Tobacco Documents Online

Item 3. Properties. Philip Morris' principal United States plants are: five manufacturing facilities for tobacco products- four in the Richmond, Virginia area, and one in Louisville, Kentucky; and two stemmeries-one located near Louisville and the other located in Richmond. The Philip Morris U.S.A. Operations Center in Richmond is believed to be the most modern cigarette factory in the world and is currently producing cigarettes at an annual rate of 100 billion units, approximately 70% of its planned production capacity. All of the foregoing are owned by the Company. Additional cigarette manufacturing facilities of Philip Morris are located in 22 countries outside of the United States. Philip Morris owns or leases other premises, including a research and development facility and an operations and data processing center in Richmond, warehouses, paper mills, converting plants and other manufacturing facilities. At present, Miller has breweries located in Milwaukee, Wisconsin; Fulton, New York; Azusa, California; and Fort Worth, Texas. Miller has embarked on a major capital expansion program. As part of this program, capacity at the Fulton brewery, at which production commenced in 1976, is being expanded; a new brewery, in Eden, North Carolina, is under construction with production scheduled to begin in 1978, and ground was broken in November 1977 for a new brewery in Irwindale, California to replace the smaller nearby Azusa facility. In addition, Miller is expanding and modernizing its facilities in Milwaukee and Fort Worth. Miller has three can-making facilities in operation, capable of an annual production of 1.5 billion cans, and an additional plant is planned for use in connection with the Eden Brewery. A glass making plant in Sennett, New York, is under construction. When completed, it will supply the Fulton Brewery with a portion of its glass bottle needs. Reference is made to the description of Mission Viejo Company under Item 1 for additional information. In 1977, capital expenditures amounted to $280,000,000 and are estimated at $500,000,000 in 1978. For the period 1978 through 1982, the Company estimates that total capital expenditures will exceed $2,250,000,000. Of this amount, more than one-half will be used for the expansion and modernization of beer operations and the rest largely for world-wide tobacco operations. Capital expenditures in the five year period 1973-1977 were $1,135,000,000. Of this amount, $484,000,000 was spent on the expansion and modernization of cigarette manufacturing facilities and $567,000,000 was spent on beer production facilities. Philip Morris' plants and properties are maintained in good condition and are believed to be suitable and adequate for present needs. As a result of recent capital expenditures, approximately 70% of Philip Morris' property, plant and equipment was less than five years old at December 31, 1977. Item 4. Parents and Subsidiaries. The active subsidiaries of the Company and their subsidiaries as of December 31, 1977 are listed below. The names of certain subsidiaries, which considered in the aggregate would not constitute a significant subsidiary, have been omitted. The consolidated financial statements included herein include the accounts of the Company and all subsidiaries whose common stock is wholly owned. Investments in and advances to unconsolidated subsidiaries are stated at cost plus equity in undistributed earnings since the dates of acquisition. Financial statements of unconsolidated foreign subsidiaries and affiliates included in the following list are omitted in accordance with the Instructions as to Financial Statements for Form 10-K. There are no parents of the Company. Name State or Country of Organization Percent of Voting Power Philip Morris Incorporated ......................................................... Virginia (the Company) Abdulla of Bond Street Ltd . ............................................... Delaware 100 Aliso Viejo Company .......................................................... California 100 Benson & Hedges (Canada) Limited ................................ Canada 100 B & H Retail Limited .................................................. Canada 100 C. A. Tabacalera Nacional ................................................. Venezuela 48 C. A. Cigarrera Doble Aguila y Sport ......................... Venezuela 100 10 204B1894f2

Name State or Country of Organization Percent of Voting Power Fabrica de Filtros C. A ................................................ Venezuela 100 Investigaciones Agricoles C. A .................................... Venezuela 100 Mendiola y Compania, S.A . ............................................... Costa Rica 51 Miller Brewing Company .................................................... Wisconsin 100 Crescent Distributing Company .................................. Louisiana 100 Star Distributing Company ......................................... Utah 100 Waterloo Malting Company, Inc ................................ Wisconsin 100 Mission Viejo Company ..................................................:... California 100 Mission Viejo Realty ................................................... California 100 MVC Escrow Corporation ........................................... California 100 MVC Financial Corporation ....................................... California 100 Park Avenue Export Corporation ....................................... Delaware 100 Philip Morris Asia-Pacific Inc ............................................. Delaware 100 Philip Morris ( Australia ) Limited ...................................... Australia 74.81(1) GPM Cigarette Distributors Limited .......................... Australia 100 Lindeman ( Holdings ) Limited ................................... Australia 100 Leo Buring Pty. Limited ...................................... Australia 100 Lindemans Wines Pty. Limited ........................... Australia 100 M. Moss & Co. Pty. Limited ................................ Australia 100 Crawford & Co. (Australasia) Pty. Limit- ed .............................................................. Australia 100 Philip Morris Limited .................................................. Australia 100 Philip Morris (New Zealand ) Limited ...................... New Zealand 100 Philip Morris Brasileira S.A. de Cigarros ........................... Brazil 81.33 Companhia de Fumos Santa Cruz .............................. Brazil 99.88 Philip Morris Export Corporation ...................................... Delaware 100 Philip Morris France S.A . ................................................... France 100 Philip Morris GmbH ........................................................... West Germany 100 Philip Morris Industrial Incorporated ................................ Delaware 100 Plainwell Paper Company, Inc . ................................. Michigan 100 Philip Morris International Capital N.V ............................ Netherlands Antilles 100 Philip Morris International Finance Corporation .............. Delaware 100 Fabriques de Tabac Reunies S.A ................................ Switzerland 100 Orecla S. A . .......................................................... Switzerland 100 Orienta S. A .......................................................... Switzerland 100 Philip Morris Espana S.A . ................................... Spain 45 Philip Morris Holland B.V . ................................. Netherlands 100 Philip Morris Iberica S.A ..................................... Spain 45 Philip Morris AB ......................................................... Sweden 100 Philip Morris Europe S.A ............................................ Switzerland 100 Philip Morris Limited .................................................. Delaware 100 Anniversary House Limited ................................. United Kingdom 100 Celebration Arts Group Limited ......................... United Kingdom 100 Charles Stewart & Company (Kirkcaldy) Lim- ited .................................................................... United Kingdom 100 Cohen Weenen & Company Limited .................. United Kingdom 100 Day & Wilkins Limited ....................................... United Kingdom 100 Godfrey Phillips Limited ..................................... United Kingdom 100 11

Name State or Country of Organization Percent of Voting Power J. Millhoff& Company Limited .......................... United Kingdom 100 The United Kingdom Tobacco Company Lim- ited .................................................................... United Kingdom 100 Philip Morris Nigeria Limited ............................................ Nigeria 90 Philip Morris Overseas, Inc ................................................. Delaware 100 Tabacalera Costarricense S.A . ............................................ Costa Rica 51 Tabacalera Nacional S.A .................................................... Panama 80 Weltab S.A . ......................................................................... Belgium 100 Distalux Luxembourg S.A ........................................... Luxembourg 100 Wikoln-Polymer Chemie GmbH ........................................ West Germany 100 Wisconsin Tissue Mills Inc Delaware 100 (1) 44.64% owned by the Company and 30.17% owned by Philip Morris International Finance Corporation. Item 5. Legal Proceedings. Three purported class actions by tobacco growers are pending against the six major United States cigarette manufacturers, including the Company, and others alleging violations of the United States antitrust laws. In these actions, it is alleged, among other things, that the Company conspired with other named defendants to fix prices at which tobacco is purchased from the plaintiffs and the growers allegedly represented by the plaintiffs. In two of the actions, the plaintiffs originally sought damages for the years 1970-1974 of approximately $2,500,000,000 in the aggregate. In April 1976, plaintiffs in one of these cases filed a proposed amended complaint which would reduce the size of the purported class, so that the aggregate damages claimed in both actions would be approximately $400,000,000. No specific amount of damages is claimed in the third action. The Company has denied any violation of law, is vigorously contesting the actions and has been advised by its counsel, Messrs. Arnold & Porter, Washington, D. C., that in their opinion these actions are not proper class actions. Furthermore, 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. On October 11, 1977, that determination was affirmed by the United States Court of Appeals. A petition for a writ of certiorari has been filed but not yet acted upon by the Supreme Court. The District Courts in the other two cases have not as yet determined whether those cases may be maintained as class actions. After service of subpoenas duces tecum, three employees of the Company testified before a United States Grand Jury in March, 1978 concerning the operations and record keeping of a Company waste water treatment facility. The Company does not believe the outcome of the matter will have a material effect on its operations. For additional information, reference is made to the litigation described herein under Item 1. Item 6. Increases and Decreases in Outstanding Securities and Indebtedness. (a) Increases and Decreases in Equity Securities: The following increases and decreases in the amounts of the Company's equity securities outstanding took place during the year ended December 31, 1977: Date or Description Increase Period of Transaction (Decrease) No. of Shares(*) Outstanding I. CohnMoN STOCK (par value $1 per share): Balance at December 31, 1976 .............................................. 59,487,393 January 1-December 31 ............... Issued upon exercise of stock options ....................... 117,540 February 2, 1977 ........................... Acquisition of Wisconsin Tissue Mills...................... 314,984 Balance at December 31, 1977 .............................................. 59,919,917 12 . 204a1$q014

II. CUIvIULATIVE PREFERRED STOCK, 4% SERIES (par value $100 per share): Balance at December 31, 1976 .............................................. 18,016 January .......................................... February ........................................ March .............:.............................. April .............................................. May ............................................... June ............................................... July ................................................ August ........................................... September ..................................... December ...................................... Open market purchases ...................... (570) Open market purchases ...................... (152) Open market purchases ...................... (113) Open market purchases ...................... (56) Open market purchases ...................... (175) Open market purchases ...................... (8) Open market purchases ...................... (20) Open market purchases ...................... (100) Open market purchases ...................... (40) Open market purchases ...................... (30) Total decrease ................................. (1,264) Balance at December 31, 1977 .............................................. 16,752 III. CUMULATIVE PREFERRED STOCK, 3.90% SERIES (par value $100 per share) : Balance at December 31, 1976 .............................................. 9,944 January .......................................... Fe bruary ........................................ April .............................................. May ............................................... June ............................................... July ................................................ August ........................................... S eptember ..................................... Open market purchases ...................... (10) Open market purchases ...................... (100) Open market purchases ...................... (111) Open market purchases ...................... (60) Open market purchases ...................... (5) Open market purchases ...................... (32) Open market purchases ...................... (52) Open market purchases ...................... (385) Total decrease ................................. (755) Balance at December 31, 1977 .............................................. 9,189 IV. OPTIONS TO PURCHASE COMMON STOCK: See Note 11 of Notes to Consolidated Financial Statements. * Amounts are stated net of shares held by or for the account of the Company. (b) Increases and Decreases in Debt Securities and Indebtedness. See Item 5 of the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1977, which is incorporated herein by reference, for a description of: the sale by the Company on April 1, 1977 of its 8'/a% Promissory Note due April 1, 1997 in the principal amount of $100,000,000; the prepayment by the Company of all of its outstanding 10% Subordinated Notes due August 1, 1982 at par plus accrued interest and the redemption by the Company's subsidiary, Philip Morris International Capital N.V., of all of its 8% Guaranteed Notes due 1978 at par plus accrued interest, both on June 1, 1977; the borrowing by the Company on May 1, 1977 of $50,000,000 from Continental Illinois National Bank and Trust Company of Chicago pursuant to a Term Loan Agreement dated as of April 28, 1977; the issuance by the Company on May 10, 1977 of its 6% Promissory Note in the principal amount of $2,600,000 due May 1, 1997 to the Industrial Development Authority of the County of Chesterfield, Virginia, and the simultaneous issuance by such Authority of a corresponding principal amount of Pollution Control Revenue Bonds. During the fourth quarter of 1977 the Company entered into the following transactions involving an increase in its indebtedness: (i) On October 4, 1977, the Company gave its Guaranty, dated as of October 1, 1977, of the principal of, premium if any, and interest on, $1,000,000 Industrial Facilities Revenue Bonds, Series A 13

(Miller Brewing Company Project) due October 1, 2002, of The Rockingham County Industrial Facilities and Pollution Control Financing Authority (the "Authority"), a political subdivision of the State of North Carolina, and its Guaranty, also dated as of October 1, 1977, of the principal of, premium, if any, and interest on, the Authority's $16,000,000 Pollution Control Revenue Bonds, Series A (Miller Brewing Company Project). The Industrial Facilities Revenue Bonds and the Pollution Control Revenue Bonds were sold on October 4, 1977 to The Aetna Casualty and Surety Company at 100% of par, the proceeds being used by the Authority to finance the acquisition, construction, and installation of certain machinery and pollution control equipment at the Eden, North Carolina, brewery of Miller. The Company's Guaranties, the Industrial Facilities Revenue Bonds and the Pollution Control Revenue Bonds were not registered under the Securities Act of 1933, as amended, because each is exempt from registration pursuant to Section 3(a)(2) of that Act. (ii) On October 26, 1977, the Company gave its Guaranty, dated as of October 1, 1977, of the principal of, premium, if any, and interest on, $4,500,000 aggregate principal amount of Industrial Revenue Bonds (Philip Morris Industrial Incorporated Project) due October 1, 1997 of the City of Fort Atkinson, an incorporated municipality of the State of Wisconsin ("Municipality"). Such Bonds were sold on October 26, 1977 to United States Fidelity and Guaranty Company at 100% of par, the proceeds being loaned by the Municipality to Philip Morris Industrial Incorporated ("Industrial"), a wholly-owned subsidiary of the Company, to finance the acquisition, construction, and equipping of a new industrial plant for Industrial's Koch Label Division located in the Municipality. The Guaranty and the Municipality's Industrial Revenue Bonds were not registered under the Securities Act of 1933, as amended, because they are exempt from registration pursuant to Section 3(a)(2) of that Act. (iii) The Company entered into a Credit Agreement dated as of December 1, 1977 with a group of U. S. and foreign banks, arranged through Bank of Boston International, pursuant to which the banks have agreed that, until November 30, 1982, they will make Eurodollar loans to the Company up to an aggregate principal amount of U. S. $250,000,000. Such loans will bear interest at a rate of'/a of 1% above the average London interbank rate offered by certain of the banks. This Credit Agreement replaces a Credit Agreement dated as of July 31, 1975 pursuant to which the Company had the right to borrow up to U. S. $180,000,000. As of December 1, 1977, the Company had no borrowings outstanding under the 1975 Credit Agreement, and no borrowings were made under the new Credit Agreement during the period to which this report applies. Item 7. Changes in Securities and Changes in Security for Registered Securities. Not applicable. Item 8. Defaults Upon Senior Securities. Not applicable. Item 9. Approximate Number of Equity Security Holders. The following table shows, as of January 31, 1978, the number of holders of record of each class of equity securities of the Company. Title of Class Number of Holders of Record Common Stock (par value $1 per share ) ................................................ 27,735 Cumulative Preferred Stock, 4% Series (par value $100 per share )...... 288 Cumulative Preferred Stock, 3.90% Series (par value $100 per share ). 151 Item 10. Submission of Matters to a Vote of Security Holders. Not applicable. 14

Item 11. Executive Ojfficers of the Registrant. The following are the executive officers of the Company: Name Office Age (1) Joseph F. Cullman 3rd (2)(3) .............. Chairman of the Board and Chief Executive Officer 65 George Weissman .................................. Vice Chairman of the Board 58 Ross R. Millhiser .................................... President 57 Hugh Cullman (2) ................................. Executive Vice President 55 Clifford H. Goldsmith ............................ Executive Vice President 58 John A. Murphy ..................................... Executive Vice President 48 Thomas F. Ahrensfeld ........................... Senior Vice President and General Counsel 54 James C. Bowling ................................... Senior Vice President 49 John T. Landry ....................................... Senior Vice President 53 Hamish Maxwell .................................... Senior Vice President 51 Albert E. Bellot ...................................... Vice President 57 Russell N. Freund ............................... :.. Vice President 50 William K. Howell ................................. Vice President 47 Jetson E. Lincoln .................................... Vice President 56 William D. McCoy ................................. Vice President 48 W. Wallace McDowell ........................... Vice President 41 James J. Morgan .................................... Vice President 35 R. William Murray ................................. Vice President 41 William J. O'Connor .............................. Vice President 47 Shepard P. Pollack ................................. Vice President and Chief Financial Officer 49 Philip J. Reilly ........................................ Vice President 48 Carlos E. Salguero .................................. Vice President 48 Edward M. Schaaf, Jr . ........................... Vice President 63 Benjamin A. Soyars ................................ Vice President 59 Walter F. Sperber .................................. Vice President and Controller 60 Helmut R. R. Wakeham ........................ Vice President 61 Lauren S. Williams ................................ Vice President 40 Eugene J. T. Flanagan ........................... Associate General Counsel, Secretary 54 Alexander Holtzman .............................. Associate General Counsel 53 F. Harrison Poole ................................... Treasurer 57 George P. Hibbard ................................. Assistant Treasurer 36 Edward G. Silcock ................................. Assistant Treasurer 46 Norman J. Treisman (3) ....................... Assistant Treasurer 40 John C. Lino ........................................... Assistant Controller 46 Horace W. Pierpoint .............................. Assistant Controller 48 Robert H. Souther .................................. Assistant Controller 54 Robert A. White ..................................... Assistant Controller 50 Mary E. Russell ...................................... Assistant Secretary 62 Anthony W. Giraldi ............................... Assistant Secretary 53 ( 1) As of January 31, 1978. (2) Messrs. Joseph F. Cullman 3rd and Hugh Cullman are first cousins. (3) Mr. Cullman is the father-in-law of Mr. Treisman. All of the above mentioned officers have been employed by Philip Morris in various capacities during 15

the past five years with the exception of George P. Hibbard who earned his M.B.A. degree in finance at the Harvard University Graduate School of Business Administration in 1971 and was associated with Smith Barney, Harris Upham & Co. from September 1971 until February 1974. From March 1974 until December 1974, when he joined the Company, Mr. Hibbard was an independent consultant. Item 12. Indemnification of Officers and Directors. The Virginia Stock Corporation Act (§ 13.1-3.1) grants corporations the power to indemnify their directors and officers in connection with actions, suits and proceedings and provides that directors and officers shall be indemnified when successful in defense thereof. The Act further provides that any corporation shall have power to make any other or further indemnity authorized by the articles of incorporation or stockholder adopted by-law except an indemnity against gross negligence or wilful misconduct. The Company's articles of incorporation provide that a director or officer of the Company shall be indemnified except in relation to matters as to which he shall have been finally adjudged to be liable by reason of having been guilty of gross negligence or wilful misconduct in the performance of his duties. The Company has purchased directors' and officers' liability insurance. Item 13. Financial Statements, Exhibits Filed and Reports on Form 8-K. (a) The following financial statements and exhibits are filed as part of this report: (i) Financial statements: See Index to Financial Statements and Schedules on page F-1. (ii) Exhibits: 1. Consent of Independent Public Accountants. 2. Copy of Credit Agreement dated as of December 1, 1977. (b) The Company filed no reports on Form 8-K during the last quarter of the period covered by this report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PHILIP MORRIS INCORPORATED (Registrant) By SHEPARD P. POLLACK Shepard P. Pollack Vice President and Chief Financial Officer Date: March 28, 1978 16

PHILIP MORRIS INCORPORATED INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES Report of Independent Public Accountants ................................................. F-3 Financial Statements: Balance Sheets ....................................................................................... F-4 Statements of Earnings .......................................................................... 6 Statements of Stockholders' Equity ...................................................... 8 Statements of Changes in Financial Position ....................................... F-6 Notes to Financial Statements .............................................................. F-8 Schedules: III-Investments in, Equity in Earnings of, and Dividends Re- ceived from Affiliates and Other Persons ............................... F-24 IV-Indebtedness of Affiliates and Other Persons-Not Current.... F-26 V-Property, Plant and Equipment .................................................. F-28 VI-Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment ...........:............:..................:.. F-29 VII-Intangible Assets, Preoperating Expenses and Similar Defer- rals ........................................................................................... F-30 VIII-Accumulated Depreciation and Amortization of Intangible Assets ....................................................................................... F-31 IX-Bonds, Mortgages and Similar Debt .......................................... F-32 XII-Valuation and Qualifying Accounts and Reserves .................... F-34 XIII-Capital Shares ............................................................................. F-36 Schedules other than those listed above have been omitted either because the required information is ,,,wained in notes to the consolidated financial statements or because such schedules are not required or ,Ii r not applicable. Separate financial statements of the Company are omitted since the Company is primarily an ,,1)rrating company and all subsidiaries included in the consolidated financial statements are wholly ,,~N, iied. The long-term indebtedness of two unconsolidated subsidiaries is guaranteed by the Company. Financial statements of unconsolidated subsidiaries and affiliates are not filed for the reason that no ;,iiI»idiary or affiliate individually constitutes a significant subsidiary.

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of PHILIP MOEtRIS INCORPORATED: We have examined the consolidated balance sheets of PHILIP MORRIS INCORPORATED and Consoli- dated Subsidiaries as of December 31, 1977 and 1976, and the related consolidated statements of earnings, stockholders' equity and changes in financial position for each of the five years in the period ended December 31, 1977 and the supporting schedules. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, the financial statements mentioned above (pages 6 to 8 and F-4 to F-23, inclusive ) 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 each of the five years in the period ended December 31, 1977, and the supporting schedules (pages F- 24 to F-37, inclusive) present fairly the information required to be included therein, all in conformity with generally accepted accounting principles applied on a consistent basis. COOPERS & LYBRAND 1251 Avenue of the Americas New York, N. Y. January 24, 1978 F-3