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PHILIP M®RRIS C®OVIPANIES 1NC.

7 iC®ANCIAL H5i81iHLA9AHTS (in millions of dollars, except per share amounts) i 1987 1986 1985 1984 1983 Operating revenues $27,695 $25,409 $15,964 $13,814 $12,976 Net earnings 1,842 1,478 1,255 889 904 Earnings per share 7.75 6.20 5.24 3.62 3.58 Dividends declared per share 3.15 2.475 2.00 1.70 1.45 Funds from operations per share 11.73 9.28 7.41 6.30 5.35 Percent Increase Over Prior Year Operating revenues 9.0% 59.2% 15.6% 6.5% 12.0% Net earnings 24.7°!° 17.7% 41.3% (1.7%) 15.6% Earnings per share 25.0% " 18.3% 44.6% 1.0% 15.1%o Dividends declared per share 27.3% 23.8% 17.6% 17.2% 20.8% ®perating Revenues Philip Morris U.S.A. $ 7,576 $ 7,053 $ 6,611 $ 6,134 $ 5,520 Philip Morris International Inc. 7,068 5,638 3,991 3,741 3,647 General Foods Corporation 9,946 9,664 1,632 Miller Brewing Company 3,105 3,054 2,914 2,928 2,922 Othert - - 816 1,011 887 i Total operating revenues $27,695 $25,409 $15,964 $13,814 $12,976 income From Operations Philip Morris U.S.A. $ 2,633 $ 2,366 $ 2,047 $ 1,744 $ 1,337 Philip Morris International Inc. 631 492 413 395 374 General Foods Corporation 722 741 120 - - ~ Miller Brewing Company 170 154 132 114 224 Philip Morris Credit Gorporation* 51 55 23 11 , 5 7 Mission Viejo Realty Group Inc.* 21 18 12 17 20 Othert 19 (8) 45 30 - 4,297 3,818 2,792 2,311 1,960 Amortization of goodwill 104 111 32 15 16 Total income from operating companiesi $ 4,193 ~ 3,707 8 2,760 ~ 2,296 $ 1,944 Compounded Average Annual Growth Rate 1987-1982 1987-1977 1987-1972 Operating revenues 19.0% 18.2% 18.6% Net earnings - -- 18.7% 18.6% 19.7% Earnings per share 20.0% 18.7% 18.7% :Income from operating companies is income before corporate expense and interest and other debt expense, net. i *Represents equity in net earnings of these unconsolidated subeidiaries. i Composed of The Seven-Up Company, substantially all of the operations of which were sold in 1986, and Philip Morris Industrial, substantially all of the operations of which were sold in 1985. General Foods Corporation was acquired in November 1985. Accordingly, consolidated results shown above include the operating results of General Foods Corporation after October 1985.

PHyLIP ®RRIS COMPANIES INC.-PE®PLE WH® DELIVER QUALiTY Back9cg each ef ®cr best-selling Wacds (cover) a9'e 1he indiv9gua8 telen#s o@ 113,000 ctlY97OmMed yI9Y0p1®y@/ea7. Marson Haskins Assistant Manager, U.S. Leaf Purchases 1 Philip Morris U.S.A. Richmond, Virginia Miller Brewing Compang Milwaukee, Wisconsin General Foods White Plains, New York Jim Herro Panel Operator Category Manager, Desserts Division John A. iNindeiii Group Leader, Technical Research, Desserts Division Kevin McCorrnack Manager, Coffee Decaffeination Art Santos Maintenance Mechanic, Coffee Decaffeination Brenda Harding Machine Operator ,

Your company's operating revenues increased by 9.0% to $27.7 billion in 1987. Net earnings improved by 24.7% to $1.8 billion and earnings per share were up 25% to $7.75. Earnings were favorably affected by higher unit sales volume in all of our businesses, increased manufacturing efficiencies, a lower tax rate, reduced interest expense, favorable currency effects on re- ported international earnings, and higher margins in Philip Morris U.S.A. Overall, Philip Morris sold 23.9 billion more cigarettes in 1987 than in the previous year and achieved share gains in nearly all major markets. In the United States, our cigarette volume in- creased by approximately 1 billion units in a market which declined by 2.1%, and Philip Morris U.S.A:s market share reached 37.8%; internationally, cigarette volume increased by 7.8%. Food volumes were up by 2.9% and Miller Brewing Company increased volume by 1.4% to 39.3 million barrels. In November, the Board of Directors increased the quarterly dividend by 20%, raising the annualized rate to $3.60 per share. This was the 23rd increase in the dividend payment in the last 20 years. General Foods reorganized into three operating companies during the year, and Philip Morris Inter- national was made a first tier subsidiary of Philip Morris Com- panies Inc. at year-end. The restructuring programs ensure that each of our operating companies is effectively concerned with competing successfully in its own segment of the consumer packaged goods industry, that management is adequately decen- tralized and able to move quickly to meet competitive oppor- IaGWtrem OpWttMgCsrtr11rks , brPrMycrirr -.. ':: Ct~_ 'JTo't3-co~+ o-= T® OUR STOCKHOLDERS: tunities, and that the corporate management of Philip Morris Companies Inc. is focused on stra- tegic directions. During the year, we made a number of acquisitions designed to increase our representation in growth areas of our non-tobacco businesses. We defended the company against continuing legislative threats to our legitimate business interests. In 1987, we opposed various pro- posals to ban tobacco advertising and promotion, to increase the excise tax on tobacco products, and to legislate smoking bans in public areas and in the workplace. Through our corporate contri- butions program, we substantially increased our support of educa- tion, the arts, and other non-profit institutions, with particular emphasis on those in our plant and headquarters communities.

A report outlining our public interest activities is in preparation and will be mailed to stockholders later this year. Effective April 1, 1987, the Board of Directors elected William Murray as Vice Chairman of Philip Morris Companies Inc. The Board also elected Philip L. Smith as Vice Chairman of Philip Morris Companies Inc. He con- tinues as Chairman of General Foods Corporation. . In April of 1987, three former members of senior management retired from your Board of Direc- tors. Joseph F. Cullman 3rd and George Weissman, each formerly Chairman and Chief Executive Officer, and Ross R. Millhiser, formerly President and Vice Chair- man, stepped down after many years of service to Philip Morris. We thank them for their outstand- ing contributions to Philip Morris' success and growth. On January 14,1988, William K. Howell resigned as President and Chief Executive Officer of Miller Brewing Company and director of Philip Morris Compa- nies Inc. to take early retirement. Leonard J. Goldstein, Senior Vice President, Sales, was appointed to succeed Mr. Howell. We are grate- ful for Mr. Howell's long and distin- guished service to the corporation. The Outlook We are committed to increasing the value of our stockholders' invest- ment-through superior income performance and improved returns. We expect to continue to diversify our earninga base within the consumer packaged goods industries and to increase divi- dends as our income grows. In mid- year, we committed $1 billion to begin another program to repur- chase up to 10 million shares of Philip Morris common stock and we will consider further programs in the future. We will also commit our resources to the continued upgrading of our plants and equip- ment as well as to the acquisition of the most advanced technologies available in our industries. Our capital expenditures for the next five years are expected to total $4.1 billion, of which $1.0 billion is planned to be spent in 1988. In cigarettes, food, and beer we are committed to very large, profitable, worldwide industries. Although each is more or less mature, Philip Morris has shown that it can generate volume growth through share-of-market gains and we intend to continue, and to try to accelerate this progress. We are fortunate to have tal- ented men and women in our orga- nization. To symbolize their achievements we have focused this year's Annual Report on the employees of Philip Morris, only a handful of whom can be shown on these pages. We are confident that the efforts and dedication of all of the employ- ees of Philip Morris will enable your company to meet the challenges and opportunities that lie ahead.

Philip Morris U.s.A:s unit sales, market share, and Income from operations once again rose to record levels In 1987. Our cigarette unit sales rose 0.5% to 215.6 billion units in 1987, despite a 2.1% industry decline to 570.4 billion units. Operating rev- enues rose 7.4% to $7.6 billion, while income from operations rose 13.4% to $2.7 billion. Our full-price brands continue to increase market share despite the,growth of price-value prod- ucts. Philip Morris now holds 40% of the full-price category, in which we generate 96% of our unit sales. Continuing its momentum, Marlboro remains America's larg- est-selling cigarette, with 1987 sales reaching 134.6 billion units, up 0.3% over 1986. Further increases in the brand will be aided by Marlboro Lights, which is growing rapidly. Moreover, Marlboro increased its strength in most demographic categories of smokers. Virginia Slims widened its lead among cigarettes made especially for women with the successful introduction of Virginia Slims Ultra Lights, an ultra low tar line extension in a newly designed five- sided pack. Benson & Hedges suc- cessfully introduced Benson & Hedges Lights 100s in a box. The Merit brand continued to benefit from the strong performance of Merit Ultra Lights in the growing ultra low tar category. The price-value category, which consists of generic and lower- priced name brands, continued to grow and now accounts for 10% of industry volume. In 1987, Philip Morris U.S.A. introduced full-flavor Cambridge as a quality alternative for price-conscious smokers. The strong performance of the Cambridge brand family led to an increase in the company's share of the price-value category to 15.6%. Our presence at retail con- tinued to improve as Philip Morris U.S.A. realigned its field sales force to merchandise and promote our products more effectively. In 1987, we increased our share both of retail inventory and of carton and pack display space for all our brands. American-grown leaf tobacco continues to be the cornerstone of our cigarette blends' superior taste and quality. The Tobacco Program Improvement Act of 1986 has provein effective in enhancing domestic producers' ability to grow quality leaf at competitive prices for the global market. One part of the program that is proceeding ahead of schedule is the buy-out, by Philip Morris and other major U.S. cigarette manu- facturers, of surplus tobacco accu- mulated from 1976 to 1984 in the growers' cooperatives. The manu- facturers have already committed to purchase approximately 60% of these surplus stocks. Because of increased demand, the U.S. Department of Agricul- ture has announced an increase in both the flue-cured and burley quotas for 1988. Together, the buy-out, the quota increases, and Philip Morris U.S.A.'s public commitment to purchase more U.S. tobacco as a replacement for imports have provided growers with positive incentives for future production of flue-cured and burley tobacco.

NkpJ'Iorris alagazine now se more than eight million h_olds quarterly. The maga- eignificantly raised public ess of our point of view on ~es facing us. r ughout 1987, the cigarette ~ mobilized opposition to ed excise tax increases. i`e itlt, Congress was clearly ' :. 4 - ormed by leaf growers, tobacco esalers, retailers, consumers, ers in addition to the that there is deep resis- this country to increased sses on tobacco due largely regressive impact on those le to afford them. 987, Philip Morris L'.S.A:s on of leadership in the U.S. tte industry was character- y the strong performance of ands, our reliance on qual- estic leaf, and our vigorous se;of the rights of our cus- ~.z.. -,and our industry. Phiiip Morris International Inc. achieved its highest ever volume, revenues, and income. I,nit volume increased to 315.2 billion units, a gain of 7.8% over 1986, excluding volume added as a result of the merger of our Canadian subsidiary with a sub- sidiary of Rothmans International plc in Canada. Operating revenues increased 25.4% to V.1 billion, while income from operations was $631 million, up 28.2% over the year before. Our U.S. cigarette export vol- ume reached a record 63.5 billion, an increase of 37.7%. The com- pany's exports of cigarettes and tobacco made a gross contribution of $1.7 billion to the 19871;.S. bal- ance of payments. Our increased export volume reflects a worldwide appreciation of U.S. -manufactured cigarettes. Philip Morris brands meet the highest standards of quality, no matter where they are manufac- tured or sold, and this has been the basis of their growth. International's growth in share and volume was highlighted by four majow developments: • Signific.,nt progress in the Japa- nese and other -Asian markets. • Continued strong volume and share growth in France, West German., and Turkey. • The growth of Marlboro in Spain and throughout Latin American markets. • Continued development of Philip Morris Lights, Philip Morris Superlig}its, and Parliament as major international brands. Amon.a our leading brands, Marlboro continues to grow in both volume and share. It remains the world's best-selling cigarette and is aniong the most widely rec- ognized (onsumer products. In addition. the Philip Morris brand family continued to grow strongly in Europe, Japan, and Australia, while Parliament achieved excel- lent results in Japan, Taiwan, and Turkey. We continued to increase sales and volume in the European Eco- nomic Community (EEC). Unit volume was up 4%, and our aggre- gate share increased to approxi- mately 20% of the total EEC r 10

market. We gained market share in Italy and France, and expanded our share of the large German market to 25.4%. In Spain, due primarily to Marlboro's strong performance, we increased volume and improved our share-of-mar- ket by 2.7 share points. Volume was up for our EFTA, Eastern Europe, Middle East, and Africa (EEMA) region. In addition to the very good performance in Turkey, where volume rose 39%, volume also increased in Egypt, Senegal, and Finland. In Switzer- land, our market share climbed to a new high of 38%. Our exports to Eastern Europe were up 30% and our licensees in Poland, Czechoslovakia, East Germany, and Yugoslavia recorded volume gains. In the Middle East Gulf area, where overall industry volume declined, we continued to increase our share of the market. Throughout the Latin Ameri- can region, Marlboro achieved substantial volume gains, increas- ing 9.4% over 1986. Our market share improved in every major market where we do business. Per- formance was especially strong in Mexico and the Dominican Republic. In Brazil, our market share rose even though price in- creases depressed industry volume. In Canada, we successfully completed the merger of our sub- sidiary, Benson & Hedges (Can- ada) Inc., with Rothmans of Pall Mall Limited to form Rothmans, Benson & Hedges Inc. Although industry volume in Canada was down, profitability of the newly combined operations, in which we have a 40% holding, exceeded expectations. Our Australian cigarette busi- ness performed strongly. Volume rose 3% and share improved by 0.8 share points, led by Peter Jackson, which gained 5.6% in volume. With the suspension of import duties in Japan and improved access to the cigarette market in Taiwan, volume in the Asian region increased dramatically dur- ing 1987. Volume more than dou- bled in Japan on strong sales by Lark, Philip Morris Lights, Philip Morris Superlights, and Parlia- ment. Marlboro Lights, produced under license by Japan Tobacco Inc., was introduced in Japan in the fourth quarter. In the growing import segment of this large and important market, our brands hold a 62.8% share. Following the opening of the Taiwanese market to foreign brands in March, Marlboro, Marlboro Lights, and Parliament achieved an 8.4% share. Volume in the People's Republic of China was up 43.8%. In Hong Kong, Marlboro widened its lead as the best-selling brand, increasing volume and market share by 16.1% and 2.7%, respectively. Marlboro's volume and market share rebounded strongly, recap- turing its position as the market leader in Singapore. The year 1987 was another period of investment for Philip Morris International Inc. Our strong volume performance, together with currency gains, enabled us to further increase our marketing spending in a number of important markets. These investments will have a positive impact on our performance in the years ahead.

FOOD General Foods Corporation's operating revenues increased to $9.9 billion, on 2.9% higher unit volume. Most of General Foods' businesses performed well during the year, with gains in volumes and earn- ings. Processed meats, baked goods, cereals, and international products were especially strong in 1987. An exception was domestic coffee, where pricing and market- ing spending depressed earnings. Income from operations in 1987 declined 2.7% to $722 million. The decline reflects a $117 million •pre-tax charge for restructuring, which was partially offset by a $46 million pre-tax gain on the sale of the Open Pit barbecue sauce retail business. Excluding these special items, income from operations increased 6.9% to $793 million. During the year, General Foods Corporation announced a reor- ganization program designed to improve management effectiveness and productivity. With the forma- tion of three operating companies - General Foods USA, General Foods Worldwide Coffee & Inter- national, and Oscar Mayer Foods -a substantial number of staff positions were eliminated and decision-making was moved closer to the marketplace. Certain manu- facturing facilities are also being restructured to improve operating efficiencies, and there were sav- ings in other overhead functions. General Foods USA Increased Its unit volume by 2.3% in 1987. Established products performed well, generally increasing their market shares. In cereals, good volume gains helped Post Grape- Nuts, Natural Raisin Bran, Super Golden Crisp, and Pebbles to improve their positions. During the year, we also introduced an innovative cereal packaging-our resealable Zip-Pak. Jell-O reversed a volume decline and increased its share of the gelatin market to a new high of 77.4%. Kool-Aid, Crystal Light, and Country Time increased their share of powdered beverages to 78.4%, with strong earnings growth. Our bakery business per- formed well, with Entenmann's successfully expanding to the Pacific Northwest. In November, we completed the acquisition of The Charles Freihofer Baking Company, a major regional baker in the Northeast. We accelerated new product introductions in all menu segments. Crispy Critters, a new low-sugar children's cereal, was marketed nationally. Enten- mann's introduced Fruit & Fibre muffins and a line of "indulgence" pastries.

Kool-Aid Koolers, in its second year of national distribution, achieved a 13% share and is sec- ond in the fast-growing aseptically packaged beverage market. Jell-O refrigerated ready-to-eat puddings were expanded to full distribution on the West Coast after completing a successful test market. We gained valuable experience in convenience meals, testing Culinova refrigerated entrees, Impromptu shelf-stable meals, and Ronzoni frozen Italian entrees. Birds Eye introduced two new lines: Custom Cuisine and Deluxe Vegetables. General Foods Worldwide Cotfee & International unit volume was up 3.6% over 1986. Maxwell House and our other brands continued as the overall share leader in the U.S. market. However, operating income gains in our international operations were more than offset by an earn- ings decline in our domestic coffee business. Through 1987, the U.S. coffee market failed to recover from 1986's depressed levels. With over- all consumption weak, heightened spending by General Foods was needed to compete, which had an adverse impact on earnings. Early in the year, we launched a new, naturally decaffeinated Sanka. New packaging and adver- tising strengthened the position of the Hag brand as Europe's number-one decaffeinated coffee. We gained share in England with the acquisition of Kenco Cof- fee Company Limited, a well- established supplier of grocery and food service ground coffee. In Spain, we introduced Saimaza Cafe Superior and widened our lead in the ground coffee market. With broadened distribution, the Gevalia coffee brand increased its share in Scandinavia. In Canada, our share of coffee in the food-away-from-home market grew with the acquisition of Chase & Sanborn and the Melrose and Dickson food service businesses. We also increased share in Japan and Korea, and began producing soluble coffee in the People's Republic of China. All of our non-coffee businesses were strong in 1987. Kibon ice cream in Brazil performed espe- cially well, increasing volume, and earnings despite a difficult economic environment. In France, our Hollywood gum and Krema confectionery busi- nesses introduced new products and are now distributing Stimerol premium gum in France. We also acquired La Vosgienne, a maker of premium candies. In January 1988, General Foods' Hostess Food Products, the largest brand of salty snack foods in Canada, announced a plan to form a partnership with Frito- Lay, a unit of PepsiCo, Inc. The partnership is subject to approval of the Canadian government. Oscar Mayer Foods continued its leadership in sliced luncheon meats, bacon, and hot dogs, and unit volume increased 3,6%. The market share of Oscar Mayer brand of sliced luncheon meats rose to 26.1%. Our share of the bacon and hot dog categories rose to 10.9% and 13%, respectively. The unit volume of Louis Rich turkey products was up 10%, as it continues as the leader in its categories. Oscar Mayer entered test mar- ket with several new products. Zappetites is a line of eight snack foods made especially for micro- wave ovens. The Lunchables line of convenient light meals includes meat, cheese, and crackers. We are also expanding distri- bution of surimi-based products from the Louis Kemp Seafood Company, which was acquired in 1986. It produces a line of lower- cost, natural alternatives to crab meat.