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PROXY STATEMENT This proxy statement is furnished by the management of Philip Morris Incorporated (the "Company"), 100 Park Avenue, New York, N.Y. 10017, in connection with its solicitation of proxies for use at the annual meeting of stockholders on Thursday, April 27, 1978, and at any and all adjournments thereof. Mailing of the proxy statement will commence on or about March 23, 1978. Holders of record of Common Stock, $1 par value, at the close of business on March 15, 1978 will be entitled to one vote for each share held on all matters to come before the meeting. On March 13, 1978, there were outstanding 59,924,737 shares of Common Stock. A proxy on the enclosed form may be revoked at any time before it has been exercised. Unless so revoked, it will be voted and, if a choice is made with respect to any matter to be acted upon, in accordance with such choice. ELECTION OF DIRECTORS Twenty-one 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 of the Board of Directors 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, all of whom were elected by the stockholders at the 1977 annual meeting. 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. In addition to certain biographical information with respect to the nominees, their beneficial ownership of the Company's Common Stock at January 31, 1978 (as well as beneficial ownership of equity securities of subsidiaries and affiliates of the Company) is also set forth below. Except where specifically noted, there are included, without separate iden- tification, holdings (beneficial ownership of which is disclaimed) in certain fiduciary capacities and of wives, minor children and other relatives sharing the homes of the nominees. Thomas F. Ahrensfeld First employed by the Company in 1959, Mr. Ahrensfeld be- Senior Vice President and came a Vice President in 1970 and Senior Vice President in General Counsel 1976. Prior to joining the Company, he practiced law in New York City. He is a member of the Environmental Director since 1976 Committee of the Board of Directors of the Company. Common Stock: 35,350 shs. 1

James C. Bowling Senior Vice President and Director of Corporate Affairs Alfred Brittain III Chairman of the Board of Bankers Trust Company, New York, N.Y. George V. Comfort Chairman of the Board of George Comfort & Sons, Inc., New York, N. Y., real estate management Director since 1971 Common Stock: 1,000 shs. Dr. J. A. Cordido-Freytes Member of Betancourt, Cordido and Associates, Caracas, Ven- ezuela, attorneys Director since 1968 Common Stock: 2,000 shs.(1) 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 the chairman of the board and a director of Keep America Beautiful, Inc. and a trustee of Berea College. Mr. Bowling is a member of the Environmental and Public Affairs and Social Responsibility Committees of the Board of Directors of the Company. Mr. Brittain serves as chairman of the board and as a direc- tor of Bankers Trust New York Corporation and Bankers Trust Company. He is a director of Collins & Aikman Cor- poration, the Economic Development Council and the New York Chamber of Commerce and Industry. Mr. Brittain is a member of the Finance and Incentive Compensation Com- mittees of the Board of Directors of the Company. Mr. Comfort serves as a director of General Cable Corpora- tion, The Mutual Life Insurance Company of New York, The Sperry & Hutchinson Company, Burns International Security Services, Inc. and the Harlem Savings Bank. He is a mem- ber of the Executive, Incentive Compensation, Nominating and Stock Unit Plan Committees of the Board of Directors of the Company. Dr. Cordido-Freytes also serves as a director and president of Banco Exterior, Caracas, Venezuela, and president of C.A. Tabacalera Nacional, an affiliate of the Company. He is a member of the Environmontal Committee of the Board of Directors of the Company. (1) Dr. Cordido-Freytes owns 4,752 shares of C.A. Tabacalera Nacional. 2 k_1

Hugh Cullman Executive Vice President and President of Philip Morris International Director since 1964 Common Stock: 93,816 shs.(2) Joseph F. Cullman 3rd Chairman of the Board and Chief Executive Officer Director since 1954 Common Stock: 180,749 shs.(3) Richard W. Dammann Member of Dammann & Heming, New York, N.Y., attorneys Director since 1959 Common Stock: 77,616 shs. Clifford H. Goldsmith Executive Vice President and President of Philip Morris U.S.A. First employed in 1948 by Benson and Hedges, Mr. Cullman became Executive Vice President of the Company in 1966 and President of Philip Morris International in 1967. He is a director of United Virginia Bankshares Incorporated and serves as trustee and is a member of the Executive Com- mittee of the U.S. Council of the International Chamber of Commerce. Mr. Culiman serves on the 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 became President and Chief Executive Officer of the Com- pany in 1957 and assumed his present title in 1966. He is a director of Bankers Trust New York Corporation, Ford Motor Company, IBM World Trade Europe/Middle East/Africa Cor- poration, Levi Strauss & Co. and the World Wildlife Fund- U.S.A., a commissioner 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. Mr. Cull- man is chairman of the Executive Committee and serves on the Stock Unit Plan Committee of the Board of Directors of the Company. He is a first cousin to Hugh Culiman. Mr. Dammann is chairman of the board and a director of U.S. Rubber Reclaiming Co., Inc. He is a member of the Audit, Executive, Incentive Compensation, Public Affairs and Social Responsibility and Stock Unit Plan Committees of the Board of Directors of the Company. First employed in 1945 by Benson and Hedges, Mr. Goldsmith became Executive Vice President of the Company and Presi- dent of Philip Morris U.S.A. in 1973. He serves as a director of the Central National Corporation and the Central National Director since 1966 Bank, Richmond, Virginia, and the National Multiple Sclerosis Common Stock: 42,000 shs. Society. Mr. Goldsmith is a member of the Environmental, Executive, Finance and Public Affairs and Social Responsi- bility Committees of the Board of Directors of the Company. (2) Mr. Hugh Cullman owns 2,498 ordinary shares of Philip Morris (Australia) Limited, and members of his immediate family own 2,220 ordinary shares. (3) Mr. Joseph F. Cullman 3rd owns 2,000 ordinary shares of Philip Morris (Australia) Limited, and he is a trustee and beneficiary of trusts which own 56,072 shares of Common Stock of Philip Morris Incorporated. 3

Robert E. R. Huntley President, Washington and Lee University, Lexington, Va. John T. Landry Senior Vice President and Executive Vice President of Philip Morris U.S.A. Director since 1972 Common Stock: 23,304 shs. Edward Lasker Counsel, McKenna & Fitting, Los Angeles, Calif., attorneys Director since 1961 Common Stock: 38,000 shs. Jacques G. Maisonrouge Chairman of IBM World Trade Europe/Middle East/Africa Corporation, White Plains, N.Y. Director since 1974 Common Stock: 100 shs. , I Mr. Huntley serves as a director of Shenandoah Life Insur- ance Company, Best Products Incorporated, Central Tele- phone & Utilities Corporation, Central Telephone Company of Virginia and the George C. Marshall Research Founda- tion. He is a member of the Committee on Public Affairs and Social Responsibility 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 has been Executive Vice President of Philip Morris U.S.A. since 1973. He is a member of the Committee on Public Affairs and Social Responsibility of the Board of Directors of the Company. Mr. Lasker serves as a director of Great Western Financial Corporation and Great Western Savings and Loan Associa- tion and as a trustee of Pomona College. He is a member of the Audit, Executive, Finance, Nominating and Stock Unit Plan Committees of the Board of Directors of the Company. Mr. Maisonrouge, who is also a senior vice president of IBM Corp., serves as a director of IBM World Trade Europe/Middle East/Africa Corporation and L'Air Liquide. He is a member of the Audit Committee of the Board of Directors of the Company.

H. Robert Marschalk Vice Chairman of the Board of Richardson-Merrell, Inc., Wilton, Conn., pharmaceuticals manu- facturer Director since 1966 Common Stock: 1,440 shs. Hamish Maxwell Senior Vice President and Executive Vice President of Philip Morris International Director since 1974 Common Stock: 21,400 shs.(4) Ross R. Millhiser President Director since 1963 Common Stock: 75,989 shs.(5) T. Justin Moore, Jr. Vice Chairman and Chief Executive Officer of Virginia Electric and Power Company, Richmond, Va. Director since 1973 Common Stock: 2,070 shs. Mr. Marschalk serves as a director of Piedmont Manage- ment Corp., Richardson-Merrell, Inc. and Thyssen-Borne- misza N.V. He is a member of the Audit, Executive, Finance and Incentive Compensation Committees of the Board of Directors of the Company. First employed by the Company in 1954, Mr. Maxwell be- came a Vice President in 1969 and Senior Vice President in 1976. He has been Executive Vice President of Philip Morris International since 1973. Mr. Maxwell is a member of the Committee on Public Affairs and Social Responsibility of the Board of Directors of the Company. First employed by the Company in 1941, Mr. Millhiser be- came President in 1973. He serves as a director of First & Merchants Corporation and First & Merchants National Bank, Richmond, Virginia. Mr. Millhiser is a member of the Execu- tive and Finance Committees of the Board of Directors of the Company. In addition to serving on the Board of Directors of the Vir- ginia Electric and Power Company, Mr. Moore is a director of Central National Corporation and Central National Bank, Richmond, Virginia, and serves as a trustee of the Colonial Williamsburg Foundation and the University of Richmond. He is a member of the Executive, Finance, Nominating and Public Affairs and Social Responsibility Committees of the Board of Directors of the Company. (4) Mr. Maxwell owns 5,332 ordinary shares of Philip Morris (Australia) Limited. (5) Mr. Millhiser owns 7,481 ordinary shares of Philip Morris (Australia) Limited. 5

John A. Murphy Executive Vice President and President of Miller Brewing Company John S. Reed Executive Vice President of Citicorp and Citibank, N.A., New York, N.Y. Director since 1958 Common Stock: 73,800 shs.(6) Margaret B. Young Chairman of the Whitney M. Young, Jr. Memorial Foundation, New York, N.Y.; Consultant to the Company First employed by the Company in 1962, Mr. Murphy be- came Executive Vice President in 1976. Joining Miller Brewing Company In 1971, he has served as its president since 1972. Mr. Murphy serves as a director of M & I Mar- shall & lisley Bank and Marquette University. He is a member of the Environmental, Finance and Public Affairs and Social Responsibility Committees of the Board of Directors of the Company. Mr. Reed serves as a director of Arlen Realty & Development Corp. and Citibank (New York State) N.A. and as a trustee of the Russell Sage Foundation and the Memorial Sloan-Ketter- ing Cancer Center. He is a member of the Audit, Finance and Stock Unit Plan 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 and assumed his present position in 1973. He serves as a director of Avnet Incorporated, the Harlem Savings Bank and the Lincoln Center for the Performing Arts and as a member of the Swarthmore College CoUncil and the Boards of Visitors of the City University of New York and the City College of New York. Mr. Weissman is a member of the Executive and Finance Committees of the Board of Directors of the Company. Mrs. Young is a member of the Board of Governors of the United Nations Association and a director of the Metropolitan Museum of Art and the Lincoln Center for the Performing Arts. She is a member of the Environmental and Public Affairs and Social Responsibility Committees of the Board of Direc- tors of the Company. (6) Mr. Weissman owns 8,332 ordinary shares of Philip Morris (Australia) Limited.

Remuneration of Directors and Officers The table below sets forth, with respect to the fiscal year ended December 31, 1977, information concerning each director whose aggregate direct remuneration from the Company and its subsidiaries exceeded $40,000 and concerning all directors and officers as a group. The three highest paid officers are also directors. Names and Capacities in Which Remuneration Was Received _ _ Aggregate Direct Remuneration(1) Deferred Profit-Sharing Plan(2) Incentive Compensation Plan(3) T. F. Ahrensfeld, Senior Vice President and General Counsel $ 139,347 $ 9,031 $ 65,250 J. C. Bowling, Senior Vice President 148,943 10,044 72,000 J. E. Cookman, Chairman of Finance Committee 110,975 7,427 57,700 J. A. Cordido-Freytes, President and Director of C.A. Tabacalera Nacional, Director of the Company 92,725 - - Hugh Cullman, Executive Vice President 214,053 13,927 123,750 J. F. Cullman 3rd, Chairman of the Board and Chief Executive Officer 324,288(4) 21,776 234,000 C. H. Goldsmith, Executive Vice President 220,037 14,095 141,000 J. T. Landry, Senior Vice President 145,357 9,791 80,000 Hamish Maxwell, Senior Vice President 141,741 8,440 70,000 R. R. Millhiser, President 244,056 16,459 162,000 J. A. Murphy, Executive Vice President 170,000 11,479 120,000 George Weissman, Vice Chairman of the Board 252,375 16,796 165,000 All Directors and Officers $4,805,342 $ 285,789 $2,215,550 (51 in number) (1) Amounts paid or to be paid under the Deferred Profit-Sharing and Incentive Com- pensation Plans are shown separately. Direct remuneration shown is the aggregate amount paid by the Company and its subsidiaries for the full year. Certain officers and employees are reimbursed for club dues and assessments when such memberships are maintained for business purposes. The aggregate direct remuneration shown in the table does not include the incidental economic benefit of personal use of clubs, since, in the opinion of management, such benefit cannot be valued. (2) The amounts heretofore allocated to the above persons are: Mr. Ahrensfeld, $53,728; Mr. Bowling, $58,208; Mr. Cookman, $76,005; Mr. Hugh Cullman, $84,881; Mr. J. F. Cullman 3rd, $157,870; Mr. Goldsmith, $77,718; Mr. Landry, $53,945; Mr. Maxwell, $42,430; 7

t I Mr. Millhiser, $97,011; Mr. Murphy, $49,596; Mr. Weissman, $115,332; all directors and officers, $1,558,796. Reference is made to the material appearing under the caption "Amendments to Deferred Profit-Sharing Plan". (3) Awarded in 1978 with respect to the calendar year 1977 and payable 50% in 1978 and 50%, subject to certain conditions, in 1979. Reference is made to the material appear- ing under the caption "Amendment to Incentive Compensation Plan". (4) The Company has agreed to pay Mr. Joseph F. Cullman 3rd annual compensation of at least $310,000 during his tenure as chief executive officer and thereafter, until April 30, 1982, 50% of his annual compensation as of December 31, 1978 or as of his relinquish- ment of the office of chief executive officer, whichever first occurs. The Board of Directors intends to select a new chief executive officer between April 30, 1978 and December 31, 1978, such selection to be effective no later than December 31, 1978. Examples of annual full retirement allowances* payable under the Retirement Plan to employees, including officers, are set forth in the following table. The examples assume retirement at the normal retirement age of 65 after assumed periods of service. Five-Year Average Compensation Years of Service 5 10 20 30 40 $100,000 $ 8,544 $ 17,087 $ 34,174 $ 51,262 $ 68,349 150,000 12,919 25,837 51,674 77,512 103,349 200,000 17,294 34,587 69,174 103,762 138,349 250,000 21,669 43,337 86,674 130,012 173,349 300,000 26,044 52,087 104,174 156,262 208,349 350,000 30,419 60,837 121,674 182,512 243,349 *Full retirement allowances are payable upon retirement at the normal retirement age of 65; such annual retirement allowances are computed at the rate of 11/4 % of five-year average compensation (the average amount of annual compensation received during the 60 highest paid consecutive months of the last 120 months of an employee's accredited service) 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 security integration level, multi- plied by the number of years of accredited service. In the table, the social security integra- tion level in effect for the calendar year 1978 has been used. The Employee Retirement Income Security Act of 1974 limits the maximum annual benefit payable under a retirement plan. If an annual benefit exceeds the limit imposed by said Act, the payment of the excess will be made from the Company's general funds rather than from the Retirement Plan Trusts. During the year ended December 31, 1977, the firm of Betancourt, Cordido and Associates, of which Dr. Cordido-Freytes is a member, received legal fees of $110,106 from the Com- pany and its affiliates, and the firm of McKenna & Fitting, to which Mr. Lasker is counsel, received legal fees of $363,787.

The Company and its subsidiaries have transactions in the ordinary course of business, including borrowings, with Bankers Trust Company, New York, N.Y., of which Mr. Brittain is chairman of the board; Citibank, N.A., New York, N.Y., of which Mr. Reed is an executive vice president; and Banco Exterior, Caracas, Venezuela, of which Dr. Cordido-Freytes is president. From January 1, 1977 to January 31, 1978, the maximum amount of borrowings outstanding at any one time from Bankers Trust Company was $19,800,000; from Citibank, N.A. was $91,600,000; and from Banco Exterior was $4,200,000; at January 31, 1978, the amounts outstanding were $14,300,000, $73,400,000 and $1,200,000, respectively. During the period January 1, 1977 to January 31, 1978, interest (including commitment fees) accrued to Bankers Trust Company was $1,555,000; Citibank, N.A., $8,184,000; and Banco Exterior, $201,000. Such borrowings were on substantially the same terms, including interest rates, as those prevailing at the time for comparable transactions with other financial institutions. The Company and certain of its subsidiaries maintain deposit account balances with Bankers Trust Company and Citibank, N.A. to compensate those banks for account handling and other important services and to support lines of credit. Bankers Trust Company is a participant in and the agent for a $250,000,000 Eurodollar Revolving Credit concluded by the Company with 23 banks in 1977. Edward M. Schaaf, Jr., a vice president, is a director, and his wife owns 23% of the stock, of Richmond Cold Storage Company, Inc. ("Storage"), Richmond, Virginia. The Company uses Storage's public warehouse at negotiated and competitive rates. In 1976, Storage constructed, for $3,650,000, a cold storage warehouse (the "Warehouse") for use by the Company and for which Storage obtained 100% mortgage financing. The Warehouse has been leased (with an option to buy) to the Company for at least ten years at a rental sufficient to cover debt service, taxes and insurance. For warehousing services, the Com- pany pays 115% of the operating expenses of the Warehouse. In 1977, the total amount paid by the Company to Storage amounted to approximately $456,000,'of which $412,000 represents rent and operating expenses for the Warehouse. AMENDMENTS TO DEFERRED PROFIT-SHARING PLAN Participation by Additional Employees At present, the Philip Morris Incorporated Deferred Profit-Sharing Plan (the "Profit- Sharing Plan") covers only employees of the Company and one subsidiary, Philip Morris Overseas, Inc., approximately 13,000 persons. Management now believes it advisable to provide for participation by certain other employees. Accordingly, the Board of Directors has adopted, subject to stockholder and Internal Revenue Service approval, amendments to the Profit-Sharing Plan which would extend participation to employees of Miller Brewing Company and most of its subsidiaries (the "Miller Group") as of January 1, 1978 and to employees of other subsidiaries when and if such subsidiaries elect to participate and if 9

7 such participation is approved by the Board of Directors of the Company. At present, approximately 1,300 employees of the Miller Group will participate. Employees with more than two years of service are eligible to participate. In addition to the employer's contribution, employees are permitted to make contributions not exceeding 10% of annual compensation. The employer's contribution for each year is allocated among those who were participants on the last business day of such year in the propor- tion which the compensation for such year of each such participant bears to the aggregate compensation for such year of all such participants. Distribution of the part of an individual's share in the trust fund which is attributable to the employer's contributions is normally made after he or she ceases to be an employee, but an employee is permitted to withdraw amounts up to 50% of his or her proportionate share of the employer's contri- butions under certain circumstances. For the fiscal year ended December 31, 1977, the employer's contribution, which was made entirely by the Company, amounted to $11,938,701. See "Remuneration of Directors and Officers" herein. Increase in Annual Contribution As presently in effect, the Company's annual contribution is an amount equal to 3% of the Company's earnings for the year in question on an unconsolidated basis, before Federal income taxes and before deduction of the sum to be contributed to the Profit- Sharing Plan and the amount allocated to the Incentive Compensation Plan Reserve. The amendments provide that once a subsidiary or group of subsidiaries is approved for participation an additional contribution will be made annually on behalf of its or their participating employees, which will, subject to certain immaterial exceptions, equal the smaller of (i) 3% of Operating Profit of the subsidiary or group, as the case may be, and (ii) 15% of the aggregate annual compensation of the participants among whom the con- tribution is to be allocated, or (iii) such lesser amount as shall be determined by the Board of Directors of the Company. Operating Profit means operating revenues less operating expenses (computed before deducting any sums contributed under the Profit-Sharing Plan and any incentive compensation plan) of the subsidiary or group, as the case may be, as determined by the Company's independent public accountants in accordance with generally accepted accounting principles. At present, the Board of Directors intends to limit contributions so that participating employees of subsidiaries or groups will not receive allocations which, as a percentage of compensation, are greater than those received by present participants in the Profit-Sharing Plan. Had the Miller Group participated in the Profit-Sharing Plan in 1977, it would have made an employer contribution of approxi- mately $700,000, although 15% of the 1977 compensation of those who would have been eligible participants was $3,103,780 and 3% of the Operating Profit of the Miller Group was $3,193,680. 10 3J ~ .~ ~ ~ ~

Amendment Without Stockholder Approval As presently in effect, the Profit-Sharing Plan may be amended by the Board of Directors, without stockholder approval, unless the effect of such amendment is to increase the Company's contribution to an amount in excess of 3% of unconsolidated earnings be- fore Federal income taxes and before deduction of the sum to be contributed to the Profit-Sharing Plan and the amount allocated to the Incentive Compensation Plan Reserve. For 1977, this amount was $11,938,701, the amount actually contributed by the Company. It is now proposed to amend this provision to provide that the Board of Directors may amend the Profit-Sharing Plan without stockholder approval, unless the effect of such amendment is to increase the aggregate annual contribution of the Company and its sub- sidiaries to an amount in excess of 3% of earnings of the Company and its consolidated subsidiaries, before deduction of contributions under the Profit-Sharing Plan and of alloca- tions to or contributions under all incentive compensation plans and before all income taxes. For 1977, this amount would have been $19,292,000. The amendment does not otherwise affect the existing authority of the Board of Directors to amend the Profit-Sharing Plan without stockholder approval. Deductibility for Federal income tax purposes of the amounts contributed by the Company and its subsidiaries to the Profit-Sharing Plan Trust depends, among other things, upon the exemption of the trust under the Internal Revenue Code. The resolution of the Board of Directors authorizing the amendments is subject to the receipt of a determination from the Internal Revenue Service to the effect that the exemption of the trust will continue. In the event that changes in the amended Profit-Sharing Plan are necessary to obtain this determination, such changes may be made without resubmission to stockholders. It is not anticipated that any such changes would be material. When such determination is received, it is believed that all contributions will be deductible. AMENDMENT TO INCENTIVE COMPENSATION PLAN In 1967, the Company, with stockholder approval, adopted an Incentive Compensation Plan (the "Incentive Plan"). Under the Incentive Plan, awards are made out of a Reserve, to which amounts are credited annually by the Board of Directors. Awards from the Reserve are made by the Incentive Compensation Committee (the "Committee"), consisting of directors and former directors, none of whom is eligible for an award. Any person who served as an employee of the Company or any of its subsidiaries in an important position at any time during the calendar year prior to the year in which an award is made is eligible for consideration for an award, but the Committee has absolute discretion with respect to his or her selection for an award, the amount of the award and the method of its payment, except that no employee may be granted an award in excess of 100% of his or her highest annual salary rate during the calendar year prior to the year 11

t 1 4 in which the award is made. (As originally adopted, the Incentive Plan limited individual awards to 50% of the highest annual salary rate; however, pursuant to authority granted to it by the terms of the Incentive Plan, the Board of Directors in 1976 increased the limitation to 100%.) Awards are deductible by the Company for Federal income tax pur- poses. As originally adopted in 1967, the maximum annual amount which could be credited to the Reserve was the smallest of: Formula A: 7% of the amount by which the Company's consolidated pre-tax earnings for the year less $65,000,000 were greater than 15% of the amount by which stockholders' equity on a consolidated basis as of December 31 of that year exceeded $250,000,000; Formula B: The amount which added to the Company's contribution to its Profit-Sharing Plan Trust with respect to the year was equal to 7% of the amount by which consolidated pre-tax earnings for the year exceeded 15% of stockholders' equity on a consolidated basis as of December 31 of such year; or Formula C: 6% of the amount of cash dividends declared by the Company on its Common Stock during the year. In 1975, the Board of Directors amended Formula A to increase the deductible from $65,000,000 (the approximate amount of the Company's 1966 consolidated pre-tax earn- ings) to $225,000,000 and the stockholders' equity base from $250,000,000 (the approx- imate amount thereof on December 31, 1966) to $700,000,000. The Board of Directors believes that the Incentive Plan has been of great benefit to the Company in attracting and retaining key employees who have contributed to the growth of the Company since 1967. However, because of this growth, the increase in the number of participants in the Incentive Plan and the amendments proposed to the Profit-Sharing Plan (see "Amendments to Deferred Profit-Sharing Plan"), the Board of Directors has determined that the maximum amount that can be allocated to the Reserve will soon become too small. Accordingly, subject to stockholder approval, the Board of Directors amended, effective as of January 1, 1978, the Incentive Plan to provide that the maximum amount which can be credited to the Reserve is the smaller of: Method l: 7% of the amount by which the Company's consolidated pre-tax earn- ings for the year less $475,000,000 are greater than 15% of the amount by which stockholders' equity on a consolidated basis as of December 31 of that year exceeds $1,425,000,000; or Method /l: 8% of the amount of cash dividends declared by the Company on its Common Stock during that year. 12 ,

For 1976, consolidated pre-tax earnings were $472,000,000 and stockholders' equity at December 31, 1976 was $1,430,000,000. As is evident from a comparison of the amendment with the existing limitation, the major changes are a ten-year updating of Formula A, the elimination of Formula B and the increase to 8% from 6% of the dividend limitation of Formula C. Under the existing limita- tion, the maximum amount that could have been credited to the Reserve for 1977 was $5,611,761, which equals 6% of the cash dividends declared on the Company's Common Stock in 1977; had the proposed amendment been in effect, this amount would have been increased to $7,482,320. With respect to 1977, the Formula A limitation was $17,640,427, whereas under the amendment (Method I), it would have been $7,752,927. Under Formula B, the limitation with respect to 1977 was $14,101,726; had the employees of the Miller Group been participants in the Profit-Sharing Plan in 1977 (see "Amendments to Deferred Profit-Sharing Plan"), the Formula B limitation would have been $13,401,726. In each of the last five years, Formula C has determined the maximum amount creditable to the Reserve. Under Formula C, such maximum amount in each of the last five years was as follows: 1977, $5,611,761; 1976, $4,101,960; 1975, $3,265,140; 1974, $2,610,240; 1973, $2,227,680. The amount actually credited to the Reserve by the Board of Directors in each of the last five years was: 1977, $5,611,761; 1976, $3,940,000; 1975, $3,100,000; 1974, $2,400,000; 1973, $2,200,000. The aggregate amounts awarded from the Reserve with respect to the years 1973 through 1977 to each person named in the Remuneration Table on page 7, to all directors and officers as a group and to all employees have been as follows: T. F. Ahrensfeld, $231,790; J. C. Bowling, $306,750; J. E. Cookman, $280,200; J. A. Cordido-Freytes, none; Hugh Cullman, $472,830; J. F. Cullman 3rd, $755,000; C. H. Goldsmith, $491,190; J. T. Landry, $304,890; Hamish Maxwell, $240,950; R. R. Millhiser, $555,630; J. A. Murphy, $381,350; George Weissman, $590,420; all directors and officers, $7,553,940; all employees, $16,642,799. ADDITIONAL INFORMATION In addition to the Profit-Sharing and Incentive Plans, the Company, its subsidiaries and affiliates maintain various benefit plans for their employees, the most important of which are described below. The Company maintains a non-contributory retirement plan for approximately 16,000 employees. Under this plan, an employee normally retires at the age of 65 (earlier under certain circumstances) on a full retirement allowance based on the average amount of annual compensation received during the 60 highest paid consecutive months of the last 120 months of accredited service. (See "Remuneration of Directors and Officers" for examples of full retirement allowances.) The Company's contribution to the retirement 13

14 I r l plan for the fiscal year ended December 31, 1977 amounted to $18,233,678. Retirement plans maintained by subsidiaries and affiliates vary over a wide range depending upon the country in which the subsidiary or affiliate is located and other factors. The cost of these plans is not significant in relation to the enterprise as a whole. The Company also main- tains a Long-Term Disability Plan and a Survivor Income Benefit Plan. The former plan protects most employees and their families against loss of income due to long-term dis- ability. Prior to age 65, the maximum annual benefit is $24,000. At age 65, 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 computed as if the employee had worked during the entire period of disability (until age 65) at the compen- sation being received at the time of disability. The Company's contribution to the Long- Term Disability Plan Trust for the year 1977 amounted to $641,524. Disability plans are also maintained by subsidiaries. The Survivor Income Benefit Plan provides annual income benefits to the family of a salaried employee 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 basic annual compensation at the time of death. Commencing with the date the deceased employee would have attained age 65, the spouse receives an annual amount for life equal to what he or she would have received under the Company's retire- ment plan if the employee had lived, had remained in the employ of the Company to age 65 at the compensation 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 actuarially reduced retirement allowance. In certain instances, benefits are also payable to dependent children. The Company's contribution to the Survivor Income Benefit Plan Trust for the year 1977 was $455,672. In 1977, the Company adopted, effective January 1, 1976, an Employee Stock Ownership Plan pursuant to the Federal Tax Reduction Act of 1975. Annually, an amount equal to 1% of qualified investments (as defined in the Internal Revenue Code as being eligible for investment credit under Section 38 thereof) of the Company and its domestic subsidiaries is paid in cash or Common Stock of the Company to a trust and allocated among participants according to their compensation. Any cash contribution is invested in the Common Stock of the Company. Generally speaking, salaried employees of the Company and most of its domestic subsidiaries in the lower compensation grades with 3 years of service participate. No contributions by participants are permitted, and distribution of a participant's share in the trust occurs upon termination of employment. For 1976, the Company's contribution was $1,901,862, which was claimed as a credit against 1976 Federal income taxes.

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 Com- mon Stock at fair market value on 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 expira- tion, which is generally 5 years from the date of grant in the case of qualified options and 10 years in the case of non-qualified options. Each optionee has agreed to remain in the employ of the Company or a subsidiary for one year from the date of the granting of the option at such rate of compensation (not less than the rate then in effect) as the Company may from time to time determine. In 1977, the stockholders approved the 1977 Stock Unit Plan providing for the granting to key employees of the Company and its affiliates of units with respect to a total of 1,000,000 shares of Common Stock. Each recipient of a unit must agree to remain in the employ of the Company or its affiliates for one year from 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; or receive, in the form of Common 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 fair market value of such a share on the date the unit was granted (the "Appreciation Value" of such unit), provided that such unit holder at the same time exercises 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 Appreciation 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 for 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. The last reported sales price of the Company's Common Stock on the New York Stock Exchange on March 13, 1978 was $581/4 per share. The following table shows the reported 15

I high and low sales prices of the Company's Common Stock on the New York Stock Exchange, adjusted to give effect to stock split-ups: High Low 1973 .......................... $683/a $483/4 1974 .......................... 613/a 341/a 1975 .......................... 591/4 40~/a 1976 .......................... 631/4 493/4 1977 .......................... 647/a 511/2 1978 through March 13 .......... 613/4 557/8 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, 51 persons, (i) the number of shares subject to options and units and the average per share price as to options and units granted since January 1, 1973, (ii) the number of shares for which options were exercised during such period, the aggregate option price and the aggregate market value of shares acquired on date of exercise, (iii) the number of shares of Common Stock sold during the period by those persons who exercised options, and (iv) the number of shares subject to options and units and the average per share exercise price as to shares subject to all unexercised options and units held as of January 31, 1978. Figures in the tabulation have been adjusted, where appropriate, to reflect stock split-ups. COMMON STOCK, $i PAR VALUE T. F. Ahrensfeld J. C. Bowling J. E. Cookman Hugh Cullman J. F. Cullman 3rd C. H. Goldsmith J. T. Landry Hamish Maxwell R. R. Millhiser J. A. Murphy George Weissman Group GRANTED(1)-1973 TO JANUARY 31, 1978 EXERCISED(2)-1973 TO JANUARY 31, 1978 SALES-1973 JANUARY 31, 1978(3) UNEXERCISED(1) AT 1ANUARY 31, 1978 Number of Shares Average Per Share Exercise Price Number of Shares Aggregate Option Price of Options Exercised Aggregate Market Value of Shares on Date Options Exercised Number of Shares Number of Shares Average Per Share Exercise Price 14,000 $53.46 4,000 $ 120,500 $ 214,750 3,000 14,000 $53.46 14,000 53.63 12,000 253,000 640,000 4,000 14,000 53.63 - - 6,000 151,000 340,500 13,000 - - 13,700 52.47 28,000 497,313 1,713,500 12,500 13,700 52.47 - - 24,000 506,000 1,328,000 50,360 - - 23,300 51.95 6,000 156,250 332,000 22,000 23,300 51.95 15,500 52.76 15,800 339,725 838,375 12,500 15,500 52.76 14,700 53.18 12,000 323,500 656,500 800 12,700 53.60 29,700 51.18 7,000 198,625 402,625 - 29,700 51.18 20,000 53.64 24,000 583,250 1,154,250 8,550 20,000 53.64 15,700 52.44 17,500 389,375 967,313 4,100 15,700 52.44 333,500 $52.96 275,100 $6,836,975 $15,382,200 199,259 330,000 $52.98 (1 ) The number shown is the combined number of shares for which options and units were granted. Units were granted as follows: T. F. Ahrensfeld, 3,000; J. C. Bowling, 3,000; 16 q t-.i 0 ~ i-+fU ~ LJi

Hugh Cullman, 5,700; C. H. Goldsmith, 6,300; J. T. Landry, 3,500; Hamish Maxwell, 3,500; R. R. Millhiser, 6,700; J. A. Murphy, 5,500; George Weissman, 6,700; Group, 84,350. The unit exercise price of all the foregoing units is $60.0625. (2) No units have been exercised. (3) Sales by directors and officers who exercised options during the period January 1, 1973 to January 31, 1978. In addition, during the period, other employees were granted options for 591,250 shares at a weighted average option price per share of $53.25 and 214,350 units at a unit exercise price of $60.0625. SELECTION OF AUDITORS The Audit Committee of the Board of Directors, consisting of Messrs. Dammann, Lasker, Maisonrouge, Marschalk and Reed, has recommended to the Board 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, 1978. 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. 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 custod- ians, nominees and fiduciaries to forward soliciting material to the beneficial owners of the 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 engagement and direc- tion of D. F. King & Co., Inc., 20 Exchange Place, New York, N.Y. 10005, at an anticipated cost to the Company of $15,000. The Company's 1977 Annual Report, including financial statements for the two years ended December 31, 1977, has been mailed to all stockholders. The Annual Report is not to be considered proxy soliciting material. Eugene J. T. Flanagan, Secretary March 17, 1978 17