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Philip Morris Companies Inc. Annual Report 1986

er share Dividends declared p ~ Funds front operations per sliarc __- - -- ~-- Percent lncraase Over Prior Year 5.24; , ..3.62 2.475 , 2.00 l:?b ' . 9.28 -- 7.39 59.2°Ia 15.6e1r 1T.7°!o 41.3% 18.3°a 44.6% : 6.30 : 6,5°~'0 a~•  ~ ~ F~ffl a n ~ l an~la~ E{I~t'1< 1~[!tS 4,itt mtlhons of eloE[at~, except per share antountsl ~Operatirtg revenues LVet earnings ' Earnings per share _ 1)n°iclends declared per share Operating Revenues 1'ililtp Morris L~.S.A.~ ~ _--....T_............~.....__.._e.. --.._..... Philip Morris International General Foods Corporation 14lifller 73rewing Company The Seven-~Cip Companyt Philip_~lnrris 1nd_ustrial$ Consolidated operating revenues p Operating Incorrta-~ ~~ Philip_M_csrris U.S.A. ~_ ~1'Ftilip Nt<~rris International General Foods Corporation Miller Brewing Company _ Philip Morris Credit Corporation* Mission Viejo Realty Group Ino * The Seven-Up Ctanrpany°~ Philip Morris lndustrxal$ Aannrtization of goodwill Consolidated operg ating income 1986 1985 $25,409 $15,9r1 1,478 _ , 1,255 6.20 23.8% 17.6% $ 7,053 $ 6,611 ~ 5.638 3,991 ~ , 9,664 1,632 3A54 ~......_2,.914- ' 678 $25.409 $15,9&4$13,814 $ 2,369 $ 2,050 740 158 ' 18 106 $ 3,735. $ 2, 138 1984 $13,814 889 3,918 734 277 ~ _ 1983 1982 $12,976 A $11,586 2,922 650 . 237 116 227 11-..._.._..~_ 5 17 20 6 30 12 4 $ 1,946 $ 1986-1976 19.51'0 18.7°s'a 04 782 ' 12.0c'lo 8.1% (1.7%.)' 15.6% 18.5% 1.0% 151''0 18.0% 17.2% 20.8~'lc~ 20.0% $ 6,134 $ 5,520 $ 4,330 3,741 3,6473,564 2;929 530 233 $12,9 76 $11,586 $ 1,745 $ 1,338 $ 1,102 Y 421366 446 1986-1981 18.8% ~..e_ Netear.ninp. 17.5% Earnings per s1Eat~ 18.6°'0 18.7% 18.3% Operating companies' income es income before corporate expense, interest and nonoperating income and deductions. `Phe amortization of pre. ~ viously capitaliaed interest is included in operating companies' income. All per-shaew amounts have been adjusted to reflect the two-for-one coennaon stock split-up distributed on Apri110, 1986 to etoekholders of cord en March 14, 1986. General Foods Corporation was acquired in EYovember 1985. Accordingly, consolidated operating results shown above include the operating, resulte esf General Foods lr°.orporation aftr.r tJctober I986. In 198+1.; a write-down of the eomplated but inactive Miller Brewing Company facility in Trenton,.t'JhBat reduced earnings before income taxes, net earnings and earnings per share by $280 tttiElion. $146 million and x.$9, reepectively. I epra ecnta eciuity iu riet carnin~n.qsf tEQeac unconsislEdaterl4itliaidiariae '. " n F986; the company setld substantially all of the operations of The Seven-Up Cantpany to various purchasers and plans to divest the remalning ~ operrmtaons; Seven-[Up 4aas decixnsolidated cffeetive ;Tatsuat'y-1,1986< . tk flr.ctive July 1,19}44, auhstantiallp all oithe Philip Morris Industrial operations were toEdd fur $250 milli®n. The gain on these sales increarea ' exrninga beferr, inecF:rce t; xe5, net earnings antl earnings per share by $77 million, $38 million and iV.1d, respectively, fcr the year 1')85. 1986-1971 19.1~a 19.5a'o

The Components of Success Purchasing.. . only the highest ctuality agricultural products. Promotion.. . i~ffective advertising, ompelling promotion. , onsurner satis£action is our ul.tnn.ate goal. 1Vlanufacturing.. . modern facilities using advanced process technologies. assuring esthetic appeal with real consumer benefits. >Dlstrl.butlon.. . depth, market- y-market, Aore-by-store. .

To Our Stockholders: Iit 1986, Philip Morris Compa- nies Inc. increased its operating revenues, net earnings, and earnings per share b,r' 59.2%, 17.7%, and 18.3%, respectively. The large revenues gain includes a full year of the operat- ing results of General Foods which was acquired in November 1985 and for which only two-month results were recorded in 1985. The inclusion of General Foods' results, together with the interest costs and amortization of goodwill associated with its acquisition, had no dilutive effects on the earnings of Philip Morris Com- panies Inc. in 1986. Your Board of Directors raised the dividend on Philip Morris common stock twice in 1986, for a combined increase of 50% over the dividend rate pre- vailing at year-end 1985. These actions reflect not only our Operating Revenues by Product Line  Other I.7 Beer  Food Products  Tobacco• Bil lions of Dollars 24.5 82 83 84 85 86 strong performance and confi- cfence in our futttre but our continuing effort to add to the value of your investment in our company. In 1986, we made real progress in each of our core businesses. • Our worldwide cigarette sales again increased by over 18 bil- lion units, and we gained share in both the U.S. and interna- tional markets. The Marlboro brand contributed substantially to these results. • At General Foods, except for coffee, food volumes increased and strong gains were realized in key categories. U.S. coffee sales volume declined as a result of much higher prices for coffee following a short crop in Brazil. Capital expenditures in support of improved technology, cost savings, and increased capacity were the highest ever. Operating Income by Product Line  Other 63 Beer  Food Products  Tobacco Bil lions of Dollars 4.2 3.6 3.0 2.4 1.8 1.2 .6 0 II 82 83 84 85 86 • Miller Brewing Company increased volume and market share, and new Miller Genuine Draft was successfully intro- duced nationally. We continued our restruc- turing of'the company in 1986. The Miller Brewing Company and Philip Morris Credit Cor- poration (PMCC) were both ntade first tier subsidiaries of Philip Morris Companies Inc. Mission Viejo Realty Group became a subsidiary of PMCC to improve focus on its financial performance and to help its competitive position in the real estate industry. We completed the divestiture of substantially all of the world- wide franchise business and other assets of The Seven-Up Company. The divestiture of Seven-Up had no impact on our 1986 results. The Administration and Net Earnings Billions of Dollars 1.4 r 1.2 ~, 1.0 ' ® .8 ® ®, .4 ® ® ®' E.Ft n ~ .2 i ® " CJ't ly 82 83 84 85 86

Congressional initiatives that resulted in the Tix Reform Act of 1986 were supported by your eompan}; which expects to benefit from a more equitable distribution of the corporate tax burden. As tax reform was debated in the Congress, we vigorously opposed proposals to increase excise taxes. These taxes are regressive and fall most heavily on those least able to pay. The doubling of the fed- eral cigarette excise tax_only four years ago reduced industry sales, lowered employment, and did much damage to farmers and the tobacco growing pro- gram. We expect pressures for increased excise taxes again in 1987, and we will work with others to oppose them and to demonstrate their detrimental effect. Jacques G. Maisonrouge, for ten years a Director of Philip Morris, resigned from the Board in 1986 in order to become the Directeur General de 1'Industrie with the government of France. We wish to thank him for his long and valuable service to our company. At year-end, Philip L. Smith was appointed Chief Executive Officer of General Foods, suc- ceeding James L. Ferguson, who had held that position since 1973. We are fortunate that Mr. Ferguson's counsel will remain available to the com- pany in his continuing position as Chairman of the Executive Committee of General Foods and as a Director of Philip Morris Companies Inc. The Outlook As we look to 1987 and the future, we are confident of pro- gressing toward our ambition to be the most successful corpora- Dividends Declared Per Share Dollars 2.45 2.10 0 1.75 1.40 .70 .35 82 83 84 85 86 tion in the world in our chosen fields. We will measure that suc- cess not only against that of our competitors but against our aim to improve on our own past performance. We plan to excel in increasing our physical volume and market shares, earnings per share, financial returns, and total return to our stockholders. In general, we aim to be the leader in product quality and in innovation as we produce, distribute, and market our products. Lastly, we intend to continue to attract and retain the highest quality people without whom our plans and ambitions could not be achieved. Our past prog- ress depended on them, and I thank them for the hard work and dedication which will help assure our future success. Hamish Maxwell Chairman of the Board and Chief Executive Officer 3 I

Review of the Year Tobacco Philip Morris U.S.A. cigarette uuit sales were up 0.5% to 214.6 billion units in 1986 while oper- ating income rose 15.6% to $2.4 billion and operating revenues increased 6.7%. Total industry volume declined 2.1% to 582 billion units. Philip Morris U.S.A:s share of the market rose to 36.9%. Marlboro, whose volume grew to 134.2 billion units, was again the nation's largest selling brand, a position it has held for 12 years. Virginia Slims Lights 120's helped the total Virginia Slims brand grow by 1.6%. The value category-generic and lower price name brands- increased to 8.9% of the industry in 1986. Philip Morris U.S.A. entered that segment in 1986 with Cambridge Lights and Players Lights 25's and, by year-end, had built an 11.6% share of the category. Despite the growth of this segment and our participation in it, we remain committed to the high- margin segment of the industry which represented 97% of our unit sa es: Our brands continued to benefit from improved visibility and availability at retail. We have redeployed our sales force, implemented new merchandis- ing and promotion programs, and strengthened distribution channels. As a result, we gained greater share of retail inventory, increased our display space in supermarkets and other high- volume outlets, and substan- tially improved the placement of our display fixtures in all other retail categories. We continue to invest in facility and equipment improvements consistent with the corporation's capital expen- diture programs to insure that our cigarette manufacturing facilities remain the best in the industry. As has been true historically, American-grown leaf tobacco is responsible for the superior U.S. Cigarette Industry Unit Sales  U.S. Cigarette Industry Unit Sales . Philip Morris Share of the U.S. Industry (%) Billion Units % 630 42 oiulllu 36 alli 360 taste and quality of our ciga- rette blends. A new federal price support program, The Tobacco Program Improvement Act, was signed into law in 1986. As provided in the Act, Philip Morris and three other U.S. cigarette manufac- turers made commitments to buy more than 1.1 billion pounds of surplus tobacco which had accumulated in the growers' cooperatives from 1976 to 1984. The purchase of these tobaccos by Philip Morris and others relieves growers of the considerable expense of carry- ing these surplus inventories and should clear the way for the program to operate more efficiently. Early indications from the 1986 flue-cured and burley auc- World Cigarette Industry Unit Sales Excluding U.S.A.  World Cigarette Industry Unit Sales (Excluding U.S.A ) . Philip Mortis Share of the World Market (4'0) Billion Units % 4900 10.5 4200 - 19.0 4

~ tion markets arc in line with the expectations for the new pro- gram. «nly 55 million pounds of the Rue-cured.crop were unsold and taken by the coop- eratives compared with 132 mil- lion pouiiels in the prior year. Burley marl.et results were similar. Despite our major commit- nucnt to lutrchase part of the grow~~rs' surplus stocks, we bought actively in the 1986 crop auction tnarkets. In 1986, there were calls for a national ban on the advertising and promotion of cigarettes. We believe that such proposals ignore the constitutional rights of our industry. Further, they seek to establish a precedent that could have very damaging consequences for many other products which are also legally sold but which periodically attract public or legislative criticism. We have spoken out vigor- ously against such prohibition, stressing the protection of com- mercial free speech under the First Amendment. And to focus attention on this crucial issue, Philip Morris Magazine spon- sored a nationally-advertised essay competition which drew thousands of entries. With regard to another issue, anti-smoking forces continued to push for workplace and pub- lic smoking restrictions based on claims of health hazards from cigarette smoke in the air. These claims are made despite deficiencies in the scientific data and a need for more research which are acknowledged even by our critics. We continue to believe that the weight of scien- tific evidence indicates that exposure to cigarette smoke causes no health impairment to a healthy nonsmoker. Philip Morris International's 1986 volume of 292.3 billion units was its highest ever, a gain of 6.3% over 1985. In addition, our cigarette export volume was extremely strong with unit vol- ume up 14%, and we increased our total share of the profitable cigarette export market to a record 64%. Our exports of cigarettes and tobacco made a gross contribution of $1.2 billion to the U.S. balance of payments in 1986. International's operating revenues increased 41.2% over 1985, and operating income was $501 million, up 15.2% over 1985. International's volume improvement, together with favorable currency movements, would have produced a higher earnings gain had it not been for the decision to increase marketing spending in several high-potential markets. Marlboro accelerated its his- torical pattern of growth during 1986. It is a strong brand entry in most international markets and is one of the world's best- known trademarks. In many markets, the successful intro- duction of Marlboro Lights has added momentum as well as volume and market share to the Marlboro brand family. In addition, our other inter- national brands continue to perform well, notably Merit in Italy, Chesterfield in Spain and Argentina, L&M in Lebanon, and Lark and Parliament in Japan. The Philip Morris brand family continues to make prog- ress in Western Europe and in Japan. Regional and national brands such as Peter Jackson in Australia, Lider in Ecuador, 5

Multifilter in Italy, Mistura Fina in Brazil, and Nacional in the Dominican Republic maintained or improved their positions. We continue to increase sales and gain share in the European Economic Community (EEC). Unit volume was up 6.5%, and our aggregate share increased to approximately 19% of the total EEC market. In Germany and France, our market shares rose to 23.6% and 18.7%, respectively, on strong volume gains. Our share of the Italian market increased. We added volume and gained market share in Spain. Elsewhere in Europe, we improved in both volume and share in the important Swiss market and increased share in Finland and Sweden. Our export business to Tur- key achieved superior results. Volume was up 79% over the previous year, and our share of total market increased by 3.7 percentage points. The industry was down in the Gulf countries of the Midcllc East ilueto the deteriorating <~couoinic clinnate. Despite this, PhiLip 1lorris brands increased share in the major markets within the region. In Canada, our subsidiary, Benson & Hedges (Canada) Inc., merged with Rothmans of Pall Mall Limited. The new company, Rothmans, Benson & Hedges Inc. (in which our direct holding is 40%), has a 30% share of the market and is well positioned to meet the future challenges of the highly compet- itive Canadian environment. Trading was difficult through- out Latin America due to depressed economic conditions. We achieved sales and share increases in most markets in which we operate, which will enhance earnings as the econo- mies in the region improve. We made particularly good progress in Argentina, Mexico, Ecuador, and the Dominican Republic. Marlboro and several of our other international brands performed well throughout the region. Cigarette volume increased in Australia, and our market share improved by more than two share points. We are restructuring Lindemans, our wine business, and consolidating our operations at the Karadoc Winery in Victoria. This restruc- turing will place Lindemans on better financial footing and improve its profit performance in the future. The strong and expanding economies in Asia offer espe- cially attractive growth oppor- tunities. In Japan, our four brand families command a 75% share of the import segment. We are well positioned to take advantage of the expansion of the imported segment of the Japanese market which will result from the suspension of tariffs on imported cigarettes as of April 1987. In Hong Kong, our brands continued to gain volume and market share, and we increased volume in the Philippines. The suspension of the tariffs in Japan and the recent opening of the market in Taiwan are the direct result of effective negotiations by the Office of the U.S. Trade Representative. 6

General Foods Corporata®n General Foods' operating income increased 7.2% to $740 million from the full year 1985 on higher revenues of $9.7 bil- lion in 1986. Overall unit volume declined slightly in 1986 due to a decrease in the U.S. coffee mar- ket. Several key franchises in the United States, however, posted important gains and, internationally, volume growth was strong across most product lines and markets. New product activity contin- ued strong, particularly in ineals, beverages, desserts, baked goods, and coffee. U.S. Grocery Business Volumes in this sector, which contributes approximately half General Foods Corporation Operating Revenues 1982• 1984 data are for 1983•1985 fiscal years, ended approximately March 31. 8ii0ons of Dollars 10.5 9.0 7.5 s.0 4.5 3.0 1.5 0 82 83 84 85 86 of General Foods' operating income, were about even with those of 1985. Our bakery business had an excellent year. Volumes, sales, and earnings moved ahead in all principal markets. New products contributed to the renewed growth of Entenmann's business in the Northeast. Expansion into the Southeast, Midwest, and, most recently, California continues to be vig- orous, keeping Entenmann's the clear national leader in fresh sweet baked goods. Oroweat specialty breads also lead their markets and likewise increased market strength in 1986. Post cereals achieved gains in both volume and earnings. Sev- eral key brands-Natural Raisin Bran, Grape-Nuts, Fruit & Fibre, Pebbles, and Super Gold- General Foods Corporation Operating Income 1982-1984 data are for 1983•1985 fiscal years, ended approximately March 31. Millions of Dollars 840 82 83 84 85 86 en Crisp-increased or main- tained market share. We are committed to continued product development in this market where the potential for growth is good. We made significant progress in the development of new pre- pared convenience meals, one of the fastest growing segments in the food industry. Following a successful test market, Birds Eye Fresh Creations premium frozen dinners are expanding to a number of new markets. Culinova, a unique line of refrigerated gourmet entrees, and Impromptu, a line of shelf- stable meals that require no freezing or refrigeration, are also in test market. In addition, as part of a pro- gram to create a broad line of Italian foods, Ronzoni's new frozen entrees were expanded into the New York market fol- lowing a successful test in Florida. General Foods' position in the dessert business continued to benefit from the strength of the Jell-O brand name. Jell-O Fruit Bars were intro- duced nationally and, together with Jell-O Pudding Pops and Gelatin Pops, helped us main- 7

tain share leaderslril) in the vrowin, frozen uovelty business. New Jell-O ready-to-eat des- serts continue to do well in test market. Worldwide Coffee & International Products This sector accounts for approximately one-third of General Foods' operating income. It increased its earnings and posted good volume gains in key international businesses despite a decline in its coffee volume caused by price volatil- ity which disrupted normal consumer and trade buying patterns, especially in the United States. We introduced Maxwell House Private Collection, a line of premium coffees offered in whole bean and ground forms. Offered last year in selected markets, Private Collection is the first nationally distributed product in the gourmet coffee category, the fastest growing segment of the U.S. market. New programs are contribut- ing to share growth in interna- tional markets. We introduced preiuiutn instaut coffees in C<uia(la, the Unitecl Kinrdont, and ['rance. And in Korea, where the coffee market has been developing rapidly, our volume continues its double- digit annual growth. Our other international busi- nesses, including Hostess snack foods in Canada, Simmenthal meats in Italy, and Hollywood chewing gum in France, per- formed well in 1986. In Brazil, both our Kibon ice cream fran- chise and our joint venture in the powdered beverage business were exceptionally strong. General Foods also enhanced its international business through acquisition and joint ventures. Early in 1987, we pur- chased Kenco Coffee Company Limited, a well-established sup- plier of ground coffee in the United Kingdom. In Denmark, General Foods and Karat Kaf- fee A/S have formed a joint venture to produce and market a variety of coffee products. In Ireland, we acquired Cressett Foods, a manufacturer of con- venience meals, our first such venture in Europe. In Canada, we purchased Laurentide, a Quebec-based snack food company, to complement our Hostess business. We had a very good year in our food service businesses based largely on gains in insti- tutioual coffee sales. In addition to coffee, we sell desserts, bev- erages, and a variety of other grocery items to hotels, restau- rants, schools, hospitals, and other institutions. Processed Meats The company's processed meat business, primarily the Oscar Mayer and Louis Rich brands, contributed approximately 17% of General Foods' operating income in 1986. Volumes, sales, and earnings increased despite some disruption in produc- tion due to temporary plant shutdowns during labor negotiations. However, these negotiations resulted in the conclusion of satisfactory long-term labor contracts. Louis Rich processed turkey products achieved good volume growth across most product lines. These results reflect the trend to white meat consump- tion and the increased national recognition of the Louis Rich brand. Oscar Mayer brand bacon, hot dogs, and luncheon meats continue to rank as best sellers nationally.

Beer `liller 13rewin g Company's operatin,r reNcnues were up 4.8% and uperating income was up 16.7% in 1986. Shipments of 38.7 million barrels were up 4.4%, the first significaut gain in four years, and our barrelage increase resulted in a gain in market slfare. Miller Lite, the second best- selling brand in the United States, increased volume and continued to lead the low calorie segment. New Miller Genuine Draft was successfully intro- duced nationally and very sig- nificantly slowed the volume docline of the Miller High Life brand family. Lowenbrau had a declitfe in volume but held its share of the super-premium segrnent. Meister Brau and U.S. Beer Industry Barrel Shipments Federal Tax Paid Withdrawals ; U.S. Beerlndustry Barrel Shipments . Miller Share of U.S. Industry (%) Milwaukee's Best, our entries in the popular-price category, both strongly increased their volume with resulting share gains. During 1986, we introduced new products into test market in the United States and suc- cessfully began selling Miller Lite under license in the United Kingdom. Financial Services and Real Estate Operations In 1986, Philip Morris Credit Corporation's (PMCC) financ- ing revenues rose 74% to $162 million, and net earnings rose over 100% to $70.9 million. These results include the equity income since July 1986 of Mis- sion Viejo Realty Group Inc. (MVRG), PMCC's real estate subsidiary. Our after-tax return on invested capital was 25% in 1986, up from 16% in the prior year. PMCC's growth resulted pri- marily from customer financing operations and leveraged lease investments. In addition, cumu- lative gains on PMCC's lever- aged lease portfolio, resulting principally from the Tax Reform Act of 1986, and the inclusion of General Foods Credit Corporation and MVRG, also contributed to increased earnings. In 1986, we invested $343 million in leveraged leases, bringing the total equipment value of our portfolio to over $3 billion. We also continued to provide financing services to customers of Philip Morris' subsidiaries. Operating revenues for MVRG rose significantly in 1986, and net earnings were 45% higher than in the prior year. MVRG's performance was based on strong demand for land from builders and a good residential housing market that reacted to lower mortgage interest rates. We continued to fund PMCC's operations through the issuance of commercial paper and long- term debt in domestic and international capital markets. In sum, Ph4 Morris Compa- nies Inc.'s progress in 1986 ggives us conj'idence that we can con- tinue to build upon our strong base to achieve superior results in the future. 9

Purchasing... only the highest quality agricultural products. ur purchasing systems assure the acquisition of adequate supplies of the finest raw materials. Quality control personnel, using the most advanced testing equipment and stringent control procedures, are an integral part of our manufacturing processes. The highest standards are maintained from raw materials to finished goods. Philip Morris begins with quality to deliver quality.

1VJ..eeting or exceeding standards for speed and costs while increasing quality levels is efficient manufactur- ing. To keep costs down, we design or acquire the most advanced process technologies. Combined with effec- tive systems engineering and a posi- tive personnel environment, these factors are key to Philip Morris' success- ful manufacturing operations. At Philip Morris, machinery counts but more important are the people who run it.

Pacliapng,•• Serviceable package design is f h k' d e A6thou h e t assuring esthetic appeal with real consumer benefits. designers are engaged to assure visual appeal. At Philip Morris, p. g ar more an s sn appearance is of paramount impor- tance to effective marketing, the design must guarantee the delivery of quality to the consumer. Cartons and cans, cases and packages must meet the rigorous tests of transit, storage, and shelf life. The most modern and exhaustive testing is applied to insure ~ consumer satisfaction while the finest a package design begins with the consumer in mind.

Distribution. in depth, mar•ket- bY-market, store-bY-stoY°e • he distribution process begins as goods move out of our plants. Our shipment of products is carefully managed in order to eliminate exces- sive inventories or, worse yet, out-of- stock conditions. The flow of our products is overseen through every stage of the system-from ware- house to retail, from the back room to the shelf. Philip Morris people work to guarantee a fair share of exposure, thus assuring availability and visibility in every retail outlet. At Philip Morris, distribution is the delivery of consumer satisfaction.

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Promotion... effective advertising, compelling promotion. Successful marketing is the effective use of every element of the marketing mix in order to induce consumer awareness, comprehension, trial, and repeat sales. The tools are varied and conditions differ froan product to product, but one rule is an imperative at Philip Morris: only the best... advertising that's compelling and promotions that fit the interests of our consumers. At Philip Morris, ~,effective marketing balanced ;with quality products leads to our ultimate goal-consumer satisfaction.

Management's Discussion and Analysis of Financltal Condition and Results of Operations Financial Review General Net earnings for 1986 increased 17. 7% to ti1.5 billion. The 1986 results include the first full year of operating results of General Foods Corporation ("Gerieral Foods") which was acquired in November 1985. The capital structure of the company reflects the two-for-one common stock split-up distributed in Apri11986. Except as otherwise noted, all per-share amounts have been restated to reflect the split-up. Earnings per share reached $6.20 in 1986, up 18.3% from 1985. Dividends declared in 1986 increased 23.8% to $2.475 per share ($590 million) from $2.00 per share ($479 million) in 1985. The quarterly dividend declared in November 1986 was at an annual rate of $3.00 per share, an increase of 50% over November 1985. Return on average stockholders' equity was 28.4% in both 1986 and 1985. The company's return on average assets was 10.6% in 1986, down from 12.8% in 1985 due principally to the inclusion of General Foods for a full year. In 1986, 1.9 million shares of common stock were repur- chased after the common stock split-up at an average cost of $72.53 per share. In 1985 and 1984, the company repurchased 6.6 million shares of its common stock at a pre-split average cost of $79.35 per share (13.2 million shares at $39.68 per share after giving effect to the common stock split-up). Sub- stantially all of the shares repurchased in 1985 and 1984 were retired prior to the common stock split-up. ® Stockholders' Equity (Year•End) . Net Return on Average Stockholders' Equity (%) Biliions of Dollars 5.6 28 4.8 ' 24 4.0 20 3.2 16 2.4 12 1.6 .1111111118 .a 4 0 1111111111D 77 78 79 80 81 82 83 84 85 86 % ® Total Assets (Year•End) ~ Net Return (Before Net Interest) on Average Total Assets (%) Bitlions of Dollars % 17.5 ~ 14 2.5 0 1111111111. 77 78 79 80 81 82 83 84 85 86 Debt and Interest At December 31, 1986, the company's debt-to-equity ratio was 1.22 to 1.00, down from 1.69 to 1.00 at December 31, 1985. In 1986, the company reduced total debt by $1.1 billion to $6.9 billion with funds generated from operations and from the sale of The Seven-Up Company ("Seven-Up"). At December 31, 1986, approximately $1.2 billion (17%) of the company's total debt was sensitive to interest rate fluctua- tions, compared with 39% at December 31, 1985. The com- pany's average interest rate on total debt during 1986 was 9.3% versus 9.9% during 1985. At year-end 1986, the average interest rate on total debt was 8.8%. Credit facilities totaling $7.8 billion are maintained with var- ious lenders to support commercial paper borrowings for sea- sonal and other needs of the company's operations. Substantially all of these facilities have maturities beyond one year. Of these facilities, $6.8 billion were unused at December 31, 1986. Interest expense more than doubled in 1986 to $779 million. The increase was due primarily to the first full year of interest on the General Foods acquisition debt. Interest coverage (earnings before interest and taxes divided by interest) was 4.61 in 1986 compared with 7.76 in 1985. The company maintains an "A-1/P-1" rating in the commer- cial paper market and a strong "A" credit rating for long-term obligations. Total debt increased by $5.4 billion in 1985 due principally to financing of the General Foods acquisition and $1.0 billion of outstanding General Foods debt. The acquisition financing consisted principally of a $3.6 billion borrowing under a  Total Debt (Year•End) ~ Ratio of Total Debt to Stockholders' Equity (vear•End) Billions of Dollars . Ratio 8.4 3.5 7.2 ' 3.0 6.0 ' ' 2.5 4,8 ~ ' 2.0 3.6 . .  1.5 2.4 . 1.0 1.2 .I 1 115 ', 0120 .'rIt11111.5 IllIlIIlli0 ~o IIIIIIIIt10 77 78 79 80 81 82 83 84 85 86 ~J 77 78 79 80 81 82 83 84 85 86  Interest Expense ~ Interest Coverage (Earnings Before Interest and Taxes D'mded by Interest) Millions of Dollars 840 10.5 720 1 9.0 ~ 240 . 3.0 Coverage 20

revolving credit facility and $1.4 billion in other short-term debt. Prior to the end of 1985, the company refinanced $1.5 billion of the debt by issuing long-term fixed rate debt and also entered into $700 million of interest rate swap and cap agreements. During 1986, the company issued $1.8 billion of long-term debt, of which $1.1 billion was to refinance acquisition debt, 5372 million was to refinance short-term debt underlying the 1985 interest rate swap and cap agreements, and $250 million was to refinance high-coupon debt. Long-term debt issued in 1986 included $885 million in the United States, $500 million in the Eurodollar market and the equivalent of $403 million of foreign currency denominated borrowings. The company entered into forward exchange agreements to hedge its exposure on the 1986 foreign currency denominated borrowings. Funds Provided and Used In addition to funds related to capital and debt activities previously discussed, other funds provided and used were as follows. Funds Provided Consolidated funds from operations increased $442 million (24.9%) to $2.2 billion in 1986 due primarily to increased earnings and noncash charges for depreciation and amortiza- tion. The increase in noncash charges for depreciation and amortization was due principally to the inclusion of the first full year of operating results of General Foods. In 1985, funds from operations increased 14.6% over 1984 due primarily to increased earnings. Total funds provided in 1986 included $487 million of work- ing capital generated principally from the sale of substantially all of Seven-Up. In 1985, total funds provided included $169 million of working capital generated from the sale of the Philip Morris Industrial operations. Since the company is a holding company, one of its principal sources of funds is dividends from its subsidiaries. Philip Morris Incorporated ("PMI"), comprising the company's tobacco operations, has certain debt agreements that restrict its ability to pay cash dividends and to make other distribu- tions with respect to its common stock. At December 31, Foreign Currency Translation The company's consolidated international operations account for 26% of its operating revenues, 10% of its operating profit and 20% of its identifiable assets. The principal consolidated foreign operations are in Europe and use local currency as the functional currency. Currency translation adjustments increased stockholders' equity by $139 million in currency gains for 1986 as the dollar continued a weakening trend that began in 1985. Currency translation adjustinents resulted in a $54 million increase to stockholders' equity in 1985 and a decrease of $120 million during 1984 when the dollar was very strong. The company continually monitors its foreign currency exposure and acts to minimize such exposure, when deemed prudent, through various hedging transactions. 1986, approximately $1.5 billion of PMI's consolidated earn- ings reinvested in its business was free of such restrictions. None of the company's other subsidiaries' long-term debt agreements limit their ability to pay cash dividends or to make other distributions with respect to their common stock. The company expects that funds from operations and avail- able credit facilities will be sufficient to meet the needs of the business. Funds Used Capital expenditures increased $331 million to $678 million in 1986 due primarily to the inclusion of the first full year of General Foods. Similarly, the 16% increase in capital expenditures for 1985 was attributable to capital expenditures of General Foods from the date of its acquisition. Capital expenditures are estimated to be $900 million in 1987 and $3.1 billion for the years 1988-1991, of which approximately $500 million and $2.0 billion, respectively, relate to General Foods. In 1986, the company elected pursuant to Section 338 of the Internal Revenue Code to "step up" the tax bases of General Foods' assets and paid the resulting tax. The most signifi= cant effect of the election was to increase the carrying value of domestic property, plant and equipment by $508 mil- lion. In addition, certain intangibles became deductible for tax purposes. The principal use of funds in 1985 was the payment of $5.6 billion to acquire General Foods, $718 million of which was working capital acquired. 21

Operating Results 1986 Compared with 1985 Operating revenues for 1986 increased $9.4 billion (59.2%) and operating profit, as definedfor segment reporting, increased $938 million (34.9%). The increases reflect the inclusion of the first full year of operating results of General Foods and growth in the tobacco and beer operations, partially offset by the exclusion of Seven-Up and Philip Morris Industrial. Net earnings increased by $223 million (17.7%) over 1985, due principally to increased operating profit, partially offset by interest expense associated with the acquisition of General Foods as well as a higher effective income tax rate. Earnings in 1986 included $106 million of goodwill amorti- zation, substantially all of which related to the acquisition of General Foods. Goodwill amortization of $28 million in 1985 included $16 million amortization of General Foods goodwill from the date of its acquisition. Interest expense, net increased by $443 million in 1986 due principally to General Foods acquisition borrowings. In 1986, other deductions, net increased by $39 million. In 1985, this line item included a $77 million gain on the sale of the Philip Morris Industrial operations and a $50 million write-down in anticipation of the sale of Seven-Up. The company's effective tax rate in 1986 was 47.5% com- pared with 46.1% in 1985. The increase resulted from the non- deductibility of certain intangibles and other items relating to the acquisition of General Foods and from the impact of cer- tain provisions of the Tax Reform Act of 1986 (the 'Act"). The Act repealed investment tax credits retroactive to January 1, 1986. Accordingly, the company's 1986 effective tax rate reflects only investment tax credits for capital additions con- tractually committed at December 31, 1985. Other provisions of the Act that will affect the company in future years include changes in the calculation of depreciation for tax purposes, changes in the foreign tax credit provisions and reduction of corporate income tax rates. The impact of the Act on 1986 net earnings was not significant. Based on preliminary analy- sis, it is anticipated that changes in the tax law will have a positive impact on both earnings and cash flows for 1987 and future years. In 1986, the company changed its method of determining expense for domestic pension plans to conform to the require. ments of Statement of Financial Accounting Standards No. 87 ("SFAS 87"). The change increased earnings before income taxes, net earnings and earnings per share by $76 million, $39 million and $.16, respectively. The decrease in pension costs reflects changes in certain actuarial assumptions and the amortization of the unrecognized net gain of $429 million at the date of adoption, January 1, 1986. Future pension costs are expected to be more volatile due to certain requirements of SFAS 87. Changes in pension costs resulting from that volatility are not, however, expected to be as great as the initial decrease in pension costs resulting from the adoption of SFAS 87. Based on the current overfunded status of the plans, the company anticipates that no significant contributions will be required for the next several years. Management believes that inflation has not had a significant impact on the company's results of operations as reported in the accompanying financial statements. 1985 Compared with 1984 In 1985, operating revenues increased $2.2 billion (15.6%) and operating profit, as defined for segment reporting, increased $406 million (17.8%). The increases were due primarily to growth in tobacco operations and to the inclusion of the operating results of General Foods from its date of acquisition. In 1985, net earnings increased by $366 million (41.3%) over 1984 due to increases in operating profit and a write-down in 1984 of the brewery in Trenton, Ohio, which reduced net earn- ings by $146 million. In 1985, interest expense, net was $38 million (14.3%) higher than 1984 due principally to borrowings to finance the acquisition of General Foods. The company's effective income tax rate in 1985 was 46.1% compared with 44.7% in 1984. The increase was due primarily to higher non- deductible expenses. 22

Operating Results by Business Line Qperating revenues and operating profit, as defined for seg- ment 1•eporting, increased 59.2% and 34.9%, respectively, over 1985. pOperating revenues of tobacco operations were 50% of total revenues compared with 66% in 1985, due to the inclusion of the first full year of the operating results of General Foods in 1986. Tobacco Tobacco operations continued to show strong gains in operat- ing revenues and operating profit, which in 1986 increased 20.4% and 16.5%, respectively. Philip Morris U.S.A. had a 6.7% increase in revenues in 1986 due primarily to price increases. Philip Morris U.S.A. increased its unit volume by 0.5r/o even though the domestic cigarette industry unit volume declined by 2.1% in 1986. As a result, Philip Morris U.S.A. increased its unit volume to 214.6 billion units for a market share of 36.9% in 1986 compared with 35.9% in 1985. Marl- boro increased its unit volume by 0.7% to 134.2 billion units. Philip Morris International increased its revenues by 41.2% due primarily to increases in unit volume and currency trans- lation and the consolidation of two majority-owned subsidi- aries previously reported on the equity method. Total unit vol- ume of Philip Morris International increased 6.3% over 1985. Currency translation increased operating revenues by $877 million in 1986. The increase in operating profit is due princi- pally to higher revenues and currency translation, partially offset by higher marketing expense. In 1985, revenues and operating profit from tobacco opera- tions increased 7.5% and 14.0%, respectively. The increase in revenues was attributable to domestic price increases and international volume gains, partially offset by $177 million due to currency translation. Domestic cigarette industry volume declined 0.8% from 1984. Philip Morris U.S.A. increased its unit volume 1% and market share from 35.3% to 35.9%. Philip Morris International total unit volume increased 6.5%. The increase in operating profit was due to increased revenues, partially offset by the unfavorable impact of cur- rency translation. Food Products Revenues and operating profit for 1986 reflect the inclusion of General Foods' operating results for a full year. To facilitate a year-to-year analysis, this discussion addresses changes in General Foods' 1986 operations compared with operating results of calendar year 1985. Food products revenues increased 7.1% in 1986 to $9.7 bil- lion, due primarily to higher coffee prices, resulting from higher green bean costs, and the weakening of the U.S. dollar. Total unit volume declined slightly, due primarily to lower cof- fee volume largely influenced by coffee price volatility which disrupted consumer and trade buying patterns. Excluding coffee, domestic unit volume increased in 1986, principally in processed turkey products, baked goods and cereals. Interna- tionally, growth was strong across most product lines and mar- kets. Operating profit, as defined for segment reporting, decreased 3.9% to $622 million. However, excluding goodwill amortization, operating profit increased more than 7%. The increase reflects higher revenues and currency translation, partially offset by higher green bean costs and marketing expenses. Beer Beer revenues in 1986 increased 4.5% over 1985, primarily attributable to a 4.4% increase in barrel volume. This increase was higher than the 1.9% projected industry growth for tax paid withdrawals. Market share rose to 21.7% from 21.2% in 1985. Operating profit increased 16.7% due to higher revenues and lower cost of products sold, partially offset by higher mar- keting expenses related to the introduction of new brands. In 1985, revenues were slightly lower than 1984 d'ue to a 1.1% decline in barrel volume. Operating profit increased 16.7% due primarily to lower cost of products sold, partially offset by higher marketing expenses. 23

Selected Financial Data-Fifteen-Year ReVteW (in millions, except per share amounts and employees) -~ ! 1986 1985 1984 1983 1982 Summary of Operations: -- j ------------------- Operating revenues 525,409 15,964 13,814 12,976 ---- 11,586 United States export sales 1,193 923 925 970 978 Cost of sales: --- Cost of products sold 11,039 6,318 5,517 - 5,343 - ------- 5,315 Federal excise taxes 2,653 2,049 2,041 1,983 1,180 Foreign excise taxes 2,075 1,766 1,635 1,527 1,435 Operating income 3,735 2,768 2,334 1,946 1,704 Interest expense, net 747 304 266 220 252 Earnings before income taxes 2,811 2,329 1,607 1,585 1,300 Pre-tax profit margin 11.1 % 14.6% 11.6% 12.2% 11.2% Provision for income taxes $ 1,333 1,074 718 681 518 Net earnings 1,478 1,255 889 904 782 Earnings per share 6.20 5.24 3.62 3.58 3.11 Dividends declared per share 2.475 2.00 1.70 1.45 1.20 Weighted average shares 239 240 245 252 251 Capital expenditures $ 678 347 298 566 918 Annual depreciation 514 367 341 294 250 Property, plant and equipment (net) 6,237 5,684 4,014 4,381 4,178 Inventories 3,836 3,827 2,653 2,599 2,834 Working capital 1,432 1,926 1,289 1,117 1,989 Total assets 17,642 17,429 9,339 9,667 9,622 Long-term debt 5,945 7,331 2,059 2,515 3,746 Total debt 6,912 8,009 2,588 3,075 3,746 Deferred income taxes 994 872 784 737 565 Stockholders' equity 5,655 4,737 4,093 4,034 3,663 Funds from operations 2,214 1,772 1,547 1,349 1,160 Net earnings reinvested 888 776 472 538 480 Common dividends declared as % of net earnings 39.9% 38.1% - 46.8% 40.5% 38.6% Book value per common share $ 23.77 19.85 16.86 16.14 14.55 Market price of common share high-low 78-43'/a 475/s-36 415/s-31 36'/s-27 337/8-22 Closing price year-end _• . - ?1'/a 44'/a 403/s 35'/8 30 Price/earnings ratio year-end 11 8 11 10 9 Number of common shares-outstanding year-end 238 239 243 250 252 Number of employees 111,000 114,000 68,000 68,000 72,000 Operating companies' income is income before corporate expense, interest and nonoperating income and deductions. The amortization of previously capitalized interest is included in operating companies' income. All per-share amounts have been adjusted to reflect the two-for-one common stock split-up distributed on April 10, 1986 to stockholders of record on March 14,1986. General Foods Corporation was acquired in November 1985 in a transaction accounted for as a purchase. Accordingly, consolidated operating results shown above include the operating results of General Foods Corporation after October 1985. 2500011376 24

Philip Morris Companies Inc. and Subsidiaries ~ . 1981 1980 1979 1978 1977 1976 1975 1974 1973 1972 ~' L0,7 22 9,650 8,149 6,633 5,202 4,294 3,642 3,011 2,602 2,131 ~ 834 702 521 424 316 211 158 132 108 92 ~ ~ 5.024 4,447 3,656 3,072 2,402 1,967 1,657 1,290 1,061 833 ~ 1.169 1,105 1,037 961 862 778 686 620 559 495 ~ 1.411 1,389 1,122 703 490 381 392 349 335 228 1,434 1,261 1,167 961 782 634 492 403 329 287 243 202 189 137 95 97 96 79 47 34 ~ '1,068 924 895 746 626 472 361 298 256 230 ~10.0% .9.6% 11.0% 11.2% 12.0% 11.0% 9.9% 9.9% 9.8% 10.8% 408 375 387 337 291 206 149 122 107 105 660 549 508 409 335 266 212 176 149 124 2.64 2.20 2.04 L69 1.40 1.12 0.91 0.79 0.68 0.59 1.00 .80 ' .625 .513 .391 .288 .231 .194 .169 .158 250 249 249 241 239 238 234 223 219 212 1,019 751 629 566 280 220 245 216 175 120 211 178 133 106 79 65 50 38 30 27 3,583 2,806 2,214 1,738 1,202 994 851 660 510 373 _ 2,922 2,499 2,235 2,189 1,818 _ 1,658 1,448 1,269 1,009 801 t,798 1,662 1,728 1,585 1,416 _ 1,202 891 725 515 525 9,115 7,302 6,322 5,608 4,048 3,582 3,134 2,653 2,108 1,701 3,498 2,597 2,447 2,147 1,427 1,248 918 768 500 480 3,804 2,800 2,507 2,372 1,564 1,526 1,443 1,239 947 681 ` 411 303 220 • 150 104 78 71 67 47 36 3,234 2,837 2,471 2,115 _ 1,690 1,430 1,228 975 815 696 976 784 703 577 444 348 261 211 178 151 408 350 352 284 254 197 157 132 111 90 37.9% 36.3% 30.6% 30.6% 27.9% 25.7% 25.7% 24.8% 25.0% . 27.2% 12.89 11.37 9.92 8.51 7.05 6.01 5.17 4.26 3.68 3.19 27i/z-21 24i/a-14t/z 193/s-155/a 19i/a-14 161a-127/s 15'/a-12'/z 143/a-101/a 153/s-81/z 171/s-12t/a 143/a-81/z - 243/s 215/s -• -18 175/a 15'/z 15'/z 131/a 12 143/a 143/a 9 9 8 10 11 13 14 15 21 25 251. 250 249 249 240 238 237 229 222 218 72,000 72,000 65,000 60,000 53,000 51,000 48,000 38,000 37,000 33,000 I n 1986, the company sold substantially all of the operations of The Seven-Up Company to various purchasers and plans to divest the remaining operations. Seven-Up was deconsolidated effective January 1, 1986. E;ifective Jul substantially all of the Philip Morris Industrial opera- 1 1985 before income taxes, net earnings and earnings per share by $77 million, $38 million and $16, respectively, for the year 1985. In 1984, a write-down of the completed but inactive Miller Brewing Company taxes, net earnings facility in Trenton, Ohio, reduced earnings before income y , , tions were sold for $250 million. The gain on these sales increased earnings and earnings per share by $280 million, $146 million and $.59, respectively. N) cn 0 ~ r-+ N W V v 25 ;4

Consolidated Balance Sheets (in millions of dollars) at December 31 1986 1985 Assets ^ Cash and cash equivalents $ 73 8 156 Receivables, net 1,878 1,797 Inventories: Leaftobacco 1,899 1,882 Other raw materials 755 761 Finished product 1,182 1,184 3,836 3,827 Other current assets 127 113 Total current assets 5,914 5,89:3 Property, plant and equipment, at cost: Land and land improvements 474 399 Buildings and building equipment 2,629 2,391 Machinery and equipment 5,071 4,461 Construction in progress 312 267 8,486 7,518 Less, accumulated depreciation 2,249 1,834 6,237 5,684 Investments in unconsolidated subsidiaries and affiliates 1,067 1,099 Goodwill and other intangible assets 3,988 4,457 Other assets 436 296 $17,642 $17,429 See notes to consolidated financial statements.

Philip Morris Companies Inc. and Sub sidiaries 1986 1985 t.6abilities Notes payable $ 864 8 595 Current portion of long-term debt 103 83 Accounts payable 813 946 Accrued liabilities: Taxes, except income taxes 531 484 Employment costs 405 426 Other 1,031 952 Income taxes payable 557 362 Dividends payable 178 119 Total current liabilities 4,482 - 3,967 Long-term debt 5,945 7,331 Deferred income taxes 994 872 Other liabilities 566 522 Total liabilities 11,987 12,692 Stockholders' Equity _ Common stock, par value $1 per share 240 119 Additional paid-in capital 303 404 Earnings reinvested in the business 5,344 4,456 Currency translation adjustments (103) (242) 5,784 4,737 Less, cost of treasury stock 129 - Total stockholders' equity 5,655 4,737 $17,642 $17,429

Consolidated Statements of Earnings (in rnillions of dollars, except per share data) for the years ended December 31 Operating revenues Cost of sales: Cost of products sold 1986 1985 198.1 --, $25,409 $15,964 9D13,Hl.l Marketing, administration and research costs 5,912 3,117 2,329 Amortization of goodwill 106 28 12 Equity in net earnings of unconsolidated subsidiaries and affiliates 111 82 ?4 Operating income of operating companies _ _ 3,735 2,768 2,33-b Corporate expense 126 123 138 Interest expense, net 747 304 266 280 Other deductions, net 51 12 43 Earnings before income taxes 2,811 2,329 1,607 Provision for income taxes 1,333 1,074 718 Net earnings _ $ 1,478 $ 1,255 S 889 Earnings per share $ 6.20 ~ 5.24 S 3.62 eW ~ 0

Consolidated Statements of St®CKI ®®Ider5' Equity (in millions of dollars, except per share data) or the years ended December 31 - _ Common Stock Additional Paid-in Capital Earnings Reinvested in the Business Currency Translation Adjust- ments Cost of Treasury Stock Total Stock- holders' Equity Balance, January 1, 1984 $126 $446 53,738 S(176) S(100) $4,034 Net earnings 889 889 Exercise of stock options and stock units (19) 34 15 Cash dividends declared S1.70 per share (417) (417) Currency translation adjustments (120) (120) Stock purchased (308) (308) Balance, December 31, 1984 126 427 4,210 (296) (374) 4,093 Net earnings 1,255_ 1,255 Exercise of stock options and stock units 9 21 30 Cash dividends declared $2.00 per share (479) (479) Currency translation adjustments 54 54 Stock purchased (216) (216) Retirement of treasury stock (7) (32) (530) . 569 Balance, December 31, 1985 119 404 4,456 (242) - 4,737 Net earnings 1,478 1,478 Exercise of stock options and stock units 1 19 11 31 Cash dividends declared 52.475 per share (590) (590) Two-for-one stock split-up 120 (120) - Currency translation adjustments 139 139 Stock purchased (140) (140) Balance, December 31, 1986 $240 $303 $5,344 $(103) $(129) $5,655 ( ) Denotes deduction See notes to consolidated financial statements.

Consolidated Statements of Changes in Financial Position (in millions of dollars) for the years ended December 31 1986 1985 1984 Funds Provided By Operations: Net earnings $ 1,478 ~ 1,255 8 889 Depreciation and amortization 655 424 375 Divestitures and write-downs (3) 280 Deferred income taxes 133 159 37 Equity in undistributed net earnings of unconsolidated subsidiaries and affiliates (52) (63) (34) Funds from operations 2,214 1,772 1,547 Increases in accrued liabilities and other payables 226 1,467 46 Working capital from sales of operations 487 169 Other, net 210 214 90 Total funds provided 3,137 3,622 1,683 Funds Used For Increases (decreases) in: Cash and receivables (2) 1,005 136 Inventories 9 1,174 54 Other current assets 14 74 (3) Capital expenditures 678 347 298 Dividends declared 590 479 417 Increase in property, plant and equipment from income tax election 508 Investment in General Foods Corporation exclusive of $718 million working capital acquired 4,864 Currency translation adjustments affecting working capital (77) (18) 52 Total funds used 1,720 7,925 954 Net funds provided (required) $ 1,417 $(4,303) $ 729 Financing Activity Increases (decreases) in current notes payable $ 289 $ 149 $ (31) Long-term debt financing 1,788 4,666 35 Long-term debt retired (3,385) (326) (440) Purchase of treasury stock (140) (216) (308) Issuance of shares 31 30 15 (Decreases) increases in funds from financing activity $(1,417) $4,303 $ (729) (Decreases) increases in 1Norking Capital $ (494) S 637 $ 172 Working Capital at Year-end $ 1,432 $ 1,926 $1,289 ( ) Denotes deduction See notes to consolidated financial statements. ~ CN O 0 a 30

Notes to Consolidated Financial5tatements Summary of Significant Accounting Policies: Consolidation: The consolidated financial statements include all significant subsidiaries except for the credit corporation and real estate operations. Investments in unconsolidated subsidiaries and affiliates are accounted for generally by the equity method. Inventories: Inventories are stated at the lower of cost or market. The last- in, first-out ("LIFO") method is used to cost substantially all domestic inventories. The cost of other inventories is deter- mined principally by the average cost method. It is a generally recognized industry practice to classify the total amount of leaf tobacco inventory as a current asset although part of such inventory, because of the duration of the aging process, ordi- narily would not be utilized within one year. Acquisition: The company acquired for $5.6 billion all of the outstanding common stock of General Foods Corporation ("General Foods"), which on November 1, 1985 became a wholly-owned subsidiary of the company. The acquisition has been accounted for as a purchase, and accordingly, operating results of Gen- eral Foods have been included in the consolidated operating results of the company for periods after October 1985. The purchase price exceeded the preliminary estimates of fair value of the net assets acquired by approximately $3.9 billion. Excluding $718 million of working capital acquired, the remaining investment in General Foods represented primarily $1.8 billion of property, plant and equipment less $900 million of long-term debt. In 1986, the company elected pursuant to Section 338 of the Internal Revenue Code to "step up" the tax bases of General Divestitures and Write-Downs: In 1986, the company sold substantially all of the operations of The Seven-Up Company ("Seven-Up") to various purchasers and plans to divest the remaining operations. The total esti- mated proceeds from the sales, net of expenses, is expected to approximate the $542 million book value of the investment at January 1, 1986. In 1985, other deductions, net included a gain of $77 million Inventories: The cost of approximately 75% of inventories is determined by the LIFO method. The stated LIFO value of inventory was Income taxes: Investment tax credits are recognized currently as a reduction in the provision for income taxes. Provision is made for federal income taxes on the portion of undistributed earnings of sub- sidiaries expected to be remitted. Property, plant and equipment: The capitalized cost of facilities includes interest and real estate taxes incurred during the construction period. Depre- ciation is recorded by the straight-line method. Hedging activities: The company enters into contracts primarily to hedge fluctua- tions in costs of commodities used in production and to hedge exposures in foreign currencies. Changes in the market value of hedging contracts are generally reported as adjustments of the carrying amounts of hedged items. Foods' assets and paid the resulting tax. As a result, the carry- ing value of domestic property, plant and equipment was increased by $508 million and certain intangibles became deductible for tax purposes. The tax election and other revi- sions of preliminary purchase price allocations did not signifi- cantly change goodwill. Had the acquisition occurred at the beginning of 1985 and 1984, pro forma consolidated operating revenues, net earnings and earnings per share would have been approximately $23,361 million, $1,260 million and $5.26 for the year ended December 31, 1985 and $22,836 million, $908 million and $3.70 for the year ended December 31, 1984. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had then been in effect. on the sale of substantially all of the Philip Morris Industrial operations and a $50 million write-down in anticipation of the sale of Seven-Up. In 1984, a write-down of the completed but inactive Miller Brewing Company facility in Trenton, Ohio, reduced earnings before income taxes, net earnings and earnings per share by $280 million, $146 million and $.59, respectively. $700 million and $600 million lower than the current cost of inventory at December 31, 1986 and 1985, respectively.

Notes continued Subsidiaries and Affiliates Located Outside the United States: Principal financial data of subsidiaries and affiliates located outside the United States were as follows: Consolidated Uiiconsolidated-Equity Method (in millions) 1986 1985 1984 1986 1985 1984 Assets $3,627 $3,105 $1,481 -current $2,330 $2,087 $1,814 -noncurrent 1,338 1,280 1,111 Liabilities 1,778 1,395 667 -current 1,428 1,431 1,181 -noncurrent 1,022 895 740 Net assets 1,849 1,710 814 1,218 1,041 1,004 Company's equity 1,849 1,710 814 498 404 475 Operating revenues - 6,648 3,545 2,855 6,364 5,555 6,474 Gross profit 1,400 1,165 1,235 Pre-tax earnings 209 166 176 Net earnings 184 92 87 126 68 96 Company's equity 184 92 87 36 45 26 At December 31, 1986, investments in unconsolidated affiliates located outside the United States exceeded equity in net assets by approximately $124 million, which is being amortized over 40 years. As of December 19, 1986, a wholly-owned subsidiary located outside the United States was merged into a joint venture that is reported on the equity method. As of November 1, 1985, the company began consolidating two majority-owned subsidiaries located outside the United States that had been reported on the equity method. At December 31, 1985 and for the year then ended, combined net assets and operating revenues of the two subsidiaries were approximately $240 million and $440 million, respectively. There was no material effect on the consolidated financial statements and, accordingly, data for periods prior to November 1, 1985 have not been restated. In 1984, net earnings included a charge of $41 million for the write-down of invest- ments in certain unconsolidated subsidiaries reported on the equity method. These operations are now being accounted for on the cost method. Consolidated earnings reinvested in the business at December 31, 1986 included the company's equity of approxi- mately $200 million in undistributed earnings of unconsoli- dated affiliates. Federal income tax has not been provided on approximately $1.2 billion of accumulated earnings of subsidiaries, which are expected to be permanently invested abroad. Credit Corporation and Real Estate Operations: Philip Morris Credit Corporation ("PMCC") is a wholly- owned unconsolidated subsidiary of the company. PMCC invests in third-party leveraged and direct finance leases and securities of third parties, piimarily preferred stock, and engages in various financing activities for customers of the company's subsidiaries. Additionally, PMCC is engaged through its wholly-owned subsidiary, Mission Viejo Realty Group Inc. ("MVRG"), in community, commercial and indus- trial real estate development activities. In 1986, General Foods Credit Corporation ("GFCC") and MVRG, formerly indirect wholly-owned subsidiaries of the company, became subsidiaries of PMCC. GFCC's results are reflected in the following condensed financial data since November 1985 based on historical carrying values of assets and liabilities. PMCC accounts for MVRG by the equity method since July 1, 1986. The investment in MVRG at December 31, 1986 exceeded equity in net assets by approxi- mately $40 million, of which $17 million is being amortized. 32

Pursuant to a support agreement, the co to retain ownership of 100% of the voting st make periodic payments to PMCC to the ext mpany has a ock of PMC ent necessar greed C and y to ensure that earnings available for fixed charges equal at least 1.25 times its fixed charges. No such payments have been required. (in millions) 1986 1985 1986 1985 1984 Assets Revenues $175 w 102 $53 Finance assets $1,637 $1,232 Expenses 113 66 35 Investment in and loans to MVRG 411 110 Pre-tax earnings before Notes receivable from affiliates 23 121 MVRG and leveraged lease _ Other assets 53 45 revisions 62 36 18 Total assets $2,124 $1,508 Pre-tax earnings of MVRG 34 - - Liabilities and stockholder's equity Cumulative pre-tax adjustments Notes payable $ 175 $ 117 related to leveraged leases from tax Long-term debt 965 826 legislation and renegotiations (71) - _ Capital notes due parent - 90 Earnings before income taxes 25 36 18 Deferred taxes and other liabilities 567 325 Provision for income taxes: Stockholder's equity 417 150 Current year 35 11 7 Total liabilities and stockholder's equity $2,124 $1,508 Cumulative adjustments related to leveraged lease revisions (83) - Net earnings $ 73 S 25 $11 Cumulative adjustments to leveraged leases result from the effects of the Tax Reform Act of 1986 and certain related leveraged lease renegotiations. Condensed financial statements of MVRG at December 31 and for the year then ended follow. (in millions) 1986 1985 1986 1985 1984 Assets Operating revenues $300 $204 $237 Real estate held for sale and investment $476 $455 Costs and expenses 262 178 202 Other assets 79 56 Earnings before income taxes 38 26 35 Total assets $555 5511 Provision for income taxes 19 14 18 Net earnings $ 19 $ 12 S 17 Liabilities and stockholder's equity Payable to affiliates $118 , $112 Deferred income taxes and other liabilities 166 147 Stockholder's equity --- 271 252 Total liabilities and stockholder's equity $555 $511 Goodwill and Other Intangible Assets: At December 31, 1986, substantially all of this account is years. Accumulated amortization was $141 million and $111 being amortized on a straight-line basis principally over 40 million at December 31, 1986 and 1985, respectively.

Notes continued Short-Term Borrowing Arrangements: At December 31, the company's short-term borrowings and related average interest rates consisted of the following: (in millions of dollars) Bank loans Commercial paper obligations Amount reclassified to long-term debt 1986 1985 Amount Outstanding Average Interest Rate Amount Outstanding Average Interest Rate $ 997 8.1 % $ 1,470 9.3% 476 7.1 % 2,457 8.0% (609) (3,332) $ 864 $ 595 The company has credit facilities with a number of lending institutions amounting to approximately $7.8 billion at December 31, 1986. Approximately $6.8 billion of these facili- ties remained unused at December 31, 1986. These facilities are primarily maintained to support the company's commer- cial paper borrowings. Commitment fees of 1/o to'/4 of 1 per- cent are paid to the banks as compensation for most of the Long-Term Debt: At December 31, the company's long-term borrowings, exclusive of amounts due within one year, consisted of the following: (in millions) Short-term debt, reclassified Notes, 7% to 15'/a% (average effective rate 9.24%), payable through 1998 unused facilities. The company's credit facilities include revolving bank credit agreements expiring in 1989 totaling $6.0 billion which enable the company to refinance short-term borrowings on a long-term basis. Accordingly, short-term borrowings intended to be refinanced have been reclassified to long-term debt. Debentures, 6% to 101/2% (average effective rate 11.33%), $1,136 million face amount, payable through 2011 Other currencies: Swiss franc obligations, interest from 47/s% to 63/a%, payable 1989 to 1994 Deutsche mark obligations, interest from 6% to 9i/2%, payable through 1996 6'/z% Japanese yen bonds, payable 1991 91/4% Canadian dollar bonds, payable 1990 Purchase money obligations, 6% to 71/2%, payable through 2014 Other 1986 1985 $ 609 $3,332 3,081 2,145 775 900 664 433 294 153 123 71 184 184 144 184 $5,945 $7,331 Aggregate maturities of long-term debt, excluding short-term debt reclassified as long-term debt, in each of the following periods are: 1987, $103 million;1988, $501 million; 1989, $750 million; 1990, $767 mitlion; 1991, $626 million; 1992-1996, $1,775 million; and 1997-2001, $1,052 million. The revolving credit facilities under which the short-term borrowings were reclassified as long-term debt expire in 1989 and any amounts then outstanding mature. 34

Restrictions: The company's revolving bank credit agreements restrict approximately $850 million of consolidated earnings reinvested payment of cash dividends and the purchase, redemption or in the business was free of such restrictions. retirement of capital shares. At December 31, 1986, Currency Translation Adjustments: Currency translation adjustments included translation gains (losses) as follows: (in millions) 1986 1985 1984 Translation adjustments $ 54 $(25) $ (96) Related income taxes 85 79 (24) Net chanre' $139 $ 54 $(120) Capital Stock: On March 14, 1986, a two-for-one common stock split-up was stock plan data have been restated to reflect the split-up. effected in the forin of a 100% stock dividend. All references Shares of common stock authorized were 350,000,000; in the financial statements to the weighted average number of issued and outstanding were as follows: shares and related prices, dividends, per-share amounts and Balance, January 1, 1984 Exercise of stock options and stock units Purchased Balance, December 31, 1984 Exercise of stock options and stock units Purchased Retirement of treasury stock Balance, December 31, 1985 Exercise of stock options and stock units prior to stock split-up Two-for-one stock split-up Exercise of stock options and stock units after stock split-up Purchased Balance, December 31, 1986 Issued Treasury Outstanding 126,371,774 (1,389,050) 124,982,724 472,166 472,166 (4,059,600) (4,059,600) 126,371,774 (4,976,484) 121,395,290 214,491 285,256 499,747 (2,543,800) (2,543,800) (7,234,528) 7,234,528 119,351,737 (500) 119,351,237 222,457 500 222,957 119,574,194 119,574,194 470,560 168,741 639,301 (1,930,150) (1,930,150) 239,618,948 (1,761,409) 237,857,539 At-December 31, 1986, 3,799,908 shares of common stock 10,000,000 shares of Serial Preferred Stock, $1 par value, were reserved for stock options and stock units and were authorized, none of which have been issued. 35

Notes continued Stock Plans: Under stockholder-approved stock option and unit plans, 298,275 shares of common stock of the company remain avail- able to be granted to employees. Under the option plans, com- mon stock of the company has been made available for purchase by employees at market prices on dates of grant. Under the unit plan, a holder may elect to purchase shares of common stock at market prices on dates 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 the equivalent of 50% of the units granted. At December 31, 1986, options and units for 2,431,310 shares were exercisable. Per Share Under Option Per Share Exercised Price Range End of Year Price Range 1986: Units 595,221 $15.02-$25.91 798,283 $15.02-$25.91 Options 618,437 $12.86-$42.63 2,703,350 $25.72-$73.75 1985: Units 692,012 $15.02-$25.91 1,409,804 $15.02-525.91 Options 449,648 $11.11-$34.69 2,478,142 812.86-842.63 1984: Units 699,754 $15.02-$25.91 2,114,076 $15.02-$25.91 Options 461,568 $11:11-$34.69 2,303,338 $11.11-$34.69 Earnings per Share: Earnings per common share have been calculated on the ing for each year, which was 238,510,748, 239,698,288 and weighted average number of shares of common stock outstand- 245,350,158 for the years 1986, 1985 and 1984, respectively.

Pre-Tax Earnings and Provision for Income Taxes: (in millions) 1986 1985 1984 "Pre-tax earnings: United States $2,398 $2,179 $1,488 Outside United States 413 150 119 Total $2,811 $2,329 $1,607 Provision for income taxes: United States federal: Current S 811 $ 762 8 572 Deferred 156 144 12 967 906 584 State and local 167 130 84 Total United States 1,134 1,036 668 Outside United States: Current 222 23 25 Deferred (23) 15 25 _" Total outside United States 199 38 50 Total provision for income taxes $1,333 $1,074 $ 718 Deferredd tax expense is primarily attributable to the excess of, taz over book depreciation, reduced in 1984 by the tax bene.fit attributable to the facility write-down. The effective income tax rate on consolidated pre-tax earn- ings differed from the U.S. federal statutory rate for the fol- lowing reasons: (i`n'millions of dollars) ; Provision computed at U.S. federal statutory rate --"::-.~:of reported pre-tax earnings Increases (decreases) in the provision resulting from: Investment tax credit Equity in net earnings of unconsolidated subsidiaries and'affiliates Income taxed at other than U.S. federal statutory rate State and local income taxes, net of federal tax benefit Nondeductible amortization Other Provision as reported 1986 1985 1984 Amount % Amount % Amount % $1,293 46.0% $1,071 46.0% $739 46.0% (17) (0.6) (34) (1.5) (20) (1.3) (51) (1.8) (38) (1.6) (25) (1.5) (39) (1.4) (21) (0.9) (20) (1.3) 90 3.2 70 3.0 45 2.8 33 1.2 12 0.5 5 0.3 24 0.9 14 0.6 (6) (0.3) uy; $1,333 47.5% $1,074 46.1% $718 44.7% o1 -~ ; ~ w ~

Notes continued Pension Plans: Effective January 1, 1986, the company adopted Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions" ("SFAS &7"), for its U.S. pension plans. Pension cost and related disclosures for non-U.S. U.S. Plans: The company and its subsidiaries sponsor noncontributory defined benefit pension plans covering substantially all of their employees. The plans generally provide retirement benefits for salaried employees based on years of service ren- dered and compensation during the last years of employment. Retirement benefits for hourly employees generally are a flat plans in 1986 and for all plans in 1985 and 1984 were deter- mined under the provisions of the previous accounting prin- amount for each year of service rendered. The company funds these plans in amounts consistent with the funding requirements of Federal law and regulations. Net pension cost for 1986 included the following compo- nents (in millions): Service cost-benefits earned during the year $ 88 Interest cost on projected benefit obligation Return on assets-actual -deferred gain 172 (436) 211 Amortization on net gain at January 1, 1986 (28) Net pension cost $ 7 The adoption of SFAS 87 decreased 1986 pension cost by The funded status of the plans at December 31 and approximately $76 million. Pension cost for 1985 and 1984 January 1, 1986 was as follows (in millions): was $74 million and $73 million, respectively. December 31, lanuary 1, Actuarial present value of accumulated benefit obligation-vested -nonvested $1,758 94 $1,430 71 1,852 --, 1,501 Benefits attributable to projected salaries 551 454 2,403 1,955 Plan assets at fair value 2,917 2,519 Excess of assets over projected benefit obligation 514 564 Unrecognized net gain at January 1, 1986 (401) (429) Unrecognized net loss from experience differences and assumption changes 77 Prepaid pension cost $ 190 $ 135

The projected benefit obligation at December 31 and January 1, 1986 was determined using assumed discount rates of 73/4% and 9% and assumed compensation increases of 63/4% and 8%, respectively. The assumed long-term rate of return on plan assets was 9% at both dates. Plan assets consist principally of common stocks and fixed income securities. The company sponsors a deferred profit-sharing plan cov- von-U.S. Plans: Pension coverage for employees of the company's non-U.S. subsidiaries is provided, to the extent deemed appropriate, through separate plans, many of which are governed by local statutory requirements. Pension expense for these plans was 830 million, $15 million and $12 million in 1986, 1985 and 1984, respectively. The actuarial present value of accumulated plan benefits and net assets available for benefits were $366 million (5308 ering certain salaried, nonunion and union employees. Contri- butions and cost are determined as a percentage of consoli- dated pre-tax earnings, as defined by the plan. Subsidiaries of the company also maintain other defined contribution plans. Amounts charged to expense for defined contribution plans totaled 899 million, $77 million and $53 million in 1986, 1985 and 1984, respectively. million vested) and $477 million in 1986 and $285 million (5235 million vested) and $365 million in 1985. Net assets available for plan benefits include amounts funded with trustees or gov- ernment organizations, and book reserves of 895 million and $65 million in 1986 and 1985, respectively. The weighted aver- age assumed rate of return used in determining the actuarial present value of accumulated plan benefits was approximately 6% for both 1986 and 1985.

Notes continued Segment Reporting: _. Tobacco, food products and beer are the major segments of the since they are not material. company's operations. The company's consolidated operations Operating profit calculated for purposes of segment report- outside the United States, which are principally in tobacco and ing is operating income of operating companies less equity in food products businesses, are organized into geographic net earnings of unconsolidated subsidiaries and affiliates. regions by segment, with Europe the most significant. Invest- Identifiable assets by segment are those assets applicable to ments in unconsolidated affiliates located outside the United the respective industry segments. Reportable segment data States represent principally tobacco operations in Europe and reconciled to the consolidated financial statements are pre- Latin America and food products operations in the Asia/Pacific sented below. region. Intersegment transactions are not reported separately Data by Segment for the years ended December 31 (in millions) 1986 1985 1984 Operating revenues: Tobacco $12,691 $10,539 S 9,802 Food products 9,664 1,632 Beer 3,054 2,925 2,940 Other - 868 1,072 $25,409 $15,964 $13,814 Operating profit: Tobacco $ 2,844 . S 2,441 S 2,141 Food pro4ucts 622 95 Beer 1 158 136 116 Other - 14 23 3,624 2,686 2,280 Reconciliation: Equity in net earnings of unconsolidated subsidiaries and affiliates 111 82 54 Operating income of operating companies $ 3,735 3 2,768 8 2,334 Depreciation expense: Tobacco $ 200 8 166 $ 151 Food products 167 29 Beer 136 134 144 Identifiable assets: Tobacco $ 5,808 S 5,622 3 5,149 Food products 8,629 7,974 Beer 1,736 1,779 1,892 Other - 643 1,018 16,173 16,018 8,059 Investments in unconsolidated subsidiaries and affiliates 1,067 1,099 1,054 Corporate assets 402 312 226 Total assets $17,642 $17,429 $ 9,339 Capital additions: Rti tlt Tobacco O O $ 191 $ 151 8 163 F d d O - 395 71 pro ucts oo Beer ~-. w 10 80 87 94 N

Data by Geographic Region for the years ended December 31 (in millions) 1986 1985 1984 Operating revenues: United States -Domestic $17,568 511,496 $10 034 -Export 1,193 923 , 925 Europe 5,178 2,904 2 372 Other 1,470 641 , 483 $25,409 b15,964 313 814 Operating profit: , United States $ 3,278 3 2,540 S 2,150 Europe 308 149 134 Other 38 (3) (4) 3,624 2,686 2,280 Reconciliation: Equity in net earnings of unconsolidated subsidiaries and affiliates 111 82 ' 54 Operating income of operating companies $ 3,735 8 2,768 S 2,334 Identifiable assets: United States $12,964 513,266 S 6,616 Europe 2,482 2,029 1,286 Other 727 723 157 16,173 16,018 8,059 Investments in unconsolidated subsidiaries and affiliates 1,067 1,099 1,054 Corporate assets 402 312 226 Total assets $17,642 $17,429 S 9,339

Notes continued Litigation: There is litigation pending against the leading linited States cigarette manufacturers seeking damages for cancer and other health effects alleged to have resulted from cigarette smoking. Philip NIorris Incorporated, a wholly-owned subsidiary,.is a defendant in some of these actions. Philip Morris Incorporated and the other cigarette manufacturers have successfully defended all similar prior litigation and have not made any payments in settlement. An adverse development in pending litigation might encourage the commencement of similar litiga- tion. It is not possible to predict the outcome of the above described litigation; however, management does not believe that the pending actions will have a material adverse effect upon the financial condition of the company. All such actions will be vigorously defended. Additional Information: (in millions) Depreciation expense Rental expense Interest expense Interest income Interest expense, net Quarterly Financial Results (Unaudited): 1986 L985 1984 $514 S367 ti341 $105 575 569 $779 S345 5299 (32) (41) (33) $747 S304 $266 (in millions, except per share amounts) For Quarter ended: Mar. 31 June 30 Sept. 30 Dec. 31 Year 1986 Operating revenues $5,924 $6,534 $6,398 $6,553 $25,409 Gross profit 2,198 2,544 2,413 2,487 9,642 Net earnings 316 377 414 371 1,478 Per share: Earnings 1.32 1.58 1.74 1.56 6.20 Dividends declared .575 .575 .575 .75 2.475 Market price high-low 631/s-43'/s 76-54'/a 78-63 75'/s-66'/s 78-437/s 1985 Operating revenues $3,315 $3,719 83,634 S5,296 815,964 Gross profit 1,127 1,327 1,348 2,029 5,831 Net earnings (A) 256 322 394 283 1,255 Per share: Earnings (A) ~,. 1.06 1.34 1.65 1.19 5.24 Dividends declared .50 .50 .50 .50 2.00 Market price high-low 473/s-39'/2 475/a-403/a 435/a-365/a 453/8-36 475/a-36 The principal stock exchange on which the company's common operations were sold for $250 million. In the third quarter of 1985, the gain on these sales increased net earnings and earnings per share by $38 million and stock (par value $1 per share) is listed is the New York Stock 5.16, respectively. Exchange. At January 31, 1987 there were 39,498 holders of During the fourth quarter of 1985, a write-down in connection with the record of the company's common stock. anticipated sale of Seven-Up reduced net earnings and earnings per share by (A) Effective July 1, 1985, substantially all of the Philip iNlorris Industrial S35 niillion and 3.15, respectively.

Report of independent Certified Public Accountants: To the Board of Directors and Stockholders of Philip 1'Iorris Companies Inc.: We have examined the consolidated balance sheets of PHILIP lIORRIS C0MP_AINIES INC. and subsidiaries as of December 31, 1986 and 1985, and the related consolidated statements of earnings, stockholders' equity and changes in financial posi- tion for each of the three years in the period ended December 31, 1986. Our examinations were made in accordance with gen- erally 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 mentioned above present fairly the consolidated financial position of Philip Morris Companies Inc. and subsidiaries at December 31, 1986 and 1985, and the consolidated results of their operations and the changes in their financial position for each of the three years in the period ended December 31, 1986, in conformity with generally accepted accounting principles applied on a consistent basis. COOPERS & LYBRAND New York, New York January 27, 1987 Company Report on Financial Statements: The consolidated financial statements and all related financial information herein are the responsibility of the company. The financial statements, which include amounts based on judgments, have been prepared in accordance with generally accepted accounting principles, applied on a consistent basis. Other financial information in the annual report is consistent with that in the financial statements. The company maintains a system of internal controls which it believes provides reasonable assurance that transactions are executed in accordance with management's authorization and properly recorded, that assets are safeguarded, and that accountability for assets is maintained. The system of internal controls is characterized by a control-oriented environment within the company which includes written policies and proce- dures, careful selection and training of personnel, and exami- nations by a professional staff of internal auditors. Coopers & Lybrand, independent certified public account- ants, have examined and reported on the company's con- solidated financial statements. Their examinations were performed in accordance with generally accepted auditing standards and included studies and evaluations of internal accounting controls to the extent deemed necessary by them. The Audit Cornmittee of the Board of Directors, composed of five non-management directors, meets periodically with Coopers & Lybrand, the company's internal auditors and management representatives to review internal accounting control, auditing and financial reporting matters. Both Coopers & Lybrand and the internal auditors have unre- stricted access to the Audit Committee and may meet with it without management representatives being present.

Board of Directors Thomas F. Ahrensfeld Jane Evans ® Is William Murray Alfred Brittain III James L. Ferguson John S. Reed Dr. Harold Brown William K. Howell Frank E. Resnik Howard L, Clark Robert E.R. Huntley Philip L. Smith Dr. Jose Antonio Cordido-Freytes Hamish Maxwell Hans G. Storr homas F. Ahrensfeld' Dr. Jose Antonio Cordido- Jane Evans' Hamish Maxwell'•' enior Vice President and Freytes°s General Partner, Chairman of the Board and General Counsel Member of Betancourt, Cordido Montgomery Securities and the Chief Executive Officer a'trd'Associates, Caracas, Montgomery Consumer Group Alfred Brittain III Venezuela, Attorneys, and San Francisco, CA Dr. Elizabeth J. McCormack" Chairman of Bankers Trust President of C.A. Tabacalera Associate of Rockefeller Family Company, New York, NY Nacional James L. FergusonL1•a•6 & Associates, New York, NY Vice Chairman of the Board, Dr. Harold Brown'-s Hugh Cullman'-'•*-' and Chairman of the Executive Ross R. Millhiser° Chairman of Foreign Vice Chairman of the Board Committee, General Foods Former Vice Chairman of the Policy Institute, Corporation Board The Johns Hopkins University Joseph F. Cullman 3rd' rv School of Advanced Chairman Emeritus William K. Howell' T. Justin Moore, Ja2•''S Cil International Studies, President and Chief Executive Counsel, Hunton & Williams, O Washington, DC William H. Donaldson1z-'-' Officer, Miller Brewing Company Richmond, VA O O Chairman and Chief Executive ~ Howard L. Clark Officer of Donaldson Enterprises Robert E.R. Huntley=,'•4 John A. Murphyt.2•6 Former Chairman and Chief Incor orated New Yo k NY President and Chief Operating President and Chief Operating Cv Executive Officer of American p , r , Officer of Best Products Co., Inc.,. Officer ~ 0~ Express Company, Paul W. Douglas' Richmond, VA New York, NY Chairman and Chief Executive Officer of The Pittston Company, Greenwich, CT

Hugh Cullman Dr. Elizabeth J. McCormack Joseph F Cullman 3rd Ross R. Millhiser William H. Donaldson T. Justin Moore, Jr. John A. Murphy William P. Tavoulareas George Weissman Margaret B. Young William Murray2 Hans G. Storr= 'Member of Executive Committee President and Chief Vice President and George Weissman, Chairman Executive Officer Chief Financial Officer , Zl'Iember of Finance Committee Morris International Phili p William P. Tavoulareas'-' Hugh Cullman, Chairman John S. Reed'2-'•5 Former President of Mobil 'Member of Audit Committee Chairman and Chief Executive Corporation, New York, NY Robert E.R. Huntley, Chairman Officer of Citicorp and Citibank, N.A., George Weissman1z•6 `Member of Committee on Public NY New York Chairman of the - Affairs and Social Responsibility , Executive Committee Hugh Cullman, Chairman Frank E. Resnik' ' ` ' 'Member of Nominating President and Chief Executive Margaret B. Young • - Committee Officer, Philip Morris U.S.A. Chairman of the Whitney M. Chairman Justin Moore Jr. T Young, Jr. Memorial Foundation, , , . Philip L. Smith New York, NY 'Member of Office of the President and Chief Executive Chairman Officer, General Foods Hamish Maxwell, Chairman Corporation

Offecers Philip Morris Philip Morris Philip Morris Companies Inc. U.S.A. International Hamish Maxwell Staff Vice Presidents: Frank E. Resnik William -Murra,v Chairman of the Board and President and President and Chief Executive Officer Bruce S. Brown Chief Executive Officer Chief Executive Officer Gene A. Knorr John A. Murphy F. Robert Kurimsky William I. Campbell Geoffrey C. Bible President and William C. Smiy Executive Vice President, Executive Vice President Chief Operating Officer William K. Transue Marketing Carlos E. Salguero Hugh Cullman Mark A. Serrano Executive Vice President Vice Chairman of the Board Executive Vice President, Operations Richard L. Snyder James L. Ferguson Executive Vice President Vice Chairman of the Board, and W. John Campbell Chairman of the Executive Senior Vice President, Committee, General Foods Plant Operations Vice Presidents: Corporation John J. Gillis Bernard Beaurpere Thomas F. Ahrensfeld Senior Vice President, Martin D. Buss Senior Vice President and Trade Development Elizabeth Butson General Counsel Aleardo G. Buzzi Fred J. Laux Dinvar Devitre R. Nelson Beane Senior Vice President, 3'Iarc Goldberg Vice President and Controller Personnel Richard A. Hutchinson, Jr. Eugene J.T. Flanagan Thomas NI. Kearns Vice President, Secretary, and Vice Presidents: Lee Pollak Associate General Counsel Walter Thoma Albert J. Bissmeyer III William H. Webb Ehud Houminer Vincent J. Buccellato Andrew Whist Vice President, Planning David Dangoor 0. Witcher Dudley George R. Lewis Vice President and Treasurer Alexander Holtzman Dr. Kenneth S. Houghton William J. O'Connor Edwin J. McQuigg Vice President, Administration Guy L. Smith IV and Human Resources Harry G. Steele George W.B. Taylor Stanley S Scott . James L. Thompson, Jr. Vice President Director of , Lawrence W. Zinski Corporate Affairs Hans G. Storr Vice President and Tobacco Technology Group Chief Financial Officer Donal P. O'Brien Alexander Holtzman Senior Vice President Associate General Counsel James T. Breedlove Vice Presidents: Assistant Secretar y George Karandjoulis Patricia A. Malzacher Dr. Robert B. Seligman Assistant Secretary Louis R. Turano John van Harn

General Foods Miller Brewing Philip Morris Credit Corporation Company Corporation Philip L. Smith Vice Presidents: William K. Howell Hans G. Storr President and President and President and Chi f E ti Offi C. Richard Blundell ve e xecu cer Charles J. Bowen Chief Executive Officer Chief Executive Officer Robert L. Seelert Philip J. Davis Warren H. Dunn Norman J. Treisman Senior Executive Vice President Thomas F. Duesler Senior Vice President, Senior Vice President Richard D. Finucane M.D. Administration Ervin R. Shames , Harold A. Golle Senior Executive Vice President Enrique J. Guardia Leonard J. Goldstein Vice Presidents: Jerry M. Hiegel Anthony Hass Senior Vice President, Sales James T. Breedlove Executive Vice President, and Gabrielle J. Hermann Allen A. Schumer Michael J. Kinney Chairman, Oscar Mayer Foods Bennett Hersch Senior Vice President, Operations Corporation Sylvester T. Hinkes David F. Hurwitt Mission Viejo Realty Adolph S. Clausi David W. Johnson Vice Presidents: Group Inc. Senior Vice President and Chief Paul J. Keating Billy R. Apple Philip J. Reilly Research Officer William H. Korab Dr. Vincent S. Bavisotto President and Peter J. De Luca Philip A. Korn Rodney J. Blucher Chief Executive Officer Senior Vice President and Brian G. Laragh Alan G. Easton James G Gilleran General Counsel Stephen B. Morris Leonard H. Jacob . Executive Vice President Lloyd A. Nelson Raymond E. Jones, Jr. Thomas J. Hoeppner Alan R. Plassche Thomas A. Koehler Jack G. Raub Senior Vice President, Finance Raymond C. Schaub George D. Riemer Executive Vice President Edward A. Schefer William A Sau e Andrew J. Schroder III Jack H. Scott . p Ronald R Strain James G. Toepfer Senior Vice President, Administration Douglas A. Smith . Georgy N. Tarala Executive Vice President Paula A. Sneed Robert A. Toledo James L. Huesman John M. Keenan David E. Soffe Senior Vice President and Group Vice President Joseph B. Tharp Treasurer Paul J. Tiller James W. McVey Raymond G. Viault Group Vice President, and Gerald D. Wollert Vice Presidents: President and Chief Executive Officer, Oscar Mayer Foods Alan M. Shaver Danette S. Fenstermacher Corporation Secretary William K. Smith Paul Van Stevens Robert Sansone Steven G. Klein Robert P. Swank Group Vice President Treasurer James C. Tappan Group Vice President 4

General Corporate Information Headquarters Philip Morris Latin Americal Annual Meetin : Dividend Reinvestment Addresses: Iberia g Agent: 1'20 Park Avenue The annual meeting of Philip Morris Companies Inc. New York, New York 10017 stockholders of Philip Morris Morgan Shareholder Services Companies Inc. will be held on Trust Company 120 Park Avenue Philip Morris Asia, Inc. April 30, 1987 at the Philip Dividend Reinvestment Plan New York, New York 10017 25th Floor, United Centre , Morris Manufacturing Center P.O. Box 3506 (212) 880-5000 95 Queensway, Central , 3601 Commerce Road, Richmond, Church Street Station Philip Morris Incorporated Hong Kong Virginia. New York, New York 10008-3506 120 Park Avenue Philip Morris (Australia) Limited New York, New York 10017 One Little Collins Street Form 10-K: Stock Exchange Listings: Melbourne Victoria 3000 Philip Morris U.S.A. , Australia The company's annual report on New York 120 Park Avenue Form 10-K which will be filed Amsterdam New York, New York 10017 General Foods Corporation , with the Securities and Exchange Basel 250 North Street Commission will be available t kf F t Philip Morris International White Plains, New York 10625 , o stockholders in A ril u on written ran ur Geneva 120 Park Avenue p p New York, New York 10017 Miller Brewing Company request to: Lausanne 3939 West Hi hland Boulevard Paris Regional Headquarters: g Milwaukee Wisconsin 53201 Eugene J.T. Flanagan, Secretary Tokyo , Philip Morris Companies Inc. Zurich Philip Morris EEC Philip Morris Credit 120 Park Avenue Brillancourt 4 Corporation New York, New York 10017 NY Stock Exchange Case Postale 120 Park Avenue Symbol: MO 1001 Lausanne New York New York 10017 Switzerland , Transfer Agents and Mission Viejo Realty Group Inc. Registrars: Auditors: Philip Morris EF°rA, Eastern 24800 Chrisanta Drive Europe, the Middle East, & Africa Mission Viejo California 92691 Morgan Shareholder Services Coopers & Lybrand Avenue de Cour 107 , -Trust Company 1251 Avenue of the Americas Case Postale 30 West Broadway New York New York 10020 1001 Lausanne New York, New York 10007-2192 , Switzerland United Virginia Bank Box 26665 Richmond, Virginia 23261

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Philip Morris Companies Inc. 120 Park Avenue New York, -N1.Y. 10017

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