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Management and the Board of Directors At its June meeting, the Boarcl tif Diroc•ttlrs of Philip llorris Incorporated ete(-a-d Il~uii±,h _~1a•,:yell io,uccee-d (reorge Weissman. effectike Julv 1. i'),~', Lts t'hairman and Chief Executive Officer of the company. The Board also elected John A. Murphy President and Chief Opera- ting Officer of Philip Morris Incorporated, and Hugh Cullman Vice Chairman and Chairman of the Finance Committee of the Board. At the same time, Frank E. Resnik was appointed President and Chief Executive Officer of Philip Morris U.S.A., and William K. Howell was named President and Chief Executive Officer of Miller Brewing Company. Pre- unrestricted basic grants to selected organizations. pro- viding funds over several years to help recipients projeet their revenues and formulate long-range plans. We support federated charitable organizations such as the United Way of America. In addition, we fund creative programs for inner-city neighborhoods and IfrOup5 With special problems. We continue to do business with some 60 minority-owned banks and to encourage minority- owned vendors to work with us. We try to be creative in all of our corporate contribu- tions, and this is most visible in the arts. Indeed, our art support program has become an important symbol of Philip Morris' sense of corporate social responsibility. We continue to sponsor a variety of projects. Some of these are historic, such as the traveling exhibition that opened in 1984 at the Museum of Modern Art in New York, titled "Primitivism in 20th Century Art: Affinity of the Tribal and the Modern." It examines the debt that modern art owes to African, North American, and Oce- anic art. Several other nationally recogni.zed shows trav- eled - - --- eled in the United States under our sponsorship. Many of our cultural affairs projects are less publi- cized, covering support for various institutions in our operating companies' home towns-libraries, museums, and performing arts centers among others. We continue to match employee gifts to institutions, thus encouraging our employees to help shape our contributions policy. In 1984, we supported 209 arts organizations, includ- ing the Joffrey Ballet, the Alvin Ailey American Dance Theater, the Western States Art Foundation, and the American Association of Museums. In New York, we fund a branch of the Whitney Museum of American Art in our Headquarters building; the branch has attracted thousands of visitors since its opening in 1983. We believe that onr corporate involve- ment with the arts helps to encourage our own employees' creativity and enhances the quality of their lives. viously, Mr. Resnik had been President of the Tobacco Technology Group and Mr. Howell had been Miller's President and Chief Operating Officer. At a subsequent meeting, Messrs. Resnik and Howell together with R. William Murray, President and Chief Executive 4fficer of Philip Morris International, were elected to the com- pany's Board of Directors, effective October 1, 1984. Mr. Weissman continues as Chairman of the EYecu- tive Committee and a member of the Office of the Chair- man. The former Chairman of the Executive Committee, Joseph F. Cullman 3rd, has been named Chairman Emeritus. In 1984, Clifford H. Goldsmith retired as Vice Chair- man of the Board and as a director on reaching the age of 65. From 1978 to 1983, Mr. Goldsmith was President of the corporation. James C. Bowling and John T. Landry also retired as officers and directors-of the-corporation. We are grateful for their long and distinguished service and for the fact that all three remain consultants to the corporation. The Public Interest Philip Morris operates in some 170 countries and terri- tories around the world. The company derives $1.1 bil- lion in export revenues through the sale of cigarettes, ~tobacco, beer, soft drink extract, and other products. Philip Morris recognizes its responsibility to those Ilocations in which we do business and seeks to improve % society in the countries where we operate, and especially in the communities where we have plants and offices. In 1984, our Corporate Contributions Committee made 1,066 grants, mostly in the general categories of education; health and welfare; conservation and environ- ment; and culture and the humanities. The recipients included 213 educational organizations as well as 530 children of our employees who were aided by our College Scholarship and Vocational/Technical Scholarship Award Programs. In all categories in 1984, we began making Social and Legislative Issues Philip Morris did well in 1984 for one basic reason: peo-. .ple liked our products well endugh to purchase more of them than ever before. But it was also more difficult to use them, because restrictions and regulations have appeared that previously did not exist. Virtually all businesses can complain about special fees or taxes or controls, and for many, such obstacles are

;enerate+t by antagonists who use legisiative processes ` --- for their uwn ends. For Philip tiIurrls. there are restrictions and controls +-~n IminN' areas tllat affect Our bnsines~es-including 'ei'[1JLIlg •1nr.i t.ii~rril{,Itit+n; theie ale ;.ilso t}I,erou>>ne i ~ (lL ' dia~ tl? ..i:'.`~1 _~t)4"°1'11i1;E nt il'rlUlls: --- ~'1'tl i(l it'~. Ia : (t+. LreilteCl iail'I~.". UI1CUI'Clliti~t{?14' the 1t"e iltil; pI tt be ' - t record shutivs -I lack +, fairness, particularLy as our ~ 1lnttigonists and ~letr~tctors continue to press for new reaulations to restrict our marketing activities and for increased taxes on our products. __ ~j'e oppose increased excise taxes because they are unt'air. regressive, and disruptive of natural market forces. Such taxes fall most heavily upon the economi=-_ cally disadvantaged who must pay a disproportionate per- centage of their disposable income for products so taxed. ~ Beyond taxation, emotional campaigns are being tsaged to restrict advertising and use of our products. In connection with cigarettes, such campaigns are fueled by claims based largely on statistical data regard- ing smoking and health. Since 1954, Philip Morris and the tobacco industry have contributed more than $120 million to fund independent research on smoking and health. We continue to believe that the results of scientific investigations to date fail to demonstrate a cause-and-effect relationship between smoking and chronic diseases. We also believe that the preponderance of scientific evidence indicates that the presence of cigarette smoke causes no health impairment to a healthy non-smoker. Simultaneously, in the area of alcoholic beverages, a similar outcry is raised because alcohol has been abused by some. As a brewer of beer, the traditional drink of moderation, Miller believes that responsible attitudes toward drinking are necessary, and the company is dedi- cating significant resources to campaigns promoting such responsible attitudes by all consumers of its products. Hamish Maxwell past, we will find new opportunities in change and that we will successfully manage and overcome whatever difficulties we encounter. We intend to maintain good rates of growth in sales, market shares, and income. We are gaining high produc- tivity through our capital investments, we have the best products available in our industries, and we have the resources to achieve our goals and to broaden our base of business. We have momentum. Above all, Philip Morris retains a talent for attracting unusually able employees and bringing out their best. The commitment, drive, and initiative of our 68,000 em- ployees are the strongest guarantees that we will maintain that momentum. It should be noted that in both the cigarette and the beer industries stringent advertising codes have been in _ h_ _--_-: place for years-codes designed to avoid promoting such products among youth, to emphasize the qualities of individual brands, and n_ot_to encourage the use of either product. Although the external pressures on our principal businesses have intensified, we are confident that we can resist them successfully and, therefore, we remain opti- mistic about the future. The Outlook We face the usual uncertainties about the future in all our businesses, both in the United States and interna- tionally. Included among them are tax changes, volatile conditions and economic difficulties in some overseas markets, currency fluctuations, and the future of the. U.S. tobacco program. We are confident that, as in the Hamish Maxwell Chairman of the Board and Chief Executive Officer John A. Murphy President and Chief Operating Officer N cn Q 0 0 ~ © o ~ a

In.1984..Philip 3forris L'.S..-1. intro- - dnced several new packings and dezel- ,ped a new generation of carton and package display units that improt•ed uur product distribution. [Villiaml. Cantpbell (R). Executive Viee Pre.sident, ,1Lirkeling;-Vineent I Buccellato (C), I'iee President, Sales; and Rosenzarie Gullo (L), Assistant Division .llan- ager all nfPhilip Morris Z:S..-l., are reviewing one of the units used in the national introduction of the.ilarlboro )5's pack. Virtually all data pertaining to Philip Morris U.S.A.'s operations are proc- essed at our James River Center in Richmond. Here, Harry G. Steele (C), Vice President, Finance and Adminis- tration, and F Robert Kurimsky (R), Vice President, Information Services, review with Dorothy McDaniel (L), Manager, Data Center Gperations, one of the programs used to monitor our production processes. Philip Morris U.S.A. In millions Operating Operating Revenues Income 1984 $6,133.3 $1,745.2 1983 $5,519.9 $1,337.8 1982 $4,330.1 $1,101.6 1981 $3,761.6 $ 905.7 1980 $3,272.1 $ 786.1 Consistent product quality is partially a result of exacting manufacturing standards continually reviewed by our senior operations management. Mark A. Serrano (2nd from L), Executive Vice President, Operations; W John Camp- bell (2nd from R), Senior Vice President, Plant Operations; and Newton Fowler (R), General Manager of our Cabarrus facility, discuss with Perry C. Bostic (L), one of our technicians, the effi- ciency of our production equipment at Cabarrus. 2500010942

Philip Morris International In millions Operating Operating Revenues Income 1984 $3,741.0 $420.9 1983 _ $3,646.7 $366.0 1982 $3,563.7 $446.0 1981 $3,400.3. $396.6 1980 $3,205.4 $318.0 In the high-potential Japanese market the best-selling import is Philip :Yforris' Lark brand. Here, Lark point of sale is being examined by Dinyar Devitre (znd from R), President, Philip Morris Asia, and, from Philip Morris Asia's Japan branch, Hikojiro Yokota (L), Director, Key Accounts & Sales Planning; Yutaka Suzuki (2nd from L), Marketing Manager; and Shinsuke Katayama (R), Brand Manager. in 19•3~. consamers in i~est Germany relurned to tualnstream brands after a p,rnitire ta.r increase in 1982 had cnused a.shift to lower-priced ciga- rel tes. .ll<u•lhoro eujoyed particular succe.ss in this market, helped by the intruduction of 1larlboro 100'.s early in 19,0. Gfinler iVille/Ll, Managing Dfl•ector,f Philip .Vlorris GmbH, is reriercing an wutdoor placenaent for Marlboro 100's with Knut Fockler (C), .Vlarketing.Vlanager., and Hans-Jochen Richter (R), Product Manager. Our long-term success in Latin Amer- ica depends on the introduction of new brands, one of which is California in Brazil. Examining California on the production line are Lauro Peuckert (L), Vice President, Operations, and Salva- dor Rivera (C), Director of Manufactur- ing, both of Philip Morris Brasileira, S.A., and Gustavo Mario Montes (R), Production Manager of our Curitiba plant.

A neticork of strong, well-managed, and aggressive distribulors,has been essential to 3liller Breicing Cornpany's ,uccess over the years. Here, Leonard J. Goldstein (L), Vice President, Sales, of Ifiller Brewing, discusses with hirby tif. Laiclis (R), President of }1iller Brands in i6auuatosa, U, .11il1- er's date coding systern which ensures the f reShness of -tifiller's prod u cts. State-of-the-art production equipment and techniques have allowed Miller to both control its costs and meet demand from our current breweries. Here, Allen A. Schumer (R), Senior Vice President, Operations; Billy R. Apple (C), Vice President, Plant Operations; and Georgy N. Tarala (L), Vice Presi- dent, Engineering, are inspecting a filler line at Miller's Milwaukee brewery. Miller Brewing Company In millions Operating _- - Revenues Operating Income 1984 $2,928.2 $116.2 1983 $2,922.1 $227.3 1982 $2,928.7 $158.8 1981 $2,837.2 $115.6 1980 $2,542.3 $144.8 In order to improve its margins, Miller has several premium-priced brands in various stages of development. Here, . Robert A. Toledo (R), Vice President, Br.and :Ytanagement, discusses with Brand Managers William H. Barrett (L) _ and Jerome F. Schmutte (C) commercial ; story boards for one of our brands in test market. i 2500010946

The Seven-Up Company In millions Operating Operating Revenues Income 1984 $734.0 $ 5.3 1983 $649.9 $(10.8) 1982 $530.6 $ (1.2) 1981 $432.1 $ (1.7) 1980 $353.2 $ (7.1) Seven-Up's continued success will depend on maintaining a strong net- work of profitable, independent bot- tlers. Charles W Schmid (R), Executive Vice President of The Seven-Up Com- pany, is responsible for that network whick includes Bart Brodkin (L), Presi- dent of Westinghouse Beverage Group. >r e+-j'n'a rr,lume la!ns (tre partially +! ;'vs,!)l „f'iniloP(1LlI'!! j)QChilf)!1lf~. r.Sl,rarvl i{: Fr•ants•l iR). Presideut and r'hivf E.rerntire Qfjicer uf The Seren- 1tt C'nurpany, rvrirn•s the new •3-liter ,-CP h.,ttle +ritlt Rfv,re Jinl„ns (L). NP Brau l.tLutnyer, and Lev Becktnan (C), Dirrrtf,r q'Finiwwv anll c)pe'ratiuns ~5uppurt u,j lhe Pcu•kutled Bet'erage °Dirision. Gabriel F N. Beehaalany (R), Presi- dent, and Marc de Petter (L), Manager, France, both of Seven-Up Interna- tional, are shown reviewing advertis- ing materials used in 7UP's mid-1984 launch in France.

Philip Morris Industrial In millions Operating Operating Revenues Income 1984 $277.2 $29.5 1983 $237.3 $13.6 1982 $232.9 $ 7.6 1981 $291.1 $18.9 1980 $276.5 $16.9 At:VicoletPaper, quality control is a key factor in industrial's continued grouth. :Vor6ert Lepak (L), Janaes R. Frawley (C), and A'orbert Beining (R) ensure that paper rolls meet customer specifications. In 1984, Wisconsin Tissue :Yfills set a new world output reeord for the con- tinuous operation of a paper machine. This record is emblematic of the pro- ductivity increases that have charac- terized our tissue operation. William D. McCoy (L), President and Chief Executive Officer of Philip ;Ytorris Industrial, and George Mueller (R), President of Wisconsin Tissue:Yfills, are discussing that record in the com- puter roam from which tiie #3 machine is controlled.

SIVRG opene!l three new housing proj- ects in 1984 at its California communi- ties-Slission Viejo and Aliso Viejo. flere, the California Division's Curt R'est (L), Generalllanrc.ger of Con- struction, and 6ance Kxoicltun (R), Project Superintendent. are rerieuing blueprint.s,/ur the construction ~f lhe Stoneybrook project at .llission Viejo. In addition to developing communi- ties, a1VRG has become increasingly involved in commercial real estate. Here, Philip J. Reilly (R), President and Chief Executive Officer of MVRG, _ and Jack Hoppe (L), Senior Vice Presi- dent, Planning and Engineering, Jack G. Raub Co., discuss one of the busi- ness properties planned for Mission's Highlands Ranch, Colorado, project. Mission Viejo Realty Group Inc. In millions Operating Operating Revenues Income 1984 $237.7 $36.1 1983 $258.5 $40.5 1982 $130.2 $ 6.0 1981 $163.6 $22.9 1980 $172.8 $30.6

In 1984, operating revenues were S13.8 billion, an increase of 6.5°6 from 1983 and operating income increased 19.8% to S2,3 billion. Net earnings decreased 1.7 % to $888.5 million in 1984. Net earnings were reduced by $145.6 million or 51.19 per share by the write-down of the completed but inactive Trenton brew- ery to net realizable value in the fourth quarter (Chart 1). Earnings per share reached $7.24, up 1.0% from 1983, due to a reduction of outstanding shares. The write-down was due to the continuing slowdown in consumer demand in the brewing industry and for some Miller products as well as efficiency gains at other Miller breweries. In contrast to 1982 and 1983, Miller volume and market share were up slightly in 1984, but Miller still has excess capacity in relation to its near- term projections. In light of recent trends in the industry, a date for commencement of production at Trenton could not be set and, therefore, the carrying value was reduced. In February 1984, the Board of Directors declared a 17.2 % increase in the common stock dividend to an annual rate of $3.40 per share. This was the 17th consec- utive year of increase and our 57th consecutive year of dividend payments. Over the last decade, dividends per share increased 24. 3% annually, while net earnings per share increased 16.4% (Chart 2). In 1984, capital expenditures totaled $298 million. Over the last five years, we have spent nearly $3.6 billion Chart 1 Chart 2 . Operating Rsvenues  Primary Ean+ings Per Share ~ Het Earnings ~ Divldsnds Deolared Per Shars Billions of Dollars Millions of Dollars Dollars 18 900 7.50 15 / 750 6.25 12 3 0 600 5.00 450 3.75 300 2.50 150 1.25 0 0 75 76 77 78 79 80 8182 83 84 75767778798081828384 on additions to our fixed assets compared with ~1.9 bil- lion spent during the previous five years. Approximately 55 % of the amount spent over the past five years was for domestic and international tobacco operations and most of the remainder for Miller Brewing Company. We estimate capital expenditures of $325 million in 1985 and approximately 51.7 billion in the five-year peri- od 1985 through 1989. Over 80% of these expenditures will be for forecasted capacity needs and productivity improvements. In 1984, our funds from operations increased 14. 7% to $1.5 billion (Chart 3). Over the last ten years, internal funds generation increased, 22.1% annually. During the same period, net earnings advanced 17.6 % annually (Chart 4). Total assets were $9.3 billion at year-end 1984. This was almost four times greater than our asset base ten years earlier. Our net return on average total assets was 10.9%, up from 10.6% in 1983 (Chart 5). Stockholders' equity has increased over four times during the past decade reaching $4.1 billion at the end of Chart 3 a Funds from Operations - Capital Expenditures Millions of Dollars 1200 1000 800 600 400 200 YN N 0 h 75 76 7778 79 80 81 82 83 84 Chart 4 S Funds from Operations . Het Earnings F~ 9 11. 1. 11: 11 141141111 . 75 76 77 78 79 80 81828384

198-1• Our net return on average stockholders' equity was in 1984, down from 23.5% in 1983 (Chart 6). Total debt at year-end 1984 was 82.6 billion, a S.186.3 million decrease from a year earlier. Our debt to equity ratio improved to .63 to 1, compared with .76 to 1 in 1983 and an average .99 to 1 over the last ten (Chart 7 yea During the, year, we repurchased $ 94 million of 14 % to 151/4% notes. The long-term portion of the $160 mil- lion 81/2% bank term loan amounting to $133 million will be prepaid in 1985 and has been classified as a current liability. The interest rate on the 81/2 % bank term loan would have increased to a premium rate above prime commencing in 1985 and therefore led us to the decision for its early retirement. In addition, $150 million 81/2 % notes will also be retired during 1985 as scheduled. We expect a further decline in our debt over the next five years. During 1984, the company purchased 4.1 million shares of its common stock under two announced com- mon stock repurchase programs at an average cost of $75.91 per share. The repurchased shares will be used for the exercise of employee stock options and other cor- porate purposes. At year-end 1984, fixed-rate obligations were approx- imately 89 % of total debt compared with 72 % in 1979. The fixed-interest portion of our debt, totaling $2.3 bil- lion at year-end, carried an average annual interest rate of approximately 9.5 %. Currently, Philip Morris has short-term credit facili- ties with a number of financial institutions totaling Chart 5 Chart 8 approximately 81.7 billion. Of this amount, approxi- mately $350 million is in revolving credit agreements and other arrangements with both U.S. and European banks. These facilities, which exceed our expected needs in 1985, provide support for our commercial paper borrow- ings and other credit activities. Philip Morris continues to maintain the highest ratings in the commercial paper market and a solid "A" credit rating for long-term obligations. Interest expense in 1984 totaled 5299.1 million, compared with $233.9 million in 1983 (Chart 8). The increase in interest expense was due principally to lower capitalized interest during 1984 arising from the com- pletion of facilities, partially offset by lower interest in- curred due to reduced borrowings. Interest capitalized in 1984 was $14.0 million compared with $128.8 million in 1983. Earnings coverage of interest expense declined to 6.37 times interest expense for 1984 from 7.78 in 1983. The write-down of the Trenton brewery, which adversely im- pacted pre-tax earnings by $280 million, was the primary reason for the decline in the earnings coverage for 1984. Our effective income tax rate was 44. 7% in 1984 and 43.0 % in 1983. Lower investment tax credits and equity earnings during 1984 were the primary reasons for the higher effective tax rate. Chart 7 Chart 8 I Total Ass.ts (Year-End)  Stockholders' Equity (Year-End) [> Total Debt (Year-End)  Int.rast Expsnse . N.t Return (Before Net Interest) on - N.t R.tum on ~ Ratio of ibtal Debt to - Intanst Cov.ny. (Earnings Before Avaraye Totst Asssts (36) Average Stookhold.n' Equity (45) Stookhoidsn' Equity (Year-End) Interest and Taxes Divided by Interest) B illions of Dollars Billions of Dollars Billions of Dollars Ratio Millions of Dollars Coverage 9.0 12% 4.50 24°Po 3.6 1.2 270 9 0 7.5 10 3.75 I 20 3.0 1.0 225 . 7.5 Ul 6.0 8 3.00 - 16 2.4 180 0 l9 6 4.5 6 2.25 12 1.8 L] Q, .6 135 . 4.5 0 3.0 ~ 4 1.50 8 1.2 .4 90 Q 3.0 l (J'7 1.5 2 .75 4 .6 ni H .2 45 N (~ 1.5 ~ 0 0 0 0 0 0 0 0 75 76 77 78 79 80 81 82 83 84 75 76 77 78 79 80 81 82 83 84 75 76 77 78 79 80 81 82 83 84 75 76 77,78 79 80 81 82 83 84-