollack Vi ce President and Ch ef Financ al Officer Philip J, Reilly Vice President and Pres dent. M ss on V elo Compan y Carlos E. Salguero Vice Pres dent and Vice Pres dent. Ph lip Morns Internat onal Edward M, Schaaf, Jr. - - Vice President and Vice President, _ Phtl p Morrrs U S.A. Benlam n A. Soyars Vice President and Senior Vice Pres dent. Philip Morris U-SA Walter F Sperber Vi ce Pres dent and Controller Dr. Jose Antonio Cordido-Freytes Member of Betancourt, Cordido and Associates. Caracas, Venezuela, Attorneys, and President of - C A. Tabacalera Nacionaf Hugh Cullman Executive Vice President and President of Phllip Morris International Joseph F. Cullman 3rd Chairman of the Board and Chief Executive Officer Dr. Helmut R R Wakeham Vice Pres dent and Vi ce President, Philip Morrrs U S A Lauren S. Williams Vice Pres dent and Vice President. Miller8rewng Company Eugene J. T Flanagan Assoc ate General Counsel and Secretary Alexander Holtzman Associate General Counsel _F. Harrison Poole Treasurer George P Hibbard Ass stant Treasurer and Treasurer. Philip Morris International Edward G Silcock Ass stant Treasurer Norman J Treisman Assistant Treasurer John C. Lino Ass stant Controller Horace W P erpoint Assistant Controller Robert H. Souther Assistant Controlter Robert A White Assistant Controller Mary E Russell Ass stant Secretary Joseph F. Cullman 3rd t Anthony W Giraldi Ass stant Secretary Richard WDammann Member of Dammann & Heming, New York, NY Attorneys Clifford H. Goldsmith Executive Vi ce Pres dent and President of Phil p Morris U.S.A, Robert E. R. Huntley President of Washington and Lee Jacques G. Maisonrouge Chairman of IBM World Trade Europe!Middle EastiAfrica Corporation, White Plains. NY H. Robert Marschalk Vice Cha rman of Richardson-Merreu Incorporated, W'lton, CT, pharmaceuticals manufacturer University, Lexington, VA John T. Landry Senior Vice President and Executive Hamish Maxwell Senior Vice President and Executwe Vice President of Phi7p Morris International 11) Vice President of Philip Morris U.S.A. Edward Lasker Ross R. Millhiser President -t~ ~ Counsel. McKenna & Fitting. Los Angeles, CA, Attorneys b r+ O f~) Lr1

T. Justin Moore. Jr. Vice Chairman and Chief Execut ve Officer of Virgin a Electric and PowerCompany. Richmond. VA John A. Murphy Executive Vi ce President and President of Miller Brewing Company John S. Reed Executive Vice President of Citibank. N.A.. New York. NY rge Weissman e Chairman of the Board garet B. Young `rman of the Whitney M Young, Jr Memorial Foundation, New York. NY, and Consultant to the Company John E.Cookman Executive Committee Finance Committee Director Emeritus J. F. Cullman 3rd, Chairman J. E. Cookman, Chairman G. V. Comfort A. Brittain III T. Newman Lawler J. E. Cookman H. Cullman Director Emeritus H. Cullman C. H. Goldsmith Dammann R W E. Lasker J, Harvie Wilkinson, Jr. . . Goldsmith C H H R Marschalk Director Emeritus . . . . E. Lasker R. R. Millhiser Andrew C. Britton T NLawler T. J. Moore, Jr. Member, Advisory Board H. R. Marschalk J. A. Murphy R. R. Millhiser J. S. Reed Chandler H. Kibbee T. J. Moore, Jr. G. Weissman Member, Advisory Board G. Weissman J. H. Wilkinson, Jr.

John A. Murphy Margaret B. Young T. Justin Moore Jr. Jacques G Maasonrouge Thomas F Ahrensfeld Audit Committee Management Committee Office of the Chairman Committee on Public Affairs H. R. Marschalk, Chairman J. F. Cullman 3rd, Chairman J. F. Cullman 3rd, Chairman and Social Responsibility R. W. Dammann T. F. Ahrensfeld J. E Cookman J. C. Bowling, Chairman E. Lasker J. C. Bowling H. Cullman R. W. Dammann J. G. Maisonrouge H. Cullman C. H. Goldsmith C. H. Goldsmith J. S. Reed C. H. Goldsmith R. R. Millhiser R. E. R. Huntley W. D. McCoy J. A. Murphy J. T. Landry R. R. Milihiser G. Weissman H. Maxwell J. A. Murphy T. J. Moore, Jr. S. P. Pollack J. A. Murphy P. J. Reilly M B. Young G. Weissman "y

General Corporate Informat on Corporate Neadquarters: Transfer Agents: Stock Exchange L istings: Annual Report Paper: Philip Morris Incorporated Common Stock New York Paper stocks used in this report are 100 Park Avenue Morgan Guaranty Trust Company Amsterdam made by Plainwell Paper Company, New York, New York 10017 of New York Basel a division of Philip Morris Industrial. (212) 679-1800 30 West Broadway Frankfurt Cover: Kashmir Glossy 80 New York, New York 10015 Geneva Text: Kashmir Dull 100 = Annual Meeting: Lausanne The annual meeting of stockholders of United Virginia Bank Paris Philip Morris Incorporated will be held Box 6E Zu rich at 2:00 p.m. on April 27, 1978,at the Richmond, Virginia 23214 Philip Morris Operations Center 3601 Stock Exchange Symbol; , Commerce Road Virginia Richmond Preferred Stock Common Stock: MO , . , Morgan Guaranty Trust Company hJ Form 10-K. of New York Auditors: ~ .23 The company's annual report on Form Coopers & Lybrand W 10-K which will be filed with the Securi- Dividend Reinvestment Agent: New York, New York ~ , ties and Exchange Commission,will be Citibank, N.A. ~ April available to stockholders in earl WCGSM Securities 872 O y Dividend Reinvestment t~J upon written request to: CJt Box 3192 €Yi Eugene J.T. Flanagan, Secretary New York, New York 10043 Philip Morris Incorporated Credits. 100 Park Avenue Design: Chermayeff & Geismar Associates Major PhotNraphy: Stephen Anderson New York, New York 10017 Printed in U.SA.

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