Tobacco Documents Online

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Financial Highlights (in millions of dollars, except per share amounts) 1984 1983 1982 1981 ~ _ 1980 Operating Revenues _ $13,813.7 $12,975.9 $11,586.0 $10,722.3 $9,649.5 Net Earnings 888.5 903.5 781.8 659.7 549.1 Earnings Per Common Share 7.24 7.17 6.23 5.28 4.41 Dividends Declared Per Common Share 3.40 2.90 2.40 - _- _ 2.00 - - ~ 1.60 - Funds From Operations Per Common Share 12.61 10.70 9.24 7.81 _ 6.29 Percent Increase Over Prior Year 4 Operating Revenues _ 6.5% 12.0% 8.1 % 11.1 % 18.4 % Net Earnings (1.7%) 15.6% 18.5% 20.1% 8.1% Earnings Per Common Share _ 1.0% 15.1% 18.0% 19.7% 8.1 % Dividends Declared Per Common Share Oper~:'-g Reve;.uss ! fl 17.2o/a 20.8% 20,0% 25.0% 28.0% Philip Morris U.S.A. - $ 6,133.3 $ 5,519.9 $ 4,330.1 $ 3,761.6 $3,272.1 Philip Morris International _ 3 ,741 . 0 3,646.7 3,563.7 3,400.3 ,205.4 3,205.4 Miller Brewing Company 2, 928 .2 2,922.1 2,928.7 2,837.2 2 The Seven-Up Company 734.0 649.9 530.6 _ 432.1 353.2 Philip Morris Industrial 277.2 237.3 232.9 291.1 276.5 Consolidated Operating Revenues $13,813.7 $12,975.9 $11,586.0 $10,722.3 $9,649.5 Operating Income Philip Morris U.S.A. $ 1,745.2 $ 1,337,8 $ 1,101.6 $ 905.7 $ 786.1 Philip Morris International _ 420.9 366.0 446.0 396.6 318.0 Miller Brewing Company 116.2 227.3 158,8 115.6 144.8 The Seven-Up Company 5.3 (10.8) (1.2) (1.7) _(7.1) Philip Morris Industrial 29,5 13.6 7.6 18.9 16.9 Mission Viejo Realty Group Inc.* 17.2 19.6 ~ 2.0 11.1 14.7 P.M. Credit Corporation* 11.3 4.5 0.9 _ Consolidated Operating Income $ 2,345.6 $ 1,958.0 $ 1,715.7 $ 1,446.2 $1,273.4 Compounded Average Annual Growth Rate 1984-1979 1984-1974 1984-1969 1984-1959 Operating Revenues 11.1% 16.5% 18.1% 14.2% NetEarnings 11.8% 17.6% 19.9% ~ 16.5% Primary Earnings Per Share 12.2% 16.4% 17.6% 15.2% Operating companies' income is income before corpoeate expense, interest, and other non-operating income and deductions. The amortization of previously capital- ized interest is included in operating companies' income. A write-down of the completed but inactive Miller Brewing Company facility in - ; Trenton, Ohio, reduced 1984 net earnings and earnings per share by $145.6 million and $1.19, respectively. *Represents equity in net earnings of these unconsolidated subsidiaries. ~ gA ~ CS~ Z~

 Operating reventles increased ~'~.5 % to ~ 13.8 billion.  Operating income increased 19.8 % to $2.3 billion.  Net income decrea.Qed 1. 7% to $888.5 million due to a write-down of Miller Brewing's facility in 'I~renton, Ohio.  Earnings per share increased 1. 0% to $7.24.  Declared dividends increased 17.2 % to $3.40 a share.  Funds from operations per share increased 17.9%. * OIic (IeLt, zfI. itU lowesc le°7el in `',`:.'  Our worldwide cigarette unit volume increased by more than 20 billion units. Operating Revenues Billions of Dollars 80 81 82 83 84 Operating Profit Billions of Dollars 8o 81 82 83 84

Review of the Year In 1984, Philip Morris' cigarette sales again increased in volume and market share, both in the United States and internationally. Our cigarette-operations continue to gen- erate most of the corporation's earnings and growth. The overall results of our-non-tobacco businesses have not yet matched our ambitions for them, but they showed progress in 1984. Miller Brewing Company's bar- rel sales were up slightly over..1983, the first increase in three years. Seven-Up volume also improved, and the company had an operating profit for the first time since 1979. Philip Morris Indttstrial_and the Mission Viejo Realty Group Inc. had good years -~!~....- "Ind le-i-1, *,~ rcrinpaniez~ eFtd ui Mie corporate ,~taif, :n : ~r to improve productivitly. These programs, which were completed in 1984, reduced a significant number of management and staff positions and are contributing to management effectiveness as well as lowering overhead expenses, - The corporation's operating income increased 19.8,I'l over 1983 but net income was down as a result of the de.cision reached in November to write-down Miller's completed but inactive Trenton, Ohio, brewery to net realizable value; this resulted in a charge of 5280.4 mil- lion to pre-tax income and i;1-1:j.6 it~illion to the net income of the corporation. i`1 strong ir;cr_~ase in cas'1 3.`w 't' !`qen?'Jlef~ us to evy ;4Ju.3 iuii;ion ana to complete the repurchase, authorized by the Board of Directors in late 1983, of 4 million common shares. In May, 1984, a further purchase of 4 million common shares was authorized, and at year-end 1.5 million had been purchased. Capital expenditures in 1984 amounted to S298 million. In 1984, Philip Morris raised the divi- dend declared on its common stock by 17.2 % to an annual rate of $3.40 per share. In mid-year, a new management team assumed responsibility for the company and for the commitments that have characterized Philip Morris' success over the past generation: -«'e are committed to make and market products of the highest quality and to develop new products that satisfy consumers' present demands and anticipate their needs. To do that, we will continue to invest in the best and most productive facilities, machinery, and equipment as well as in research and develop- ment activities oriented to the marketplace; -«'e are committed to profitable growth. We intend to continue to gain sales and market share through innovative marketing, and to broaden the base of our business through investment or acquisition in fields compatible with ou_r expe.-ience. «'- wi:i use our n~, +;i<<g iin'tncial surn~iil~~, a~~d reso~~rces to iiripr,wE-I •.'lt, ,-i~_;e of our sto(-kl:olders' investment; We are committed to defending the legitimate inter- ests of our businesses against discriminatory taxation and critics' proposals to impose unreasonable restric- tions on the use of our products and on some of our competitive marketing tools; We are committed to continue our programs in the public interest and to recognize our obligations to the society that supports us, in particular, to the com- munities where we work and invest. Thpse comniitments require another-that of a dedi- cated an~' ~up _i~r team of rlanagement and emplo,~ees. We itit,•:?~i , .~=rve and ^:-.hLince the quality of our ue:utli~: 's pertor:nance by ~fianing sure Philip Morris remains a lively, friendly, and stimulating company for which to work. We are committed to encouraging sensi- ble and confident risk-taking, to rewarding merit and achievement, and to seeing that occasional mistakes are treated as learning experiences. Net Earnings Earnings Per Share Dividend_s Declared Capital Expenditures Per Share B

Philip Morris tJ.S.A. In 1984, cigarette sales in the United States increased to approximately 600 billion units, showing some recovery from 1983 when sales levels were depressed by the effects of greatly increased taxation. Philip Morris U.S.A.-unit i volume increased U'1,4,'o to L1Et'i ~')Iliio 1 uilits, LIl1;I I;i';;, share improved to 35.3 % . ~ ` The Marlboro brand enjoyed a particularly good year as volume increased 7.4 %.. Marlboro Red remains by far the largest-selling brand in tlie market; Marlboro Lights consolidated its position as the leading low-tar cigarette. During the year, 25's packs of King Size Marlboro Red and Lights were successfully test marketed, and this convenience package became available nationally early in 1985. 14erit low-tar king size in a box was also intro- duced nationally in 1984; among our other brands, Benson & Hedges 100's and Virginia Slims held their leading positions in their cafegories. Philip Morris U.S. A.'s strong brand performance was enhan::-et1 by a sal<~z f,lrce re&pw,.'n"nt re-i'i.il ` in a significant impi'v'veme'°it: in blith pioduct Izni: j'i'.CkdjI' distribution. The increase in distribution was partially a result of the itltrodUctiUlt o~ Iz I.Cw ~ett3C'i , j'?;? t f _a1 L:/,i •.ld i)13r-,i- age display units, which heightened Philip ivitnris i'.S,A.'s share of in-store merchandising space. Speclal proiyro- tions such as the Marlboro Country Music Concerts and the Virginia Slims women's prf,f(, 1F,_Il tenliis tf,uro,-)- nlf'1lCs, along wita ~I: v.?1It't~' _u( i,ii;IP iii'i~)IITPf~ 11) i)1 1 ~ ~ , . ;lfid "flil!'t II (C.`~r.ii'i. . . lu'•1. ' L UC2l 1(I~. }1Clnt't[)2tll~ ~ t'tiCl'IC and }!r =~e f<<hel prniil-ict~, ,whievi,ri ,a shmre nf ~ibf11-it 5.5°%, of the Li.S. marker. Philip 1lurris U.,S.A. fii/f not c,oniltetf, ii) this segment in 1984. IIowever, «'e have broad and suc- cessful experience in price segmentation marketing in other countries and are prepared to enter the segment in the United States, if appropriate. The quality of our products remains our great coin- petitive strength. That quality is based on exacting manufacturing standards and high-quality tobacco, Our overall facility improvement and modernization t.ri;gram is continuing. Production increased in our new plant in Cabarrus County, North Carolina, the world's most mod- ern and technologically advanced cigarette factory, and we have realized significant productivity gains there. By the end of 1984, our new primary tobacco processing st=tnti<tl iIi'rC:~it:-:It, was almost complete. 'We made lar ~,, purchases of the 1984 U.S. il~_-:, ,ured and burley tobacco crops, andgtzaiity American tobacco leaf remains the mainstay of our products. In recent years, U.S. leaf has iostits price competitiveness in the world market, surpluses have accumulated, and uncer- tainties have arisen about the future of the tobacco pro- gram, Philip Morris is the largest buyer of U.S. tobacco, both for its U.S. and internationally ma.nufactured brands, and we intend to continue to depend principally on U,S,-grown tobacco. VJe will support programs to in- sure adequate supplies of quality tt baccl, at pri.^"s ,sl;ic!!, while competitive, allov; a fa-ir r:'tt.)r)1 to U,S. growe~~,.  U.S. Cigarette Industry Unit Sales - Philip Morris Share of U.S. Industry (%) Philip Morris U.S.A. Philip Morris U.S.A. Operating Revenues Operating Inoome Millions of Dollars 5100 4250 3400 Millions of Dollars 1500 1250 1000 2550 1700 850 0 75 76 77 78 79 80 81 82 83 84 750 500 250 0 Phillp Morris U.S.A. U.S. Cigarette Industry Cigarette Unit Sales Unit Sales Billion Units Billion Units 160 540 42% 150 450 35 120 360 28 270 21 60 180 14 30 90 0 0 75 76 77 78 79 80 81 82 83 84 75 76 77 78 79 80 81 82 83 84 205'764'7530

Philip Morris International ~fBI`~bUPu 11 L,IGHTS urk~~ invr Ii tt i; : r t~~ ~ _ LIDHa Philip Morris International had a good year, with operat- ing income increasing 15.01 to 5420.9 million. Even more encouraging, total unit volume increased 5,5% to 258.2 billion, showing that excellent growth potential for Philip Morris remains in our_ international markets. Results were particularly strong in the developed markets of Western Europe and in the Middle East. In West Germany, where a punitive tax increase in 1982 had depressed total market demand and encouraged price c•ut- `ing', consumers began to turn l;ack to mainstream .._,~,. Nla°-it oro rid especial, I,g ;52.3% in i t,•,, t'''e s'.!cCe.W_YJl inrrOC?ttt 'tio?1 of i4lar.bot•u it,U's early in the y~ear. In Italy, we had good growth for our leading brand, Marlboro, and especially strong performances by Merit and Multifilter, In France, our unit volume grew by 16%, and our market share increased to 15.8 %. Profitability in this market remains depressed due to government price controls and a tax system that discriminates between  Unconsolidated  Consolidated _ Philip Morris International Philip Morris International Operating Revenues Operating lncome Millions of Dollars Millions of Dollars 9000 390 7500 325 6000 260 4500 195 3000 130 _ -__ ~ 0 0 -~ . . . . 75767778796081528384 - 75767778798081828364 national and international products. In the United King- dom, the Raffles brand was launched nationally in August, following a successful test market in the south. This action has effectively doubled our market share in the U.K. to about 5%. Exports to the Middle East continue to represent an important source of income, In the Gulf, Marlboro Red, Marlboro Lights, and Merit are three of the top six brands. In Egypt, Marlboro sales were well up over last year. In the Turkish domestic market.. a new source of export business in 1984, Marlboro became the top- selling imported brand. The international segment still only accounts for approximately 2% of the large Japanese market, due in part to restrictions on distribution as well as high tariff and tax barriers. The restrictions have been modified as a result of negotiations betGv::en the Japanese guvern- ntent and the Japar, tcn tceo molopolv on the one hand w fi the L S, govet>.~mF tt eso_ a_11r t1 e_f rice uf_the Special TradeRepre~eiliatlve, on the other. These conces- sions, together with our intensified marketing efforts in Japan, helped to increase our sales in 1984 while our Lark and Parliament brands remained the two lead- ing imports. We continue to work for elimination of the remaining barriers to free and fair trade with Japan and the further development of the import segment. In Hong Kong, the market stabilized after a large duty increase and consequent price cutting. Marlboro again strengthened its position and is the leading brand in the market, with a share rjf 26 uo. In Malaysia, sales of Marlboro by our licensee increased strongly during the year, which q%~o saw t} e I~iltning of licensed manufac- ture of Marlboro in Indonesia. In spite of economic diffi- culties in the Philippines, we experienced only a modest decline in our licensed sales volume. i World Cigarette Industry Unit Sales (Excluding U.S.A.) ~ Philip Morris Share of World Market (Wo) Philip Morris International World Cigarette Industry Total Cigarette Unit Sales Unit Sales Excluding U.S.A. Billion Units Billlon Units • 210 ` _ 3600 9,0~/a ~ 175 140 105 _ . ~~ . - 2400 1800 _ _ _ ' . ' _ - ' _ _ - _ _ - - ~-5 ~ 6.0 ~ 4.5 ~ _ 70 1200 ~ 3.0 ., j 35 _ _ _ 600 1.5 ~ ~ 0 0 - -~ 0 ~ ~ 75 78 77 78 79 80 81 82 83 84 75 76 77 78 79 80 61 82 83 84 !

The econom,• in Latin America has placed our busi- nesses t4Nere under pressure. Consumers have switched virtually everywhere to lower-priced brands. This trend has reduced margins, as have price controls, which con- tinues to make it difficult to recover cost increases. TtI c•rlunt,eract this ,5ituation; our policy has been to concentrate on volume and market share gains. We have launched new, free-standing brands into growing seg- ments, Among the many launches made, L&M Lights in Argentina, Lider in Ecuador, and Casino in Uruguay were particularly successful. Marlboro is gaining market share almost everywhere in the region, and this despite its relatively high price. It has performed notably well in Brazil, where the market as a«•hole shows signs of recovery, and in Mexico and the Dominican Republic where our affiliates achieved record sales volumes in 1984. Philip Morris (Australia) Limited had a good year, led by the success of Peter Jackson_ 30's. Packaged in a four- row hinge-lid box, the brand increased its share of market from 7.5 % to 13.1 %, and contributed to the com- pany's overall improvement, which brought it to 29.4% of market, up from 27.0% in 1983. Philip Morris (Austra- lia) I,i~ w iI-, e UOro ~l:l'• ij ta:= 7) T al- ited. a 14% in ea+e5 and rem<;.ins>~ iea.del, i n its industr,y. The strength of the U.S. dollar continued to reduce the value of foreign sales and income when expressed in dollars. It also makes U.S, exports less price competi- tive in foreign markets. In 1984, our cigarette export vol- ume declined slightly from 1983 levels, but our share of the total U.S. cigarette export trade again improved, to about 60%. Rothmans International p.l.c, (London), in which your company has an investment, had another good year in 1984. During the year, we restructured our investment, bringing our equity in Rothmans International to slightly over .'10% and r,ur voting rights *,,t ,.?nde_r 25%. The rZstrL-`Gl_If1?g Settled i)~jeCt l:il~ rf:_ ~'1 the oravit!2_: traihactioil by the Commission of tite Ellrope mn l,o:nmii- nities but complainants are appealing. The matter also continues to be the subject of litigation in Germany. Mil1er Brewing Company Although the U.S. beer industry showed an estimated 0.7% decline in volume in 1984, Miller Brewing Company «`s r;le .;; aoll~:~~ of Iio~~~e,; 2r, zne ~ir of Mille- ucts reduced its operating iilcome. We are planning for future sales volume and income improvement by devel- oping new products and by creating new programs to revitalize Miller High Life. Meister Brau and Milwaukee's Best were successfully introduced nationally into the popular-priced segment within the past 15 months, As a result, we have been able to maintain brewery utilization, to satisfy the vol- ume requirements of our distributors, and to safeguard shelf and cooler space within retail outlets, Although the Miller Brewing Company Operating Revenues Millions of Dollars 75 76 77 78 79 80 81 82 83 84 Miller Brewing Company Operating Income 75 76 77 78 79 80 81 82 83 84 2057647532

margins on these brands are relatively low, we have two premium-price brands in test markets and others under development. Lite is the second-best-selling brand of beer in the U.S. market, and it retained its dominant position in the growing light beer category, while achieving a small volume increase. - The super-premium segment of the market in which Lowenbrau competes has been adversely affected by imports, made relatively cheaper by the strength of the U.S. dollar. This, together with the general consumer movement to popular-priced beers, resulted in a decline in Lowenbrau sales in 1984, Miller High Life is the third-best-selling brand in the U.S. market, but its sales decline, which continued in 1984, remains a major concern, Rectification of High Life's sales trend is a top priority. ~_: nmii, , r '>sti~ig nrcirain inclica`e,~ that iligh Life . . ~ i - -- C6 U1. t.Cl i ~ T`-~- ,; hen cnnl beers on the market, it is made without additives or pre- servatives, We have undertaken several marketing initia- tives to correct the sales problems of High Life, Among them is a new advertising campaign (begun in February, 11P85) which will improve the brancL's presentation and image. High Life sales responded well in 1984 to the introduction of the new 32-ounce King Kan, The brand has also continued to do well in the Canadian market where it is made under license. We are optimistic that the corrective steps that are being taken will result in an improvement in its sales performance., I'lte slowdown in indu, ry beur sales over recent ie.~.- . togethtr ;vith the ki -'ine ` i g:iller High Life vol- t Wtfor I;Ct3i'..:1.',s, resulted in a recognition that we could not set a date for the opening of our completed but inactive brewery in Trenton, Ohio. Since we could not forecast the time when this brewery's capacity will be needed, a decision to write the asset down to its net real_izable value was made in November.  U.S. Beer Industry Barrel Shipments - Miller Share of U.S. Industry (%) isiiter rrewfng Compar.y Barre! Shipments Millions of Barrels 36 30 U.S. Beer Industry Barrel Shipments Including Imports Milllons of Barrels - _ 18 75 - 12 50 _Y_a ... ~_ s = _ _ _ . 8 6 p 6 _ -- ; ~ -- 0 0 ~ ~-c ! 0 v75767778798081828384 75767778798081828384 The Seven-Up Company In 1984, The Seven-Up Company again achieved year-to- year revenue and unit volume growth and was profitable for the firstt time in five vears. The increase in our soft drink revenues for 1984 brought Seven-Up's compound average annual increase to 20.0% over the past five years. C<<r l;. .nds 7UP and Diet 7UP again had record sales I,. ..>s. V,'e moved t;~I. 10096 ?•'t.traSwect for- .,i' ui-i ; I. ' wT:_ J'1go.r r.'e LIhe in r"3ponSe to consumer preferences, The Seven•Op Company -- The SevenmUp Company Operating Revenues Operating Income -18 I I IL 0 tt I - _ _ _.-.. . .. . ~ - 75767778798081828384 75787778798081828384

Our contiitued success cvill d^le,ncl in iar;e part on maintaining a strong network of pr1ifitable, indel:.endent bottlers. We intend to contir_uie to operate bo- tling facilities and to maintain equity positions in bottling operations. Our iilvostments-are directed to specific -fluil~ 1A'(I1>.rf' i' ~ii't;bit Itl; 1`e(iLEiCt' (>Ur dirtc•t support. In 1984, we rri>l,~r;;ni?ecl~hl.;:+ ~tn t`p Foods Group into two divisions: the Citrus Products Division will con- tinue to produce private-label ptf,!iui•ts bnt will put greater emphasis on more profitable branded products, including Juice-Up Lemonade and Lemon Juice, which will be marketed nationally in 1985. The Freeze-Dried Division will continue to market its products in the tradi- tional outdoor and specialty segm:,nts. It will also intro- duce consumer retail products in 1985 as well as supply the food service industry. For Seven-Up International, which is under the direction of Philip Morris International, volume sales increased by 5.2 % in 1984, Good progress was made in the Europe/Middle East/Africa Region, including a successful introduction of 7UP in France during the year. Sales in Latin America recovered from the depressed lev- els of lg„). I the tiflutll Andreas Gemblr••, ~vho has 5uec-~,t'i.llly led Seven-I1p International since 1979, has--returned to Philip Morris International's EEC Region as Area Vice President and has been succeeded by Gabriel Bechaalany as President of Seven-Up International. Philip Morrls Industrial _ Philip Morris Industrial Operatiny Rwenues OperatlnQ Income Millbns of Dollars 2 Millions of Dollars 240 24 200 20 160 16 120 12 80 g 40 4 0 0 75 76 77 78 79 80 81 82 83 84 7576 77 78 79 80 81 82 83 84 Philip Morris Industrial Philip Morris Industrial operating revenues increased 16.8% over 1983 to S277.2 million, and opernt'? i income increas ? _ ^~ M ;;, 5 .:(n livisions c)uter'_ to iu'~ 4's recor/ t..;~ Wiscor„ `:- Tissue Mills inc. increa-%-1 its he tissue and towel markets through its traditiona"t ~,hannels of distribution. In addition, it expanded its share of high- quality, specialty printed and non-printed napkin lines. Nicolet Paper Company continued its leadership sta- tus in glassine and greaseproof papers. It made substan- tial share gains in the release backing market. Plainwell Paper Co., Inc. continued to improve its position in fine printing papers, release backing papers, and technical specialties. It successfully introduced "Solitaire," a premium printing grade. Koch Label Company is the leading U.S. produee: oi ,-ibelS ffir Y) r_F;', .` ai-st ~ir(!(Il;~,5 ,110 i.~ti'~ "' "' . oi1 1, 11 F' and pritiiii/g in-iC;(!iit As this Annual Report goes to press, we are actively considering offers to buy the companies that make tip Philip Morris Industrial. While well and profitably man- aged, Industrial's operations do not fit our long-term strategic object.ives, <1 W

Mission Viejo Realty Group Inc. .riission Viejo Realty Group's operating revenues of $237.7 million and operating income of $36.1 million were the second highest in the_company's history. Our housing sales were strong in the first half of 1984, but slowed in the second half as mortgage rates rose. Sales of land for business properties remained strong. In 1984, we opened six new housing projects. In Mission Viejo, we opened the Briarwood and Stoneybrook neighborhoods and in neighboring Aliso Viejo, California, w^ introduced Aspen Creek. Our new, 22,000-acre :,nned community of Higlilanda Ranch, Colorado, added rr: l1, Chaiet, ai.d Remingtt;;2 Bluffs, bringing its ~74 •t ;,i'r:d7 ,., ' 1, ., °h!.}?j<_s ~alicit event17a1l0 wIll supply some 30,000 housing units for the growing Denver market and provide business opportunities to a wide range of enterprises. Our communities are built around schools, parks, re- creational facilities, and retail, commercial, and business k3VRG Operatt.^.g Rovenues 1.I V RG Operating Income parks. On July 29, 1984, much of the world glimpsed those advantages when Mission Viejo played host to the first event of the Los Angeles Olympics-the cycling road races. Through the course of the games, swimmers and divers trained at Mission Viejo won nine gold medals. During the year, we assigned responsibility for our commercial properties to two wholly-owned entities: Continental Equity Investments Inc. will develop or acquire income-producing properties to be held for the long term; IVO, Inc. will handle short-term sales. Mission Viejo Company continues to operate the community and residential development business. sl.a~

~ ~_-~~ t- --- ~ k Management and the Board of Directors At its June meeting. thw Board of' Director5 of Philip \I~,rris Int~~rnnr,it~r1 . (~ri«~! I~ Fii~h )lt)~~t~ll to treori;e Wrissiiian, effecti\(,,luf~f. 1~)ti-1• as ('hitiriuan and Cllief Exec•utive t)fl'irer uTtli~cG,iilpali~. '1'he Board also elected Johu A. Murpliv E'rt-_;ident and Chiet' Upera- tins; Officer of I'ililil) ~f rri~ Cnworhnratf'd, and lIugh Ctillman Vice Chrtirman and Chairlrian of the Finance Committee of the Board. At the same time, Frank E. Resnik was appointed President and Chief Executive Officer of Philip Morris U.S.A., and William K. Howell was named President and Chief Executive Officer of Miller Brewing Company Pre- viously, Mr• Resnik had been President of the Tobacco Technology Group and Mr. Howell had been Miller's President and Chief Operating Officer. At a subsequent meeting, Messrs. Resnik and Howell together with R. William Murray, President and Chief Executive Officer of Philip Morris International, were elected to the com- pany's Board of Director5, effec•tive October 1, 1984. I.ll'. «'I'ititiman rlntinl~tlti as Ch'dit'mian of the Exe,-k- tive Contlnittce and a menif)er of' tiie Uffic•e of the Ch;.ir- man. The former Chairman of the Executive Cummittee, Joseph F. Cullman :3rd, hus bern mtnled Chairman Emeritus. In 1954, Clifford fI. (roldsmith retired as Vice Chair- man of the Board and as a diric-ctur on reaching the age of 65. From P)78 to 1S)5.j. Mr. G(J1dsntith was President of the corporation. James C. Bowling and John T. Landry al,o retired <t~ offiror,s ~uld riirvctmr~ of the corporation. We are grateful for their long and distinguished service and for the fact that all threee remain consultants to thE' corporation. The Public Qnterest 1'hilip ?,lorris opcrtitf'-~ irn co~tuntries o.tc.;t tFr•ri- tories arwlnd l the world. '1'lle cn:iipany derives 5L.1 bil- lion in export revenues through the sale of cigarettes, tobacco, beer, soft drink extract, and other products. Philip Morris recognizes its responsibility to those locations in which we do business and seeks to improve society in the countries where we operate, and especially in the communities where we have plants and offices. In 1984, our Corporate ConU•ibutions Committee made 1,066 grants, mostly in the general categories of education; health and welfare; conservation and environ- ment; and culture and the humanities. The recipients included 213 educational organizations as well as 530 children of our employees who were aided by our College Scholarship and Vocational/Technical Scholarship Award Programs. In all categories in 1984, we began making m fir~~t~, 1~rU lir;resf.t'1Cted b<l~ic brartt`~ tf i <e loi.fr,rt w- al~i, viding funci:, over several years co hol1; recipiet?ts pI'uject their revenues and formulate long-range plans. We support federated charitable organizations such as the I?nited Way of America. In adclition, we ftutd creative programs for inner-city neit;llburllo„d," ,Ind groups %N itll special prohlent5. We cuntinue to du bw,inw~)s "onw 60 minurity-u«•ned bank5 and to encoiu•ugc Inillorit\ - owned vendors to work with us. We try to be creative in a1t ol' our Corporate Mturibu- tfons, and this is most visible in the art,. Indeed, our art supportt program has becotne an important symbol of Philip Morris' sense of corporate social respottsibiiiiy. We continue to sponsor a variety of projects. Some of these are historic, such as the travelingmexhibition that opened in 1984 at the Museum of Modern Art in New York, titled "Primitivism in 20th Century Art: Affinity of the Tribal and the Modern." It examines the debt that modern art owes to African, North American, and Oce- anic art. Several other nationally recognized shows trav- eled in the United States under our sponsorship. Many of our cultural affairs projects are less publi- cized, covering support for various institutions in our t eratltl:; com,~il:os' hotlle ti+"' _-l',)rar:es, I';tt: ".."'.15, aIiCf p~71~;?m-I~ J.'tS cFnteis anofale:'s. 1'k° Cfiit"11_LiP to match emp'ioyer gift5 to institutiun,,, thus eue,oui..ging our employees to help shape our c•untributions policy. In 1984, we supported 209 arts organizations, includ ing the Joffrey Ballet, the Alvin Ailey American Dance Theater, the '~Vestern States Art Foundation, and the American Association of Museums. In New York, we fund a branch of the Whitney Museum of American Art in our Ileadquarters building; the branch has attracted thousands of visitors since its opening in 1983. We believe that our corporate involve- ment with the arts helps to encourage our own employees' creativity and enhances the quality of their lives. Social and Legislative issues t'?IIi*'p Mo rrEa di :,' Ii rrt Pll64 it;r U..` IJasicc ple liked our products well enough to purchase more of them than ever before. But it was also more difficult to use them, because restrictions and regulations have appeared that previously did not exist. Virtually all businesses can complain about special fees or taxes or controls, and for many, such obstacles are

generated by antagonists who use legislative processes for their own ends. For Philip Morris, there are restrictions and controls on many areas that affect our businesses-including advertising and distribution; there are also onerous spe- cial taxes. In responding to such government actions, we ask only that we be treated fairly. Unfortunately, the record shows a lack of fairness, particularly as our antagonists and detractors continue to press for new regulations to restrict our marketing activities and for increased taxes on our products. We oppose increased excise taxes because they are unfair, regressive, and disruptive of natural market forces. Such taxes fall most heavily upon the economi- cally disadvantaged who must pay a disproportionate per- centage of their disposable income for products so taxed. Beyond taxation, emotional campaigns are being wage," rostrior ~rdvert!>in:,; and use of our products. Ii t~Lii'Ii `,` I"i Ci1~-=' ,ii,(~ti, sucl1 c,li<<p-~1gns are ing : moking and hvaith. Since 1954, Philip irlorris and the tobacco industry have contributed more than $120 million to fund independent research on smoking and health. We continue to believe that_the results of scientific investigations to date fail to demonstrate a cause-and-effect relationship between smoking and chronic diseases, _ We also believe that the preponderance of scientific evidence indicates that the presence of cigarette smoke causes no health impairment to a healthy non-smoker. Simultaneously, in the area of alcoholic beverages, a similar outcry is raised because alcohol has been abused 1;;: ,,,.ue. As a brF%vor of beer, the traditional drink of toward drinking are necessary, and the company is dedi- cating significant resources to campaigns promoting such responsible attitudes by all consumers of its products. It should be noted that in both_ the cigarette and the beer industries stringent advertising codes have been in place for years-codes designed to avoid promoting such products among youth, to emphasize the qualities of individual brands, and not to encourage the use of either product. Although the external pressures on our principal businesses have intensified, we are confident that we can resist them successfully artd, therefore, we remain opti- mistic about the future. The Outlook We face the usual uncertainties about the future in all our businesses, both in the United States and interna- tionally. Included among them are_tax changes, volatile conditions and economic difficulties in some overseas markets, currency fluctuations, and the future of the U.S. tobacco probram. tVe are confident that, as in the past, we will find new opportunities in change and that we will successfully manage and overcome whatever difficulties we encounter. We intend to maintain good rates of growth in sales, market shares, and income. We are gaining high produc- tivity through our capital investments, we have the best products available in our industries, and we have the resources to achieve our goals and to broaden our base of business. We have momentum. Above all, Philip Morris retains a talent for attracting unusually able emp!o;,ees and bringing out t1;e~..best. ie commitment, t::'iv', .2i.d of our 63,000 em- ployees are the strongest guarantees that we will maintain that momentum. d.1 Hamish Maxwell Chairman of the Board and Chief Executive Officer John A. Murphy President and Chief Operating Officer I

In 1984, Philip Morris U.S.A. intro- duced several new packings and devel- oped a new generation of carton and package display units that improved our product distribution. William I. Campbell (R), Executive Vice President, Marketing; Vincent J. Buccellato (C), Vice President, Sales; and Rosemarie Gallo (L), Assistant Division Man- ager, all ofPhilip Morris U.S.A., are reviewing one of the units used in the national introduction of the Marlboro 25's pack. Virtually all data pertaining to Philip Morris U.S.A.'s operations are proc- essed at our James River Center in Richnaond. Here, Harry G. Steele (C), Vice President, Finance and Adminis- tration, and R Robert Kurimsky (R), Vice President, Information Services, review with Dorothy MeDaniel (L), Manager, Data Center Operations, one of the progranws uard to naorzrc~r our producti, r pror,, asr:. Philip Morris U.S.A. In millions 1984 $6,133.3 $1,745.2 1983 $5,519.9 $1,337.8 1982 $4,330.1 $1,101.6 1981 $3,761.6 $ 905.7 1980 $3,272.1 $ 786.1 Consistent prroduct quality is partially a result of exacting manufacturing standards continually reviewed by our senior operations management. Mark A. Serrano (2ndfronzL), Executive Vice President, Operations; 63! John Camp- bell (2nd from R), Senior Viee President, Plant Operations; and Newton Fowler (R), General Manager of our Cabarrus facility, discuss with Perry C. Bostic (L), one of our technicians, the effi- ciency of our production eqnipment at Cabarrus.

i = . . _. . a..~. LL Philip Morris International In millions Operating Operating Revenues Income 1984 $3,741.0 $420.9 1983 $3,646.7 $366.0 1982 $3,563.7 $446:0 1981 $3,400.3 M6.6 1980 $3,205.4 $318.0 In the h4gh-poterrtial Japanese market the best-selling import is Philip dforris' Lark brand. Here, Lark point of sale is being examined by Dinyar Decitre(EndfromR), President, Philip Morris Asia, and, from Philip .blorris Asia's Japan branch, Hikojiro Yokota (L), Direclw} Key Accounts & Sales Plan ning; Yulaka Suzuki (2nd from L), MarketingManager; andShinsuke Katayama (R), Brand Manager. j~. 1'rRa .!,(rr,.r Ytttu'r~~r;rarivtu'icu o t„daqfLvr'a peuti4lrt fn-r owr¢o'e rr, LiD: leul rnu:+rrt a shit't lu lotrer-prirr~l cigtr reltes. blarlborn en,/r/yt•d pnrtlcutar catc'ress in lhis murket, /telpr'tl hy the lnlrurlrtrlrorr q!';}InrlBtu'u 1G0's earl,rl irr _. (trJ'lLCrtiryt" - f,ttillrllaurrqiug - ,fTirrrl"r „r'1`Lilij, )Aorris (;mb11. i.c t'(`!'!('(f(-/rlt~~ittlrfi...t'plll, tli,i'lrtfr,(' .HarIL„rn luu s,riUr Aunl Fiirlarr It'r. =~ iLufcliu,pMinmger nndltttus-.Inrherr RhkGv'(llr, 1'rr,alurl.llanul/rr: - Our long-te•nt success in Latur A/.. , ica depends on the int7oduction af,,r~,brands, one of uhicle is California in Brazil. Examining Califorraia on the production line are Lauro Peuckert (6), Vice President, Operatiorrs, and Salva- dor Rinera (C), Direclw• of ,l9araifactur- ing, both of Philip Morris Brasileira, S.A-, and Cuslavo Mario7dontes (R), Prodttction Manager of otu' Curitiba ptant.

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A network of strong, well-managed, and aggressive distributors has been essential to Miller Brewing Company's success over the years. Here, Leonard J. Goldstein (L), Vice President, Sales, of Miller Brewing, discusses with Kirby M. Lawlis (R), President of iYfiller Brands in Wauwatosa, WI, Mill- er's date coding system which ensures the f•es h ness of hli ller's prod ucts. S'tate-of-the-art production equipment and Ierluriqttes lrrzra atloued .lliiler to both rnntrol it.s costs and meet dentand f•uw our rwrcnt brr>rrcries. Herc, Allcn A. Srhrunrr (te), Senior Vice Prrsident, 0),eratinns; Billy R. Apple (('), I'ice ('rrsidrnt, Plant Operations; and Geor,r)r) A'. Tnrata (I.), Vicc Presi- dent, 6wlturyriug, m'e in.spectifir,q a filler linr• nl d/irtt,r's A9itr,ntrlrce- 6rdu•erW -. Miller Brewing Company Revenues Income 1988 In orrler to iarprorc its mrvrgins, Hiller has several premiuna-priced brands in rw~-ious sltrges of development. Her•e, Robert .9. Toledo (R), Vice President, Branrl.M1Innngenaent, discusses uit/r Brrrnd dlanagers William H. Bcirrett (L) r+rt drrame F. Srtrnruttel() conrnaeria! shrrg boards for onr o,f our brartds in t<st ma%l;et. 205764'7543

1 The Seven-Up Company In millions Operating Operating Revenues Income 1984 $734.0 $ 5.3 1983 $649.9 $(10.8) 1982 $530.6 $ (1.2) 1981 $432.1- $ (1.7) 1980 $353.2 $ (7.1) Seser-Up's continued suceess will depend on naaintainiug a sU•ong uet- uork of profitable, independent bot- tle•s. Charles u: Schmid (R), E.recuffre Vice President of The Sei'en-Up Com- pany, is responsiblefa• that network uluck includes Bart Brodkin (L), Presi- dent of [Vestinghouse Beverage Group. tr r'r'str1~ of 7itnrlbatGr'r p' c~ ;,tt). E~(rr2rd Si' Frnntel (R!. Prt'<i dvn/ "rnil ('Ai~fti.reciati2,apfficero,f7'i"' 1rp C'on-parg, re2lieus the neu• 3-liter 71'P hlltttr u'itla Rrrree Shnorts (L), 7L'P lh'nrid 7lurrirpr~t r,rd l.rrH"ed-rnnri (C'r, lkrr+=k,r`r(=h'inanr~•.~,;~( H~~rtioe.~ -- GabrielF. h. Beekaalany!ai. Presi- dent, and Marc de Petter (L,. .Flanager France, botk ofSccen-Up Gnterrra- tional, are shown reCieudrrg adcer-tis- ing rnalerzals used fn 7(P"s mid-1984 la2inck ira Frarue.

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Philip Morris Industrial , In millions Operating Operating ~ Revenues Income 1984 $277.2 $29.5 1983 $237.3 $13.6 1982 $232.9 $ 7.6 1981 $291.1 $18.9 1980 $276.5 $16.9 At Nicolet Paper, qual;ttl norrtrol is ~ey.factar in Inch~ growtlt. Norbert/.n_pah-(6), JamesR. Frazoleg (C), a re { A'o-rlsvrt Bein i ng (R) ensure thut p~per rolls mecl customer specifications. In 19N4, Wiscora.cin Tmue.l/ilis set a new 2corld output reco •d for the con- tinuous operation of a paper niachine. Thi.s rcrord is onblenantic q(the pro- ductiuity increases that hace charac- lerized oirr tissue operation. 6['illiam D. McCoy (6), President and Chief 6.recuth~e Officer of Philip Morris Industrial, and George Mueller (R), President of Wisconsin Tissue Mills, w•e disczsssiug that record in the com- puter roam from which- the H3 machine is controlled. 2057647546

BtVRG opened three new irousing proj- ects in 1984 at its California commur E- ties-Mission Viejo an d Aliso Viejo. Here, the California Division's Curt _ Ltest (6), General Man«ger of Con- _ struction, and Vance Knowlton (R), - Project Superintendent, are reviewing blueprintsfor the construction of the Stoneybrook project at Mission Viejo- rr arlditinri tu dorelnping conrnruui- .!rs, :111'Rr; kas berwnw iucreasin,ylg ,,rn/rcrl in rnrantrrrlal renl cstatc. ,lere. PGilip ,7. Rrilly (R), Presirlent md ('/m;l E.ra'cutire U,jlicrr q( tll'HU, rrul.Iack Hoppr Il.l. Senior l'ice Presi- hvrt. Nhrrrxiug and EugtnecrDtl), Jack ~. kattb C"., di.rrrtss onr ut'tite busi- .., slu`r~)i,rtiP.. ., . , n i G,s .Ill.r.cintr's ~~blarrda i~r ~ . ~ I, prutr'Ct. Mission Viejo Realty Group Inc. In millions Operating Operating Revenues Income 1984 $237.7 $36.1 1983 $258.5 $40.5 1982 $130.2 $ 6.0 - 1981 T- ___ $163.6 __ T --- - - --_ ~ _ $22.9 1980 $172.8 $30.6

0 Financial Review In 1984, operating revenues were $13.8 billion, an increase of 6.5 % from 1983 and operating income increased 19.8% to $2.3 billion. Net earnings decreased 1.7% to $888.5 million in 1984. Net earnings were reduced by $145.6 million or $1.19 per share by the write-down of the completed but inactive Trenton brew- ery to net realizable value in the fourth quarter (Chart 1). Earnings per share reached $7.24, up 1.0% from 1983, due to a reduction of outstanding shares. The write-down was due to the continuing slowdown in consumer demand in the brewing industry and for some Miller products as well as efficiency gains at other Miller breweries. In contrast to 1982 and 1983, Miller volume and market share were up slightly in 1984, but Miller still has excess capacity in relation to its near- term projections. In light of recent trends in the industry, a date for commencement of production at Trenton could not be set and, therefore, the carrying value was reduced. In Fel.; trary 1984, the Board of Dir,~ctors declared a 17.2 % increase in the common stock dividend to an annual rate of $3.40 per share. This was the 17th consec- utive year of increase and our 57th consecutive year of dividend payments. Over the last decade, dividends per share increased 24.3 % annually, while net earnings per share increased 16.4 % (Chart 2). In 1984, capital expenditures totaled $298 million. Over the last five years, we have spent nearly $3.6 billion Chart 1 Chart 2  Operating Revenues  Primary Earnings Per Share ~ Net Eamings - Dividends Deciared Per Share Billions of Dollars Millions of Dollars Dollars 18 - 900 7.50 15 ~ 750 6.25 -_ 12 /  1 600 5,00 3 0 ® 2.50 150 1.25 3.75 :il tm 75 76 77 78 79 80 81 82 83 84 75 76 77 78 79 80 81 82 83 84 WN r,7 t on additions to our fixed assets compared with $1.9 bil- lion spent during the previous five years. Approxim ft y 55% of the amount spent over the past five years wa ior domestic and international tobacco operations and most of the remainder for Miller Brewing Company. We estimate capital expenditures of $325 million in 1985 and approximately $1.7 billion in the five-year peri- od 1985 through 1989. Over 80 % of these expenditures will be for forecasted capacity needs and productivity improvements. In 1984, our funds from operations increased 14.7 % to $1.5 billion (Chart 3). Over the last ten years, internal funds generation increased 22.11) annually. During the same period, net earnings advanced 17.6 % annually (Chart 4). Total assets were $9.3 billion at year-end 1984. This was almost four times greater than our asset base ten years earlier. Our net return on average total assets was 110 .9 up frC^ ,. 1 :,rt i). 8tockl;o?det~' eciu,f, ,i,;; I c-aser :- r four t--11during the past decade reach+,.;g $4.1 bil4icn at the Fit: (-:f Chart 3 Chart 4  Funds from Operations 0 Funds from Operations . Capital Expenditures - Net Eamings _ _ Millions of Dollars 1200 1000 800 Milllons of Dollars 1200 1000 800 600 400 75 76 77 78 79 80 81 82 83 84 75 76 7778 79 80 81 82 83 84 205'7647548' t M

6oS.tlL '_'._':~ 'a .i.. Y 1984. Our net return on average stockholders' equity was 21.9 % in 1984, down from 23.5 % in 1983 (Chart 6). Total debt at year-end 1984 was $2.6 billion, a $486.3 million decrease from a year earlier. Our debt to equity ratio improved to .63 to 1, compared with .76 to 1 in 1983 and an average .99 to 1 over the last ten years (Chart 7). During the year, we repurchased $94 million of 14% to 151/a% notes. The long-term portion of the $160 mil- lion 8i/2% bank term loan amounting to $133 million will be prepaid in 1985 and has been classified as a current liability. The interest rate on the 81/2% bank term loan would have increased to a premium rate above prime Ct1Ill:?'e!l 'inU iIi j98J <1 n':a tile','eroi'a' led 1;-; *.' the dJritiion lvr ics f?T('_l V rf'tirel"Eil~. ;:i ~4%)_l iil:. i1" ~S notes will also be retired during 1985 as scheu-lletl, We expect a further decline in our debt over the next five years. During 1984, the company purchased 4.1 million shares of its common stock under two_ announced com- mon stock repurchase programs at an average cost of $75.91 per share. The repurchased shares will be used for the exercise of employee stock options and other cor- porate purposes. At year-end 1984, fixed-rate obligations were approx- imately 89 % of total debt compared with 72 % in 1979. The fixed-interest portion of our (leht, totaling $2.3 bil- lion at year-end, an aver.-re interest rate of approximately Currently, Philip A•iorris has short-term credit tacili- ties with a number of financial institutions totaling Chart 5 Chart 6 L u approximately $1.7 billion. Of this amount, approxi- mately $350 million is in revolving credit agreements and other arrangements with both U.S. and European banks. These facilities, which exceed our expected needs in 1985, provide support for our commercial paper borrow- ings and other credit activities. Philip Morris continues to maintain the highest ratings in the commercial paper market and a solid "A" credit rating for long-term obligations. Interest expense in 1984 totaled $299.1 million, compared with $233.9 million in 1983 (Chart 8). The increase in interest expense was due principally to lower capitalized interest during 1984 arising from the com- lai=-tion of facilities, partially offset by lov~er interest in- ,a ,., in ci{r.ed Li'.(e to reduced boIrLwi11gS. Interest Ci.plitilize, 1'-?8-1 was $14.0 million compared with 3128.3 million in 1983. Earnings coverage of interest expense declined to 6.37 times interest expense for 1984 from 7.78 in 1983. The write-down of the Trenton brewery, which adversely im- pacted pre-tax earnings by $280 million, was the primary reason for the decline in the earnings coverage for 1984. Our effective income tax rate was_44.7% in 1984 and 43.0 % in 1983. Lower investment tax credits and equity earnings during 1984 were the primary reasons for the higher effective tax rate. Chart 7 e Total Assets (Year-End) st Stockholders' Equity (Year-End)  Total Debt (Year-End) . Net Return (Before Net Interest) on . Net Return on . Ratio of Total Debt to Average Total Assets (%) Average Stockholders' Equity (Wo) Stockholders' Equity (Year-End) Billions of Dollars Billions of Dollars Billions of Dollars 3.0 2.4 8 1.2 75 7677 78 79 80 81 82 63 84 Chart 8  InterestEspense . Interest Coverage (Earnings Before Interest and Taxes Divided by Interest) Ratio Millions of Dollars Coverage 1.0 225 180 135 7 6 4 .4 90 3 .2 45 1.5 0 0 ~ - ~ ~- 75 76 77 78 79 80 81~828384 205'7647549 I

Selected Financial Data (in millions of dollars, except per share data) for years ended December 31 i984 1983 1982 _1981 ~ 1980 Operating Revenues $13,813.7 $12,975.9 w~11,586.0 $10,722.3 $9,649.5 United States Export Sales 924.3 969.5 978.0 833.5 702.4 Interest Expense 299.1 ~ 233.9 - __267.2 258.5~ ~ ± 215.0 Depreciation Expense 340.5 293.8, 24.9.., .9 210.5~~ 178.0 Net Earnings 888.5 903.5 . 781.8 659.7 549.1 Earnings Per Share ---- 7.24 _ _ _ 7.17 _- • 6,23 5.28 -- 4.41 Total Assets ---._,. 9,339.Tr2 . ._ _.,_ .. __ ... ~_ 9,667.0 9,622.1 9,115.1 7,301.7 Long Term Debt 2,059.5 T2,514.7 ~~ 3,745.8 -- - 3,498.2 Y~ 2,597.2 Total Debt 2,588.6 ~~__ 3,074.9 __ _ 4 .-.- 3,745.8 .____ 3,804.2 2,800.1 Deferred Income Taxes - 783 7 - -r_ -.. . . 737.3 564.5 411.3__ ~ _ 302.9 Stockholders' Equity - - --~-- ... 4,092.9 ~. . 4,033.7 3,662.9 ~' 3,233.7 2,837.0 Dividends Declared Per Common Share 3.40 2.90 2.40 2.00 1.60 Funds From Operations 1,546.8 1,348.4 1,159.8 ~ u 976.3- ~ 784.2 Capital Expenditures 238.i 566.2 .918.2 1,01.8.5 750.8 The above selected financial data of the company and consolidated subsidiaries for all exports from the United States by Philip Morris International amounted to the five years ended December 31, 1984, should be read in conjunction with the consolidated financial statements and notes thereto included in this report. In addition to cigarettes, Philip Morris International exports tobacco and tobacco-related products, soft drink ingredients and beer, and subsidiaries and affiliates purchase tobacco grown in the United States. In 1984, the value of $1.053 billion. A write-down of the completed but inactive Miller Brewing Company facility in Trenton, Ohio reduced 1984 net earnings and earnings per share by $145.6 million and $1.19, respectively.

-K- Management's Discussion and Analysis of Financial Condition and Results of Operations General Funds from operations of $1.5 billion and $1.3 billion for the years 1984 and 1983, respectively, exceeded total funds used for the respective years by $589.3 million and $279.7 million. In 1982, total funds used exceeded funds from operations by $156.3 million. Capital expenditures accounted for only 31% of the total funds used in 1984 compared with 48% in 1983 and 70% in 1982. Capital expenditures of $298 million for 1984 were below the previous two years and are estimated at $325 million in 1985 and $1.7 billion for the years 1985 through 1989. Total debt at December 31, 1984 was $2.6 billion, a $486.3 million decrease from a year earlier. At year-end 1984, the com- pany's debt to equity ratio was .63 to 1, compared to .76 to 1 at December 31, 1983. The decrease was mainly attributable to an early retirement of debt made possible by increased cash flow. The company anticipates that funds from operations will exceed the needs of the business in 1985. In addition, available credit facili- ties of $1.5 billion at December 31, 1984 are maintained through revolving credit agreements and bank lines of credit. Long-term financing needs are expected to be met through long-term debt and other financing when required. During 1984, the company repurchased $94 million of bank term notes bearing interest at 14% to 151/4%. Since the interest rate on the 81/2% bank term loan would otherwise increase to a premium rate above prime in 1985, the outstanding balance of $160 million will be paid in 1985. In addition, $150 million 81/z% notes mature and will be paid in 1985. Fixed-interest debt at December 31, 1984, was 89% of total debt compared with 87% and 78% at December 31, 1983 and 1982, respectively. This debt had an average interest rate of approximately 9.5% at December 31, 1984 and 1983. During 1984, the company purchased 4.1 million shares of its common stock under two annnunced common-stock repurchase pro- gran;s at an average cost of $7-a.91 per share. The repurchased shares will be used for the exercise of employee stock options and other corporate purposes. In 1984, interest expense was $299.1 million, an increase of $65.2 million (27.9%) over 1983 due principally to lower capitalized interest during 1984 arising from the completion of facilities, parti- ally offset by lower interest incurred due to reduced borrowings. Interest capitalized in 1984 was $14.0 million, compared with $128.8 million and $162.6 million for 1983 and 1982, respectively. In 1984, consolidated operating revenues of $13.8 billion were $0.8 billion or 6.5% higher than in 1983, attributable principally to increased revenues of $0.7 billion from tobacco and $84.1 million from Seven-Up; beer revenues were up slightly. The increase in tobacco revenues was attributable to increases in unit volume and selling prices, reduced by $275 million due to currency translation. The slight increase in beer revenues was due to volume increases for popular-priced brands partially offset by volume reductions in premium-priced brands. In 1984, operating income of consolidated companies was $416.5 million (22.2%) higher than in 1983 due mainly to domestic tobacco products. Tobacco products operating income increased $494 million (30 %) from 1983 due to volume and price increases, partially offset by the $38 million negative effect of a stronger U.S. dollar on foreign currency denominated earnings. Philip Morris U.S.A. operating income was up $408 million (30.5%) and Philip Morris International was up $86 million (28%). Domestic cigarette industry volume rose to an estimated 600 billion units, a 0.6% increase from 1983. Philip Morris U.S.A. increased its unit volume 3.4% and market share to 35.3 %. Philip Morris International total unit volume increased 5.5%. The income gains for Philip Morris International were based primarily on particularly strong unit performances in the developed markets of Western Europe and the Middle East. Beer operating income decreased $111 million (48.8%) from 1983 due primarily to lower profit margins on popular-priced brands and increased market- ing e_znenditures. Seven-Up's 1984 operating income of $5.3 million was due ,;.imariiy to voh:me and price increases: Tobacco products contributed 94% and beer 5% of consolidated operating income for 1984. In 1984, net earnings were reduced by $145.6 million or $1.19 per share by the write-down of the completed but inactive Trenton brew- ery to net realizable value in the fourth quarter. The write-down was due to the continuing slowdown in consumer demand in the brewing industry and for some Miller products. In contrast to 1982 and 1983, Miller volume and market share were up slightly in 1984, but Miller still has excess capacity in relation to its near-term projections. Equity in net earnings of unconsolidated subsidiaries and affili- ates in 1984 decreased $29 million due primarily to the write-down of certain investments in developing countries. In 1983, consolidated operating revenues of $13.0 billion were $1.4 billion or 12.0% higher than in 1982, attributable principally to increased revenues of $1.3 billion from tobacco, and $119 million frora Seven-Up. Beer revenues decreased by $6 million. The increase in tobacco revenues was attributable to increases in excise taxes and selling prices reduced by $179 million due to currency translation; cigarette unit volume of both Philip Morris U.S.A. and Philip Morris International was virtually unchanged from 1982. The decrease in beer revenues was attributable to a decrease in volume partially off- set by price increases. In 1983, operating income of consolidated companies was $231 million (14.0%) higher than in 1982, due mainly to domestic tobacco products. Tobacco products operating income increased $171 million (11.6%) from 1982 due to price increases offset by currency transla- tion of $59 million. Philip Morris U.S.A. operating income was up $236 million (21.4%) while Philip Morris International was down $65 million (17.3%). Despite a reported 4.5% domestic cigarette I Fi! l t

Management's Discussion continued industry decline, Philip Morris U.S.A. increased its unit volume mar- ginally and its market share significantly. In addition to the adverse effect of currency translation, Philip Morris International operating income was affected by price competition in a number of markets and reduced exports due to a stronger U.S. dollar. Beer operating income increased $68 million (42.9%) over 1982 due to price increases and cost savings. Seven-Up's 1983 operating loss of $10.8 Inflation-Adjusted Informatton million was attributable to increased marketing expenditures, Tobacco products contributed 88% and beer 12% of consolidated operating income for 1983. Equity in net earnings of unconsolidated subsidiaries and affiliates in 1983 increased $11.4 million over 1982. The increase was attributable principally to increased earnings from real estate operations. Consumer Price Index is used to measure the effects of general inflation for the translated current cost information. The current cost method involves the use of assumptions, approxi- mations, and estimates and, therefore, the resulting measurements should be viewed in that context and not as precise indicators of the effects of inflation. The results do not necessarily represent amounts for which the assets could be sold or costs which will be incurred in future periods, or the manner in which actual replacement of assets will occur. Schedule I presents earnings and other data for 1984 as reported and as adjusted for current cost. Schedule II covers the five-year period to show the trends in key financial data restated in terms of average 1984 constant dollars measured by the U.S. Consumer Price Index. _ - - -~ Schedule I The following current cost information is presented in accordance with the requirements of the Financial Accounting Standards Board (FASB). The current cost method reflects the effect of changes in the specific prices of the resources used in the company's operations. This method measures the resources and their consumption based on the current cost of replacing them with like resources, rather than in terms of the historical cost amounts actually expended to acquire them. These values do not consider technological improvements and efficiencies associated with the normal replacement of productive capacity. Adjustments for changes in specific prices of pro_ ortti•, plant, and equipment are principally based on external price indexes specifically or closely related to the resources being measured, or internally developed indexes and, in the case of inventories and cost of sales, on recent purchases and production costs. The U.S. (in millions of dollars, except per share data Operating revenues Deductions from operating revenues: Cost of sales, excluding depreciation expense Depreciation expense Other, net Farninas hefore inr.nme taxes or income taxes!") As Reported in the Primary Statements .istorical Cost _ .._- ;,$13,813.7 Adjusted for Changes in Specific Prices y_(Current Cost) $J3,813.7 ~_ -- _ 8.900.9 __ 8,952.8 34Q.5= -449.3 _ 2,965.4 2 965.4 1,606.9 1,446.2 718.4 _ _718.4 8.88.5 - s 727.8 _- ~ 7-.24 - F QR Gain from decline in purchasing power of net amounts owed $ _ 169.9 Inventories and property, plant, and equipment: Increase in general price level ~,-_339.1 Increase in specific prices (current cost)( ~ = 222.2 Excess of increase in general price level over increase in specific prices $ 116.9 Translation adjustment 'S ~ (89.9) Stockholders' equity $ 4,092.9 ~- $ 5,812.2 (A)'In accordance with FASB requirements, inflation-adjusted amounts do not (B) At December 31, 1984, the current cost of inventories was $3,505.5 million, reflect any adjustments in the provision for income taxes, Consequently, effective and the current cost of property, plant, and equipment, net of accumulated tax rates are: depreciation, was $4,963.5 million. As reported in the Primary Statements 44.7% Current Cost 49.7% 205'764'7552

Schedule II (in millions of dollars, except per share data) Operating revenues Current cost information: Earnings before income taxes Net earnings Earnings per common share Gain from decline in purchasing power of net amounts owed Excess of increase in general price level over increase in specific prices 'ilanslation adjustment Stockholders' equity at year-end Cash dividends declared per common share Market price per common share at year-end Average Consumer Price Index (A) Restated in average 1984 constant dollars. In arriving at current cost net earnings for 1984, depreciation expense and the raw materials and supplies components of cost of sales are the only amounts reported in the primary statements that have been adjusted into average 1984 dollars. Revenues, labor, and other costs and expenses are considered to reflect average price lew,ls for the year, and accordingly have not been adjusted. The cost of sales adjustment for 1984 decreased earnings before income taxes by $51,9 million, reflecting the fact that infl-,ation has exceeded the overall rate of increase in the historical cost of the company's raw materials and supplies. The company uses the last- in, first-out (LIFO) method to cost inventories used in its U.S. and U.S. export tobacco operations, and beer operations, This reduces the disparity in reported earnings with inflation-adjusted informa- a- 1984 19831") 1982(") 19811") .,- 1980(A) _ $1 3,81 3.7 $13,528.1 $12,467.6 $12 245.6 _- $12,163.5 $ 1,446.2 $ 1,514.1 $ 1,271.5 $ 1,088.0 $ 1,080.3 727.8 803.8 713.7 621.5 607.2 5.93 6.38 5.68 4.97 4.87 169.9 181.3 194.1 387.4 ~ 469.2 (77.3) 52.9) 26.9 39.7 (89.9) (72.3) (78.9) (46.7) - (78.5) 5,812.2 6,074.4 5,882.0 ~ 5,329.0 4,943.1 $ 3.40 $ 3.023 $ 2.583 $ 2.284 $ 2.017 $ 791h(" $ 731/2 $ 637/s $ 537/s $ 52 311.1 298.4 289.1 272.4 246.8 tion since a more effective matching of current costs with current revenues results. The depreciation adjustment decreased earnings before income taxes by $108.8 million. This adjustment reflects the increase in the valuation of the company's property, plant, and equipment measured under the current cost method over historical dollar cost amounts. The result of both inflation adjustments is a decrease in earnings before income taxes of 10.0 %. The increase in stockholders' equity of 51.7 billion as compared with the amount reported in the primary statements is attributable mainly to the appreciation of inventories and property, plant, and equipment due to inflation. Additionally, stockholders' equity is increased by gains resulting from the decline in the purchasing power of net amounts owed.

-~-~---s--,----,~ Fifteen -Year Financial Review (in millions of dollars, except per share amounts) 1984 1983 1982 1981 1980 Summary of operations: ~ Operating revenues $ 1 3,81 3.7 12,975.9 11,586.0 10,722.3 9,649.5 Cost of sales: Cost of products sold 5,516.6 5,342.8 5,315.4 5,024.2 4,446.7 Federal excise taxes 2,040.9 1,983.3 1,180.0 1,168.5 1,105.3 ~- Foreign excise taxes 1,635.0 1,527.0 1,434.5 1,410.8 1,388.7 Operating income 2,345.6 1,958.0 1,715.7 1,446.2 1,273.4 Interest expense 299.1 233.9 267.2 258.5 215.0 Earnings before income taxes 1,606.9 1,584.8 1,300.2 1,068.1 924.4 Pre-tax profit margins 11.6% 12.2% 11.2% 10.0% 9.6% Provision for income taxes 718.4 681.3 518.4 408.4 375.3 Net earnings 888.5 903.5 781.8 659.7 549.1 Primary earnings per common share 7.24 7.17 6.23 5,28 4.41 Fully diluted earnings per common share 7.24 7.17 6.23 5.28 4.41 Dividends declared per common share 3.40 2.90 2.40 2.00 1.60 Weighted average shares-primary 122.7 126.0 125.6 124.9 124.6 Weighted average shares-fully diluted- 122.7 126.0 125.6 _ 124.9 _ 124.6 Capital expenditures 298.1 566.2 918.2 1,018.5 750.8 Annual depreciation 340.5 293.8 249.9 210.5 178.0 Property, plant, and equipment (gross) 5,580.5 5,698.7 5,284.2 4,513.6 3,573.8 Property, plant, and equipment (net) 4,013.9 4,381.2 4,178.1 3,583.2 2,806.4 Inventories 2,653.5 2,599.2 2,833.8 2,921.8 2,499.2 Current assets 3,640.1 3,452.8 3,598.8 3,733.1 3,189.3 Working capital 1,288.6 1,116.5 1,989.2 1,797.5 1,662.0 Total assets 9,339.2 9,667.0 9,622.1 9,115.1 7,.?01.7 Total debt 2,5&8.6 3,074.9 3 745.8 3,804.2 2,800.1 Stockholders' equity 4,092.9 4,033.7 3,662.9 3,233.7 2,837.0 Net earnings reinvested 472.3 538.1 480.3 407.8 350.3 Common dividends declared as % of net earnings 46.8% 40.5% 38.6% 37.9% 36.3% Book value per common share $ 33.72 32.27 29.10 25.79_ 22.74 Market price of common share high-low 83114•621/s 72a/s-54 67s/4-441/s 551/s-42 481/2-291/s Closing price year-end 80% 713/4 60 483/4 43 1/4 Price/earnings ratio year-end 11 10 9 9 9 Number of common shares-actual outstanding year-end 121.4 125.0 125.9 125.4 124.8 Operating companies' income is income before corporate expense, interest, and other non-operating income and deductions. The amortization of previously capitalized interest is included in operating companies' income. A write-down of the completed but inactive Miller Brewing Company facility in Trenton, Ohio reduced 1984 pre-tax earnings, net earnings and earnings per share by $280.4 million, $145.6 million and $1.19, respectively. 205'764'7554: .>

1979 1978 1977 1976 8,149.1 6,632.5 5,202.0 4,293.8 3,655.5 3,072.1 2,401.7 1,966.9 1,036.8 960.8 862.1 778.2 1,122.0 702.8 490.4 3=81.1 1,179.4 968.1 782.7 634.5 205.5 149.8 101.6 - 102.3 894.5 745.5 625.5 471.9 . 110% . 112% . 120% . : 9 9%,%0 99 11: 1975 1974 1973 1972 1971 1970 3,642.4 3,011.0 2,602.5 2,131.2 1,852.5 ' A 1,509.5 1,656.8 1,290.3 1,060.8 832.9 700,0 5"77.1 _- 686.3 619.5 558.9 494.8 441.1 372.1 392.1 349.4 334.5 228.2 201.4 147.1 492.8 403.6 329.5 287.5 241.1 ~ 203:2 -- - _ -_ - - - .~ .- , _,. - 99.0 82.7 51.0 37.9 35.5 360.8 297.5 255.6 229.6 . 189:8 8% 10.2% ~ 35.4 150.0 386.6 336.9 290.6 206.2 149.2 122.0 107.0 105.1 88.7 ~-72.5 507.9 408.6 - 334.9 265.7 211.6 175.5 148.6 124.5 101.5 v 77.5 = -- = - 4.08 3.38 2.80 = 2:24 1.81 1.58 1.3 , 5 1.17 1.00 .84 4.08 3.38 2.80 =2:24 1.81 1.53 1.30 109.. - - - 1.25 -- -- 1.025 - - - .781 ~ - .575 - .463 ------ .388 - - _.- .337 303- 316 ~ ~ :263 _ 124.5 120.7 119.6 118.8 116.9 111.3 - - 109.6 106.0 # `T00.3 ~ 91.2 _ _ 124.5 120.7 119.6 118.8 116.9 • 114.7 . 114.6 _ -- =- _ - . 114.5 113.1 - l'13:2 -:: _ - 629.4 566.2 279-.8 ~ 220.2 - --_-- 244.5 215.8 174.7 _.. , -- T8. 120.0 0 . -39:6 132.6 105.5 78.5 64.9 49.9 38.0 30.2 26:6 21.5 ~ 17.7 ' ~ 28039 .. 22173 ,. 15949 ,. 13239 ,. 1,129.8 899.8 728.7 571.1 1 447. 394 :1 ° 214.0 1,737.6 1,202.4 993.9 851.1 659.5 b1u,3 316.4 ci}.1 Lw. i , 2,234.8 2,188.6 1,817.6 1,657.5 1,448.4 1,269.2 1,009.4 801.1 670.2 568.4 2,881.3 2,756.8 2,221.0 2,005.7 1,788.1 1,557.9 1,245.9 -_ 989:7 826.5 7288 - __ 1,727.7 1,585.1 1,415.9 =- 1,202.2 - 890.8 _ - 725.0 515.3 524.8 417.6 ~ 347.7 8 1 701.5 - 1;392:0 1,239 4 6,322.1 5,608.2 4,048.0 3,582.2 3,134.3 2,653.3 .4 2,10 , ~ . _ 2,507.1 2,372.2 1,563.5 1,525.6 T 1,443.3 1,239.3 ~ 947.4 681:0 553.9 ~ 557.7 2,471.0 2,114.7 1,690.1 1,430.0 1,227.8 974.7 ~ 815.0 `= 695.5 579.1 452.8 . 352.3 283.8 253.7 197.2 157.1 131.9 _ 111.4 _. ,89.9 69.7 -52.2 ,. E - 30.6% 30.6% 27.9% ~ 25.7% 25.7% 24.8% 25.0% 27.2% 30.6% - - 31 ' 19.84 17.00 14.08 12.00 10.32 8.48 7.33 6.28 5.36 4.47 3;'s 31'/s 38ss-28 32i/2-25s/4 31/s-247/e 296/s-201/2 303/a-17i/s - 341/a 243/s 296/s 17 17sT4 11s%a 126%s 7 36 351/4 - 31 307/a 261/2 - 24 283/a 295/s __ -- 176/s -f 123/s 8 10 - ---- 11 - 13 . 14 15 21 25 - " 17 - T4 ~ ~- 124 5 124 3 -- 119.8 ~-- 119.0 - 118.7 114.5 110.8 108:9 104.7 -96:6 _ . . - - - __~ - © GZ ~ ~ C,y-F , i,!i i 1 I -Tj d CR I I I,II,

Consolidated Balance Sheets (in millions of dollars) Property, plant, and equipment, at cost: Land and land improvements 267.0 ".50.1 Buildings and building equipment 1,772.7 1,5~-0.3 Machinery and equipment 3,315.9 3,036.1 Construction in progress 224.9 822.2 5,580.5 5,698.7 Less, accumulated depreciation 1,566.6 ~ 1,317.5 ii 4,013.9 4,38L2~~ Investments in unconsolidated subsidiaries and affiliates 1,054.0 1,184.1 Brands, trademarks, patents, and goodwill, at cost, net 547.1 559.9 ~ Other assets 84.1 89.0 cc"3 ~ ---- 89,667.0 See notes to consolidated financial statements. , Assets ~ i Cash and cash equivalents _ _ $ 93.7 $ 29.8 ~ Receivables, net 854.3 781.8 - - -- ~ - = Inventories: - - -- --- - _.__ -. Leaf tobacco 1,796.2 1,775.0 _ Other raw materials - 359.3 - ----- 331.2 Finished goods and work in process 498.0 493.0 2,653.5 2,599.2 _ Prepaid expenses 38.6 - -~ - 42.0 - _ . Total current assets 3,640.1 3,452.8 December 31 1984 and 1983 _ 1984 1983

Philip Morris Incorporated and Subsidiaries 1984 1983 Liabiiities Notes payable $ 171.6 $ 293.9 Current portion of long-term debt 357.5 266.3 Accounts payable 471.9 437.3 Accrued liabilities: Taxes, except income taxes 409.7 368.8 Employees' retirement and profit-sharing plans 129.2 130.7 _ 0ther 463.3 430.7 Income taxes payable 244.8 317.0 Dividends payable ~ 103.5 91.6 Total current liabilities 2,351.5 2,336.3 Long-term debt 2,059.5 2,514.7 Deferred income taxes 783.7 737.3 Other liabilities 51.6 45.0 Total liabilities 5,246.3 5,633.3 Stockholders' Equity Common stock, par value $1 per share 126.4 126.4 Additional paid-in capital 427.0 446.0 Earnings reinvested in the business 4,210.1 3,737.8 Curruncy translation adjustments (235.2) (176.7) 4,407.3 4,133.5 Less, cost of treasury stock 374.4 99.8 Total stockholders' equity 4,092.9 4,033.7 - ~ $9,339.2 $9,667.0 ~.-~ _

Consolidated Statements of Earnings (in millions of dollars, except per share data) for the years ended December 31 1984 Operating revenues $13,813.7 Cost of sales: Cost of products sold 5,516.6 Excise taxes on products sold 3,675.9 Gross profit 4,621.2 Marketing, administration, and research costs 2,329.3 Operating income of consolidated companies 2,291.9 Equity in net earnings of unconsolidated subsidiaries and affiliates 53.7 Operating income of operating companies 2,345.6 Corporate expense 138.1 Interest expense 299.1 Facility write-down 280.4 Other deductions, net 21.1 Earnings before income taxes 1,606.9 Provision for income taxes 718.4 Net earnings $ 888.5 Earnings per share $ 7.24 See notes to consolidated financial statements. 1983 1982 $12,975.9 $11,586.0 5,342.8 5,315.4 _ 3,510.3 2,614.5 4,122.8 3,656.1 82.6 71.2 1,958.0 ~ 1,715.7 128.8 112.8 233.9 267.2 10.5 35.5 ~ 1,584 8 1,300.2 681.3 ~ _ 518.4 903.5 $ 781.8 $ 7.17 $ 6.23

Consolidated Statements of Stockholders' Equity (in millions of dollars, except per share data) for the years ended December 31 Common Stock Additional Paid-in Capital Earnings Reinvested in the Business Currency Translation Ac(just- ments Cost of Treasury Stock Total Stock- holders' Equity Balance, January 1, 1982 $ 125.4 $ 415.7 $ 2,719.4 $ (26.8) $ 3,233.7 Net earnings 781.8 781.8 Exercise of stock options and stock units 0.2 4.0 $ 0.9 5.1 Issued in exchange for debentures reacquired 0.3 16.2 16.5 Adjustment of prior-year acquisition (0.9) = (0.9) Cash dividends declared on common stock, $2.40 per share (301.5) (301.5) Currency translation adjustments (71.8) (71.8) Balance, December 31, 1982 125.9 435 9 3,199.7 (98.6) 3,662.9 Net earnings 903.5 903.5 Exe.rcise of stock options and stock units 0.4 10.0 0.6 11.0 Issued for acquisition 0.1 0.1 0.4 0.6 Adjustment of prior-year acquisition (0.2) (0.2) Cash dividends declared on common stock, $2.90 per share (365.8) (365.8) Currency translation adjustments (78.1) (78.1) Common stock purchased (100.2) (100.2) Balance, December 31, 1983 126.4 446.0 3,737.8 (176.7) (99.8) 4,033.7 Net earnings 888.5 888.5 Exercise of stock options and stock units (19.0) 33.8 14.5 _Ca_sh dividends declared_on _ _^n!».mnn stock, $3.40 per share (416.2) (416.2) Currency translation adjustments (119.5) (119.5) Common stock purchased (308.4) (308.4) Balance, December 31, 1984 $126.4 $427.0 $4,210.1 $(296.2) $(374.4) $4,092.9 ( ) Denotes deduction See notes to consolidated financial statements.

1 ~ _,.._...._,.. ~ - - Consolidated Statements of Changes in Financial Position (in millions of dollars) for the years ended December 31 Funds Provided By Operations: Net Earnings Depreciation and amortization Facility write-down Deferred income taxes Equity in undistributed net earnings of unconsolidated subsidiaries and affiliates Funds from operations Increases (decreases) in accrued liabilities and other payables Decreases (increases) in prepaid expenses Other, net Total funds provided Funds Used Fc-- Increases (decreases) in: Cash and receivables 1984 1983 1982 $ 888.5 $ 903.5 375.5 280.4 327.0 36.5 173.5 146.2 (34.1) (55.6) _ (49.2) 1,546.8 1,348.4 1,159.8 46.3 166.5 (20.0) 3.4 (7.2) (1.4) 90.2 34.6 (26.2) 1,686.7 1,542.3 1,112.2 136.4 81.4 Inventories 54.3 (234.6) ~88.0) ~ Capital expenditures Dividends declared Currency translation adjustments affecting working capital Total funds used Net funds provided (required) Financing Activity . . T . (Decreases) increases in funds from financing activity $(729.2) $(715.4) $ 20.6 ~ Increases (Decreases) In Working Capital $ 172.1 b(872.7) $ 191.7 ~ Working Capital at Year-end $1,288.6 -$1,116.5 $1,989.2 ~ - - - ~ ( ) Denotes deduction See notes to consolidated financial statements. _ ( O A A V C ~ ~ 1 . ~~ v C ~ \ 1 V'~r ~ f .. . .. - .-.._ . . ._ .' . - . ., : i: ' . ._. .. . ; : '. '. -.} .. . . . .- ~ . . . ... . s .. . . '.~. } .r i. -~' ,. Tii (Decreases) increases in current notes payable Long-term debt issued Long-term debt retired Purchase of treasury stock Issuance of shares $ 298.1 416.2 52.5 957.5 729.2 $ (31.1) 35.1 (4;$S-.6 1.4 $ 566.2 365.8. 48,1 826.9 715.4 $ 560.2 $ 781.8 281.0 L?. ?) 918.2 301.5 48,8 1,132.8 ~ (20.6) $ ~3 06•_0) 91.1 437.8 C1,277.5) C~32.8) C100,2)_ 14 8 11 0 21 6

Notes to Consolidated Financial Statements Summary of Significant Accounting Poticies: Consolidation: The consolidated financial statements include the accounts of the company and all wholly-owned subsidiaries except for real estate operations and a credit corporation formed in 1982. Investments in unconsolidated subsidiaries and affiliates, including the real estate operations and the credit corporation, are stated at cost adjusted for equity in undistributed net earnings since the dates of acquisition. Inventories: Inventories are stated at the lower of cost or market. The company uses the last-in, first-out (LIFO) method to cost inventories used in its U.S. and U.S. export tobacco operations, and beer operations. The cost of tobacco used in products manufactured outside the L'nired States is determined by the average cost metliod and, in gen- er 1, the cost of other inventories is detErn:inrd bv the first-in, `irst- out "FIFO) method. It is a generally recognized industry practice to classify the total amount of leaf tobacco inventory as a current asset although part of such inventory, because of the duration of the aging process, ordinarily would not be utilized within one year. Facility Write•Down: A write-down of the completed but inactive Miller Brewing Company facility in Trenton, Ohio, reduced 1984 pre-tax earnings, net earn- ings, and earnings per share by $280.4 million, $145.6 million, and $1.19, respectively. '1i:,ier has excess capacity in relation to its present and near-term requirements. In view of continuing slowdown in consumer demand Inventories: At December 31, 1984 and 1983, the cost of approximately 70% of inventories was determined by the LIFO method, The stated LIFO value of inventory was $777 million and $803 million lower than the Income taxes: Certain items of income and expense included in the financial state- ments, principally depreciation, are reported in different years in the tax returns in accordance with applicable income tax laws. The resulting difference between the financial statement income tax pro- vision and income taxes currently payable is reported in the finan- cial statements as deferred income taxes. Investment tax credits are recognized currently as a reduction in the provision for income taxes. Provision is also made for federal income taxes on the portion of undistributed earnings of subsidiaries expected to be remitted. Property, plant, and equipment: Maintenance and repairs are charged against income, and expendi- tures for renewals and improvements are capitalized. The capitalized cost of facilities inclu:?es interest and real estate taxes incurred dur- ing the construction period. Industrial development incentive grants are included in income as realized. Provision for depreciation of assets is recorded by a charge against income at rates considered adequate to amortize the cost of such assets over their useful lives computed on the straight-line method, in the brewing industry, commencement of production at the Tren- ton brewery cannot presently be foreseen. The facility has been placed on inactive status pending an increase in demand, and man- agement believes it appropriate to reduce the cost to reflect the esti- mated impairment in value, current cost of inventory at December 31, 1984 and 1983, respec- tively. .1

Notes continued i Subsidiaries and Affiliates Located Outside the United States: Principal financial data of subsidiaries and affiliates located outside the United States are as follows: s Consolidated (Wholly-Owned) Unconsolidated (Partially-Owned) Unconsolidated gartially-Owned) Greater than 50% ownership 50% ownership or less ~ (in millions of dollars) 1984 1983 1982 1984 1983 1982 1984 1983 __ 1982 Assets $1,481.2 $1,359.7 $1,472.0 -current $198.1 $291.7 $ 345.3 $1,616.2 $1,829.6 J1,953.2 -noncurrent 164.5 234.5 214.6 946.8 961.3 842.8 Liabilities 667.4 721.8 868,3 -current 109.4 181.2 202.8 1,071.8 1,160.4 1,353.6 -noncurrent 2.1 21.6 10,7 738 4 922.9 ~ 784.3 Net assets 813.8 637.9 603.7 251.1 323.4 346.4 752.8 707.6 658.1 Company's equity 813.8 637.9 603.7 208.7 244.8 260.1 266.5 278.9 276.5 Operating revenues 2,855.4 2,703.3 2,600.3 902.2 869.8 1,105.6 5,571.6 144.6 6 5 963 3 a ; Gross profit 129.0 123.7 136.5 i,i05.6 , 1,198.9 , . 1,09_3.3 i ~ Pre-tax earnings (4.6) 37.8 57.2 177.2 190.1 206.6 ! Net earnings 8e.6 30.1 63.9 (15.8) 19.9 38.2 112.2 136.4 126.8 Company's equity 86.6 30.1 63.9 (13.4) 18.1 27.9 38.6 40.3 40.4 At December 31, 1984, investments in unconsolidated subsidiaries and affiliates located outside the United States exceeded equity in net assets by approximately $140 million, of which $135 million is being amortized. Economic conditions have impaired the company's investments in certain greater than 50% owned unconsolidated subsidiaries. Conse- quently, the company's 1984 net earnings include a charge of $41 million representing a write-down of such investments. These opera- tions are now being accounted for on the cost method of accounting. Consolidated earnings reinvested in the business at December 31, 1984, include the company's equity of approximately $300 million in undistributed earnings of unconsolidated subsidiaries and affiliates located outside the United States. Federal income tax has not been provided on approximately $1.02 billion of accumulated earnings of subsidiaries located outside the United States, which is expected to be permanently invested abroad.

Philip Morris Credit Corporation: Philip Morris Credit Corporation (PMCC), a wholly-owned unconsoli- dated subsidiary of the company, is engaged in financial service activities, including financing for customers of the company and its operating companies. Pursuant to a Support Agreement between the company and PMCC, the company has agreed to retain ownership of 100 % of the voting stock of PMCC and to make periodic payments to PMCC to the extent necessary to ensure that its quarterly earnings available for fixed charges equal at least 1.25 times its fixed charges. No such payments were required in 1984 or 1983. Condensed financial statements of PMCC at December 31 and for the year then ended, follow: (in millions of dollars) 1984 1983 1984 1983 Assets Financing revenues $52.1 $24.1 Finance assets $611.1 $271.5 Expenses 35.2 15.4 Other assets 13.7 4.6 Earnings before income taxes 16.9 8.7 Total assets $624.8 3276.1 Provision for income taxes 5.6 4.2 Liabilities and stockholder's equity Net earnings $11.3 $ 4.5 :;otes payable $232.7 $ 84.4 Deferred taxes and other liabilities 34.0 17.4 Long-term debt 201.4 54.1 Capital notes due parent 90.0 87.1 Stockholder's equity 66.7 33.1 Total liabilities and stockholder's equity $624.8 $276.1 I

The company s investment in MVRG at December 31, 1984, the 3ear then en___ ded~foll. - -~ .g- _ -~ ' ~ (in millions of dollars) 1984 1983 984 1983 ~ Assets Operatmg-re~enues _ „- 6237 7 8,5 S°5 Real estate held for sale and investment $237.1 $239.8 Costs_and_xpenses- =218.4 Land and offtract improvements - _~ 170.8 155,_ Earningp beforeinco~e t~xes ---~ - - _,_ -35 3 40.1. - ~ Other assets ~ 56.4 55,0 Frovision f_r i~n~me tax~s. ~20.5 Total assets $464 3 $450..5 Net earnmgs ~ $ 17_ 2 S 19.6 Liabilities and stockholder'ssequity 3 Payable to affiliates $ 87.3 $121.7 ~ ~ ~ ~ -a~ Deferred income taxes 91.9 81.0 ~ Other liabilities 45.4 25.3 Stockholder's equity --=c ~ 239.7 - -- -° 222.5 - - --~ --- -~ - a 3 - ~ - - Total liabilities and stockholder's equity ~ ,c .C4.3 $450.5 ~--- i- -~ ~ - - - _ .3.~ ... ~ r ~a Brands, Trademarks, Patents, and Goodwill: ~~ ~ .~` .~ ~ Notes continued Real Estate Operations: _ Mission Viejo Realty Group Inc. ("MVRG"), a wholly-owned uncon- solidated subsidiary of the company, is engaged in community, com- mercial, and industrial real estate development activities. ' At December 31, 1984, this account included approximately $387 million which is being amortized on a straight-line basis, principally over 40 years. Cost in excess of net assets of companies acquired prior to November 1, 1970, is not being amortized because, in the exceeded equity in net assets by approximately w~43 million, of which $19 million is being amortized, Condensed financial statements of MVRG at December 31 and for opinion of management, the re al ted investments have not experi- enced any diminution in value, Accumulated amortization was $78,9 million and $68.3 million at December 31, 1984 and 1983, respec- tively.

Short-Term Borrowing Arrangements: At December 31, the company's short-term borrowings and related average interest rates consist of the following: (in millions of dollars) Bank loans Commercial paper obligations Amount reclassified to long-term debt The company has credit facilities with a number of lending institu- tions amounting to approximately $1.7 billion at December 31, 1984. Approximately $1.5 billion of these facilities remained unused at December 611. 1984. These facilities are primarily maintained to sup- port the company's commercial paper borrowings. The company maintains bank balances of approximately $40 million to support $300 million of the unused facilities and compensate the banks for services. Commitment fees, ranging from 1/4 to 3/s of 1 per- 1984 1983 Amount Outstanding Average Interest Rate Amount Outstanding Average Interest Rate $196.5 8.4a/o $199.7 8.9% 39.8 9.9% 160.1 10.0 % (64.7) (65.9) $171.6 $293.9 cent, are paid to the banks as compensation for $700 million of the unused facilities. The company's credit facilities include revolving credit agree- ments 4iid other ar.angements which mature after 12 months and enable the company to refinance short-term borrowings on a long- term basis. Accordingly, short-term borrowings intended to be refi- nanced have been reclassified to long-term debt.

Notes continued Long Term Debt: At December 31, the company's long-term borrowings, exclusive of amounts due within one year, consist of the following: (in millions of dollars) Short-term debt, reclassified Notes: 14%-15'/4%, payable 1988 to 1991 9.55%, payable 1986 81/4% and 8'/s%, payable through 1998 5.15%, payable through 1989 Bank term loan agreement Interes at 81/z % Debentures: _ Sinking fund, interest from 65/s% to 9i/s% payable through 2004 $250 million (original issue discount), interest at 6%,_payable 2001 $200 million (original issue discount), interest at 6%, payable 1999 Other currencies: 700 million Swiss franc loans interest from 51/4% to 6s/4%, payable 1989 to 1994 400 million Deutsche mark loans, interest from 67/s% to 91/2%, payable through~990__ . Purchase money obligations: Interest principally from 6% to 71/z%, payable through 2014 Other Original issue discounts relating to the $250 million 6% debentures and $200 million 6% debentures are being amortized over the lives of the issues using the interest method, which results in effective interest rates of 15.2 % and 14.1 %, respectively. Aggregate maturities of long-term debt, excluding short-term Restrictions: Certain long-term debt agreements restrict payment of cash divi- dends and purchase, redemption or retirement of capital shares. At December 31, 1984, approximately $2.9 billion of consolidated earn- ings reinvested in the business was free of such restrictions. Interest: (in millions of dollars) Interest expensed capitalized Interest incurred _- .-299.0---- _ _r300,5-_ 112 3 1 10 ---~ __ - j , ~. 88,1 131.8 ~ _-155-2_, _ i83*7 ~ 1842 _ _ debt classified as long-term debt, in each of the following periods are: 1985, $357.5 million; 1986, $309.0 million; 1987, $54.0 million; 1988, $129.3 million; 1989, $140.5 million; 1990-1994, $705.6 mil- lion; and 1995-1999, $397.4 million. Other debt agreements specify minimum amounts of working cap- ital and limit the amount of senior debt which may be issued. At December 31, 1984, the company was in compliance with these - agreements. ~ --_:~-:- 1984,_ 1982 $299.1 ., 42_33..9~ ~ 52,67.2 14 0 _~ _ 12,8,.8_g_ - -._162 2057647566 - - ..-- _-~-~- -- 1L83_ ~ $ =64?°, _~ ~- 65-9 ~-- 25-0 Q, 319..5 25_0.0 - 250.0 - 230.0 386.:r_ ~ ~ -23.8 26._4 ~~ . 160 -Q_ 6

Currancy'Iiransiation Adjustments: Currency translation adjustments include translation losses as follows: (in millions of dollars) 1984 1983 1982 Translation adjustments $ 95.5 $60. 1 $46.6 Related income taxes 24.0 18.0 25.2 Net change 5119.5 $78.1 $71.8 Capitai Stocic: Shares of common stock authorized, issued and outstanding were: Authorized Issued Treasury Outstanding Ba,ance, January 1, 1982 200,000,000 125,401,350 125,401,350 AdJustment of prior-year acquisition (16,401) (16,401) Exercise of stock options and stock units 148,348 16,401 164,749 Issued in exchange for debentures reacquired 345,552 345,552 Balance, December 31, 1982 200,000,000 125,895,250 - 125,895,250 Adjustment of prior-year acquisition (4,340) (4,340) - Exercise of stock options and stock units T 423,786 - 11,890 ~ 435,676 Issued for acquisition 52,738 52,738 Purchased (1,396,600) (1,396,600) Balance, December 31, 1983 200,000,000 126,371,774 (1,389,050) 124,982,724 Exercise of stock options and stock units 472,166 472,166 Purchased (4,05%600) (4,059,601) Balance, December 31, 1954 2-'J,600,4flt7 12-3,371,774 ,,376e4'-'- ) 121,395,2r0 At December 31, 1984, 3,092,893 shares of common stock were reserved for stock options and stock units, and 10,000,000 shares of # -a - Serial Preferred Stock were authorized, none of which has been issued.

Notes continued Stock Plans: Under stockholder-approved stock option and unit plans, 884,186 grant or to receive the appreciation value (the excess of the market shares of common stock of the company remain available to be price at the date of exercise over the market price at the date of granted to employees. Under the option plans, common stock of the grant) in the form of stock or stock and cash. Appreciation value company has been made available for purchase by employees at mar- may be received with respect to the equivalent of 50% of the units ket prices on dates of grant. Under the unit plan, a holder may elect granted. At December 31, 1984, options and units for 1,590,433 to purchase shares of common stock at market prices on dates of shares were exercisable. Per Share Under Option, Per Share Exercised Price Range End of Year Price Range 1984: Units 349,877 $30.03•$51.81 1,057,038 $30.03•$51.81 Options 230,784 $22.22•$69.38 1,151,669 $22.22-$69.38 1983: Units 324,801 $30.03-$51.81 1,429,989 $30.03-551,81 Options 204,021 $22.22-$51.44 989,844 $22.22-$58.06 1982: Units 121,542 $30.03-551.81 1,754,790 "s30.03-$51.81 Options 51,450 $22.22-$30.97 806,083 $22.22-551.44 Earnings per Share: Earnings per common share are calculated on the weighted average number of shares of common stock outstanding for each year, which Pension Plans: The company and certain of its subsidiaries have pension plans covering substantially all their employees. Total pension expense for 1984, 1983, and 1982 was $96.3 million,$94.0 million, and $88.1 million, respectively, including amortization of prior service costs (in millions of dollars) Actuarial present value of accumulated plan benefits: The assumed rate of return used in determining the actuarial present value of accumulated plan benefits was principally 7.5 % for both 1984 and 1983. was 122,675,079, 126,044,770, and 125,565,555 for the years 1984, 1983, and 1982, respectively. over periods of up to 30 years. Generally, the plans are funded with independent trustees. A comparison of accumulated plan benefits with net assets for defined benefit plans follows: January 1, 1=54 $745.1 January 1, 19S3 $614.8

Pre Tax Earnings and Provision for Income Taxes: (in millions of dollars) 1984 1983 1982 Pre-tax earnings: United States $1,488.2 ~ $1,471.7 ~ $1,166.5 Outside United States 118.7 113.1 133.7 Total $1,606.9 $1,584.8 $1,300.2 Provision for income taxes: United States federal: Current $ 572.8 T =~~in 416.0~ ~~. 5 291.5 - Deferred 11.3 - = ~. £170,8~ 123.2 584.1 586 8 414 7 State and local 84.2 60.4 61.3 Total United States .r 668.3 647.2 476.0 Outside United States: Current 24.9 31.4 19.4 Deferred 2.7 -_.~_ --23.0 Total outside United States 50.1 34.1 42.4 Total provision for income taxes $ 718.4 $ 681.3 $ 518.4 Deferred tax expense is primarily attributable to the excess of tax over book depreciation, reduced in 1984 by the tax benefit attribut- able to the facility write-down. The effective income tax rate on consolidated pre-tax earnings differs from the U.S. federal statutory rate for the following reasons: '1984g ~ 1983 61982 (in millions of dollars) % of Amount Pre-tax Amount % of Pre-tax Amount Pre-tax Provision computed at U.S. federal statutory r te of reported pre-tax earnings $739.2 46.0% 8729.0 46.0% $598.1 46.0% Increases (decreases) in the provision resulting from: -~ ~ ,- .Tc _ $' Investment tax credit (20.2) (1.3) (39.5) (2.5) (703) (5.4) Inclusion of equity in net earnings of unconsolidated subsidiaries and affiliates in pre-tax earnings (24.7) (1.Sj ~ f (38,0) ~ -_(2.4) T(32.8)'' ~.5) Income taxed at other than U.S. federal statutory rate and not expected to be subject to U.S. tax --- -- --_ -,, z . _ ~ ~ .: Y = y . f¢ in the foreseeable future 1.8 (20.4) (1.3) (12.0) O,l (0.9) State and local income taxes, net of federal tax benefit 45.4 2.8 32.6 2.1 33,1 ' 2.5 Other (0.9) = (4,6) (0.3)r 2.3 ~ ~ 0.2 Provision as reported $718.4 44.7% $681.3 43.0% $518.4 39,9% ~ O GP -.-f ~ ~ -.~ C5~ ~

IQbtes conllnued Segment Reporting: Worldwide tobacco and domestic beer represent the primary seg- ments of the company's operations. Other products include soft drinks and industrial products. The company's consolidated opera- tions outside the United States, which are predominantly in the tobacco business, are organized into geographical regions for man- agement responsibility, with Europe being the most significant. Investments in unconsolidated subsidiaries and affiliates located out- side the United States principally represent certain tobacco opera- tions located in Europe, Australia and Latin America. Intersegment transactions are not reported separately since they are not material. Operating profit calculated for purposes of segment reporting is below. Data by Product Line for the years ended December 31 (in millions of dollars) - Operating revenues: Tobacco Beer Other Operating profit: Tobacco Beer Other Reconciliation: Equity in net earnings of unconsolidated subsidiaries and affiliates Amortization of goodwill and trademarks Operating income of operating companies Depreciation expense: Tobacco Beer Identifiable assets Tobacco Beer Other Investments in unconsolidated subsidiaries and affiliates Corporate assets Total assets Capital additions: Tobacco Beer 44 . .3. ~~~. operating income of operating companies less equity in net earnings of unconsolidated subsidiaries and affiliates and reduced by the amounts of amortization of goodwill and trademarks included in other deductions, net in the-consolidated statements of earnings. Identifiable assets by segment are those assets that are applicable to the respective industry segments. Assets of the beer segment include a brewery with a net realizable value of approximately $190 million which was completed in 1984 and has been placed on inac- tive status pending an increase in demand. Reportable segment data reconciled to the consolidated financial statements are presented $ 1984 1983 1982 _~--.- =~-- - $ -9,801.7 $ 9,094.9 S 7,821.8 2,940.3 2,935.5 $ 2,941.3 1,071.7 9 5.5 822.9 $13,313.7 512,970.9 511,556.0 $ 2,140.8 $ 1,647.0 $ 1 475.7 116.4 227.1 159.0 2,280.2 23.0 (10.9) ~ (2.4) ~~ - ~, 53.7 11.7 2,345.6 14".5 $ 150.8 ----$3;149.4 1,892.3 1,017.5 8,059.2 1,054.0 226.0 $ 9,339.2 $ F- 1,863.2 1,632.3 t 82.6 71.2 12.2 12 2 ~ . - ~ ~ - 1,958.0 $ 1,715.7 124.7 7 7 130.0 122.8 -~ ~ 5114.3$ 5070.7 2,138.9 8,260.5 8,163.8 1,184.1 1,197.1 222.4 261.2 - $ 163.1 $ 319.9~ ~ 498.9 93.6 174.6 286,3 205~~~~5`~r~

Data by Geographical Region for the years ended December 31 (in millions of dollars) 1984 1983 1982 Operating revenues: United States -Domestic -Export Europe Other $10,034.0 S 9,308.1~ -5 8,007.7 924.3 969.5- ~ 978.0 2,372.1 2,170.7 2,033.6 483.3 532.6 566.7 $13,813.7 912,975.9 ~11,586.0 Operating profit: i'aited States - Eutcl,e Ot~~er Reconciliation: Equity in net earnings of unconsolidated subsidiaries and affiliates Amortization of goodwill and trademarks _ Operating income of operating companles Identifiable assets: United States Europe Other Investments in unconsolidated subsidiaries and affiliates Corporate assets ~ Total assets $_2,149.7 134.0 ----- (3.w) 2,280.2 > 1,804.2 $ 1,513.4 67.3~ 125.0 (8.3) (6.1) 1,863.2 1,632.3 ~ - -- - 53.7 ~ L 82.6~Y 71.2 $ 2,345.6 ~1,958.0 ~ 1,715.7 3 6,615.7 $ 6,'928.5 S 6,678.3 1,286.5 1,162,1~ ~ 1,304.2 157.0 169.9~ ~ 181,3 8,059.2 1,054.0 223.0 8,260.5 8,163.8 1,184.1 1,197.1 222.4~ - =261.2 $ 9,339.2 ",667.0 $ 9,&22.1 F-~

t 1 ~ Notes continued Litigation: _ ~-=__ T.,e. There is litigation pending against the leading United States ciga- rette manufacturers seeking damages for cancer and other health effects alleged to have resulted from cigarette smoking. The com- pany is a defendant in some of these actions. The company and the other cigarette manufacturers have successfully defended all similar prior litigation and have not made any payments in settlement. An Additional Information: (in millions of dollars) Depreciation expense Rental expense Quarterly Financial Results (Unaudited): (in millions of dollars, except per share amounts) For quarter ended: 1984 Operating revenues Gross profit Net earnings (A) Per share: Earnings (A) Dividends paid Market price high-low 1983 Operating revenues Gross profit Net earnings Per share: Earnings (B) The principal stock exchange on which the company's common stock (par value $1 per share) is listed is the New York Stock Exchange. At January 31, 1985, there were 30,408 holders of record of the company's common stock. adverse development in pending litigation might encourage the com- mencement of similar litigation. It is not possible to predict the out- come of pending litigation; however, management does not believe that the pending actions will have a material adverse effect upon the financial condition of the company. The company will vigorously defend all such actions. 1984 1983 1982 $340.5 $293.8 2 9,9 $ 69.3 $ 64.4_ $ 59.4 Var. 31 June 0 Segt..°~,0 C ec. 31 Year $3,249.3 $3,608.6 $3,66: .4 $3,289.4 $13,813.7 1,020.7 1,202.7 1,292.9 1,104.9 4,621.2 205.1 257.3 321.6 104.5 888.5 1.67 2.10 - 2.62 .85 7.24 .725 .85 .85 .85 3.275 75'/4-62'h 70-62'h 79-67'14 83'/4-737/a 83'/4-62'/a $3,021.3 $3,399.6 $3,464.1 $3,090.9 $12,975.9 907.8 1,065.6 1,147.7 1,001.7 4,122.8 1810.0 220.2 285.9 211.4 903.5 1.48 1.75 2.27 1.68 7.17 .600 .725 .725 .725 2.775 64g/4-54 673/4-557/8 671/2-571I2 723/8-669/s 723/8-54 (A) A write-down during the fourth quarter of the completed but inactive Miller Brewing Company facility in Trenton, Ohio, reduced 1984 net earnings and earnings per share by $145.6 million and $1.19, respectively. (B) The sum of quarterly amounts does not equal the yearly amount due to rounding.

Report of Independent Certified Public Accountants: To the Board of Directors and Stockholders of Philip Morris Incorporated: We have examined the consolidated balance sheets of PHILIP MORRIS INCORPORATED and subsidiaries as of December 31, 1984 and 1983, and the related consolidated statements of earnings, stockholders' equity and changes in financial position for each of the three years in the period ended December 31, 1984. 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 circum- stances. In our opinion, the financial statements mentioned above present fairly the consolidated I'inancial position of Philip Morris Incorpo- rated and subsidiaries at December 31, 1984 and 1983, and the con- solidated results of their operations and the changes in their financial position for each of the three years in the period ended December 31, 1984, in conformity with generally accepted account- ing principles applied on a consistent basis. Coopers & Lybrand New York, New York January 29, 1985 Company Report on Fm _anc!a_I . tatements: The consolidated financial statements and all related financial infor- mation herein are the responsibility of the company. The financial statements, which include amounts based on judgments, have been prepared in accordance with generally accepted accounting princi- ples, applied on a consistent basis. Other financial information in the annual report is consistent with that in the financial statements. The company maintains a system of internal controls which it believes provides reasonable assurance that transactions are exe- cuted in accordance with management's authorization and properly recorded, that assets are safeguarded, and that accountability for assets is maintained. The system of internal controls is characterized by a control-oriented environment within the company which includes written policies and procedures, careful selection and train- ing of personnel, and examinations by a professional staff of internal auditors. Coopers & Lybrand, independent certified public accountants, have examined and reported on the company's consolidated financial statements. Their examinations were performed in accordance with generally accepted auditing standards and included studies and evalu- ations of internal accounting controls to the extent deemed neces- sary by them. The Audit Committee of the Board of Directors, composed of five non-management directors, meets periodically with Coopers & Lybrand, the company's internal auditors and management repre- sentatives to review internal accounting control, auditing and finan- cial reporting matters. Both Coopers & Lybrand and the internal auditors have unrestricted access to the Audit Committee and may meet with it without management representatives being present. C I%

Board of Directors Thomas F. Ahrensfeld a Senior Vice President and General Counsel Alfred Brittain III Chairman of Bankers Trust Company, New York, NY - Dr. Harold Brown 2 Chairman of Foreign Policy Institute, The Johns Hopkins University School of Advanced International Studies, Washington, DC Dr. Jose Antonio Cordido-Freytes 4 Member of Betancourt, Cordido and Associates, Caracas, Venezuela, Attorneys, and President of C.A. Tabacalera Nacional Hugh Cullman 1,2,4,s Vice Chairman of the Board Joseph F. Cullman 3rd 1 Chairman Emeritus William H. Donaldsor i, ', q Chairman and Chief Executive Officer of Donaldson Entcrprise~ Incorporated, New York, NY Paul W. Douglas 1 Chairman and Chief Executive Officer of The Pittston Company, Greenwich, CT Jane Evans 1 President and Chief Executive Officer of Monet Jewelers, Inc., New York, NY William K. Howell Vice President and President and Chief Executive Officer, Miller Brewing Company Robert E.R. Huntley',3.4 President and Chief Operating Officer of Best Prodacts Co., Inc., Richmond, VA Jacques G. Maisonrc .,ge 3 ; Vice Chairman of Liquid Air Corporation, New York, NY Hamish Maxwell i,2~4,s Chairman of the Board and Chief Executive Officer Ross R. Millhiser 1,2 Vice Chairman of the Board T. Justin Moore, Jr. 2,4 Chairman of Dominion Resources, Inc., Richmond, VA John A. Murphy 1,z,s President and Chief Operating Officer and Chairman, Miller Brewing Company William Murray Vice President and President and Chief Executive Officer, Philip Morris International John S. Reed 1,2,3 Chairman and Chief Executive Officer of Citicorp and Citibank, N.A., New York, NY Frank E. Resnik Vice President and President and Chief-F.::e:°uf',-o Officer, I'hilip Morris U.S.A. Hans G. Storr 2 Vice President and Chief Financial Officer George Weissman 1,5 Chairman of the Executive Committee Margaret B. Young 3,4 Chairman of the Whitney M. Young, Jr. Memorial Foundation, New York, NY George V. Comfort Director Emeritus H. Robert Marschalk 3 Director Emeritus Richard W, Dammann Memher, Advisory Board Ed,--zrd Las}:er Me;rter, Advisory Board i Member of Executive Committee George Weissman, Chairman 2 Member of Finance Committee Hugh Cullman, Chairman 3 Member of Audit Committee Robert E.ft. Huntley, Chairman Q Member of Committee on Public Affairs and Social Responsibility Hugh Cullman, Chairman 6 Member of Office of the Chairman Hamish Maxwell, Chairman Hamish Maxwell Hugh Cullman George Weissman John A Murphy

Alfred Brittain III Dr. Jos6 Antonio Cordido-Freytes Thomas F. Ahrensfeld Margaret B. Young Jacques G. Maisonrouge T. Justin Moore, Jr. Robert E.R. Huntley K'i,,iam H. Donaldson Paul W. Douglas Jane Evans Hans G Storr

Officers Officers of the Corporation Officers of the Corporate_ Philip Morris U.S.A. Hamish Maxwell Staff and of the Frank E Resnik Chairman of the Board and William J. O'Connor T b T h l G . President and Chief Executive Officer Vice President, o acco ec no ogy roup Chief Executive Officer Administration and Human John A. Murphy Resaurces Bruce S. Brown `,'dilliam I. Campbell President and Staff Vice President and Executive Vice President Chief Operating Officer F. Harrison Poole Director Taxes , Marketing Vice President, , Hugh Cullman Financial Affairs Donal P. 0'Brien Mark A. Serrano Vice Chairman of the Board Senior Vice President Executive Vice President Philip J. Reilly , Tobacco Technology Group , Operations Ross R. Millhiser Vice President Vice Chairman of the Board James A. Remington W John Campbell James A. Remington President . Senior Vice President Thomas F. Ahrensfeld Senior Vice President and Vice President , Tobacco Technology Group , Plant Operations General Counsel Frank E. Resnik Frank A. Saunders Fred J Laux R. Nelson Beane Vice President Staff Vice President, . Senior Vice President, Vice President and Carlos E. Salguero Cultural Affairs Personnel Controller Vice President Dr. Robert B. Seligman Albert J. Bissmeyer III Geoffrey C Bible Stanley S. Scott Vice President, Vice President, Business . Vice President Vice President, Director of Research and Development, Development Corporate Affairs Tobacco Technology Group William I Campbell Vincent J. Buccellato . Vice President Thomas B. Shropshire William C. Smiy \, ice President, Sales St~ff Vic P<< si,'; , t Eugene J.T. FlanaQan Richa: ' L ~n der and Gene ..? .',ur;: ,r 0. Witch?,' DudueVice President L 4f Vice President Sccretary and . y , e , , Associate General Counsel Vice Pr, .ident William K. Tr«nsue St ff Vi P . ~ Pobert A. Fitzmauricr Hans G Storr a rc: ce -: Vice President Edward W. Frantel Vice President . Vice President and Chief Personnel , Brand and Promotion Financial Officer Louis R. Turano Ehud Houminer Vice President John J. Gillis Vice President Planning Lauren S. Williams , International Services Vice President, National , Vic-e President , Tobacco Technology Group Accounts William K. Howell Vice President Alexander Holtzman John van Harn Dr. Max Hausermann Associate General Counsel Vice President Leaf Vice President, George R. Lewis , , Research and Develo ment Vice President and Herbert Millington Tobacco Technology Group p Treasurer Deputy Treasurer Alexander Holtznlan J t E Li l Norman J. Treisman Vice President and e son . nco n Vice President Strategic Deputy Treasurer General Counsel , Research Edward G. Silcock F. Robert Kurimskv ~ William D. McCoy Assistant Treasurer Vice President, Information Services Vice President .Ic,hn C Lii;~. t 'illiam Murrd . A~ 'ic~~ ~ll_! Gu, L. S, : .'v Vice Pre..~ at, Corporate `: ice President Ilorae- 1C. Picrnoinr. Affairs Assi=tant Cuntrulier Harry G. Stvele Robert H. Souther Vice President, Assistant Controller Finance and Administration Robert A. White George W.B. Taylor Assistant Controller Vice President, James T. Breedlove Engineering and Planning Assistant Secretary James L. Thompson, Jr. Bernadette T. Fee Vice President, Media Assistant Secretary Horace P. Jones Controller i

William Murray President and Chief Executive Officer Geoffrey C. Bible Executive Vice President Carlos E. Salguero Executive Vice President Richard L. Snyder Executive Vice President Gabriel F. N. Bechaalany President, Seven-Up International Fiizabeth Butson - PrPsident I Buzzi ent ~arv t~. u»ington Vi2e i'resident Dinyar Devitre Vice President Marc Goldberg Vice President Richard A. Hutchinson, Jr. Vice President Thomas M. Kearns Vice President, Finance Lee Pollak Vice President George D. Riemer "ice President, i :.~onnel lfer Thoma " pr:"ziHievt ,)use ae la Torriente Vice President William H. Webb Vice President Andrew Whist Vice President, Corporate Affairs Mary-Ellen Johnson Treasurer and Director, Finance Paul Tiller Controller John A. Murphy Chairman -- William K. Howell President and Chief Executive Officer Thomas B. Shropshire Senior Vice President, -Treasurer, and Assistant to the President _ Warren H. Dunn Senior Vice President, Administration Thomas A. Futrath SP>i'.or Vire Pre=id5nt, c~i;;t~iutrl ~ ~ce ['~rat 1ent, = Operations Billy R. Apple -_Vice President, Plant Operations Dr. Vincent S. Bavisotto Vice President, Brewing and Research Alan G. Easton Vice President, Corporate Affairs -Leonard J. Goldstein Vice President, Sales Larry K. Neuman Vice President, Material Flow W'i!iiam A. Saupe ~V"ice President, Planning an~i 1)weiopmtat Ronald R. Strain Vice President and Controller Georgy N. Tarala -Vice President, Engineering Robert A. Toledo -Vice President, Brand Management Charles A. Whipple Vice President, National Retail Sales Raymond E. Jones, Jr. Vice President, General Counsel, and Secretary earroll A. Bodie Assistant Secretary William G. Schmus Assistant Secretary The Sev.en-Up Company Edward W. Frantel President and Chief Executive Officer Charles W. Schmid Executive Vice President, Soft Drink Group Edward P. Callahan Senior Vice President, Administration J. Stewart Bakula Vice President, General Counsel, and Secretary Philip A. Unverzagt Vice President, Finance Philip Morris Industrial William D. McCoy President and Chief Executive Officer Alan G. Wernick Senior Vice President Thomas J. Contrucci Controller Mission Viejo Realty Group Inc. Philip J. Reilly President and Chief Executive Officer James G. Gilleran Executive Vice President Jack G. Raub Executive Vice President James G. Toepfer Executive Vice President James L. Huesman Senior Vice President and Treasurer Wil,l,',,arn K. Smith Vice President and Secretary ".,: ....r p S% .^,;ik > .-, :'ri~siden; Danette S. Fenstermacher Controller Philip Morris Credit Corporation Hans G. Storr President Norman J. Treisman Senior Vice President James T. Breedlove Vice President and Secretary. Michael J. Kinney Vice President Denni, J. Floam Direc;~,r of Firance G. Si!; ,ok lteasurer-1?inance Katherine P. Wickham Controller Bernadette T. Fee Assistant Secretary t - _,V - _-.

Corporate Headquarters: Philip Morris (Austratia) Limited Annual Meeting: Stock Exchange Listings: Philip Morris Incorporated l)ne Little Collins Street The annual meeting of stuc•k- New York 120 Park Avenue Melbourne, Victoria 3000 Australia holders of Philip Morris Incor- Amsterdam New York, New York 10017 porated will be held on April 25 B«sel (212) 880-5000 Benson & Hedges(Canada)Inc. , 1985, at the Philip Morris f rankfurt 600 Rue do Lagauchetiere, G4'est Manufacturing Ceitter, 3601 Com- Geneva Operating Company Suite d,,,00 mesce Road. Richmond, Virginia. Lausanne Headquarters: Montreal, Quebec H3B 4M1 Paris Philip Morris U.S.A. Canada Form 10-K: Zurich 120 Park Avenue Seven-Up International The company's annual report on NY Stock Exchange New York, New York 10017 120 Park Avenue Form 10-K, which will be filed Symbol: MO New York, New York 10017 with the Securities and Exchange Philip Morris International Miller Brewing Company Commission, will be available Auditors: 120 Park Avenue to stockholders in April upon New York, New York 10017 3939 West Highland Boulevard written request to: Coopers & Lybrand Milwaukee Wisconsin 53201 1251 Avenue of the Americas Regional Headquarters: , - Eugene J.T. Flanagan, Secretary New York New York 10020 The S even-Up Company Philip Morris Incorporated , Philip Morris EEC Brillancourt 4 121 South Meramec 120 Park Avenue Annual Report Paper: Case Postale St. Louis, Missouri 63105 New York, New York 10017 Paper stock used in this report 1001 Lausanne Philip Morris Industrial Transfer Agents and is made by Plainwell Paper Switzerland 100 Park Avenue Registrars: Company, a division of Philip Philip Morris EFTA Eastern New York New York 10017 Morris Industrial. , Europe, the Middle East & Africa , Mission Viejo Realty Group Inc Morgan Guaranty Trust Compan f New York Cover: Solitaire Gloss 80# Place Chauderon 4 . yo ' . °Text: Solitaire Gloss 100# C.:se Posta! 26~U t,c.r,Ro:vd 30 V es.rBroadw_ay 1000 Lau~i_itne 9 Missirn Vie,io, Californ;a 92691 ?<V_.: rtxk York Prin~jpal Ptot ,grsGhv. Pt. E__:. Erc..i Switzerland Philip Morris ~ redit Corporation Unit-l Virginia Bank !taranar-, m. Photogruti..Io-IBiclh t Lr,~ ,: Phili M i L i A Box 26665 Richard Kalvarttagnum, Claus p orr s at n n,e:;, ai laeria 120 Park Avenue Richmond Virginia 2"261 Star. James 3tifn,oe, James P, Va.a Print d i G S b A C H 120 Park Avenue New York, New York 10017 , e n . . . y ase- oyt New York New York 10017 , Dividend Reinvestment Philip Morris Asia, Inc. Agent: 25th Floor United Centre , 95 Queensway Central Morgan Guaranty Trust , Hong Kong Company of New York Dividend Reinvestment Plan P.O. Box 3506 Church Street Station New York, New York 10008 0

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