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PROXY STATEMENT This proxy statement is furnished by the Board of Directors of Philip Morris Incorporated (the "Company"), 100 Park Avenue, New York, N.Y. 10017, in connection with its solicita- tion of proxies for use at the annual meeting of stockholders on Wednesday, April 29, 1981, and at any and all adjournments thereof. Mailing of the proxy statement will commence on or about March 17, 1981. Holders of record of Common Stock, $1 par value, at the close of business on March 9, 1981 will be entitled to one vote for each share held on all matters to come before the meeting. On March 9, 1981, there were outstanding 000,000,000 shares of Common Stock. A proxy on the enclosed form may be revoked at any time before it has been exercised. Unless the proxy is revoked or there is a direction to abstain on one or more proposals, it will be voted on each proposal and, if a choice is made with respect to any matter to be acted upon, in accordance with such choice. The proxy will also instruct the bank administering the Company's dividend reinvestment plan how to vote shares held by it for a stockholder participating in the plan. ELECTION OF DIRECTORS (Proposal 1) General Information The Board of Directors has the responsibility for establishing broad corporate policies and for the overall performance of the Company, although it is not involved in day-to-day operating details. Members of the Board are kept informed of the Company's business by various reports and documents sent to them each month, as well as by operating and financial reports made at Board and Committee meetings by the Chairman of the Board and other officers. Regular meetings of the Board are held each month with the exception of the month of July. The organizational meeting follows immediately after the conclusion of the annual meeting of stockholders. The Board held 11 meetings in 1980. Committees of the Board Various committees have been established by the Board of Directors to assist it in the discharge of its responsibilities. These committees are described below. The biographical information on the nominees for director, which begins on page 3 of this proxy statement, includes committee memberships currently held by each nominee. The Audit Committee meets with management, the Company's independent auditors, and its internal auditors to consider the adequacy of the internal controls of the Company and other matters relating to financial reporting. The Audit Committee recommends to the full Board the engagement of the Company's independent auditors, discusses with 1

the independent auditors their audit procedures, including the proposed scope of the audit, the audit results and the accompanying management letters and reviews the pro- fessional services provided by the independent auditors and the non-audit fees charged therefor. The Committee consists of four non-management directors and met seven times in 1980. The Committee on Public Affairs and Social Responsibility advises the Company with respect to corporate policy on major public issues. The Compensation Committee, comprised of four non-management directors, held four meetings in 1980. The Compensation Committee determines cash remuneration arrange- ments for senior management and administers the Company's Stock Unit, Stock Option and Incentive Compensation Plans, recommending to the full Board in the case of the Incentive Compensation Plan the amount to be credited to the Incentive Compensation Reserve. This committee also determines those employees who are to receive incentive compensation awards and the amount to be awarded from the Reserve to each recipient. The Diversification Committee considers and reports to the full Board with respect to sig- nificant corporate acquisitions and dispositions. The Executive Committee has authority to act for the Board on most matters during intervals between Board meetings. Eleven directors have been designated members of this committee, which met three times in 1980. The Finance Committee monitors the financial condition of the Company and advises the Board with respect to financing needs and dividend policy. The Nominating Committee has five non-management directors and held three meetings in 1980. The Nominating Committee reviews the qualifications of candidates suggested by Board members, management, stockholders and other sources, considers the performance of incumbent directors in determining whether to nominate them for reelection and recommends to the full Board a slate of nominees for election as directors. Stockholders wishing to suggest candidates for election as directors may submit names and bio- graphical data to the Secretary of the Company who will forward such information to the Nominating Committee for consideration. Compensation of Directors Directors who are full-time employees of the Company or a subsidiary receive no addi- tional compensation for services as a director. Directors not so employed receive an annual retainer of $17,500 and fees of $500 for each board meeting attended, $500 ($1,000 for the chairman) for each meeting of the Audit Committee, Compensation Com- mittee, Executive Committee and Finance Committee attended and $250 ($500 for the chairman) for each other committee meeting attended. The Chairman of the Compensation 2

Committee receives $10,000 for additional services rendered in connection with certain of the Company's compensation plans. . The Nominees Twenty-two directors are to be elected to hold office until the next annual meeting of stockholders and until their successors have been elected. The Nominating Committee has recommended to the Board the persons named below as management's nominees, and, unless a proxy is otherwise marked, it will be voted for such persons. With the excep- tion of Paul W. Douglas, all of the nominees were elected by the stockholders at the 1980 annual meeting. Mr. Douglas was elected by the Board on June 25, 1980. Although management does not anticipate that any of the persons named below will be unable or unwilling to stand for election, a proxy, in the event of such an occurrence, may be voted for a substitute designated by the Board of Directors. Thomas F. Ahrensfeld Senior Vice President and General Counsel Director since 1976 Age: 57 Jerry Apodaca President and Owner, Jerry Apodaca Associates, Inc., Santa Fe, N.M., management of diversified personal business enterprises Director since 1979 Age: 46 First employed by the Company In 1959, Mr. Ahrensfeld had prevl- ousiy been a partner in Conboy, Hewitt, O'Brien & Boardman, New York, N.Y., general counsel to the Company, with which firm he had been associated since 1948. He became a Vice President of the Company in 1970 and Senior Vice President in 1976. Mr. Ahrensfeid is a director of the Trinity-Pawling School Corporation. He Is a member of the Committee on Public Affairs and Social Responsi- bility of the Board of Directors. Jerry Apodaca served as Governor of New Mexico from 1975 through 1978 and from 1979 to 1980 as president and chairman of the Board of the National Issues Council. Governor Apodaca Is on the Board of Trustees of the Center for the Advancement of Secondary Education and serves as a director of Shur-Gro Indus- tries, Inc., the National Board of the Epilepsy Foundation of America and the Center for Constitutional Studies at Notre Dame University. From to he served as chairman of the President's Council on Physical Fitness and Sports and as White House liaison with the U.S. Olympic Committee. The Gov- ernor is a member of the Committee on Public Affairs and Social Responsibility of the Board of Directors of the Company. 3

James C. Bowling Senior Vice President and Director of Corporate Affairs Director since 1969 Age: 52 Alfred Brittain ilf Chairman of the Board of Bankers Trust Company, New York, N.Y. Director since 1966 Age: 58 ' George V. Comfort Chairman of the Board of George Comfort & Sons, Inc., New York, N.Y., real estate management Director since 1971 Age: 66 Dr. J. A. Cordido-Freytes Member of Betancourt, Cordido and Associates, Caracas, Venezuela, attorneys Director since 1968 Age: 55 First employed by the Company in 1951, Mr. Bowling became a Vice President in 1964, Director of Corporate Affairs In 1969 and has been a Senior Vice President since 1976. He is vice chairman of Clean World International, honorary chairman of Keep America Beautiful, Inc. and a trustee of Berea College. Mr. Bowling is chair- man of the Committee on Public Affairs and Social Responsibility of the Board of Directors of the Company. Mr. Brittain has served as chairman of the board of Bankers Trust New York Corporation and Bankers Trust Company since 1975, having previously been president of both corporations. He serves as a director of Collins & Aikman Corporation, Royal Group, Inc., the Economic Development Council and the New York Chamber of Commerce and Industry. Mr. Brittain is a member of the Compen- sation Committee of the Board of Directors of the Company. Mr. Comfort has served as chairman of the board of George Comfort & Sons, Inc. since 1977, having previously served as president. He Is a director of Burns International Security Services, Inc., GK Technologies Incorporated, Harlem Savings Bank, The Mutual Life Insurance Company of New York and The Sperry & Hutchinson Company and a trustee of the New York University Medical Center. He is a member of the Compensation, Executive and Nominating Committees of the Board of Directors of the Com- pany. Dr. Cordido-Freytes has practiced law In Caracas, Venezuela, for more than twenty-five years. The firm of Betancourt, Cordido and Associates has performed and can be expected to continue to per- form legal services for the Company and Its subsidiaries or affili- ates. Dr. Cordido-Freytes serves as a director and president of Banco Exterior, S.A., as a director and vice president of Financiera Exterior, S.A. and as president of C.A. Tabacalera Naclonal, an affiliate of the Company. 4

Hugh Cullman Group Executive Vice President and Chairman of Philip Morris U.S.A. Director since 1964 Age: 58 Joseph F. Cullman 3rd Chairman of the Executive Committee Director since 1954 Age: 68 William H. Donaldson Chairman and Chief Executive Officer of Donaldson Enterprises Incorporated, New York, N.Y., management corporation Director since 1979 Age: 49 Paul W. Douglas President and Chief Executive Officer of Freeport Minerals Company, New York, N.Y., multi-national mining Director since June 25, 1980 Age: 54 First employed in 1948 by Benson and Hedges, Mr. Culiman became Executive Vice President of Philip Morris Incorporated in 1966, President of Philip Morris International in 1967 and Group Executive Vice President and Chairman of Philip Morris U.S.A. In 1978. He is a director of United Virginia Bankshares Incorporated and United Virginia Bank and serves as trustee and is a member of the Execu- tive Committee of the U.S. Council of the International Chamber of Commerce. Mr. Cullman serves on the Diversification, Executive and Finance Committees of the Board of Directors of the Company. He is a first cousin to Joseph F. Cullman 3rd. First employed in 1946 by Benson and Hedges, Mr. Cullman was Chief Executive Officer of Philip Morris Incorporated from 1957 until November 1978, serving first as President from 1957 until 1966 and then as Chairman of the Board. He is a director of Bankers Trust New York Corporation, Bankers Trust Company, Ford Motor Com- pany, IBM World Trade Europe/Middle East/Africa Corporation, Levi Strauss & Co. and the World Wildlife Fund - U.S., a commis- sioner of The Port Authority of New York and New Jersey and a trustee of the American Museum of Natural History and the Colonial Williamsburg Foundation. In addition to serving as Chairman of the Executive Committee, Mr. Cullman serves on the Diversification and Finance Committees of the Board of Directors of the Company. He Is a first cousin to Hugh Culiman. Mr. Donaldson was Dean of the Graduate School of Crganization and Management of Yale University from October 1, 1975 to , 1980, and has been the William S. Beinecke Professor in Manage- ment Studies since October 1, 1975. From 1959 to 1972, he was chief executive officer of Donaldson, Lufkin & Jenrette, Inc. In 1973 and 1974, he was a U.S. Undersecretary of State and later served as a special consultant and adviser to Vice President Nelson Rockefeller. He is a director of Aetna Life and Casualty Co., Cole National Corporation, Conoco, Inc., Crane Co., GK Technologies, Inc. and Scovill, Inc. Mr. Donaldson also serves as a trustee of the Bowery Savings Bank and as a trustee and chairman of the finance committee of the Ford Foundation. Mr. Donaldson serves on the Audit and Finance Committees of the Board of Directors of the Company. Mr. Douglas has been president and chief executive officer of Freeport Minerals Company since 1975. He serves as a director of the Freeport Minerals Company, The Japan Fund, Inc. and the United States Trust Company of New York. 5 0

Clifford H. Goldsmith President Director since 1966 Age: 61 Robert E. R. Huntley President, Washington and Lee University, Lexington, Va. Director since 1976 Age: 51 John T. Landry Senior Vice President Director since 1972 Age: 56 H. Robert Marachatk Vice Chairman of the Board of Richardson- Merrell, Inc., Wilton, Conn., pharmaceuticals manufacturer Director since 1966 Age: 65 First employed in 1945 by Benson and Hedges, Mr. Goldsmith became Executive Vice President of Philip Morris Incorporated and President of Philip Morris U.S.A. in 1973 and President of Philip Morris Incorporated in 1978. He serves as a director of Central Fidelity Banks, Inc. and the National Multiple Sclerosis Society and as a member of the board of trustees of The Mount Sinai Medical Center, New York, N.Y. Mr. Goldsmith Is a member of the Office of the Chief Executive and of the Diversification, Executive and Finance Committees of the Board of Directors of the Company. Mr. Huntley has been president of Washington and Lee University since 1968. He serves as a director of Best Products Co., Inc., Central Telephone & Utilities Corporation, Shenandoah Life Insur- ance Company and the Union Theological Seminary in Virginia. He is a member of the Audit, Executive and Public Affairs and Social Responsibility Committees of the Board of Directors'of the Company. First employed by the Company In 1956, Mr. Landry became a Vice President in 1969 and Senior Vice President in 1976. He is a mem- ber of the Committee on Public Affairs and Social Responsibility of the Board of Directors of the Company. Mr. Marschalk was president of Richardson-Merrell, Inc. from 1961 to 1975 when he assumed his present position. He serves as a director of Equitable Money Market Account, Inc., Piedmont Management Corp., Richardson-Merreli, Inc. and Thyssen-Borne- misza N.V. He is chairman of the Audit and Compensation Com- mittees and a member of the Diversification, Executive, Finance and Nominating Committees of the Board of Directors of the Company. 6

Hamish Maxwell Executive Vice President and President of Philip Morris International Director since 1974 Age: 54 Ross R. Millhiser Vice Chairman of the Board Director since 1963 Age: 60 T. Justin Moore, Jr. Chairman and Chief Executive Officer of Virginia Electric and Power Company, Richmond, Va. Director since 1973 Age: 55 John A. Murphy Group Executive Vice President and Chairman of Miller Brewing Company Director since 1971 Age: 51 First employed by the Company in '1954, Mr. Maxwell became a Vice President in 1969, Senior Vice President in 1976 and Executive Vice President in 1978 when he became President of Philip Morris International. He serves as a director of the Brooklyn Academy of Music. Mr. Maxwell is *a member of the Diversification and Public Affairs and Social Responsibility Committees of the Board of Direc- tors of the Company. First employed by the Company in 1941, Mr. Milihiser became Presi- dent in 1973 and Vice Chairman of the Board in 1978. He serves as a director of Best Products Co., Inc. and First & Merchants Corporation and in 1980 was elected a trustee of Washington and Lee University. Mr. Miilhiser is a member of the Office of the Chief Executive, chairman of the Finance'Committee and a member of the Diversification and Executive Committees of the Board of Directors of the Company. Mr. Moore has been an executive officer of the Virginia Electric and Power Company since 1967 and a director since 1970. He Is a director of Central Fidelity Banks, Inc. and Central Fidelity Bank, N.A. and serves as a trustee of the Colonial Williamsburg Founda- tion and the Virginia Foundation for Independent Colleges. He is the chairman of the Nominating Committee and a member of the Diversification, Finance and Public Affairs and Social Responsibility Committees of the Board of Directors of the Company. First employed by the Company in 1962. Mr. Murphy had previously been a partner in Conboy, Hewitt, O'Brien & Boardman, New York, N.Y. He became a Vice President in 1967, Executive Vice President in 1976 and Group Executive Vice President in 1978. Since joining Miller Brewing Company in 1971, he has served as its chief execu- tive officer. Mr. Murphy serves as a director of Alverno College, Congoleum Corporation and M & I Marshall & Ilsley Bank and as a trustee of Marquette University. He Is a member of the Diversifica- tion, Executive and Finance Committees of the Board of Directors of the Company. 7 Z4 I.P.

Shepard P. Pollack Vice President and President of Philip Morris U.S.A. Director since 1979 Age: 52 John S. Reed Senior Executive Vice President of Citicorp and Citibank, N.A., New York, N.Y. Director since 1975 Age: 41 George Weissman Chairman of the Board and Chief Executive Officer Director since 1958 Age: 61 Margaret B. Young Chairman of the Whitney M. Young, Jr. Memorial Foundation, New York, N.Y.; Consultant to the Company Director since 1972 Age: 59 First employed by the Company in 1959, Mr. Pollack became a Vice President in 1975 and served as chief financial officer of the Com- pany before becoming President of Philip Morris U.S.A. in 1978. Mr. Pollack is a director of Central Fidelity Bank, N.A. and a trustee of the Carnegie Hall Corporation. He is a member of the Committee on Public Affairs and Social Responsibility of the Board of Direc- tors of the Company. Mr. Reed was named a senior executive vice president of Citicorp and Citibank, N.A. in January 1980, after having been an executive vice president of Citibank, N.A. since 1970 and of Citicorp since 1974. He serves as a director of Arlen Realty & Development Corp. and as a trustee of the Russell Sage Foundation and the Memorial Sloan-Kettering Cancer Center. Hd is chairman of the Diversifica- tion Committee and a member of the Audit, Compensation, Execu- tive, Finance and Nominating Committees of the Board of Directors of the Company. First employed by the Company In 1952, Mr. Weissman became President of the Company in 1967, Vice Chairman of the Board in 1973 and assumed his present position on November 1, 1978. He serves as a director of Avnet Incorporated, Chemical New York Corporation, Chemical Bank, the Lincoln Center for the Performing Arts and the Whitney Museum and as a member of the Swarthmore College Council and of the Board of Visitors of the City University of New York. Mr. Weissman is a member of the Office of the Chief Executive and of the Executive Committee of the Board of Directors of the Company. Mrs. Young is a director of The New York Life Insurance Company, a member of the Board of Governors of the United Nations Asso- ciation and a director of the Lincoln Center Institute, and the Lincoln Center for the Performing Arts, the Metropolitan Museum of Art and the Whitney M. Young, Jr. Memorial Foundation. She is a member of the Executive, Nominating and Public Affairs and Social Responsibility Committees of the Board of Directors of the Company. 8

Ownership of Equity Securities The following table sets forth information as of January 30, 1981 as to the beneficial ownership of Common Stock of the Company, including shares of Common Stock as to which a right to acquire ownership exists (for example, through the exercise of stock options and stock units or through various trust arrangements), of each present director, each nominee for director and of the group (consisting of 59 persons) of present directors and officers of the Company. The beneficial ownership of each director, nominee and officer is less than 1 % of outstanding shares. The aggregate percentage beneficial owner- ship of the group is %. Common Stock Name Sole voting and investment power(1) Other(2) Aggregate total T. F. Ahrensfeld 94,700 2,500 97,200 Jerry Apodaca 87 - 87 J. C. Bowling 113,450 1,350 114,800 A. Brittain III 2,176 - 2,176 G. V. Comfort 2,057 22,900 24,957 J. A. Cordido-Freytes 4,750 - 4,750 Hugh Cullman 214,234 38,768 253,002 J. F. Cullman 3rd 301,498 111,134(3) 412,632 W. H. Donaldson 1,000. - 1,000 Paul W. Douglas 100 - 100 C. H. Goldsmith 108,070 12,000(4) 120,070 R. E. R. Huntley - 200(5) 200 J. T. Landry 64,108 200 64,308 H. R. Marschalk 1,920 960 2,880 Hamish Maxwell 45,420 9,400 54,820 R. R. Millhiser 207,026 27,772 234,798 T. J. Moore, Jr. 2,200 3,600 5,800 J. A. Murphy 103,700 5,320 109,020 S. P. Pollack 34,770 4,600(5) 39,370 J. S. Reed 200 - 200 George Weissman 174,305 70 174,375 M. B. Young Group 206 - 206 (1) Includes maximum number of shares subject to purchase on or before March 31, 1981 upon the exercise of stock options and stock units as follows: T. F. Ahrensfeld, 26,250; 9

J. C. Bowling, 20,250; H. Cullman, 28,300; C. H. Goldsmith, 31,950; J. T. Landry, 17,800; H. Maxwell, 16,150; R. R. Millhiser, 41,050; J. A. Murphy, 41,000; S. P. Pollack, 21,250; G. Weissman, 34,625; group', 512,137. (2) Represents, unless otherwise indicated, shares (beneficial ownership of which is dis- claimed) held in certain fiduciary capacities (including such holdings by a spouse) and shares owned by wives, minor children and other relatives sharing the homes of the nom- inee or officer. (3) Represents shares held in trusts of which Mr. J. F. Cullman 3rd is a beneficiary and trustee. (4) Represents shares held in trusts in which Mr. Goldsmith has a vested remainder interest. (5) Includes shares held jointly with spouse. In addition, present directors, nominees and the group owned beneficially at January 30, 1981 shares of stock (in each case less than 1% of outstanding shares) of affiliates of the Company as follows: Philip Morris (Australia) Limited(1)(2) CA. Tabacalera Naclonal(2)(3) Shares Shares J. A. Cordido-Freytes - Hugh Cullman 4,718 J. F. Cullman 3rd 2,000 Hamish Maxwell 5,332 R. R. Millhiser 7,481 George Weissman Group(5) 8,332 (1) The Company owns, directly and indirectly, approximately % of the outstanding stock of Philip Morris (Australia) Limited; the balance is publicly held and traded. (2) Except where indicated, beneficial ownership is based on sole voting and investment power. (3) The Company owns a substantial minority interest in the outstanding stock of C. A. Tabacalera Nacional, a Venezuelan corporation; the balance of such stock is publicly held and traded. (4) Includes shares (beneficial ownership of which is disclaimed) owned by immediate family members as follows: Hugh Cullman, 2,220 shares; R. R. Millhiser, 413 shares. (5) In addition, one member of the group owns shares (less than %) of E. Leon Jimenes C. por A., a Dominican Republic corporation, in which the Company owns a sub- stantial minority interest. 10

Remuneration The table below sets forth, with respect to the calendar year 1980, information concerning remuneration of the five most highly compensated executive officers of the Company and all officers and directors of the Company as a group (59 persons including the officers named below). Cash and cash-equivalent remuneration(2) Incentive Compensation Name Capacities in which served(1) Salaries and directors fees(3) and Deferred Profit-Sharing Plans(4) Personal benefits(5) Hugh Cuiiman Group Executive Vice President $ 275,833 $ 234,141 $ 31,513 C. H. Goldsmith President 311,667 282,072 14,888 R. R. Miiihiser Vice Chairman of the Board 330,000 273,194 22,245 J. A. Murphy Group Executive Vice President 275,833 220,641 2,308 George Weissman Chairman of the Board 383,333 366,185 10,376 Group 7,182,066 5,064,417 426,059 (1) All of the named persons also served as directors of the Company during 1980. (2) Amounts shown are for the full year, whether or not the person was an officer or director for the full year. (3) Directors who are full-time employees of the Company or a subsidiary receive no additional compensation for services as a director. (4) Includes amounts awarded under the Incentive Compensation Plan and amounts allocated from the Company's contribution to the Deferred Profit-Sharing Plan with respect to the calendar year 1980. (5) Represents primarily personal use of corporate aircraft (excess of the Company's in- cremental cost over amounts paid by the user) and automobiles and payment of expenses incurred in connection with financial counseling. Does not include relocation expense reimbursement made under Company policy to employees moving at the request of the Company. The Company maintains a non-contributory retirement plan (the "Retirement Plan") for the benefit of all of its employees (including officers, but excluding directors as such) and for salaried employees of Miller Brewing Company who, in each case, are not covered by collective bargaining agreements. Full retirement allowances are payable upon retire- ment at the normal retirement age of 65; such annual retirement allowances are com- puted at the rate of 11/4% of average compensation received during the 60 highest paid consecutive months of the last 120 months of an employee's accredited service ("five-year average compensation") not in excess of the applicable social security integration level, plus 13/a % of that portion of five-year average compensation in excess of such social 11

security integration level, multiplied by the number of years of accredited service. How- ever, there is a minimum benefit equal to 11/2% of the first $12,000 of five-year average compensation multiplied by not in excess of 30 years of accredited service. "Compensa- tion" is defined as base pay plus overtime and, for persons retiring on or after January 1, 1980, the full amount of any award under the Incentive Compensation Plan. Examples of annual full retirement allowances payable under the Retirement Plan are set forth in the following table. The examples assume retirement at the normal retirement age of 65 after assumed periods of service and are based upon the social security inte- gration level in effect for the calendar year 1981. However, full retirement allowances (based upon the number of years of accredited service to date of retirement) or, in some instances, actuarially reduced retirement allowances are payable upon retirement com- mencing at earlier ages. In the case of retirement after age 65, credit is given for com- pensation and accredited service to age 70, provided the employee attained age 65 after December 31, 1978; otherwise the employee receives the actuarial equivalent of the full retirement allowance he or she would have received at age 65. An employee with more than 35 years of accredited service is limited to the greater of a full retirement allowance based upon 35 years of service and five-year average compensa- tion including incentive compensation awards or a full retirement allowance based on all service and five-year average compensation excluding incentive compensation awards, with a maximum allowance in either case of $ . However, the maximum annual re- tirement allowance payable is subject to adjustment in 1982 and future years by the same percentage increase applicable to the maximum permissible benefit under the Employee Retirement Income Security Act of 1974 ("ERISA"). ERISA limits the maximum annual benefit payable under a qualified retirement plan. If an annual benefit exceeds the limit (presently $ ) imposed by ERISA, the payment of the excess is made from the Com- pany's general funds rather than from the Retirement Plan Trust. Five-year average compensation Years of service 5 10 20 30 35 $100,000 $ 8,496 $ 16,992 $ 33,985 $ 50,977 $ 59,473 150,000 12,871 25,742 51,485 77,227 90,098 200,000 17,246 34,492 68,985 103,477 120,723 300,000 25,996 51,992 103,985 155,977 181,973 400,000 34,746 69,492 138,985 208,477 243,223 500,000 43,496 86,992 173,985 260,977 304,473 600,000 52,246 104,492 208,985 313,477 700,000 60,996 121,992 243,985 At January 30, 1981, Messrs. H. Cullman, Goldsmith, Millhiser, Murphy and Weissman had accredited service (calculated to the nearest whole year) of 32, 35, 40, 19 and 29 years, respectively. 12

A long-term disability plan protects most employees and their families against loss of income due to long-term disability. Prior to age 65 (or, if disabled after age 60, after five years of disability or age 70, whichever first occurs), the maximum annual benefit is $48,000. At age 65 (or such other age as aforesaid), benefits cease unless the employee had five years of accredited service at the time of disability, in which case benefits would be payable equal to a full retirement allowance under the Retirement Plan computed as if the employee had worked during the entire period of disability (until age 65 or such other age) at the compensation being received at the time of disability. A survivor income benefit plan provides annual income benefits 'to the family of a salaried employee of the Company who dies while in active service or after retirement. Subject to certain exceptions, the spouse of a salaried employee who dies while in active service and prior to age 65 receives, until the date such employee would have attained age 65, an annual amount; commencing in the fifth year after the employee's death, equal to 25% of the employee's base annual compensation at the time of death. Benefits cease when the employee would have attained age 65 unless the employee had five years of accredited service at the time of death in which case the spouse would receive an annual amount for life equal to what he or she would have received under the Retirement Plan if the employee had lived, had remained in the employ of the Company to age 65 at the com- pensation in effect at death and had elected the option giving the spouse 50% of an actuarially reduced full retirement allowance for life. If the employee dies after retirement or after age 65 while in active service, the annual income payments equal 50% of the employee's retirement allowance. In certain instances, benefits are also payable to de- pendent children. Prior to 1977, the Company, with stockholder approval, had adopted various stock option plans: These plans provided for the granting of options to purchase the Company's Common Stock at fair market value on the date of grant; the options were intended to constitute qualified stock options ("qualified options") under the Internal Revenue Code or options that were not so qualified ("non-qualified options"). No further options may be granted under these plans. However, outstanding options may still be exercised until their expiration, which is generally five years from the date of grant in the case of qualified options and ten years in the case of non-qualified options. In accordance with stock- holder approval obtained in 1977, the Compensation Committee of the Board of Directors is empowered to extend for an additional period of up to five years the term of any qualified option granted prior to April 28, 1977. The effect of such an extension is to convert the qualified option into a non-qualified option. In 1977, the stockholders approved the 1977 Stock Unit Plan. Under the Plan, units are granted to key employees of the Company and its affiliates. Each recipient of a unit must agree to remain in the employ of the Company or its affiliates for at least one year from 13

the date of the grant at such rate of compensation (not less than the rate then in effect) as the Company or its affiliates may from time to time determine. Subject to certain exceptions with respect to persons who are subject to the reporting requirements of the Securities Exchange Act of 1934, upon exercise of a unit, the unit holder is entitled to do one of the following: purchase one share of Common Stock at not less than the fair market value on the date the unit was granted (the "unit price"); or receive, in the form of Com- mon Stock or Common Stock and cash, the amount by which the fair market value of a share of Common Stock on the date of exercise of the unit exceeds the unit price (the' "Appreciation Value" of such unit), provided that such unit holder at the same time exer- cises a second unit and purchases one share of Common Stock; or receive, in the form of Common Stock or Common Stock and cash, an amount equal to one-half of the Appre- ciation Value of such unit on the date of exercise (the "Reduced Appreciation Value"). No unit holder may, upon exercise, receive in cash more than one-half of the Appreciation Value or Reduced Appreciation Value of all of the units such unit holder is exercising at such time. The maximum term of a unit is ten years. No unit may be exercised during the first year of its term. During the second year, any number of units up to 25% of the total covered by the grant may be exercised and, during the third and fourth years, any number of units which, when added to those previously exercised, do not exceed 50% and 75%, respec- tively, of the total number granted. During the fifth and following years, the unit holder may exercise any number of units which, when added to units previously exercised, does not exceed the total number of units covered by the grant. No units were granted during 1980. With respect to options granted under the Company's stock option plans and units granted under the Stock Unit Plan, the following tabulation shows, as to certain directors and officers and as to all directors and officers as a group, 60 persons including the officers named below, (i) the number of shares subject to options and the average per share exercise price as to options granted since January 1, 1980, (ii) the net value of shares or cash realized since January 1, 1980 upon the exercise of options and units granted since January 1, 1980 or prior thereto, (iii) the number of shares sold since January 1, 1980 by officers who exercised options or units since that date, (iv) the number of shares subject to options and the number of units outstanding at January 30, 1981, and (v) the potential (unrealized) value of such outstanding options and units as of such date (market value less exercise or unit price). Figures in the tabulation have been adjusted, where appro- priate, to reflect stock split-ups. 14

H. C. H. R. R. J. A. G. Cuiiman Goldsmith Mitihiser Murphy Weissman Group Granted(1) January 1, 1980 to January 30, 1981: Number of Shares ..... 61,700 Average per share exer- cise price ......... $24.30 Exercised January 1, 1980 to January 30, 1981: Net value realized In shares or cash (2) .. - 336,478 Sales January 1, 1980 to January 30, 1981: Number of Shares ..... 10,000 Outstanding at January 30, 1981: Number of shares sub- ject to options ..... 16,000 18,000 26,000 29,000 18,000 380,200 Number of units ...... 26,400 30,600 33,400 26,000 39,700 421,025 Potential unrealized value(3) ............ $653,006 $739,869 $939,819 $852,000 $851,838 $12,300,133 In addition, during the period employees were granted extensions with respect to previ- ously granted qualified options covering a total of 30,010 shares at an average option price per share of $25.50. (1) Represents extension, for an additional five years, of previously granted qualified options. (2) Represents market value less exercise price in the case of options and Appreciation Value and/or Reduced Appreciation Value in the case of units. (3) Represents market value less exercise price in the case of options and Appreciation Value in the case of units. Additional Information As previously indicated, several of the Company's directors are officers or directors of banks or bank holding companies with which the Company and its subsidiaries have transactions in the ordinary course of business. The following table sets forth the names of certain of the banks involved, the maximum amount of borrowings outstanding at any one time from such bank by the Company and its subsidiaries during the period January 1, 1980 to January 30, 1981, the amount of such borrowings outstanding at January 30, 1981 and the amount of interest (including commitment fees) accrued to such banks during such period. In all instances, such borrowings were on substantially the same terms, including interest rates, as those prevailing at the time for comparable transactions with 15

other financial institutions. The Company and certain of its subsidiaries maintain deposit account balances with certain of these banks to compensate them for account handling and other important services and to support lines of credit. Outstanding Jan. 1, 1980 Bank Jan. 30,1981(1) Jan. 30,1981 Interest accrued(2) Bankers Trust Company 27,239,000 1,548,000 1,352,814 Chemical Bank 29,900,000 1,612,167 Citibank, N.A. 99,285,000 52,338,000 18,027,087 M & I Marshall & Ilsley Bank 6,500,000 38,203 United Virginia Bank(3) 16, 000,000 10, 000, 000 994,875 (1) Maximum amount. (2) Includes commitment fees. (3) Does not include $10,000,000 General Obligation Water and Sewer Bonds Series 1980 of the Mission Viejo Water and Sanitation District purchased by Bankers Trust Company in 1980, $8,600,000 of industrial revenues bonds held by Central Fidelity Bank, N.A. and a $1,000,000 industrial development revenue note payable to United Virginia Bank. The general obligation bonds are guaranteed by the Company and the industrial revenue obli- gations are secured by promissory notes in like principal amount of the Company payable to the issuing authority. A subsidiary of Aetna Life and Casualty Co., of which Mr. Donaldson is a director, owns $30,800,000 principal amount of industrial revenue bonds which are guaranteed by the Company, and The New York Life Insurance Company, of which Mrs. Young is a director, owns $25,000,000 principal amount of the Company's 8~/s % Promissory Notes due November 30, 1998. During the year ended December 31, 1980, the firm of Betancourt, Cordido and Associates, of which Dr. Cordido-Freytes is a member, received legal fees of $204,995 from affiliates of the Company. Edward Lasker, a former director, is counsel to the firm of McKenna, Conner & Cuneo; from January 1, 1980 to April 23, 1980, during which period Mr. Lasker served as a director, a predecessor firm was paid legal fees of $281,595 by the Company and its subsidiaries. 16 c:

SELECTION OF AUDITORS (Proposal 2) The Audit Committee has recommended to the Board of Directors that Coopers & Lybrand, who have been the Company's auditors since 1933, be continued in that capacity. The stockholders are being asked to approve the Board's decision to retain Coopers & Lybrand for the fiscal year ending December 31, 1981. A representative of Coopers & Lybrand will be present at the meeting, will be given an opportunity to make a statement if he desires to do so and will be available to answer questions. Audit services performed by Coopers & Lybrand during the year ended December 31, 1980 consisted of the examination of the consolidated financial statements of the Com- pany and its consolidated subsidiaries, examination of the financial statements of uncon- solidated subsidiaries and affiliates, examination of the financial statements of employee benefit plans sponsored by the Company and its subsidiaries, preparation of various reports based on such examinations, limited review of quarterly financial information, services related to filings with the Securities and Exchange Commission, attendance at meetings of the Audit Committee of the Board of Directors and consultation with officers of the Company and its subsidiaries and affiliates in connection with various accounting matters. In addition to these auditing services, during the year ended December 31, 1980, Coopers & Lybrand performed other professional services which accounted in the aggre- gate for 35.8% of the audit fees paid to Coopers & Lybrand for 1980. 8.1 % of such fees was accounted for by computer and communications system services, 10.6% by tax planning and return preparation services for the Company and its subsidiaries, 8.2% by tax planning and tax return preparation services for employees, 4.6% by a review of ad- ministrative service functions and 4.3% by other services. The Audit Committee of the Board of Directors meets regularly with representatives of Coopers & Lybrand and reviews the nature and extent of the auditing services provided by that firm. The Audit Com- mittee approves the non-audit professional services performed by Coopers & Lybrand either before or after such services are rendered, after considering the possible effect of such services on the independence of that firm. The Board of Directors recommends a vote FOR Proposal (2). 17

STOCKHOLDER PROPOSAL (Proposal 3) The Company has been notified that the following proposal* will be submitted to the meeting: "WHEREAS the nature of business demands that our Company increase markets in the highly competitive cigarette industry; WHEREAS cigarette industry executives estimate 'annual consumption for the next several years will slow to between a 0.3% decline and a 0.7% gain' (Business Week 12/15/80); WHEREAS these facts make the relatively untapped market in developing nations a po- tential target for increased promotion of cigarettes; WHEREAS some tobacco firms are using aggressive promotion tactics to create new markets, even in remote corners of the Third World, which have had little traditional consumption of cigarettes; WHEREAS the vast majority of people in such countries can ill-afford to become habitu- ated to smoking for financial and health reasons; WHEREAS many cigarettes in the Third World are relatively more expensive and carry up to 76% more grams of tar than those same brands sold in developing nations; THEREFORE BE IT RESOLVED that the shareholders request the Board of Directors to make available to requesting shareholders a report, produced at reasonable cost and excluding proprietary information, which shall cover the following: 1. A description of Third World regions of Africa, Asia, and Latin America where our Company manufactures and/or markets cigarettes. 2. Market size and market share, as well as advertising and promotional activities and costs in these areas annually since 1975, including projections for the next five years. 3. A description of our Company's present policy related to: a. The World Health Organization's recommendation on banning promotion of tobacco, especially in Third World nations. b. A limitation of cigarette tar and nicotine levels in Third World nations equal to that in the United States. c. Informing consumers of the risks of tobacco use in countries where there may be little or no governmental regulations concerning health risks for smokers." The statement submitted in support of the proposal is as follows: "The United States cigarette industry in 1980 posted its best performance in five years. Yet overall tobacco consumption is increasing at a higher rate in new Third World markets * The name and address of the proponents will be furnished by the Company or the Se- curities and Exchange Commission to any person, orally or in writing as requested, promptly upon the receipt of any oral or written request therefor. 18

than domestic. This raises serious concern about the future health prospects in develop- ing nations where previously uncommon smoking-related diseases are now beginning to appear. - WHO warned in a recent report that smoking-related diseases will appear in developing nations before communicable diseases and malnutrition have been controlled, and its Committee on Smoking Control has recommended that all nations ban the promotion of tobacco and limit cigarette tar and nicotine content. We are concerned that some current practices of tobacco companies in developing nations may vitiate against such recom- mendations of the World Health Organization. Tobacco consumption is growing fastest in countries with the greatest poverty, illiteracy and food shortages. As church investors, we are concerned about the health and welfare of such people and do not believe these should be unnecessarily sacrificed for financial return to us as shareholders." The Board of Directors recommends a vote AGAINST Proposal (3). Your Board of Directors believes that this resolution is not in the best interests of the Company and its stockholders. In addition, it is misleading in a number of respects. Contrary to the proponents' sugges- tion, the Company's cigarette business within the United States has never been stronger- indeed in 1980 the Company achieved its largest one-year increase in unit sales and the highest unit sales and largest market share in its history. The Company is not diverting any of its energies from the United States market and has no intention of doing so. Contrary to the proponents' suggestion, our cigarettes exported from the United States are identical to our comparable brands sold domestically. Our cigarettes manufactured abroad are essentially similar to our domestic cigarettes although they may be designed to appeal to local tastes and may contain locally-grown tobacco in response to legal and other requirements. None of our cigarettes delivers more than a small fraction of a gram of tar. In all areas of the world, the Company complies with all legal requirements affect- ing the manufacture, sale, advertising and promotion of cigarettes. The price of cigarettes sold abroad varies widely from country to country due primarily to the effect of excise and other taxes and, in many instances, is subject to governmental price controls. Despite the expenditure of hundreds of millions of dollars by governments, the tobacco industry and other research groups over more than 25 years, no conclusive clinical or medical proof of any cause-and-effect relationship between cigarette smoking and disease has been discovered. Despite the proponents' disclaimer, compliance in a meaningful fashion with the resolu- tion would be expensive and would require disclosure, to the competitive detriment of the Company, of confidential information such as projections for the next five years. Finally, it is doubtful if the requested report would be useful to shareholders. 19

OTHER MATTERS Management knows of no other business which will be presented to the meeting. If other matters properly come before the meeting, the persons named as proxies will vote on them in accordance with their best judgment. The cost of this solicitation of proxies will be borne by the Company. In addition to the use of the mails, some of the officers and regular employees of the Company may solicit proxies by telephone and telegraph and will request brokerage houses and other cus- todians, nominees and fiduciaries to forward soliciting material to the beneficial owners of Common Stock held of record by such persons. The Company will reimburse such persons for expenses incurred in forwarding such soliciting material. It is contemplated that additional solicitation of proxies will be made in the same manner under the engage- ment and direction of D. F. King & Co., Inc., 60 Broad Street, New York, N.Y. 10004, at an anticipated cost to the Company of $17,000 plus reimbursement of out-of-pocket ex- penses. The Company's 1980 Annual Report, including financial statements, has been mailed to all stockholders. The Annual Report is not to be considered proxy soliciting material. 1982 ANNUAL MEETING Proposals of stockholders intended to be presented at the 1982 Annual Meeting must be received by the Company on or before December 13, 1981 in order to be included in the Company's proxy statement for such meeting. Eugene J. T. Flanagan, Vice Presldent and Secretary March 13, 1981 20