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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.