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PI{1LIP MORRIS INCORPORATED 1979 Philip Morris Incorporated is now_a leading company in three large industries-ciga- rettes, beer, and soft drinks-that provide - simple pleasures to tens of millions of peo- -- ple every day. In 1979, the company regis- tered its 26th consecutive year of growth in operating revenues, net earnings, and earn- ings per share. Founded more than a century ago and __ incorporated in Virginia in 1919, the company has long been a major cigarette manufact- urer. Today, it is the second-largest ciga- rette company in the U.S. market and the largest U.S.-based international cigarette company, selling its 160 brands in more than 170 countries and territories. The corporation acquired full control of the Miller Brewing Company in 1970. At that time, Miller was the seventh-largest brewer in the U.S. Today, Miller is the second-largest. In 1978, the company expanded its operations with the purchase of The Seven- Up Company, the third-largest soft drink pro- ducer in the world. Philip Morris has also diversified into the manufacture of specialty papers, flexible packaging materials, and specialty chemi- cals as well as into community development and homebuilding. These businesses are conducted by six operating companies: Philip Morris U.S.A., Philip Morris International, Miller Brewing Company, The Seven-Up Company, Philip Morris Industrial,and Mission Viejo Company. i L f i Table of Contents 1 Financial Highlights 4 Review of theYear 14 Philip Morris U.S.A. 18 Philip Morris International i`3 Cti 22 Miller Brewing Company 26 The Seven-Up Company 0 30 Philip Morris Industrial Q ~ 32 Mission Viejo Company ~ 34 Financial Review QN 38 Fifteen-Year Financial Review - ~i W 54 Board of Directors 56 Officers

FINANC/AL HIGHLIGHTS 1979 1978 1977 1976 1975 (dollar amounts, except per-share amounts, _ _ expressed in thousands) Operating Revenues - $8,302,892 $6,632,463 $5,201,977 $4,293,782 $3,642,414 Net Earnings 507,881 408,581 334,926 265,675 211,638 Earnings Per Common Share 4.08 3.38 2.80 2.24 1.81 Dividends Declared Per Common Share 1.25 1.025 .781 .575 .463 Percent Increase Over Prior Year Operating Revenues 25.2% 27.5% 21.2% 17.9% 21.0% Net Earnings 24.3% 22.0% 26.1 % 25.5% 20.6% Earnings Per Common Share 20.7% 20.9% 25.3% 23.5% 14.9% Dividends Declared Per Common Share 22.0% 31.2% 35.9% 24.3% 19.4% Operating Companies Revenues Philip Morris U.S.A. $2,767,035 $2,437,465 $2,160,362 $1,963,144 $1,721,549 Philip Morris International 2,581,270 1,810,861 1,349,280 1,083,970 1,040,002 Miller Brewing Company 2,236,481 1,834,526 1,327,619 982,810 658,268 The Seven-Up Company 295,480 186,494 Philip Morris Industrial 268,847 237,165 216,699 169,096 151,960 Mission Viejo Company 153,779 125,952 1,48,017 94,762 -70,635 Consolidated Operating Revenues $8,302,892 86,632,463 $5,201,977 $4,293,782 $3,642,414 Operating Companies Income Philip Morris U.S.A. $ 701,340 $ 568,145 $ 474,400 $ 401,426 $ 337,314 Philip Morris International 260,620 188,561 153,791 130,104 112,975 Miller Brewing Company 180,984 150,300 106,456 76,056 28,628 The Seven-Up Company 6,985 26,291 Philip Morris Industrial 18,268 15,024 14,860 10,620 8,052 Mission Viejo Company 22,437 19,761 33,225 16,333 5,875 Consolidated Operating* Income $1,190,634 $ 968,082 $ 782,732 $ 634,539 $ 492,844 Compounded Average Annual Growth Rate 1979-1974 1979-1969 1979-1964 1979-1954 Operating Revenues 22.5% 21.9% 18.6% 13.5% Net Earnings 23.7% 24.2% 23.1 % 15.8% Primary Earnings Per Share 20.9% 20.4% 20.5% 14.4% Consolidated operating revenues and operating income include the results of the company and all wholly-owned subsidiaries (The Seven-Up Company and its subsidiaries since June 1, 1978). Effective Jan- uary 1, 1979, Philip Morris International assumed responsibility for the operations of Seven-Up Interna- tional and Philip Morris International's 1979 operating results include those of Seven-Up outside North America. Only North American operations are included in The Seven-Up Company. Corporate expense, interest expense, and other items which are not directly attributable to the operat- ing companies are not allocated to them. In the opin- ion of management, any allocation thereof would be arbitrary and would diminish the accuracy of meas- urement of their performances. 1

FINANCIAL HIGNLIGHTS Operating Revenues by Operating Company Operating Income by Operating Company rs~nons of Ooi~a's _ 9000 M,n~ons oi pa'.ars _ 8750 - - iL00 - 8500 1360 - - 8250 !320 8000 1280 7750 t240 7500 1200 7250 1120 1080 6500 . . ~ 1 1040 1000 920 4500 - °- '_-~ 720 4000 680 640 3-U 0 600 3500 = 560 3250 _ '- 520 3000 480 2750 2500 2250 2000 1750 1500 1250 1000 750 500 250 0 440 400 360 200 160 120 80 40  Philip Morris U.S.A.  Philip Morris International -~_ Miller Brewing Company  The Seven-Up Company  Philip Morris Industrial ~ Mission Viejo Company

Net Earnings h4a6ons or poilars 540 525 3,75 3.00 2 85 2.55 2.40 2.25 1 95 1.65 1 50 1,35 1 20 1 05 90 75 60 45 30 15 95 90 85 80 70 65 40 35 30 15 10 05 500 450 425 400 375 350 325 300 250 200 175 150 125 100 65 2.70 2,10 1 80 77 78 79 1.25 625 1,20 600 1 15 ~ 575 3 30 ~~ 1 10 ~ 550 3.15 1.05 _.. ~ 525 1 00 75 55 275 45 25 375 360 345 330 315 300 285 270 255 240 225 210 195 180. 165 150 135 120 105 90 75 60 45 30 15 0 Earnings Per Share Doflars 5,40 525 Dividends Declared Capital Expenditures Per Share Dollars 1.80 1.75 5.10 1.70 850 4.95 1.65 825 4 80 1.60 800 4 65 1.55 775 4 50 1,50 750 4.35 1 .45 725 420 - 1.40 700 405 1,35 675 3.90 1 30 650 M,Ilions of Dollars 900 8 75

REVIEW OF THE YEAR Geor.ge We ssman, cha rman of the board and ch ef execut ve officer (standing), meets w th the other members of the Office of the Chairman (left to right); Hugh Cullman, group executive vice president, Ross RMillhiser, vice chairman; Clifford H. Goldsmith, president: and John A. Murphy, group executive vice president. Philip Morris Incorporated We started the 1970s as a large U.S. and international cigarette company with partial ownership of a relatively small beer com- pany. We end the decade as a larger, more successful U.S. and international cigarette company, the world's second largest brewer, and an important entrant in the large soft drink industry. Our industrial and real estate activities have also prospered. Most of the quality products we sold in 1979 were made on machines or in factories that did not exist in 1970. Neither did many of the brands. From 1970 to 1979, the worldwide unit sales of our cigarette products grew by a compounded 10%, spurred by the suc- cesses of our principal brands. But, while tobacco contributed 85.1% of Philip Morris' revenues in 1970, by 1979 that percentage- even while cigarette units grew from 177 bil- lion to 402 billion-had been reduced to 63.8% as we broadened our base through the acquisition and grobvff of non-tobacco businesses. Our growth continued throughout the decade, without interruption, and shows every sign of continuing momentum as we move into the 80s. In fact, one of the com- pany's primary needs now is to expand its production facilities to meet the current and projected demand for its products. Nineteen seventy-nine was the 26th con- secutive year in which our performance resulted in record operating revenues, net earnings, and earnings per share. Operating revenues were $8.3 billion, an increase of 25.2% from 1978; net income rose 24.3% to $507.9 million; and earnings per share reached $4.08, a gain of 20.7%- even though there were 3.7 million addi- tional average shares outstanding. The company declared dividends of $1.25 per share, an increase of 22.0% over the previous year. This was the 14th time in the last 12 years that the company has raised its dividend and the 52nd consecutive year in which dividends were paid. Our worldwide cigarette business accounted for the majority of the company's revenue and earnings gains for the year. Philip Morris U.S.A:s cigarette unit sales increased 5.0% over the prior year to 177 billion, and increased the company's share of the U.S. market from 27.8% to approxi- mately 29% in 1979. Philip Morris Interna- tional had a notably successful year with cigarette unit sales increasing 12.0% to 225 billion units. Our share of the estimated 3.7 trillion unit world market, excluding the United States, rose to about 6% from 5.5%. The continued growth of our brewing operations provided the other major ingre- dient in our 1979 success. The Miller Brew- ing Company shipped 35.8 million barrels in 1979, an increase of 14.5%. Miller's market share moved up from 18.9% to about 21 %. 4

I For The Seven-Up Company, 1979 was a difficult year of transitlon. We restructured the Seven-Up organization, adding new per-_ sonnel to strengthen both our marketing and research capabilities and our relationships with bottlers in the United States, Canada, and Puerto Rico. In addition, Seven-Up International was integrated into Philip Morris International in order to take full advantage of the latter's long experience in the worldwide marketplace. Worldwide extract sales for Seven-Up were up slightly over the previous year but earnings were impacted by the moves which were designed to build a stronger Seven-Up for the future. As in the early stages of our Miller acquisi- tion, we do not expect Seven-Up to be a significant contributor to our profits for a few years. But, we do not believe that this will adversely affect the trend lines of the cor- poration's overall performance. Philip Morris Industrial and the Mission Viejo Company both had a good year with their 1979 revenues increasing 13.4% and 22.1 °o, respectively, over 1978. In 1979, Philip Morris' capital expenditures totaled $632 million for new production facil- ities and the installation of new capital equipment. During the year, construction began on a new cigarette manufacturing facility in North Carolina, and plans were announced for a new Administration and Technical Center in Richmond, Virginia, which will support our worldwide tobacco operations. Internationally, cigarette manu- facturing plants are being constructed or expanded in several locations, including West Berlin, Germany, and Bergen op Zoom, the Netherlands, In NewYork, prog- ress was made on the erection of a new corporate headquarters building at Park Avenue and 42nd Street. A new Miller brewery in Albany, Georgia, began production late in the year. Another brewery in Irwindale, California, commenced production in January-ot 1980. Other Miller facilities were expanded or improved, and plans for a new brewery near Trenton, Ohio, were announced during the year. Capital expansion programs will result in the expenditure of about $850 million in 1980, and from 1980 through 1984, capital expenditures are projected to be approxi- mately $3.5 billion. During the year, three new members were elected to the Board of Directors: William H. Donaldson, Dean of the Graduate School of Organization and Management, Yale Univer- sity; Jerry Apodaca, former Governor of New Mexico and now Chairman of the Presi- dent's Council on Physical Fitness and Sports; and Shepard P. Pollack, vice presi- -dent of Philip Morris Incorporated and presi- dent of Philip Morris U.S.A. Richard W Dammann, a member of the Board for more than 20 years, retired as a director in 1979. We are deeply indebted to him for his contributions over the years. He is now a Director Emeritus and continues in that capacity to advise the company. Dr. John C. Sawhill resigned as a director during the year to become Deputy Secretary of the U.S. Department of Energy. , Philip Morris U.S.A. Philip Morris U.S.A. in 1979 achieved nota- ble progress on many fronts. Setting new records, revenues increased 13.5% over 1978, and operating income grew 23.4% over the previous year. Ciga- rette unit sales reached a new high of 177 billion, an increase of 8.5 billion units over 1978 sales. Our market share also set a new high of approximately 29% in 1979, up from 27.8% in 1978. Nineteen seventy-nine was the 13th consecutive year in which Philip Morris U.S.A. led the industry in unit gains and market share growth. Marlboro strengthened its position as the best-selling cigarette brand in the United States and the world; Benson & Hedges 100's maintained its ranking as the leading 100mm cigarette; and Merit became the leader among low-tar brands-the fastest- growing cigarette category. Merit has continued to grow steadily from its introduction four years ago to a level that enabled this brand to contribute $355 million to our operating revenues in 1979. A new brand extension, Virginia Slims Lights in a crush-proof purse pack, was successfully introduced in the fourth quarter. With Virginia Slims already the top-selling cigarette made especially for women, Virginia Slims Lights appeals to the growing number of women smokers with a preference for low- tar cigarettes. Philip Morris U.S.A. produces six major brands in the low-tar category: Merit, Benson & Hedges 100's Lights, Marlboro Lights, Parliament Lights, Saratoga 120's, and Virginia Slims Lights. The Philip Morris Research Center in Richmond continued its many programs dealing with tobacco science. Virginia Slims Lights, Regular and Menthol, are additional 5

examples of our capabflity to develop low-tar products with taste that earn rapid consumer acceptance. Construction commenced on the central power plant and leaf tobacco warehouses for our new cigarette manufacturing facility in Cabarrus County, North Carolina. It is expected to begin production in early 1983 by which time our present facilities will be insufficient to meet the projected demand for our products. We continue to purchase the most modern, high-speed cigarette making and packing equipment for our Richmond and Louisville manufacturing facilities. This will increase the productivity of our people and our plants. Late in the year, we announced plans to construct a major Administration and Techni- cal Center adjacent to our Richmond facili- ties. This project is a result of rapid growth in the size and the technical complexity of our worldwide cigarette business over the last decade and the associated growth of a highly skilled staff. These investments reflect the continuing confidence of Philip Morris in the cigarette industry and our ability to make further prog- ress in this industry. All ten labor union locals at our Richmond and Louisville manufacturing facilities signed an innovative nine-year master agreement which stipulates that binding arbitration will be used to settle any dif- ferences which cannot be resolved through negotiation. The chief purpose of the agree- ment is to avert possible work stoppages, thereby assuring the company and its employees stable and undisturbed produc- tion and employment. The result should be substantial gains in productivity, with increased wages and benefits for employ- ees as a consequence. Energy conservation continued to have high priority at our Richmond and Louisville plants. Our new facilities are being designed from the ground up to be highly energy-efficient and will use coal as their basic fuel. Philip Morris U.S.A. made a five-year grant to Virginia Polytechnic Institute to support advanced training for state agricul- tural extension agents, reflecting our convic- tion that excellence in tobacco products begins with the grower. Philip Morris International Operating revenues and operating income again advanced to record levels, respec- tively up 42,5% and 38.2% over 1978. Cigarette unit sales reached 225 billion units, an increase of 12.0% against an _ increase of approximately 3% for the inter- national market as a whole (excluding the U.S.). Export sales increased 16.7%, and we maintained our position as the leading ex- porter of cigarettes from the United States. During 1979, Philip Morris marketed more than 160 different cigarette brands in more than 170 countries and territories through 27 manufacturing and marketing affiliates, 36 licensees, and regional export sales organi- zations. With unit sales continuing to grow rapidly, our market share has reached 15% or higher in over 20 countries. With about 6% of the total 3.7 trillion unit international mar- ket, Philip Morris has substantial opportuni- ties for future growth. Marlboro continued to grow, strengthen- ing its position as the world's best-selling cigarette. International unit sales of Merit increased 34% in 1979. Sales of the brands for which Philip Morris purchased overseas rights in 1978 from the Liggett Group also showed good volume growth. A broad range of national as well as regional brands attuned to differing taste preferences around the world accounted for about half of Philip Morris International's unit volume. Philip Morris Europe/Middle East/Africa posted record unit sales, operating reve- nues, and operating income. In West Ger- many, unit volume of Philip Morris GmbH increased 31 % versus 1.5% for the industry, and Marlboro, moving from third to second place among the country's best-selling brands, had a market share of close to 12% by year's end. Marlboro also had strong sales gains in virtually all European markets and in several countries of the Middle East. Merit achieved excellent sales increases in France, Italy, Norway, and Belgium. We continued to make progress on our major capital expansion programs at Ber- gen op Zoom, the Netherlands, and in West Berlin, to help meet the fast-growing demand for Philip Morris products in Europe. Modernization of our facilities in Brussels and Munich will also provide needed capacity increases. Our Swiss affiliate, Fabriques deTabac Reunies S.A., is the leading tobacco com- pany in Switzerland. FTR's low-tar brands- Muratti 2000, Muratti Extra Mild, and Brun- ette Extra-performed well in this segment. 6

In Italy, several major Philip Morris brands -Marlboro, Merit, Muratti Ambassador, Philip Morris Multifilter 100's, Diana-recorded strong volume growth, increasing the com- pany's overall market share. The Latin Americalberia region set new records in unit sales, operating revenues, and operating income. Marlboro achieved significant unit gains in Mexico, the Dominican Republic, Argentina, and export markets. A licensing agreement for the production of Marlboro in Portugal was signed with Tabaqueira E.P In Brazil, unit volume and market share increased, and operating losses were reduced. Galaxy, the country's first low-tar brand, and Monterey posted particularly good gains. Philip Morris continues to improve its position in the higher priced seg- ments of the market. We expect that with our basic infrastructure in place, profitability in time will be achieved in this large market. Lark, acquired in the 1978 purchase of the overseas business of the Liggett Group, continued its growth trend in Ecuador, main- taining its position as that country's best- selling brand. Our affiliate, Tabacalera Andina S.A., completed construction of a new and larger stemmery in Guayaquil. In Argentina, our affiliate, Massalin y Celasco S.A.C.e I., announced its intention to merge with Manufactura de Tabacos Imparciales S.A.I.C.A. and Manufactura de Tabacos ParticularVF. Grego S.A. Comple- tion of the merger is expected during 1980, subject to government approvals. Our Panamanian affiliate, Tabacalera Nacional S.A., closed its old facility in Pan- ama City and began production in its new cigarette plant inTocumen. In Spain, Fortuna, a blended cigarette jointly developed by Philip Morris and Taba- calera S.A., the state tobacco company, posted record sales in 1979 and achieved a 12% share of the total market. In 1979, Philip Morris Asia achieved rec- ord unit sales, operating revenues, and operating income. _: Record export sales to Asian markets included major volume gains by Marlboro in Hong Kong and Singapore. Philip Morris continued to be the largest exporter of ciga- rettes to Japan, with Lark the leading imported brand in that country. Our licensee in the Philippines posted record sales of locally produced Marlboro. In India, to comply with that country's Foreign Exchange Regulations Act, Philip Morris reduced its equity holding in Godfrey Phillips, India, Ltd., to 40%. In a related move, the Modi Group, an Indian company, became a stockholder of Godfrey Phillips. Philip Morris and Modi will work together to expand and modernize the company's operations. Operating revenues and unit sales of Ben- son & Hedges (Canada) Inc. exceeded those of the previous year, aided by the growth of MarkTen Lights which achieved wider distribution throughout Canada. Ben- son & Hedges 100's Lights was introduced to take further advantage of the growing mild segment of the market. In Australia, cigarette unit volume and operating revenues increased as new mar- keting strategies, including the introduction of new brands and line extensions, success- fully countered price competition. Peter Jackson 25's moved into second position in the rapidly growing segment featuring 25 cigarettes to a pack. To further improve our position in this segment, we introduced a new brand, Longbeach25's. Lindeman (Holdings) Limited, the wine- making subsidiary of Philip Morris (Austra- lia) Limited, increased sales and strength- ened its position as the country's leading wine company. Philip Morris International entered the soft drinks business in 1979 as Seven-Up Inter- national became an operating division of Philip Morris International. Seven-Up International now markets the 7UP brand in more than 90 countries out- side the United States, Canada, and Puerto Rico. Product distribution and sales are achieved through franchised bottlers and distributors. - The 7UP brand showed strong market volume growth overall in international mar- kets, with particularly significant gains in Mexico, Argentina, and the Philippines. Encouraging progress was also made in several new markets, including Greece and Egypt. Seven-Up offers significant growth potential internationally as the worldwide consumer demand for high-quality soft drinks increases. Although uncertainties persist in interna- tional trade and monetary affairs, the pros- pects for Philip Morris International remain excellent. Our unit sales continue to gain in country after country. With the advantages of experienced management and geographic- ally well-situated operations, we are in a good position to capitalize on the steadily rising demand for our products. 7

Miller Brewing Company In 1979, the Miller Brewing Company also set new records. Operating revenues increased 21.9%, and operating income rose 20.4% over 1978. Including imported brands, the U.S. brew- ing industry sold about 172 million barrels during the year, an increase of 3.9%. Of this total, Miller sold 35.8 million barrels, an increase of 14.5% over 1978. Continued strong consumer demand caused retail sales of Miller products to increase at an even higher rate. Miller continues to rank a strong second among U.S. brewers, with a market share of about 21 %, up from 18.9% in 1978. Miller High Life maintained its position as the country's second-largest-selling beer. Lite, which dominates the lowered-calorie segment, continued its success story. Lowenbrau further solidified its position in the super-premium segment, ending the year with an improving sales trend. The growing demand for Miller products has led to a formidable program to expand brewing capacity. During the year, construc- tion continued on a 10 million barrel brewery at Albany, Georgia, and a 5 million barrel brewery at Irwindale, California, which will replace the 2 million barrel brewery in Azusa. Albany began production late in 1979, and Irwindale commenced production in January 1980. Expansion of the Fulton, NewYork, and Eden, North Carolina, breweries, each to 10 million barrels of capacity, moved toward completion. For the past seven years, Miller has been unable to meet demand for its products on a continuing basis. With the Albany and Irwin- dale breweries coming on-stream, we can adopt more orderly and efficient production schedules. Production began at the new can manu- facturing plant at Reidsville, North Carolina. The plant of our Central New York Bottle Company at Sennett, New York, was expanded to an annual-capacity of 990 mil- lion units. In December, Miller announced that Tren- ton, Ohio, will be the site of a new $412 mil- lion, 10 million barrel brewery, with construc- tion to begin in 1980. The sum expended through 1979 to expand and modernize Miller's facilities totaled more than $1.3 billion. Legislation regulating container use and disposal continued to be proposed in vari- ous jurisdictions across the country. Miller considers most such proposals seriously inadequate in that they address no more than 20°% of the litter problem and much less of the solid waste problem and yet mislead the public to believe that both problems will be largely solved. The Seven-Up Company For The Seven-Up Company, 1979 was a sig- nificant year, prncipally characterized by a major restructuring program designed to posi- tion the Seven-Up organization for the future. Seven-Up International moved to Philip Morris International (see footnote page 1); The Seven-Up Company is now responsible for operations within the United States, Canada, and Puerto Rico. This reorganiza- tion was largely accomplished in 1979, and a substantial investment was made in ex- panded marketing, research, and person- nel programs. As a result of this investment spending, The Seven-Up Company's operating income was reduced. Advertising was the principal component of Seven-Up's enlarged marketing program. The campaign-"America'sTurning 7UP"- was intended not only to improve the awareness and product positioning of 7UP but also to assist our bottlers in improving distribution and retail availability of our prod- ucts. The campaign, now featuring endorse- ments by such prominent athletes as Earvin "Magic" Johnson, Larry Bird, John McEnroe, and Earl Campbell, has created substantial consumer awareness. It has also helped to strengthen our relationship with our bottlers. In addition, Seven-Up has restructured and increased its staff-particularly its field sales force-and has substantially improved its product research activities. In March, William E. Winter, previously president, became chairman, and Edward W Frantel, previously vice president-sales of Miller, was appointed president and chief executive officer of Seven-Up. During the remainder of the year, a number of other organizational changes were made to establish the marketing, distribution, quality control, finance, and planning organizations needed for further growth consistent with Philip Morris' long-term objectives. To the extent that new senior positions could not be filled by existing Seven-Up personnel, they were largely filled by people from other divisions of Philip Morris. Also during the past year, a sweeping graphics design program was begun, and the resulting new graphics will be introduced in the spring of 1980. In addition, a new 8

distribution planning department was established to assist bottlers. Seven-Up's own bottling operations in Phoenix, Houston, Norfolk, and Toronto reg- istered a sharp improvement in 1979. The Seven-Up Company has a variety of subsidiaries that offer interesting potential for the future: Warner-Jenkinson Company is the country's leading producer of food color- ings, with major food processors as its prin- cipal customers. The Ventura Coastal Corporation is a processor of lemon products, including lemon oil used in Seven-Up products and about half of all frozen lemonade produced in the United States. Its reconstituted lemon juice is marketed under the Golden Crown label. In addition, Ventura owns and operates lemon ranches. Oregon Freeze Dry Foods, Inc. is one of the country's leading producers of freeze- dried foods. It produces foods for consumer use in leisure activities and ingredients for the food industry. In addition, the company makes products for use by the crews of nuclear submarines and manned space missions, and as a replacement for the tradi- tional U.S. Army "C" rations. A second plant is under construction in Oregon. Marbert Incorporated is fundamentally a manufacturer of flavors, and its operations will soon be merged with those of Warner- Jenkinson. Philip Morris Industrial Philip Morris Industrial completed the best year in its history in both operating revenues; which rose 13.4%, and operating income, up 21.6%. The four groups which make up Philip Morris Industrial-Chemical, Paper, Tissue, and Packaging-each contributed to this performance. The Chemical Group, which makes spe- cialty chemicals for the graphic arts and textile industries as well as powder coating for metals, achieved its increase in income as a result of the performances of Wikolin- Polymer Chemie GmbH in West Germany, Polymer Industries' Adhesives and Liquid Coatings division, and the Armstrong Products Company. The Paper Group, which produces fine printing, technical specialty, and glassine papers, generated a substantial increase in income due to the continued strong demand for the products of the Plainwell Paper Com- pany and the Nicolet Paper Company. TheTissue Group, following a record year in 1978, continued to solidify its position in the rapidly growing food service industry. Start-up costs of a new de-inking facility, which will enable the group to use 100% recycled paper as its major raw material, impacted earnings in 1979; however, signifi- cant benefits from this facility are expected in 1980. The Packaging Group's increase in income reflects results at the Fort Atkinson, Wisconsin, plant, which produces bottle carriers for the brewing industry, and at the Colonial Heights, Virginia, plant, which makes cigarette packaging materials. Both facilities are new, with 1979 the first year of operations unimpeded by start-up costs. The group's flexible packaging division, which had experienced severe pricing pres- sures in 1978, also showed improvement. Mission Viejo Company Mission Viejo Company recorded its second best year ever in 1979, exceeded only by 1977. Operating revenues and income increased 22.1 % and 13.5%, respectively, over 1978. Even though interest rates on home mortgages reached unprecedented highs during the year and the money supply remained tight, sales of homes by the com- pany totaled 1,497. Of particular note was buyer acceptance of three new neighborhoods surrounding the new 124-acre Lake Mission Viejo in California: Mallorca, a medium-density con- dominium project; Galicia, single-family detached homes for growing families; and Andalusia, single-family residences for families with older children. Plans for the development of Aliso Viejo, our 6,619-acre ranch near Mission Viejo, California, were approved by the Orange County Planning Commission. Zoning approval was granted in January 1980, and initial development is scheduled for later in the year, with first home deliveries planned for 1982. A construction program of 20,000 residential units, as well as industrial and commercial development, will extend beyond the year 2000. In Colorado, our 22,000-acre Highlands Ranch just south of Denver received zoning approval for 30,000 homes and industrial and commercial development covering approximately 900 acres. Shortly thereafter, the company exercised its option to pur- chase the property. Initial infrastructure work is scheduled to begin in late 1980. Deliveries of homes will begin in 1981 and continue over the next 25 years. ra cn ~ 0 a ~ ca0:) N 9

The Public Interest Through the 1970s, Philip Morris continued to deepen and expand its social commit- ments. At Philip Morris,, the social and busi- ness areas are not separate entities. More than ever, we believe in the correctness of our guiding rules: our business activities must make social sense, and our social activities must make business sense. In 1979, Philip Morris was a company on the move, and our financial vigor had and will continue to have important social con- sequences: new jobs and expanded oppor- tunities for our own employees, larger tax bases for the communities in which we operate, and increased orders for suppliers. Three moves made toward the end of the year exemplify this social-business connection: On December 10, Miller Brewing announced selection of Trenton, Ohio, as the site for a new $412 million brewery, repre- senting the largest capital investment ever made at one time by Philip Morris in a new production facility. Governor James A. Rhodes of Ohio hailed the move as meaning "increased prosperity for the entire area and for our state." Nine days later, Philip Morris U.S.A. announced plans for the construction of a $41 million Administration and Technical Center in Richmond, Virginia. This move prompted Manuel Deese, City Manager of Richmond, to issue a statement describing Philip Morris as "an outstanding example of a fine corporate citizen." Five days later, Mission Viejo exercised an option to acquire the 22,000-acre Highland Ranch south of Denver, where over the next 25 years the company plans a new commu- nity of 30,000 homes, leaving 60% of the area as non-urban open space. One other example is in the area of water quality improvement: Philip Morris Indus- trial's Wisconsin Tissue Mills has established a standard for paper mills unequaled today by any other in the United States. And in 1979, it earned its fourth award for water quality improvement. A Philip Morris unit must be an exemplary corporate citizen wherever it operates. One quick measure of our efforts is job creation, We entered the 1970s with 25,000 employees around the world and began 1980 with almost 65,000. However, Philip Morris continues to operate in a climate of hostility engendered by those who would legislate cigarettes out of existence and who are bent on making smoking socially unacceptable. In facing these issues, we try to respond with scien- tific evidence and reason. Nineteen hundred seventy-nine saw the introduction in various state legislatures of 113 bills which sought to curtail smoking in public places. Of these measures, 48 were defeated, 8 were enacted, 57 were unre- solved. Miller Brewing also mounts a strong governmental affairs program these days. It has fought successfully on the state level against legislation that would narrowly define the size of the containers in which beer can be sold. Concern about alcoholism in the United States has led to proposals that health-warn- ing labels and further restrictions than now exist be placed on the advertising, availabil- ity, sale, and consumption of alcoholic bev- erages, including beer which is often described as the "beverage, of moderation." Miller believes such measures would penal- ize the industry without helping to solve the problem. It has, therefore, helped fund the efforts of the Health Education Foundation of Washington, D.C., to develop an alcohol-use education program directed at college-age youths. We feel that positive steps of this kind are preferable to blanket restrictions that tend to vest alcohol with the glamour of "forbidden fruit" and are often unenforce- able and even conducive to law-breaking. Philip Morris again significantly contrib- uted to the U.S. balance of trade. As a group, the U.S. tobacco industry's net posi- tive contribution in 1979 totaled nearly $1.7 billion, due to exports of cigarettes, com- bined with substantial overseas shipments of tobacco and other cigarette manufactur- ing materials. Completion last year of theTokyo Round of the General Agreement on Tariffs and Trade was an important step forward in fur- ther liberalization of world trade. Elimination of the European Community's discriminatory tariff affecting high-quality U.S. tobacco will provide an opportunity for increased exports of higher leaf grades following appli- cation of the lower tariff in 1980. There has also been a significant reduction in the tariff on raw leaf cigarette tobacco exported from the United States to Australia. Philip Morris International's operations around the world contribute to economic and social development of host countries through the transfer of management and 10

production technotogy, capital investment, and extensive employee training programs. These factors are particularly significant in developing countries, where equity in vir- tually all our affiliates is shared with local investors. In 1979, Philip Morris International affili- ates continued their active support of com- munity and cultural programs. Our Swiss affiliate's Brunette Foundation contributed to ten conservation programs and organized ecological exhibitions throughout Switzerland to promote protec- tion of wildlife and the natural environment. In Australia, Philip Morris Limited helped establish and expand the programs of the Industry Group to support Keep Australia Beautiful. Philip Morris and our affiliate in the Domin- ican Republic made substantial contribu- tions of finds and food to aid victims of Hur- ricane David. Numerous affiliate educational contribu- tions included scholarships to help needy students in eightVenezuelan universities, an MBA Scholarship at the Indian Institute of Management in Ahmedabad, and funding for construction of a student center at the Instituto Superior de Agricultura in the Dominican Republic. Our affiliate in Germahy organized a con- temporary sculpture competition and exhi- bition; and the Philip Morris Arts Grant in Australia supported a major exhibition of Australian photography. A substantial Philip Morris grant funded a series of photography workshops in Venice during the exhibition "Venezia'79-La Fotografia" held under the auspices of UNESCO. Our profit performance in the 1970s has enabled us to play a much larger role in the nonprofit world. Last year, Philip Morris made charitable contributions to 497 dif- ferent organizations. This compares with con- tributions made to 126 organizations in 1969. These examples were but a few of our 1979 activities which attest to the extent and variety of our commitment:. - Support of the "Challenge of Excellence" program of the Future Farmers of America. Grants to the Performing Arts Center in Richmond, the Virginia Foundation for Inde- pendent Colleges, and the Science Museum of Virginia. The funding and publishing of a pioneer- ing booklet, "A Guide to Hispanic Organiza- tions," which is the first directory of its kind ever published. The underwriting of another booklet, "You Have a LotTo Win," published by the National Women's Political Caucus, which is a guide for women who want to become del- egates to the national political conventions of the Republican and Democratic parties. Philip Morris is a major corporate sup- porter of the arts. In 1979, we sponsored a traveling exhibition titled "A Century of Ceramics in the United States, 1878-1978," the most extensive collection of American pottery and china ever assembled. We also bring the excitement of the cre- ative arts to our workplaces. Our new brew- ery in Eden, North Carolina, for example, has a collection of works by local artists. Concern for employees must be a com- ponent of all social responsibility programs. We have in place at Philip Morris benefits programs that are among the best in U.S. industry and are constantly being improved. We also continue to make strides in expand- ing opportunities for our female and minority group employees. Minorities now fill 12.9% of positions classified as "officials and man- agers;" women now make up 11.3% of that category and hold 24.7% of all our profes- sional jobs. Our combined sales forces are now 18.5% minority, 17.7% female. In the United States, one out of every four employ- ees is amember of a minority group. The National Bankers Association, the association of minority-owned banks, pre- sented Philip Morris with its 1979 Corporate Award in recognition of our support of minor- ity banking institutions. We now maintain de- posits in 60 minority-owned banks and have lines of credit with 40 of these institutions. A book that underlined our commitments was published early in 1980. Working in the Twenty-First Century, published by John Wiley & Sons, is the edited proceedings of a symposium funded by the company and held last April at our Richmond Operations Center. The Colgate Darden Graduate ' School of Business at the University of Vir- ginia and the Wharton School of the Univer- sity of Pennsylvania sponsored the sympo- sium, which brought together some 350 leaders from business, labor, government, and education to discuss the important issues which will confront us as we move toward the next century. Being involved in such activities is what Philip Morris is all about. We care about the future, not only in terms of the company's interests but in terms of the interests of employees, of working men and women generally, and of society as a whole. 11

The Seventies and the Eighties The end of one decade and the beginning of another call for an appraising look in both directions. To look back first, the 1970s clearly were extremely good years for Philip Morris. Operating revenues rose from $1,142 mil- lion in 1969 to $8,303 million in1979, an increase of 627%, or 21.9% annually com- pounded. Net earnings rose from $58 million to $508 million, an increase of 771%, or 24.2% annually compounded. Dividends declared rose from $0.244 per share to $1.25 per share, or 17.7% annually compounded. Ten years ago in this company's largest and most profitable market, Philip Morris U.S.A. held a 15% share. Nineteen seventy was the year all television and radio adver- tising of cigarettes was terminated. Philip Morris U.S.A. now holds approximately 29% of this market, with the total market itself,-in units, almost 20% larger now than it was then: For Philip Morris International, the ten-year story has been much the same. Revenues have increased at a compounded rate of 26.0%, operating income has increased at 21 % compounded and market share has more than doubled. During 1970, Philip Morris acquired full control of Miller Brewing Company. The next few years were a period of trial and prepara- tion during which Miller revenues remained flat while operating income dropped stead- ily. But by then the early learning years had begun to produce results, and the second half of the decade has been a period of spectacular success for Miller. In 1979, bar- rel shipments were more than 7 times larger than in 1970, and operating income was almost 16 times as great. Market share has quintupled to about 21% of a market which, in units, itself grew more than 40% during the decade. In 1970, Miller ranked seventh among domestic brewers; today it is a strong second. For our other operating companies, Philip Morris Industrial and Mission Viejo Company, progress during the decade was highly satisfactory. For The Seven-Up Company, acquired by Philip Morris in June, 1978, it is obviously too soon to make comparisons. In assessing the prospects for the 1980s, an appropriate point of departure is to restate briefly the kind of company Philip Morris is. To begin with, Phllip Morris is an interna- tional processor, packager, and marketer of agricultural products grown by independent farmers. Its most important raw materials- tobacco for Philip Morris U.S.A. and for export; grains and hops for Miller; lemons and limes for Seven-Up-are grown on American soil. Much of the raw material used by Philip Morris Industrial is supplied by our forests. For Mission Viejo, the chief raw material is the American land itself. Second, in the manufacture of its prod- ucts Philip Morris relies heavily on technol- ogy. During the 1970s, we completed or began the construction of many new plants in the United States and abroad, and made major renovations of existing facilities. We constantly look for ways to improve the qual- ity and uniformity of our products, and to be more cost effective in their manufacture, Third, our principal markets are huge. Cigarettes, beer, and soft drinks each have retail sales in excess of $16 billion in the United. States alone. The products we sell are all low-priced, high-turnover items that are part of life's simple pleasures. All are widely known and their sales highly respon- sive to effective advertising, packaging, and retail display. The buyers and users of these products number in the tens of millions daily around the world. Even adverse general econorriic conditions have not had more than a short-term effect on their purchases. Essentially, then, Philip Morris enters the 1980s as a company whose business is built on a strong, four-sided foundation: agricul- ture, high technology, large consumer mar- _ kets, and marketing skill. In the uncertainties and even hazards which many predict for the decade ahead, this combination of attributes makes the out- look for Philip Morris most reassuring. Yet in this generally bright picture are patches of shadow, about which brief comments are in order. Despite the expenditure of hundreds of millions of dollars by government, the tobacco industry, and other research groups over more than 25 years, no conclusive clinical or medical proof of any cause-and- effect relationship between cigarette smoking and disease has yet been discovered. The anti-smoking activists have recently given emphasis to the effect of smoking on non-smokers in airplanes, restaurants, and other public areas. Although the weight of scientific evidence, as reported by the Sur- geon General, is that ambient cigarette smoke is not harmful to the health of non- N cn ~ 0 0 ~ ~ Co tn 12

smokers, in some state and local jurisdic- tions restrictive laws and ordinances have been passed. Others have been fended off or defeated. Anti-smoking activities at international levels took a_new turn in 1979. Proposals for bans on cigarette_advertising and promotion increased in 1979, although no significant restrictions were imposed in our key mar- kets. Total advertising bans in Italy, Finland, Norway, and Singapore have not reduced cigarette sales, and sales in Eastern European countries have risen steadily over many years despite the absence of advertising. In view of what has been achieved and what remains to be achieved, we see years of growth ahead for Philip Morris through the eighties and beyond. The company's continuing growth explains our spending substantial sums each year to build new plants, upgrade existing ones, install new equipment, and increase inventories. Through the mid- seventi'es, our capital expenditures moved in the range of $220 million to $280 million annually. in 1978, they more than doubled from the previous year, to $566 million. In 1979, they increased by another 12%, to $632 million. Most of our capital investment is to meet the demand for our growing brands. We expect this growth to continue, and we are continuing to prepare for it. More than most large companies, Philip Morris has benefited and continues to bene- fit from the unusual stability and depth of our management. Essentially the same team now running the company has moved upward together through the ranks for more than 20 years. It is therefore fortunate that the growth of Philip Morris through the 1970s was such that new opportunities, which would both test and reward able managers, arose almost constantly. As a result, mainly through training and development, the com- pany has in place a strong cadre of young managers just below the senior level who are thoroughly prepared to assume the responsibilities of those whom they will grad- ually replace during the 1980s. Maintaining our growth record throughout the 1970s was a difficult and challenging task, particularly in view of an increasingly complex external climate. That climate will become more, rather than less, complex as we move into the 1980s, but we intend to exert a maximum effort to continue our rec- ord. And, the dedication and commitment to excellence that our 65,000 employees around the world bring to our company enable us to enter the 1980s with confidence. George Weissman Chairman of the Board and Chief Executive Officer Ross R. Millhiser Vice Chairman of the Board Clifford H. Goldsmith President 13

Miliions of Dollars - 2800 Operating Revenues Operating Income 1979 $2,767,035,000 $701,340,000 1978 $2,437,465,000 $568,145,000 1977 52,160,362,000 $474,400,000 1976 $1,963,144,000 $401,426,000 1975 $1,721,549,000 $337,314,000 Philip Morris U.S.A. Operating Revenues Over the last ten years, Philip Morris U.S.A:s operating revenues have increased atan average annual compounded rate of 132y . Philip Morris U.S.A. Cigarette Unit Sales _ Total unit sales of Philip Morris U.S.A. have grown at an average annual compounded rate of 8.5% during the past ten years. 72 73 74 75 76 77 78 79 Officers 70 71 72 73 74 75 76 77 78 79 Hugh Cullman Chairman and Chief Executive Officer Shepard P. Pollack President and Chief Operating Officer W Wallace McDowell Executive Vice President, Operations Millions of Dollars James J. Morgan 700 Executive Vice President, Marketing James A. Remington 600 Senior Vice President, Manufacturing R. Nelson Beane 500 Vice President, Finance and Administration 400 W John Campbell Vice President, Plant Operations 300 Robert H. Cremin Vice President, Sales Philip Morris U.S.A. 200 Robert A. Fitzmaurice Vice President, Operating Income Philip Morris U.S.A:s operating income has risen at amaverage 00 Director of Brand Management John J. Gillis annual compounded rate of - 20.7% for the last ten years. 0 Vice President, National Accountsand 70 71 72 73 74 75 76 77 78 79 Manpower Development - Alexander Holtzman Vice President and General Counsel Fred J. Laux Vice President, Personnel J. Paul Jeb Lee Vice President, Marketing Services William G, Longest Vice President, Leaf Arthur R. Pasquine Vice President, Engineering Richard D. Robertson Vice President, Ecology Stanley S, Scott Vice President, Public Affairs Dr. Robert B. Seligman Vice President, Research and Development James L. Thompson, Jr. Vice President, Media Douglas H. Nelson Treasurer and Director of Finance Harry G. Steele, Controller U.S. Cigarette Industry Unit Sales Over the last ten years, total U.S. cigarette industry unit sales have grown at an average annual rate of 1.7 %, while our market share has almost doubled, reaching about29% in 1979. ~ U.S. Cigarette Industry Unit Sales ~ Philip Morris Share of U.S. Industry (%) 2400 2000 1600 1200 70 71 100 Billion Units % 700 35 .. . ~~ ( ® .. ~ .. ® .-. ~ ~~ © 0 ALEAREJEAKEURNIM0 70 71 72 73 74 75 76 77 78 79

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PHILIP MORRIS U.S.A. 1 Tobacco is grown on an estimated 276,000 farms in the United States w th more than a half million farm families directly or indirectly involved in its production. In 1979, more than 800,000 acres of tobacco were harvested. 2 The Marlboro Country theme, recognized worldwide, has helped Marlboro strengthen its position as the number one sell- ing cigarette in the U.S. and the world. 7 3 A new brand extenslon, Virginla Slims Lights, was successfully introduced in the fourth quarter. Virginia Slims continued its lead as the top-selling cigarette made especially for women. 4 Benson & Hedges 100's main- tained its ranking as the largest- selling 100mm cigarette. 5 In 1979, Merit became number one 10 in the low-tar category and the eighth-best-selling brand overall. 6 Supported by an advertising cam- paign in major media, low-tar Parliament Lights was phased into nationwide distribution last March. 7 Quality tobacco leaf for use in our cigarette brands is purchased at tobacco auctions; in 1979, our purchases at these U.S. auctions amounted to S511.6 million. 11 12 8 Skilled technicians use modern computerized equipment to insure that the high-quality stan- dards set for Philip Morris ciga- rettes are met. 9 Marlboro Lights, Merit, Benson & Hedges 100's Lights, and Parlia- ment Lights are well positioned to meet market demand in the fast growing low-tar category. 10 Close-up of a new high-speed filter assembler used at our cigarette manufacturing facilities to keep up with rising customer demand. 11 NewVirginia Slims.Lights being produced in the crush-proof purse pack in our Louisville factory. 12 Energy management computer systems are used to reduce elec- trical usage and conserve energy during peak periods at Richmond Manufacturing Center.

Millions of Douars ' 4200 Operating Revenues 1979 $2,581,270,000 1978 $1,810,861,000 1977 $1,349,280,000 1976 $1,083,970,000 1975 $1,040,002,000 Operating Income $260,620,000 $188, 561, 000 $153,791,000 $130,104, 000 $112,975,000 Officers Hamish Maxwell President and Chief Executive Officer R. William Murray Executive Vice President, EuropeiMiddle EastlAfrica Carlos E. Salguero Executive Vice President, Latin Americallberia Lee Pollak Vice President and Chief Administrative Officer Albert E. Bellot Vice President Geoffrey C. Bible Vice President Aleardo G. Buzzi Vice President Mary W. Covington Vice President, Corporate Affairs Andreas Gembler President, Seven-Up International John G. Gibson Vice President - Staffan Gunnarsson Vice President Hamilton Hurley Vice President Thomas M. Kearns Vice President, Finance George D. Riemer Vice President, Personnel WalterThoma Vice President William H. Webb Vice President Philip Morris International Operating Revenues 3600 3000 2400 Operating revenues of the 1800 consolidated and unconsolidated affiliates of Philip Morris ` International have increased at an average annual compounded rate of 20 9% over th e past ten years. ~ Consolidated ~ Unconsolidated 1200 70 71 2 73 7 75 76 77 78 79 Billion Units - 245 210 175 140 105 Philip Morris International Cigarette Unit Sales 70 Total unit sales of Philip Morris International's affiliates, licensees. and exports have risen at an 35 average compounded rate of 11,5% over the last ten years. 0 70 71 72 73 74 75 76 77 78 79 Millions of Dollars 280 240 W 200 160 tzo Philip Morris International Operating Income eo During the last ten years, Philip Morris International's operating income has grown A09 at an average annual ~~ compounded rate of 21.0%. G~l O O C3 N O ~ -o ra World Cigarette Industry Unit Sales Excluding U.S.A. Over the past ten years, worldwide cigarette rndustry unit sales have increased at an average annual rate of 3,3% while our market share has more than doubled, to about 6.0% in 1979. ~ World Cigarette Industry Unit Sales _ (Excluding U.S.A) Philip Morris Share of World Market (%). 70 71 72 73 74 75 76 77 78 79 Billion Units % 3850 14 3300 2750 2200 1650 1100 550 0 12 r 10 8 6 4 2 0 70 71 72 73 74 75 76 77 78 79

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--..: - ~L 10 11 12 13 PHILIP MORRIS INTERNATIONAL 1 Philip Morris International pur- chases high-quality tobaccos, including U.S.-grown flue-cured and burley, for use in more than 160 cigarette brands. 2 Record sales of Marlboro, Lark, and other brands to worldwide duty-free outlets and other export markets strengthened Philip Morris' position as the leading exporter of cigarettes from the United States. 3 Lark, acquired by Philip Morris when it purchased the overseas trademarks of the Liggett Group, is Ecuador's best-selling cigarette. 4 MarkTen L'egere, introduced nationally in Canada early last year, showed steady sales growth, 5 The Merit World Backgammon Championship in Monte Carlo and other special events are an important part of Philip Morris' worldwide community relations, cultural, and sports programs. 6 Modernizing our European facili- ties with a new generation of high- speed equipment and continuing factory expansion programs in the Netherlands and West Ger- many, will increase manufacturing capacity to meet the growing demand for our products. 7 Marlboro recorded strong unit growth in the Middle East, including Egypt and Saudi Arabia, and contin- ued as the number-one selling brand in Kuwait and Lebanon. 8 Lindeman (Holdings) Limited, the company's wine affiliate in Austra- lia, again increased sales and maintained its leadership position in the industry. 9 Seven-Up International, an operating division of Philip Morris International, reported strong sales in Egypt. 10 Muratti 2000, a popular low-tar brand on the Swiss market, helped Fabriques deTabac Rbunies, S.A. continue as the country's leading cigarette company. 11 In West Germany, Philip Morris GmbH again outperformed the industry, and Marlboro became the second-best-selling cigarette in that large European market. 12 The rapid growth of exports of U.S.-manufactured Marlboro to Hong Kong and other Asian mar- kets contributed to Philip Morris' record unit volume in the region. 13 Galaxy, Brazil's first low-tar brand, helped Philip Morris Brasileira S.A. achieve record volume growth and increase its market share.

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Operating Revenues Operating Income 1979 $2,236,481,000 $180,984,000 1978 $1,834,526,000 $150,300,000 1977 $1,327,619,000 $106,456,000 1976 $ 982,810,000 $ 76,056,000 1975 $ 658,268,000 $ 28,628,000 Officers John A. Murphy Chairman and Chief Executive Officer William K. Howell President and Chief Operating Officer Lauren S. Williams Executive Vice President Thomas B. Shropshire SeniorVice President and Treasurer Dr. Vincent S. Bavisotto Vice President, Brewing and Research Warren H. Dunn Vice President and General Counsel Thomas A. Fulrath Vice President, Personnel Leonard J. Goldstein Vice President, Sales James R. Holland Vice President, Corporate Affairs Larry K. Neuman Vice President, Material Flow William A. Saupe Vice President, Brand Management Allen A. Schumer Vice President, Plant Operations Georgy L. Tarala Vice President, Engineering Travis G. Adler Controller Raymond E. Jones, Jr. Associate General Counsel and Secretary Miller Brewing Company Operating Revenues During the last ten years, Miller's operating revenues have increased at an average annual compounded rate of 27.7%, Miller Brewing Company Barrel Shipments Miller's barrel volume has grown at an average compounded rate of 21.6% annually for the past ten years. Miller Brewing Company Operating Income Operating income of Miller has grown at an average annual compounded rate of 28.0% over the last ten years. U.S. Beer Industry Barrel Shipments Including Imports Total U.Sbeer industry barrel sales have risen at an average annual rate of 3,9% over the last ten years. During the same period Miller's share of the market more than quintupled, reaching about 21%in 1979. ~ Imported, Super-Premium, Nationally Distributed Premium, and Lowered Calorie Beer a~l Regional, Non-Premium Beer, Ale, Malt Liquor ~ Miller Share of U.S. Industry (%) Millions of Dollars 2450 2100 1750 1400 - a- -4 -A--i 0 ?-f3 I A I 114A - 70 71 72 73 74 75 76 77 78 79 Millions of Barrels 35 Millions of Dollars 210 Millions of Barrels 175 70 71 72 73 74 75 76 77 78 79 % 28

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MILLER BREWING 11 COMPANY 1 Miller Brewing Company uses only the finest ingredients, includ- ing malted barley and cereal grain, Miller`s vendor rating system ensures that all ingredients meet our high quality standards. 2 Bottles on their way to the pas- teurizer at Miller's Ft. Worth brew- ery are inspected by brewery workers as well as by sophisti- cated quality-control equipment. 3 Malt scale hoppers-such as these at Miller's Albany, Ga., brewery-funnel dry malted barley into mash mixers where it is mixed with water. 4 The liquid-called wort-is boiled in copper kettles at Miller's Mil- waukee plant to further blend and condition the brew. 5 Milier's breweries use the latest technology to help insure the quality and uniformity of its products, as this control room picture shows. 12 6 Labeling equipment at Miller's Fulton brewery can label up to 500 quart bottles, shown here, per minute and 950 twelve oz. bottles per minute. 7 Miller breweries have fully auto- mated packaging systems, such as this one at Miller's Eden, N.C., brewery. 8 Miller uses high-speed equipment, such as this bottle filler at its Ft. Worth, Tex., brewery to package its products. The bottler is capa- ble of filling up to 1,200 bottles in one minute. 9 Miller, through its brands, sponsors 13 four national amateur sports teams, including the U.S. CyclingTeam, which competed in the Lowen- brau National Cycling Champion- ships. 10 Each bottle, can, and keg of Miller's product is subjected to more than 150 quality checks before it reaches the consumer to make sure it meets Miller's high standards. r1l) CJi O a O ~ O >T -0 co 11 Miller High Life commercials celebrate the working man in America such as these lobster- men from one of Miller's latest commercials. 12 The latest in a series of "alumni" commercials brings together celebrities who have appeared in Lite beer commercials. 13 After meeting the challenge of jogging ten miles, the men in this recent Lowenbrau commercial reward themselves with a glass of Miller's entry in the super- premium beer category.

Min,ons of Dollars , 350 300 The Seven-Up Company Operating Revenues The Seven-Up Company's operating revenues have grown at an average annual compounded rate of 14.8 % over the past ten years. 72 73 74 75 76 77 78 79 M,Il1ons of Dollars 49 42 Operating Revenues 1979 $295,480,000 1978 $274,767,000 1977 $231,662,000 1976 $217,387,000 1975 $198,997,000 Operating Income $ 6,985,000 $40,306,000 $41,769,000 $41,971,000 $36,211,000 The Seven-Up Company Operating Income In 1979, the Seven-Up Company's operating income was reduced as a result of substantial investments in expanded marketing, research, and personnel programs. 35 28 2•1 Officers 70 71 72 73 74 75 76 77 78 79 William E. Winter Chairman Edward W Frantel President and Chief Executive Officer Gerard J. Martin Executive Vice President AlbertJ. Bissmeyer, III Senior Vice President, Corporate Marketing J. Stewart Bakula Vice President, General Counsel and Secretary Dr. John E. Bujake Vice President, Research and Development Edward P Callahan Vice President, Personnel Ralph L. Countryman Vice President, Media William A. Fagot Vice President, Finance T. M. Hoff Vice President, Bottling Operations Arnold F Larson Vice President, Procurement and Product Flow Frederick C. Mutter Director, Food Operations ClarkW. Russell, Jr. Vice President, Corporate Planning Charles W. Schmid Vice President, Sales r.j - David L. Smith U1 Vice President, Brand Management Cc - Subsidiary Presidents a C Ellis Byer President, Oregon Freeze Dry Foods, Inc. O v - William L. Kelly, III President, Ventura Coastal Corporation C i O O ol n B. Scarfe President, Seven-Up Canada, Ltd. Ol iverW Hickel, Jr. President, Warner-Jenkinson Company

6 10 N rJ'1 0 O O ~ 0 v O N THE SEVEN•UP COMPANY 1 A significant percentage of the lemons used by Seven-Up are grown on its own_lemon ranches. 2 The 7UP Super Stars-an unprec- edented array of young up-and- coming talent from professional sports-are giving the "America's Turning 7UP" campaign a whole new dimension. Super Stars Ilke: Earvin `Maglc" Johnson, of the Los Angeles Lakers: John McEnroe, considered one of the most dynamic tennis players in the world: and Earl Campbell, running back of the Houston Oilers, 3 The flight of the DaVinci Trans- america 11-story helium balloon established a new land record and broke the second-place world endurance record.The Seven-Up Company was the major sponsor of the flight. 4 Warner-Jenkinson is the nation's leading producer of food color- ings and also of more than 5,000 food flavorings. 5 The "Canada's Turning 7UP" cam- paign has*been very successful in increasing consumer aware- ness of 7UP. The Canadian Super Stars feature popular Canadian athletes. 6 A leading producer of lemon and lime products, including lemon oil-a principal ingredient in 7UP extract-Ventura Coastal Corpora- tion, which grows many of the lemons it uses, produces one-half of all domestic-produced frozen lemonade. The nation's largest producer of freeze-dried foods, other than coffee, Oregon Freeze Dry Foods has introduced new packaging for foods for consumer use. The single most important ingre- dient in 7UP and Diet 7UP-qual- ity-is constantly monitored by sophisticated testing equipment. State-of-the-art filling equipment, such as this modern, high-speed can line at Seven-Up's company- owned Toronto bottling facility, aids in moving 7UP and Diet 7UP to the consumer with the greatest efflciency 10 The 7UP Super Stars campaign is backed up by an array of in-store promotions, including a highly successful poster campaign. 11 A completely new direction in Diet 7UP advertising features television star Linda Carter and the famous comedian Don Rickles.

1 The nation's forests, a renewable resource, supply much of the raw material used by Philip Morris Industrial. During the past three years, the company's utilization of recycled waste paper has reduced its consumption by 1.3 million trees per year. 2 This machine at the Nicolet Paper Company produces specialty papers for various technical applications. Nicolet is also the nation's major producer of low- density glassine paper for use in the packaging of candy and snack foods. 3 This die at the Koch Label Com- pany's new beer carrier facility must meet very close tolerances. When completed, it is used to cut and score six-pack carriers for the Miller Brewing Company. 4 One of Milprint's slitters in its Mil- waukee plant cuts specially lami- nated material for Aim toothpaste tubes. Milprint is one of the major suppliers of material for this pack- aging. 5 During the recent revamping of the George Washington Bridge in New York City, all the reinforcing bars for the approaches were coated with epoxy powder from Philip Morris Industrial's Armstrong Products Company. 6 Wisconsin Tissue Mills' new wet lap machine processes stock from its new de-ink facility and converts it into pulp which is sold to other Philip Morris Industrial paper companies and to outside customers. 7 A laboratory technician at Wikolin- Polymer Chemie GmbH prepares a urethane polymer. Wikolin is a leading producer of urethane laminating adhesives for the packaging industry throughout Europe and the Middle East. 8 The gauge recorder on the tandem extruder at MilprinUMilwaukee measures the thickness of poly film to 1/1,000 of an inch. Material produced on this machine is used to package many types of food products, particularly processed meat and cheese. Philip Morris Industrial Operating Revenues Over the last ten years, Philip Morris Industrial's operating revenues have increased atan average annual compounded rate of 12.3%. Philip Morris Industrial Operating Income Operating income of Philip Morris Industrial has grown at an average annual compounded rate of 13.0 % during the past ten years. 1979 1978 1977 1976 1975 Mlllions of Dollars 280 70 71 72 73 74 75 76 77 78 79 Millions of Dollars 21 _ 18 15 70 71 72 73 74 75 76 77 78 79 Operating Operating Revenues Income $268,847,000 $18,268,000 $237,165,000 $15,024,000 $216,699,000 $14,860,000 $169,096,000 $10,620,000 $151,960,000 $ 8,052,000 Officers William D. McCoy President James B. Kurtzweil Executive Vice President, Operations Dr. Herbert Aschkenasy Vice President and President, Chemical Group James E. Asmuth Vice President and President, Tissue Group Ralph J. Becker Vice President, Purchasing Jasper H. Butler Vice President, Personnel Richard W. Detrick Vice President and President, Paper Group George R. Lewis Vice President, Financial and Planning, Treasurer James M. Sheridan Vice President and President, Packaging Group Alan G. Wernick Vice President, Administration James R. Kieckhefer Secretary

t 1 Mission Viejo Company has ac- quired the 22,000-acre Highlands Ranch, south of Denver. Colo- rado, for development over the next 25 years. 2 Mission Viejo!7UP's Five- andTen- Kilometer Run drew nearly a thou- sand joggers. 3 Andalusia, MissionViejo's new luxury series, sold rapidly in 1979. A unit is shown here under construction. 4 Mallorca, overlooking Lake Mission Viejo, was one of seven distinctive product lines offered in Mission Viejo, California, last year. 5 Ranching operations continue on AlisoViejoas MissionViejo's devel- opment plans undergo final gov- ernmental review. 6 Almost two-thirds of the Highlands Ranch will be preserved as a permanent, non-urban area. A balanced community of approxi- mately 30,000 new homes will be built. There will be approximately 900 acres of commercial and industrial acreage. 7 Olympic Silver Medalist Greg Louganis is among the world- class athletes who represented the Mission Viejo Nadadores Swimming and Diving Teams in the 1979 Pan-Am Games. _ 8 Mission Viejo's float, "Baubles, Bangles and Beads," won the Sweepstakes trophy in the 1980 Pasadena Tournament of Roses Parade. The parade is seen on television by more than 125 mil- lion people around the world. 9 Lake MlssionViejosymbolizes the recreation-oriented environment offered in the Southern California community. Officers Philip J. Reilly President James G. Gilleran Executive Vice President Jack G.Raub Executive Vice President James G. Toepfer Executive Vice President Marvin E. Lawrence Senior Vice President G. H. Lodder Senior Vice President John F Biggs Vice President James L. Huesman Vice President and Treasurer Gerard D. Ognibene Vice President William K. Smith Vice President and Secretary Harvey Stearn Vice President Paul Van Stevens Vice President Robert P Swank, Jr. Vice President Danette S. Fenstermacher Controller Mission Viejo Company Operating Revenues During the last ten years, Mission Viejo Company's operating revenues have grown at an average annual compounded rate of 17.9 %. MissionViejo Company Operating Income Operating income of Mission Viejo has increased at an average annual compounded rate of 40.8 % over the past ten years. Mission Viejo Company Share of Orange County Market Sales of Mission Viejo Company accounted for 8.0% of the new homes sold in Orange County, California, in 1979. Miqions of Doqars 175 so 9.0 Operating Revenues Operating Income 1979 $153,779,000 $22,437,000 R7 1978 $125,952,000 $19,761,000 CS1 0 1977 $148,017,000 $33,225,000 O 1976 $ 94,762,000 $16,333,000 O 1975 $ 70,635,000 $ 5,875,000 O ~J -

FINANCIAL REVIEW In 1979, Philip Morris achieved its 26th consecutive year of revenue and earnings growth. Despite a much larger operating base, the 25.2% revenue increase and the 24_3% net earnings increase in 1979 were above the average annual growth rates of the last decade (Chart 1). In February, 1979, the Board of Directors declared a 22% increase in the common stock dividend to an annual rate of $1.25 per share. This represented the 12th consecutive year of increase. Our dividends declared as a percent of net earnings rose slightly to almost 31 % in 1979, the highest payout ratio since 1970. Over the last ten years, dividend increases have correlated closely to earnings growth despite a high level of investment and capital expenditure (Chart 2). In April, shareholders approved a two-for-one split- up of our common stock in the form of a 100% stock dividend. This action has broadened the appeal of our common stock, with a 5% increase in the number of stockholders since the split-up. In excess of 90% of capital expenditures over the next five years will provide for forecasted capacity needs and productivity improvements. For the most part these projects are investment opportunities with high rates of return. They are being selectively and carefully monitored to insure that capacity growth closely correlates with the demand for our products. In 1979, capital expenditures totaled $632 million. At year-end, approximately 70% of our fixed assets were less than five years old. We estimate expenditures of $850 million in 1980 and approximately $3.5 billion during the five year period from 1980 through 1984. Funds from operations, which increased 24.9% in 1979 and 25.7% annually over the last decade, have provided solid support for our capital expendi- ture program (Chart 3). In 1979, our internal funds from operations reached $720 million. Approximately 29% of this total represented depreciation and deferred income taxes which are primarily related to capital expenditures. In essence, our expanding fixed asset base is providing an increasingly larger portion of the funds necessary for further capital expansion. Although earnings growth has been impressive, even more impressive has been the growth in funds from operations. This was particularly true over the last five years when annual increases in funds from operations exceeded comparabl.e-.earnings increases by a full four percentage points (Chart 4). Total assets reached almost $6.4 billion in 1979. Our net return on average total assets was an historically high 10.2% in 1979 (Chart 5). This record was particu- larly impressive in view of a 42% increase in the non- productive construction-in-progress account, which totaled $581 million at year-end. Stockholders' equity reached almost $2.5 billion in 1979, a sixfold increase over the last decade. Never- theless, our net return on average stockholders' equity remained consistently high and exceeded 22% for the first time (Chart 6). Total debt last year advanced only $144 million. The lower than anticipated increase in debt resulted pri- marily from tight controls over our capital expendi- tures and effective balance sheet management. Our debt-to-equfty ratio improved from 1.12 to 1 in 1978 to 1.02 to 1. The ratio by year-end 1979 was below the average of the last ten years (Chart 7). We expect a decline in this ratio over the next five years. During the second quarter, we completed a public offering of $250 million in seven-year notes with an annual interest rate of 9.55%. As a result, fixed interest debt as a percentage of total debt increased to 72% at year-end. By contrast, our fixed interest debt was 68% of the total in 1978, 60% in 1977, and 55% in 1976. This trend has been particularly important in view of the recent rapid escalation in short-term interest rates. During the year, we also increased our revolving credit agreements with a number of banks from $550 million to $650 million, Credit availability through these agreements and bank lines of credit comfortably exceeds our needs in 1980. We may, however, issue long term debt if the market becomes attractive. Currently, Philip Morris maintains a solid "A' credit rating and the highest ratings in the commercial paper market. Interest expense in 1979 slightly exceeded $200 million. This represented a substantial increase from the $150 million expensed in 1978. However, our coverage of interest expense last year, despite histor- ically high rates, was at about the same level as the average of the last ten years (Chart 8). In 1980, Finan- cial Accounting Standards Board Statement No. 34 requires that interest costs associated principally with construction in progress be deferred and amortized over the life of the assets. This statement will increase the amount of assets on which interest will be capital- ized in the future. Our effective income tax rate declined from 45.2% in 1978 to 43.9% in 1979. This primarily reflected a decline in the domestic statutory income tax rate. The dollar, helped in part by the credit-tightening moves of the Federal Reserve in October, declined only modestly against major European currencies last year. Our multifaceted hedging program was again successful in minimizing the effect of currency move- ments. Last year, we incurred a small after-tax gain on foreign currency transactions and translations. Our extensive capital spending and investment pro- gram and growth in working capital required net exter- nal financing in each of the last eight years. Neverthe- less, our financial condition is sound and will continue to strengthen in the years ahead. Strong earnings and cash flow momentum, experienced management and proven operating policies, combined with the stability of our industries, provide a solid basis for continued growth at Philip Morris. ~ 0 0 a N 0 v 0 34

Primary Earnings Per Share Dividends Declared Per Share Chart 2 ~ Primary Earnings Per Share ~ Dividends Declared Per Share Funds from Operations Capital Expenditures Chart 3 a~ Funds from Operations ~ Capital Expenditures 8illions of Dollars Mlllions of Dollars Dollars 5.6 70 71 72 Millions of Dollars 700 600 500 400 300 100 74 73 76 77 75 78 79 Total Assets (Year End) Net Return on Average Total Assets Chart 5 m Total Assets (Year End) ~ Net Return (Before Net Interest) on AverageTotal Assets (%) Stockholders' Equity (Year End) Net Return on Average Stockholders' Equity s Stockholders' Equity (Year End) ~ Net Return on Average Stockholders' Equity (%) Total Debt (Year End) Ratio of Total Debt to Stockholders' Equity Chart 7 ~ Total Debt (Year End) ~ Ratio of Total Debt to Stockholders' Equity (Year End) Interest Expense Interest Coverage Chart 8 ~ Interest Expense ~ Interest Coverage (Earntngs Before Interest and Taxes Divided By Interest) 70 71 72 73 74 75 76 77 78 79 ~ -Billions of Dollars 2.8 Billions of Dollars Ratio 28 1 4 Millions of Dollars 210

FtVE YEAR SUMMARY OF OPERATING RESULTS BY INDUSTRY SEGMENT i (dollar amounts expressed in millions 1979 1978 1977 1976 1975 Operating Revenues: Tobacco S5,293 64% $4,231 64% $3,493 67°6 52,987 70% $2,704 74°0 Beer 2,237 27 1,834 28 1.328 26 983 23 658 18 Other Products 773 9 567 8 381 - 7 324 7 280 8 $8,303 100 % 86,632 100 % $5,202 100 % $4,294 100 % $3,642 100 % Cost of Sales: Cost of Products Sold 3,779 3,072 2,402 1,967 1,657 Federal and Foreign Excise Taxes 2,159 1,663 1,352 1.159 1,078 Gross Profit $2,365 $1,897 $1,448 $1,168 $ 907 Operating Profit: Tobacco $ 946 82% $ 751 78% $ 615 80% $ 516 83% $ 426 91 % Beer 180 16 150 16 106 14 76 12 28 6 Other Products 31 2 56 6 49 6 28 5 15 3 $1,157 100 % $ 957 100 %$ 770 100 %$ 620 100 % $ 469 100 % Reconciling Items 34 11 13 .15 24 Operating Income of Operating Companies $1,191 $ 968 $ 783 $ 635 $ 493 Interest Expense 205 150 102 103 99 Corporate and Other Expenses 80 72 55 60 33 Earnings Before IncomeTaxes $ 906 $ 746 $ 626 $ 472 $ 361 Provision for Income Taxes 398 337 291 206 149 Net Earnings $ 508 $ 409 $ 335 $ 266 $ 212 Earnings Per Common Share $ 4.08 $ 3.38 $ 2.80 $ 2.24 $ 1.81 Identifiable Assets: Tobacco $3,338 $3,066 $2,510 $2,242 $2,047 Beer 1,583 1,245 819 646 497 Other Products 1,131 979 407 336 285 $6,052 $5,290 $3,736 $3,224 $2,829 Depreciation Expense: Tobacco $ 60 $ 52 $ 42 39 $ 32 Beer 55 41 27 18 10 Capital Additions: Tobacco $ 197 $ 174 $ 78 $ 61 $ 86 Beer 386 358 183 147 146 Worldwide tobacco (Philip Morris U.S.A. and Philip Morris International) and domestic beer (Miller Brewing Company) represent the company's primary industry segments. "Other Products" include soft drinks, and food flavors and colors (The Seven-Up Company), industrial products (Philip Morris Industrial), and land development operations (Mission Viejo Company). For segment reporting purposes, operat- ing profit is defined as operating income of operating companies less equity in net earn- ings of unconsolidated foreign subsidiaries and affiliates and reduced by the amounts of amortization of goodwill and trademarks included in other deductions, net in the statements of earnings. Additional industry segment information is included in the notes to consolidated financial statements. 36

j ANAGEMENT'S DISCUSSION AND ANALYSIS OF THE SUMMARY OF OPERATIONS The following analysis pertains to the latest two years of the five-year summary of operating results on the preceding page, Operating Revenues In 1979, consolidated operating revenues were 31,671 million (25.2%) higher than in 1978. Rev- enues from worldwide sales of tobacco were up $1,062 million (25.1 %), of which $427 million is attributable to increased cigarette unit sales, $327 million to increases in selling prices (includ- ing increases in certain foreign excise tax rates), $124 million to translation of foreign currencies at average exchange rates in effect during 1979, and $184 million to the reorganization of the company's Brazilian operations in 1979. Operat- ing revenues from beer sales were up $403 million (21.9%), with $259 million due to greater volume and $144 million to price increases. The Seven-Up Company was acquired in June, 1978, in a transaction accounted for as a pur- chase, and its revenues for 1979 and 1978 are included in other products. Of the total revenue increase, $145 million was due to the inclusion of Seven-Up for the full year in 1979 compared with only seven months in 1978. Consolidated operating revenues in 1978 were $1,430 million (27.5%) higher than in 1977. Revenues from worldwide sales of tobacco were up $738 million (21.1%), of which $322 million was attributable to increased cigarette unit sales, $252 million to increases in selling prices (including increases in certain foreign excise tax rates), and $164 million to translation of foreign currencies at average rates in effect during 1978. Operating revenues from beer sales were up $506 million (38.2%), with $385 million of the increase coming from greater vol- ume and $121 million due to price increases. The Seven-Up Company's revenues from June 1 of $186 million are included in 1978 revenues from other products. Cost and Expenses Cost of sales, which inctudes cost of products sold and federal and foreign excise taxes on products sold, increased $1,203 million (25.4%) in 1979 over 1978 and $981 million (26.1%) in 1978 over 1977. Cost of sales of tobacco accounted for $724 million of the 1979 increase, of which $303 million is attributable to volume, $130 million to cost increases (including in- creases in certain foreign excise tax rates), $112 million to translation of foreign currencies, and $179 million to the reorganization of the company's Brazilian operations in 1979. Cost of sales of beer increased $349 million in 1979, of which $219 million is due to greater volume and $130 million to cost increases. The inclusion of Seven-Up for a full year in 1979 compared with only seven months in 1978 accounted for $79 million of cost increases. The total cost of sales increase in 1978 over 1977 included increases of $467 million for tobacco, $403 million for beer, and $102 million for Seven-Up. Tobacco increases included $241 million attributable to volume, $77 million to cost increases (including increases in cer- tain foreign excise tax rates), and $149 million to translation of foreign currencies. The $403 million higher cost of beer included $325 mil- lion from higher volume and $78 million of cost increases. Marketing, administrative and research costs in 1979 were $264 million (28.3%) higher than - in 1978 and $255 million (37.7%) higher in 1978 than in 1977, reflecting increases from growth in operations, inflation, the effect of currency translation, and the inclusion of Seven-Up for a full year in 1979 compared with seven months in 1978, and in 1979, expansion of Seven-Up's marketing, research, and personnel programs. Other Items Equity in net earnings of unconsolidated sub- sidiaries and affiliates increased $17.6 million in 1979 compared with 1978 and decreased $8.4 million (71.5%) in 1978 compared to 1977. The 1979 increase is principally attributable to a reorganization of the company's Brazilian operations during 1979. Previously, both manu- facturing and marketing functions in Brazil were combined in an unconsolidated subsidi- ary in which the company had an 81% interest with the balance held by a Brazilian state finan- cial institution. A new, wholly-owned marketing subsidiary has been established and has acquired exclusive marketing rights in Brazil for tobacco products manufactured by the partly-owned subsidiary. Accordingly, opera- tions of the marketing subsidiary are included with those of the company and its other wholly- owned subsidiaries, and equity in net earnings of unconsolidated subsidiaries and affiliates reflects only manufacturing results for the partly-owned Brazilian subsidiary. Interest expense in 1979 increased by $55 million (37.2%) over 1978 and was $48 million (47.5%) higher in 1978 than in 1977, in both years attributable to increased borrowings and higher average interest rates. The $61 million and $46 million increases in income taxes in 1979 and 1978, respectively, reflect the applicable taxes on the increased income for those years. Reference is made to the Notes to Consolidated Financial State- ments for additional information. 0 37

FIFTEEN•YEAR FINANCIAL RIMEW (thousands, except per-share amounts) 1979 1978 1977 1976 1975 Summary of Operations: Operating Revenues $8,302,892 6,632,463 5,201,977 4,293,782 3,642,414 Cost of Sales: Cost of Products Sold 3,778,737 3,072,134 2,401,680 1,966,871 1,656,839 Federal ExciseTaxes 1,036,803 960,791 862,115 778,161 686,276 Foreign ExciseTaxes 1,121,998 702,809 490,372 381,125 392,127 Operating Income 1,190,634 968,082 782,732 634,539 492,844 Interest Expense 205,476 149,794 101,584 102,834 99,045 Earnings Before IncomeTaxes 905,436 745,497 625,516 471,928 360,810 Pre Tax Profit Margins 10.9% 11.2% 12.0% 11.0% 9.9% Provision for IncomeTaxes 397,555 336,916 290,590 206,253 149,172 Net Earnings 507,881 408,581 334,926 265,675 211,638 Primary Earnings Per Common Share 4.08 3.38 2.80 2.24 1.81 Fully Diluted Earnings Per Common Share 4.08 3.38 2.80 2.24 1.81 Dividends Declared Per Common Share 1.25 1.025 .781 .575 .461~ Weighted Average Shares-Primary 124,482 120,735 119,645 118,817 116,885 Weighted Average Shares-Fully Diluted 124,482 120,735 119,645 118,817 116,885 Capital Expenditures $ 632,041 566,228 279,818 220,173 244,477 Annual Depreciation 133,872 105,496 78,466 64,856 ' 49,853 Property, Plant & Equipment (Gross) 2,825,096 2,217,331 1,594,910 1,323,923 1,129,838 Property, Plant & Equipment (Net) 2,229,502 1,737,605 1,202,432 993,879 851,103 Inventories 2,371,300 2,188,553 1,817,561 1,657,504 1,448,428 Current Assets 3,028,315 2,756,757 2,221,020 2,005,745 1,788,08E Working Capital 1,833,186 1,585,090 1,415,867 1,202,224 890,797 Total Assets 6,378,852 5,608,165 4,048,039 3,582,209 3,134,326 Total Debt 2,516,369 2,372,179 1,563,498 1,525,638 1,443,27C Stockholders' Equity 2,470,955 2,114,660 1,690,066 1,429,982 1,227,78' Net Earnings Reinvested 352,372 283,805 253,661 197,195 157,10f Common Dividends Declared as % of Net Earnings 30.6% 30.6% 27.9% 25.7% - 25.7°/ BookValue Per Common Share $ 19.84 17.00 14.08 12.00 10.3: Market Price of Common Share High-Low 385/a-311/8 383/a-28 321/z-253/4 315/s-24~/s 295/s-201i Closing PriceYear-End 36 351/a 31 30~/a 261, Price/Earnings RatioYear-End 8 10 11 13 1 No. of Common Shares-Actual Year-End 124,544 124,268 119,840 118,975 118,71 2500010711 38

Philip Morris Incorporated and Consolidated Subsidiaries 1974 1973 1972 1971 1970 1969 1968 1967 1966 1965 ~ t 1 , 3,010,961 1,290,319 619,504 349,363 403,585 82,741 297,502 9.9% 121,986 175,516 1.58 1.53 .388 111,299 114,679 2,602,498 1,060,777 558,947 334,512 329,483 50,993 255,609 9.8% 106,977 148,632 1.35 1.30 .337 109,608 114,632 2,131,224 832,890 494,778 228,151 287,461 37,870 229,634 10.8% 105,168 124,466 1.17 1.09 .316 105,999 114,531 1,852,495 700,021 441,143 201,386 241,137 35,472 189,800 10.2% 88,302 101,498 1.00 .91 .303 100,253 113,114 1,509,540 577,106 372,092 147,124 203,180 35,425 150,008 9.9% 72,510 77,498 .84 .71 .263 91,226 113,193 1,142,373 454,718 319,086 54,247 153,237 28,640 115,613 10.1 % 57,273 58,340 .64 .60 .244 89,078 99,117 1,019,846 409,912 295,903 41,841 126,159 15,949 100,107 9.8% 51,241 48,866 .55 .53 .213 87,716 90,140 904,841 363,115 271,073 39,658 101,838 10,205 81,317 9.0% 37,716 43,601 .49 .49 .175 86,700 87,965 771,975 311,784 234,975 30,057 81,867 8,094 65,144 8.4% 30,961 34,183 .38 .38 .175 704,544 292,588 214,128 27,780 65,128 6,098 52,423 7.4% 25,914 26,509 .30 .30 .15 215,770 174,665 120,034 68,001 39,595 23,636 26,373 25,688 17,089 12,078 38,006 30,245 26,576 21,500 17,658 13,512 12,139 10,903 9,532 8,857 899,810 728,726 571,148 447,075 394,088 236,962 219,346 193,656 172,593 159,759 659,520 510,286 373,372 274,070 236,697 147,354 138,704 123,555 110,157 104,044 1,269,212 1,009,414 801,145 670,244 568,428 447,319 451,922 386,576 297,761 271,823 1,557,908 1,245,934 989,708 826,453 728,837 574,988 561,685 485,908 372,895 339,082 725,000 515,347 524,791 417,591 347,682 315,871 312,406 306,172 253,257 213,826 2,653,263 2,108,403 1,701,494 1,392,035 1,239,424 976,489 786,578 648,994 512,549 466,277 1,239,312 947,364 681,000 553,900 557,700 490,400 354,800 256,400 161,000 158,100 974,673 815,028 695,549 579,114 452,849 355,808 314,496 280,186 249,821 230,677 131,890 111,376 89,894 69,666 52,176 35,659 29,189 27,453 18,159 12,670 24.8% 25.0% 27.2% 30.6% 31.6% 37.4% 38.4% 34.9% 44.2% 48.6% 8.48 7.33 6.28 5.36 4.47 3.70 3.28 2.94 2.62 2.41 303/a-171/s 341/4-243/s 295/s-17 173/4-113/4 125/a-7 91/s-61/4 85/a-51/2 71/4-4 41/2-31/a 41/a-31/a 24 283/4 295/s 175/s 123/s 9 8 55/s 41/4 33/4 15 21 25 17 14 13 14 11. 11 12 114,529 110,757 108,888 104,678 96,635 90,261 88,801 87,323 86,453 86,087 2500010712 39

CONSOLIDATED BALANCE SHEETS December 31, 1979 and 1978 Assets Cash and cash equivalents Receivables Inventories: Leaf tobacco Other raw materials Work in process and finished goods Housing programs under construction Prepaid expenses Total current assets Investments in and advances to unconsolidated foreign subsidiaries and affiliates Land and offtract improvements Property, plant and equipment, at cost: Land and land improvements Buildings and building equipment Machinery and equipment Construction-in progress Less, Accumulated depreciation Brands, trademarks, patents and goodwill Long-term receivables Other assets See notes to consolidated financial statements. 1979 1978 $ 59,060,000 $ 72,930,000 576,858,000 473,586,000 1,548,422,000 1,459,048,000 253,767,000 198,541,000 432,614,000 419,551,000 136,497,000 11 1,413,000 2,371,300,000 2,188,553,000 21,097,000 21,688,000 3,028,315,000 2,756,757,000 260,172,000 243,271,000 114,445,000 72,836,000 133,980,000 101,256,000 562,489,000 476,152,000 1,547,558,000 1,231,438,000 581,069,000 408,485,000 2,825,096,000 2,217,331,000 595,594,000 479,726,000 2,229,502,000 1,737,605,000 645,586,000 652,368,000 51,534,000 66,258,000 49,298,000 79,070,000 $6,378,852,000 $5,608,165,000 § 40

philip Morrls Incorporated and Consoiidated Subsldlaries Liabilities Notes payable Current portion of long-term debt Accounts payable and accrued liabilities Federal and other income taxes Dividends payable Total current liabilities Long-term debt Deferred income taxes Other liabilities Total liabilities 1979 1978 $ 59,909,000 $ 211,345,000 8,699,000 13,866,000 897,415,000 785,201,000 190,186,000 129,388,000 38,920,000 31,867,000 1,195,129,000 1,171,667,000 2,447,761,000 2,146,968,000 233,604,000 149,952,000 31,403,000 24,918,000 3,907,897,000 3,493,505,000 Stockholders' Equity Cumulative preferred stock, par value $100 per share 7,693,000 Common stock, par value $1 per share 124,544,000 62,136,000 Additional paid-in capital 385,085,000 439,443,000 Earnings reinvested in the business 1,961,326,000 1,608,954,000 2,470,955,000 2,118,226,000 Less, Cost of treasury stock 3,566,000 2,470,955,000 2,114,660,000 $6,378,852,000 $5,608,165,000 41

CONSOLIDATED STATEMENTS OF EARNINGS for the years ended December 31, 1979 and 1978 Philip Morris Incorporated and Consolidated Subsidiaries 1979 1978 Operating revenues $8,302,892,000 $6,632,463,000 Cost of sales: Cost of products sold 3,778,737,000 3,072,134,000 Federal and foreign excise taxes on products sold 2,158,801,000 1,663,600,000 Gross profit 2,365,354,000 1,896,729,000 Marketing, administration and research costs 1,195,667,000 931,978,000 1,169,687,000 964,751,000 Equity in net earnings of unconsolidated foreign subsidiaries and affiliates 20,947,000 _ 3,331,000 Operating income of operating companies 1,190,634,000 968,082,000 Corporate expense 70,207,000 54,106,000 Interest expense (excluding capitalized interest of $23,680,000 in 1979 and $13,425,000 in 1978) 205,476,000 149,794,000 Other deductions, net 9,515,000 18,685,000 Earnings before income taxes 905,436,000 745,497,000 Provision for income taxes 397,555,000 336,916,000 Net earnings $ 507,881,000 $ 408,581,000 Earnings per common share $ 4.08 $ 3.38 See notes to consolidated financial statements. 42

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY I for the years ended December 31, 1979_and 1978 Philip Morris Incorporated and Consolidated Subsidiaries Preferred m C Additional P id I Earnings R Cost of Total ' Stock mon o Stock a n - Capital einvested in the Business Treasury Stock Stockholders Equity Balance, Jan. 1, 1978 $8,262,000 $59,922,000 $300,538,000 $1,325,149,000 ($3,805,000) $1,690,066,000 Net earnings for the year 1978 408,581,000 408,581,000 Common stock issued upon exercise of stock options and stock units 180,000 9,967,000 10,147,000 Common stock issued for acquisition 34,000 94,000 481,000 609,000 Sale of common stock 2,000,000 128,675,000 130,675,000 Preferred stock purchased for treasury (161,000) (161,000) Preferred stock retired (569,000) 169,000 400,000 Cash dividends declared: Preferred stock (97,000) (97,000) Common stock, $1.03 per share (125,160,000) (125,160,000) Increase (decrease) 1978 (569,000) 2,214,000 138,905,000 283,805,000 239,000 424,594,000 Balance, Dec, 31, 1978 7,693,000 62,136,000 439,443,000 1,608,954,000 (3,566,000) 2,114,660,000 Net earnings for the year 1979 507,881,000 507,881,000 Two-for-one stock split-up 62,255,000 (62,255,000) Common stock issued upon exercise of stock options and stock units 122,000 6,071,000 6,193,000 Common stock issued for acquisition 31,000 164,000 161,000 356,000 Preferred stock retired (5,319,000) 1,753,000 3,566,000 Preferred stock redeemed (2,374,000) (91,000) (2,465,000) Cash dividends declared- Preferred stock (18,000) (18,000) Common stock, $1.25 per share (155,652,000) (155,652,000) Increase (decrease) 1979 (7,693,000) 62,408,000 (54,358,000) 352,372,000 3,566,000 356,295,000 Balance, Dec.31, 1979 $124,544,000 $385,085,000 $1,961,326,000 F10 $2,470,955,000 cn ( ) Denotes deduction. 0 See notes to consolidated financial statements. 0 a 43

CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION for the years ended December 31, 1979 and 1978 Philip Morris Incorporated and Consolidated Subsidiaries Sources of Working Capital 1979 1978 Net earnings $ 507,881,000 $ 408,581,000 Add (deduct) items not requiring use of working capital: Depreciation and amortization 149,605,000 116,226,000 Deferred income taxes 73,451,000 42,508,000 Equity in net earnings of unconsolidated foreign subsidiaries and affiliates (20,947,000) (3,331,000) Dividends from unconsolidated foreign subsidiaries and affiliates 10,437,000 12,605,000 From operations 720,427,000 576,589,000 Long-term debt issued 368,514,000 776,554,000 Sale of common stock 130,675,000 Common stock issued under stock options and stock units 6,193,000 10,147,000 Land and offtract improvements transferred to housing programs under construction 2,702,000 3,989,000 Disposal of property, plant and equipment 15,245,000 8,936,000 Changes in long-term receivables 15,468,000 4,455,000 Funds in escrow for construction 30,857,000 (27;809,000) Other, net 6,751,000 (1,740,000) Additions to working capital 1,166,157,000 1,481,796,000 Uses of Working Capital Dividends 155, 670, 000 125,257,000 Capital expenditures 632,041,000 566,228,000 Capitalized lease obligations 8,069,000 10,869,000 Land and offtract improvements 44,311,000 7,249,000 Investments in and advances to unconsolidated foreign subsidiaries and affiliates 6,391,000 23, 037, 000 Investment in The Seven-Up Company, exclusive of working capital acquired 456,333,000 Repayment of long-term debt 69,114, 000 78,439,000 Preferred stock redeerned or purchased 2,465,000 161,000 Purchase of trademarks and related business 45,000,000 Working capital used 918,061,000 1,312,573,000 Increase in working capital $ 248,096,000 $ 169,223,000 Changes in Components of Working Capital rv c-n Cash and receivables $ 89,402,000 $ 157,562,000 O 0 0 Inventories 182 747 000 370 992 000 ~ , , , , 0 Prepaid expenses (591,000) 7,183,000 J ~ Notes payable and long-term debt currently payable 156,603,000 (88,332,000) J Accrued liabilities and other payables (180,065,000) (278,182,000) $ 248,096,000 $ 169,223,000 See notes to consolidated financial statements. 44

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS Summary of Significant Accounting Policies Consolidation The consolidated financial statements include the accounts of the Company and all wholly- owned subsidiaries. Investments in and advances to unconsolidated subsidiaries and affiliates are stated at cost adjusted for equity in undistributed earnings or losses since the dates of acquisition. Inventories Inventories are valued at the lower of cost or market. The cost of leaf tobacco is determined on an average cost basis, and the cost of other inventories is determined generally on a first-in, first-out basis. It is a generally recognized industry practice to classify the total amount of leaf tobacco inventory as a current asset although part of such inventory, because of the duration of the aging process, ordinarily would not be utilized within one year. The cost of housing programs under construction repre- sents the cost of land, including offtract improvements, interest and property taxes, and housing construction costs on sites cur- rently under development. Real estate operations The cost of land, including offtract improve- ments, interest and property taxes, is reported as a noncurrent asset until a designated site is placed into development. The amount of inter- est capitalized is determined by the Com- pany's average borrowing rate. Offtract improvements are access roads, utilities and other improvements, which are essential to the development of a community, but which are not directly attributable to the de- velopment of a particular site, The cost of these improvements is allocated to the salable acre- age remaining in each project and is charged to cost of sales when such acreage is sold. Income taxes The provision for income taxes is calculated on reported pre-tax earnings. Certain items of income and expense included in the financial statements, 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 provision 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 foreign subsidiaries and affiliates that is expected to be remitted to the United States. Property, plant and equipment Maintenance and repairs are charged against income, and expenditures for renewals and improvements are capitalized. In order to pre- sent more realistically the economic cost of a constructed facility, the capitalized cost of the facility includes interest and real estate taxes incurred during the construction period. The interest capitalized on construction of facilities is determined by applying the Company's average short-term borrowing rate to the related construction balance. Industrial devel- opment 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. Pension plans The Company and certain of its subsidiaries have pension plans covering substantially all their employees. Prior service costs, which are being amortized over periods of up to thirty years, and accrued pension costs are gener- ally funded with independent trustees. rri cn 0 0 0 0 v ~ ~ 45

NOTES continued Acquisitions In June, 1978, the Company acquired all of the outstanding common stock of The Seven-Up Company for $520,000,000. The acquisition has been accounted for as a purchase; and accordingly, operating results of Seven-Up have been included in the consolidated operat- ing results of the Company for periods after May 31, 1978. The excess of investment cost over net assets acquired of $398,000,000 is being amortized over a period of forty years. Foreign Exchange Various hedging activities are engaged in to minimize the effect of currency fluctuations on net earnings. Gains and losses resulting from balance sheet translation and transactions, Foreign Subsidiaries Principal financial data of foreign subsidiaries and affiliates are as follows: 1979 Assets Liabilities Net assets Company's equity and advances Operating revenues Net earnings Company's equity 1978 Assets Liabilities Net assets Company's equity and advances Operating revenues Net earnings Company's equity At December 31, 1979, investments in uncon- solidated foreign subsidiaries and affiliates exceeded equity in net assets by approxi- mately $17,000,000, including $12,000,000 which arose subsequent to November 1, 1970, and is being amortized. _ ShortTerm Borrowing Arrangements In addition to the domestic and foreign bank loans and commercial paper obligations included in current liabilities, the information presented below also includes short-term notes payable classified as long-term debt in In June, 1978, a wholly-owned subsidiary of the Company purchased for $45,000,000 the international cigarette business of Liggett Group Inc., consisting of the right to sell ciga- rettes outside the United States under the trademarks L & M, Lark, Chesterfield, Eve and Decade. The Company also purchased for approximately $63,000,000 inventories of leaf tobacco and finished goods and receivables associated with such business. including forward exchange contracts, net of related income taxes, increased net earnings $6,200,000 in 1979 and decreased net earn- ings by $400,000 in 1978. Consolidated (Wholly-Owned) Unconsolidated (Partially-Owned) _$_1,087,005,000 _ 588,811,000 __ 498,194,000 _ 498,194,000 _ 2,074,140,000 _ 56,638,000 56,638,000 944,956,000 _ 552,052,000 392,904,000 392,904,000 1,401,928,000 58,398,000 58,398,000 $ 776,255,000 421,391,000 354,864,000 242,808,000 1,269,794,000 34,433,000 20,947,000 667,850,000 346, 099, 000 321,751,000 226,871,000 1,099,767,000 13, 561, 000 3,331,000 Federal income tax has not been pro- vided on approximately $475,000,000 of undis- tributed earnings of forelgn subsidiaries and affiliates, accumulated since inception of such investments, which are expected to be perma- nently invested abroad. accordance with Financial Accounting Standards Board Statement No. 6. At Decem- ber 31, 1979 and 1978, $650,000,000 and $550,000,000, respectively, of short-term notes were included in long-term debt. 46

Data with respect to short-term notes payable follow: Average During theYear 1979 1978 Bank Loans $124,608,000 $266,311,000 Weighted Average Interest Rates 9.0% _9.6% Commercial Paper Obligations $521,081,000 $366,690,000 Weighted Average Interest Rates 10.7% 7.8% At December 31 1979 1978 Bank Loans $185,158,000 $236,372,000 Average Rates of Interest 12.7% 10.7% Commercial Paper Obligations $524,751,000 $524,973,000 Average Rates of Interest 13.3% 10.2% The highest level of short-term borrowings at any month-end during 1979 was $900,000,000. Lines of credit at December 31, 1979, amount- ed to approximately $1,600,000,000 of which $900,000,000 remained unused. During 1979, the Company and its consolidated subsidiaries maintained average demand deposit bank bal- ances of approximately $55,000,000 with a number of banks, principally in the United States, to compensate them for account han- dling and other important services and to sup- port lines of credit, Long Term Debt Outstanding at December 31, exclusive of amounts due within one year: Short-term notes (see below) Notes, interest principally from 81/a% to 9.55%, payable from 1982 to 1998 Bank term loan agreements: At 7.9% average effective rate, payable in 1980 (see below) At 81/8% interest, payable in 1981 and 1982 At 81/2% interest to 1985 and at a fluctuating rate to 1988, payable 1985 to 1988 Sinking Fund debentures, interest from 65/s% to 91/8%, payable from 1980 to 2004 Purchase money obligations, interest principally from 6% to 7%, payable through 2009 Other The Company has revolving credit agreements of $300,000,000 maturing in 1981 and $350,000,000 maturing in 1982, which can be used to refinance short-term notes payable. Management intends to exercise its rights under these agreements_in.the event that such exercise becomes advisable. Accordingly, at December 31, 1979, $650,000,000 of short- term notes payable has been classified as long-term debt in accordance with Financial Accounting Standards Board Statement No. 6. The $150,000,000 bank term loan agreement is classified as long-term debt in accordance with Financial Accounting Standards Board Statement No. 6 since the Company intends and has entered into agreements with the banks involved to refinance these loans to mature in 1984 bearing interest at each bank's prime rate. The Company has a right to pre- 1979 1978 $ 650,000,000 936,800,000 150,000,000 50, 000, 000 $ 550,000,000 689,400,000 150,000,000 50,000,000 160,000,000 361,421,000 123, 774, 000 15,766,000 $2,447,761,000 160, 000, 000 369,121,000 114,461,000 63,986,000 $2,146,968,000 pay, without penalty, this obligation at any time. Generally, long-term debt is callable, at annually decreasing premiums. Expenses incurred in securing long-term loans are included in other assets and are being amortized on the straight-line method over the lives of the respective issues. Total interest incurred on long-term debt, excluding interest on short-term debt classified as long-term debt as noted above, was $148,000,000 and $107,000,000, respectively, for the years ended December 31, 1979 and 1978. Aggregate maturities of long-term debt in each of the following periods are: 1980, $8,699,000; 1981, $346,462,000; 1982, $424,644,000; 1983, $15,470,000; 1984, $371,111,000; 1985-1989, $753,699,000 and 1990-1994, $215,276,000. ra cn C 0 0 ~ ~ 0 47

NOTES continued Capitalized Interest The effect on pre-tax income of the policy to capitalize interest was an increase of $10,119,000 in 1979 and $4,517,000 in 1978 relating to major facilities and an increase of $8,138,000 in 1979 and $4,961,000 in 1,978 relat- ing to real estate operations. The combined effect on net income was an increase of $9,277,000 in 1979 and $4,590,000 in 1978. Restrictions Certain of the agreements covering long-term debt contain restrictions with respect to the payment of cash dividends on common stock and to the purchase, redemption or retirement of capital shares. At December 31, 1979, approximately $950,000,000 of consolidated earnings reinvested in the business was free of such restrictions. Other debt agreements specify minimum amounts of working capital and limit the amount of senior debt which may be issued. At December 31, 1979, the Company was in compliance with these agreements. Stock Plans Under the stockholder-approved 1977 Stock Unit Plan, units with respect to 738,550 shares of common stock of the Company remain avail- able to be granted to employees of the Com- pany or its affiliates. A stock unit entitles the holder to purchase one share of common stock at the market price at the date of grant, or to receive the appreciation value (the excess of the market price at the date of exercise over the market price at the date of grant) in the form of stock or stock and cash. Appreciation value may be received with respect to no more than 50% of the units granted. Appropriate appreciation value is recognized currently as compensation expense. Pursuant to previously approved stock option plans, common stock of the Company has been made available for option to officers and other key employees at market prices on the dates granted. Stock Units Stock Options 1979 1978 1979 1978 Under option, beginning of year 583,976 597,400 948,170 1,345,550 Granted 693,400 Exercised (4,230)(A) (774) (209,979)(C) (359,284) Canceled (16,700) (12,650) (16,300) (38,096) Under option, end of year 1,256,446 (B) 583,976 721,891 (C) 948,170 Became exercisable 142,562 146,186 4,000 169,116 (A) At $30.03 per share, resulting in issuance of 3,773 shares and cash. (B) At prices of $30.03 and $32.56 per share. (C) At prices ranging from $22.22 to $30.97 per share. Earnings Per Share Earnings per common share for 1979 and 1978 ing for each year, which was 124,482,320 and are calculated on the weighted average 120,735,450, respectively. number of shares of common stock outstand- Incentive Compensation Plan In accordance with the stockholder-approved for awards that may be made to officers and Incentive Compensation Plan, a provision of other key employees. A provision of $7,800,000 $10,750,000 was made against 1979 earnings was made against 1978 earnings. 48

Capital Shares Stockholders, at the annual meeting held April 26, 1979, approved amendments to Articles of Incorporation which authorized a new class of Serial Preferred Stock, consisting of 10,000,000 shares, without par value, and an increase of the Company's authorized Com- mon Stock from 100,000,000 to 200,000,000 shares with par value remaining at $1 per share. None of the newly authorized Serial Pre- ferred Stock has been issued, and all outstand- ing shares of the Company's earlier issues of preferred stock were redeemed during 1979. Concurrent with the increase in authorized Common Stock, a common stock split-up was effected in the form of a 100% stock dividend and was accounted for by a transfer of $62,255,000 from additional paid-in capital to capital stock. All references in the financial statements with regard to number of shares of common stock and related prices, dividends and per share amounts have been restated, where applica- ble, to reflect the foregoing common stock split-up. Authorized Issued Treasury Outstanding Preferred: At December 31, 1978 76,928 76,928 (53,188) 23,740 Retired from the treasury (53,188) (53,188) 53,188 Redeemed (23,740) (23,740) (23,740) At December 31, 1979 - Common: - At December 31, 1978 100,000,000 62,136,393 (2,224) 62,134,169 Exercise of stock options and stock units prior to stock split-up 87,300 87,300 Shares issued for acquisition 31,000 31,000 Two-for-one stock split-up 100,000,000 62,254,693 (2,224) 62,252,469 Exercise of stock options and stock units after stock split-up 34,704 4,448 39,152 At December 31, 1979 200,000,000 124,544,090 - 124,544,090 As of December 31, 1979, 2,716,887 shares were reserved for the exercise of stock options and stock units, of which 1,002,012 shares were exercisable. Quarterly Financial Results (Unaudited) (thousands, except per-share amounts) Per Share of Common Stock Operating Revenues Gross Profit Net Earnings Dividends Market Price Earnings* Paid* (High-Low) Quarter Ended: March31 $1,901,967 $ 543,656 $109,915 $ .88 $ .256 $373/s-313/4 June 30 2,114,725 601,868 130,597 1.05 .313 343/4-31 1/s September30 2,129,519 613,354 144,418 1.16 .313 385/s-331/s December 31 2,156,681 606,476 122,951 .99 .313 361/4-31 1/s Year 1979 .-$8,302,892 $2,365,354 $507,881 $4.08 $1.194 385/a-31 '/a Quarter Ended: March 31 $1,390,709 $ 379,989 $ 87,521 $ .73 $.206 $30~/a-28 June 30 1,672,252 473,258 104,316 .87 .256 36'/s-285/s September 30 1,817,641 524,728 115,182 .96 .256 383/s-323/s December 31 1,751,861 518,754 101,562 .84 .256 371/z-325/a Year 1978 $6,632,463 $1,896,729 $408,581 $3.38 $.975 383/a-28 *The sum of quarterly amounts may not equal the yearly amount due to rounding. 49

NOTES continuea Provision for IncomeTaxes The 1979 provision includes: Currently payable Deferred The 1978 provision includes: Currently payable Deferred Deferred tax expense for 1979 and 1978 was primarily attributable to the tax benefit derived from the excess of tax over book depreciation. The effective income tax rate on consolidated pre-tax earnings differs from the U.S. federal statutory rate for the following reasons: Provision computed at federal statutory rate of reported pre-tax earnings Increases (decreases) in the provision resulting from: Inclusion of equity in net earnings of unconsolidated subsidiaries and affiliates in pre-tax earnin s Investment tax credit Foreign income taxed at other than U.S. federal statutory rate and not expected to be subject to U.S. tax in the foreseeable future State and local income taxes, net of federal tax benefit Other Provision as reported Brands, Trademarks, Patents and Goodwill At December 31, 1979, this account included approximately $460,000,000 which is being amortized on a straight-line basis, principally over forty years. Cost in..exeess of net assets of Segment Reporting Worldwide tobacco and domestic beer repre- sent the primary segments of the Company's operations. Other products include soft drinks, industrial products and land development operations. The Company's foreign operations, which are predominantly in the tobacco busi- ness, are organized into geographical regions for management responsibility with Europe being the most significant. Intersegment trans- actions are not reported separately since they are not material. Operating profit calculated for purposes of segment reporting is operating income of operating companies less equity in net earn- 50 Federal Foreign State and Local Total $235,668,000 $42,613,000 $45,823,000 23,000 $324,104,000 62,487,000 10,964,000 73,451,000 $298,155,000 $53,577,000 $45,823,000 $397,555,000 $231,948,000 $24,966,000 $37,494,000 $294,408,000 35,254,000 7,254,000 42,508,000 $267,202,000 $32,220,000 $37,494,000 $336,916,000 1979 1978 Per Cent Per Cent to to Amount Pre-tax Amount Pre-tax $416,501,000 46.0% $357,839,000 48.0% (9,636,000) (1.1) (1,599,000) (0.2) (36,528,000) (4.0) (29,293,000) (3.9) (3,734,000) (0.4) (10,884,000) (1.5) 24,744,000 2.7 19,497,000 2.6 6,208,000 0.7 1,356,000 0.2 $397,555,000 43.9% $336,916,000 45.2% companies acquired prior to November 1, 1970, is not being amortized because, in the opinion of management, the related investments have not experienced any diminution in value. ings of unconsolidated foreign subsidiaries and affiliates and reduced by the amounts of amortization of goodwill and trademarks included in other deductions, net in the statements of earnings. Identifiable assets by segment are those assets that are used in the Company's opera- tions in each segment. Corporate assets consist primarily of long-term receivables and fixed assets. Reportable industry segment data for 1979 and 1978 are included in the summary pre- sented on page 36 of this report. Data by geographical region with a reconciliation to the consolidated statements are presented below.

Data by Geographical Region Consolidated for years ended December 31. 1979 and 1978 - 1979 1978 Operating Revenues: United States 36,228,752,000 $5 230 535 000 Europe - 1 ,736,002,000 . . . 1 268 127 000 Other Foreign 338,138,000 , . . 133 801 000 $8,302,892,000 . , $6,632 463 000 Operating Profit: , , United States $1,067,265,000 -$ 877 947 000 Europe 102,911,000 , , 67 991 000 Other Foreign (12,754,000) , , _11,129 000 1,157,422,000 , 957,067,000 Reconciliation: _ Equity in net earnings of unconsolidated foreign subsidiaries and affiliates 20,947,000 -3,331,000 Amortization of goodwill and trademarks 12,265,000 - 7,684,000 Operating income of operating companies $1,190,634,000 $ 968 082,000 Identifiable Assets: United States $4,984,037,000 $4,394,028,000 Europe 927,350,000 765,760,000 Other Foreign 140,956,000 129,671,000 6,052,343,000 5,289,459,000 Investments in and advances to unconsolidated foreign subsidiaries and affiliates - 260,172,000 243,271,000 Corporate Assets 66,337,000 75,435,000 Total Assets $6,378,852,000 $5,608,165,000 Additional Information 1979 1978 Working capital at year-end $1,833,186,000 $1,585,090,000 Depreciation expense $ 133,872,000 $ 105,496,000 Rental expense $ 39,646,000 $ 33,777,000 Pension expense $ 54,049,000 $ 41,757,000 Report of Independent Certified Public Accountants To the Board of Directors and Stockholders of Philip Morris Incorporated: We have examined the consolidated balance sheets of PHILIP MORRIS INCORPORATED and Consolidated Subsidiaries as of December 31, 1979 and 1978, and the related consolidated statements of earnings, stock- holders' equity and changes in financial posi- tion for the years then ended. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. _ in our opinion, the financial statements men- tioned above present fairly the financial posi- tion of Philip Morris Incorporated and consoli- dated subsidiaries at December 31, 1979 and 1978, and the results of their operations and the changes in their financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis. Coopers & Lybrand r..l C 0 January 29 1980. New York ~ , , ~ 0 ~ ~ ~ 51 t N

Inflation Adjusted Information In accordance with the requirements of recently issued Statement No. 33 of the Finan- cial Accounting Standards Board (FASB), the following schedule of earnings for the year ended December 31, 1979 and five-year sum- mary of selected financial data are presented to provide certain information with respect to the effects of inflation on the Company's opera- tions. Statement No. 33 requires use of (a) the constant dollar method which measures changes in general price levels and (b) the cur- rent cost method which measures changes in specific prices appfcable to the Company's operations. The constant dollar method provides finan- cial information in dollars of the same purchas- ing power, so that revenues for each year are matched with expenses expressed in dol- lars with the same general purchasing power. The Consumer Price Index for All Urban Con- sumers is used as the broad-based measure of the general inflation rate. 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. Adjust- ments for changes in specific prices of prop- erty, plant and equipment were principally based on external price indexes specifically or closely related to the resources being mea- sured, or internally developed indexes, and in the case of inventories and cost of sales, on recent purchases and production costs. Both of these methods inherently involve the use of assumptions, approximations, and esti- mates, and therefore, the resulting measure- ments should be viewed in that context and not as precise indicators of the effects of inflation. They 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. The schedule of earnings and other data for 1979 as reported and as adjusted for changing prices follows: Adjusted for As Reported in the Adjusted for Changes in (in millions of dollars, except Primary Statements General Inflation Specific Prices per-share amounts) (Historical Cost) (Constant Dollar) (Current Cost) Operating revenues Costs and expenses, exclusive of depreciation expense: Cost of sales Other operati ng expense Corporate expense Interest expense Depreciation expense Equity in net earnings of unconsolidated subsidiaries and affiliates Other deductions, net Earnings before income taxes Provision for income taxes (A) Net earnings-- - Earnings per common share Gain from decline in purchasing power of net amounts owed Inventories and property, plant and equipment: Increase in general price level (constant dollar) Increase in specific prices (current cost) (B) Excess of increase in general price level over increase in specific prices Stockholders' equity (A) In accordance with FASB requirements, the inflation adjusted amounts do not reflect any adjustments in the provisions for income taxes. Consequently, the effective tax rates are: - As reported in the Primary Statements 43.9% Constant Dollar 59.3% Current Cost 51.9% $8,303 $8,303 $8,303 5,815 6,009 5,905 1,186 1',186 1,186 68 68 68 205 205 205 134 175 183 21 21 21 10 10 10 906 671 767 398 398 398 $ 508 $ 273 $ 369 $ 4.08 - $ 2.20 $ 2.97 $ 368 $ 368 $ 601 373 $ 228 $2,471 $3,199 $3,124 (B) At December 31, 1979 the year-end current cost of inventories was $2,543 million and the year-end cur- rent cost of property, plant and equipment, net of accumulated depreciation, was $2,891 million. N 0 ~ N cn 52

In arriving at constant dollar and current cost net earnings for 1979, depreciation expense and the raw material and supplies components of cost of sales are the only amounts reported in the primary statements that have been adjusted into average 1979 dollars. Revenues, labor, and other costs and expenses are con- sidered to reflect average price levels for the year, and accordingly have not been adjusted. The cost of sales adjustments decrease earnings before income taxes by $194 million and $90 million under the constant dollar and current cost methods, respectively, reflecting the fact that the general rate of inflation has exceeded the overall rate of increase in the historical cost of the Company's raw materials and supplies. The depreciation adjustments decrease earnings before income taxes by $41 million in constant dollars and $49 million in current cost. These adjustments reflect the increase in the valuation of the Company's property, plant and equipment measured under the constant dollar and current cost methods over historical dollar cost amounts. The result of the inflation adjustments is a decrease in earnings before income taxes in constant dollars of 25.9% and in current cost of 15.3%. The FASB rule does not permit any (in millions of dollars, except per-share amounts) Operating revenues Cash dividends declared per common share Year-end market price per common share Average Consumer Price Index (A) Restated in average 1979 constant dollars. adjustment to the provision for income taxes. Nevertheless, the Company's use, for tax pur- poses only, of accelerated depreciation and of special inventory adjustments allowed in cer- tain countries in which the Company does business provides some tax relief, not reflected in the provision for income taxes, for the effects of inflation. The increases in stockholders' equity of $728 million and $653 million under the constant dollar and current cost methods, respectively, as compared with the amount reported in the primary financial statements, are attributable mainly to the appreciation of inventories and property, plant and equipment due to inflation. Additionally, stockholders' equity is increased under both methods by unrealized gains result- ing from the decline in the purchasing power . of net amounts owed. As is the case with the constant dollar and current cost adjustments to net earnings, no tax effect has been applied to the unrealized gains included in stock- holders' equity. The following five-year comparison shows the trends in operating revenues and other data restated in terms of average 1979 con- stant dollars as measured by the Consumer Price Index. 1979 1978(A) 1977(A) 1976(A) 1975(A) $8,303 $7,379 $6,231 $5,475 $4,912 1.250 1.140 .935 .733 .624 34(A) 373/a 361/4 381/2 345/a 217.4 195.4 181.5 170.5 161.2 O O O 53

BOARD OF DIRECTORS Thomas F Ahrensfeld4 Senior Vice President and General Counsel Jerry Apodaca Chairman of the President's Council on Physical Fitness and Sports, and President of the National Issues Council, Santa Fe, New Mexico James C. Bowling4 Senior Vice President, Assistant to the Chairman of the Board, and Director of Corporate Affairs Alfred Brittain III Chairman of Bankers Trust Company, New York, NY George V. Comfort, Chairman of George Comfort & Sons, Inc., New York, NY, real estate management Dr. Jose Antonio Cordido-Freytes Member of Betancourt, Cordido and Associates, Caracas, Venezuela, Attorneys, and President of C.A, Tabacalera Nacional Hugh Cullman1 2.5 Group Executive Vice President and Chairman and Chief Executive Officer, Philip Morris U.S.A. Joseph F Cullman 3rd' 2 Chairman of the Executive Committee William H. Donaldson2 Dean of the Graduate School of Organization and Management, Yale University, New Haven, CT Clifford H. Goldsmith12 s s President Robert E. R. Huntleyl34 President of Washington and Lee University, Lexington, VA JohnT Landry4 Senior Vice President and Director of Marketing Edward Laskerl 2 3 Counsel, McKenna & Fitting, Los Angeles, CA, Attorneys Jacques G. Maisonrouge Chairman of IBM World Trade EuropelMiddle Eas[lAfrica - Corporation, Paris, France H. Robert Marschalkl2,3 Vice Chairman of Richardson- Merrell Inc., Wilton, CT pharmaceuticals manufacturer Hamish Maxwell4 Executive Vice President and President and Chief Executive Officer, Philip Morris International Ross R. Millhiser'~2S6 Vice Chairman of the Board T. Justin Moore, Jr.,2 3 a Chairman and Chief Executive Officer of Virginia Electric and Power Company, Richmond, VA John A. Murphy' 2 5 Group Executive Vice President and Chairman and Chief Executive Officer, Miller Brewing Company _ Shepard P Pollack4 Vice President and President and Chief Operating Officer, Philip Morris U.S.A. John S. Reed' 2.3 Senior Executive Vice President of Citicorp and Citibank, N.A., NewYork, NY George Weissman' 5 s Chairman of the Board and Chief Executive Officer Margaret B. Young4 Chairman of the Whitney M. Young, Jr. Memorial Foundation, New York, NY and Consultant to the Company John E. Cookman' 2 Director Emeritus Richard W. Dammann3 4 Director Emeritus T. Newman Lawler Director Emeritus J. Harvie Wilkinson, Jr.,z Member, Advisory Board Member of Executive Committee Joseph F Cullman 3rd, Chairman 2Member of Finance Committee John E. Cookman, Chairman 3Member of Audit Committee H. Robert Marschalk, Chairman 4Member of Committee on Public Affairs and Social Responsibility James C. Bowling, Chairman 5Member of Office of the Chairman George Weissman, Chairman 6Member of Office of the Chief Executive 54

OFF)CERS George Weissman Chairman of the Board and Chief Executive Officer Ross R, Millhiser Vice Chairman of the Board Clifford H. Goldsmith President Hugh Cullman Group Executive Vice President and Chairman and Chief Executive Officer, Philip Morris U.S.A. John A. Murphy Group Executive Vice President and Chairman and Chief Executive Officer, Miller Brewing Company Hamish Maxwell Executive Vice President and President and Chief Executive Officer, Philip Morris International Thomas F Ahrensfeld Senior Vice President and General Counsel James C. Bowling Senior Vice President, Assistant to the Chairman of the Board, and Director of Corporate Affairs JohnT. Landry Senior Vice President and Director of Marketing Albert E. Bellot Vice President and Vice President, Philip Morris International Robert H. Cremin Vice President and Vice President, Sales, Philip Morris U.S.A. Eugene J. T. Flanagan Vice President, Secretary, and Associate General Counsel Edward W. Frantel Vice President and President and Chief Executive Officer, The Seven-Up Company William K. Howell Vice President and President and Chief Operating Officer, Miller Brewing Company Jetson E. Lincoln Vice President, Planning William D. McCoy Vice President and President, Philip Morris Industrial W Wallace McDowell Vice President and Executive Vice President, Operations, Philip Morris U.S.A. James J. Morgan Vice President and Executive Vice President, Marketing, Philip Morris U.S.A. R. Wllliam Murray Vice President and Executive Vice President, Philip Morris International William J. O~Connor Vice President, Administration and Human Resources Shepard P Pollack Vice President and President and Chief Operating Officer, Philip Morris U.S.A. F Harrison Poole Vice President and Treasurer Philip J. Reilly Vice President and President, Mission Viejo Company Frank E. Resnik Vice President and Executive Vice President, Tobacco Technology Group Carlos E. Salguero Vice President and Executive Vice President, Philip Morris International Thomas 8. Shropshire Vice President and Senior Vice President, Miller Brewing Company Richard L. Snyder Vice President and Controller Benjamin A. Soyars Vice President and President, Tobacco Technology Group Walter F Sperber Vice President, Financial Research and Controls Hans G. Storr Vice President and Chief Financial Officer Dr. Helmut R. R. Wakeham Vice President and Vice President, Research and Development, Tobacco Technology Group Lauren S. Williams Vice President and Executive Vice President, Miller Brewing Company William E. Winter Vice President and Chairman, The Seven-Up Company Alexander Holtzman Associate General Counsel and Vice President and General Counsel, Philip Morris U.S.A. George P. Hibbard Deputy Treasurer Edward G. Silcock Assistant Treasurer Norman J. Treisman Assistant Treasurer John C. Lino Assistant Controller Horace W Pierpoint Assistant Controller Robert H. Souther Assistant Controller Robert A. White Assistant Controller Mary E. Russell Assistant Secretary Bernadette T Fee Assistant Secretary Anthony W. Giraldi Assistant Secretary Michael A. DeMita Staff Vice President, Washington Relations Wallace G. Lloyd Vice President, Manufacturing Technology, Tobacco Technology Group Frank A. Saunders Staff Vice President, Corporate Relations and Communications William K.Transue Staff Vice President, Personnel Graham U. White Staff Vice President, Taxes 56

General Corporate Information Corporate Headquarters: Philip Morris Incorporated 100 Park Avenue New York. New York 10017 (212) 679-1800 - =- - Operating Company Headquarters: Philip Morris U.S.A 100 Park Avenue New York, NY 10017 Philip Morris International 100 Park Avenue NewYork, NY 10017 Regional Headquarters: Europe/Middle East/Africa Philip Morris Europe, S.A. Brillancourt 4 1006 Lausanne Switzerland Latin America/Iberia Philip Morris Espana, S.A. Centro Colon Marques de la Ensenada, 16 Madrid 4 Spain Asia Philip Morris Asia Inc. 2803-10, Realty Building 71-72 Des Voeux Road Central, Hong Kong Australia/New Zealand/South Pacific Philip Morris (Australia) Limited One Little Collins Street Melbourne, Victoria 3000 Australia Canada Benson & Hedges (Canada) Inc. Place du Canada, Suite_800___ 1010 Laguacfietiere Street, West _. Montreal, Quebec H3B 2P4 "T,anada" Seven-Up lntemational iQO Park Avenue. ew Yorks NY 10017 Miller Brewing Company 3939 West Highland Boulevard Milwaukee, Wisconsin 53201 The Seven-Up Company 121 South Meramec St. Louis, Missouri 63105 Philip Morris Industrial 4200 North Holton Street Milwaukee, Wisconsin 53201 Mission Viejo Company 26137 La Paz Road Mission Viejo, California 92691 Annual Meeting: The annual meeting of stockhold- ers of Philip Morris Incorporated will be held on Aprll 23. 1980. at the Philip Morr s Operatr.ons Center. 3601 Commerce Road. Richmond. Virginia. Form 10-K: The company's annual report on Form 10-K. which will be filed with.the Securities and Exchange Commission, will be available to stockholders in April upon written request to: Eugene J.T. Flanagan. Secreta~y Philip Morris Incorporated 100 Park Avenue New York, New York 10017 Transfer Agents and Registrars: Morgan Guaranty Trust.Company of New York 30 West Broadway NewYork, NewYork10015 United Virginia Bank Box 6E Richmond, Virginia 23214 Stock Exchange Listings: New York Amsterdam Basel Frankfurt Geneva Lausanne Paris Zurich Stock Exchange Symbol: MO Auditors: Coopers & Lybrand NewYork, NewYork . Annual Report Paper: Paper stocks used in this report are made by Plainwell Paper Company, a division of Philip Morris Industrial. Cover: Kashmir Gloss $0# Text: Kashmir Dull 100# Credits: Design: Chermayeff & Geismar AssQc. Major Photography: SAND. A. D'Arazienilmage Bank, Ted Horowitz. Jay Maisel, Arnold Rosenberg. H. Sundrlmage Bank, LeodeWyslnc. - - Printed in'U.S.A.

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