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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.

BEER Miller Brewing Company's shipments of 39.3 million barrels were up 1.4°/°. Income from operations of $170 million in 1987 was 10% higher than the 1986 level, while oper- ating revenues rose 1.7% to $3.1 billion. In the premium beer segment, Miller Genuine Draft increased its sales strongly over 1986 to 2.6 mil- lion barrels. Miller Lite, the second-best- selling beer in the United States, continues to lead the low-calorie segment by a substantial margin. Although Miller High Life's vol- ume declined again in 1987, it remains the third-best-selling beer in the U.S. In the popular-priced category, Meister Brau and Milwaukee's Best increased their combined volume. Meister Brau Light was introduced during the year in five Eastern states to meet consumer demand for reduced-calorie, popular-priced beers. During the year, we introduced Matilda Bay Wine Cooler. This is a premium blend of white wine and fruit flavors and is the first non- carbonated wine cooler on the market. Financial Services and Real Estate Operations The financing revenues of Philip Morris Credit Corporation (PMCC) declined 1.1% to $162 million, including intercompany transactions of approximately $4 million. Net earnings also decreased 6.3% to $51 million. Year-to-year financial compari- sons are distorted because of 1986 adjustments to PMCC's leveraged leasing portfolio resulting from the effects of the Tax Reform Act of 1986 and certain related leveraged lease renegotiations. Excluding the impact of this accounting adjustment, PMCC's 1987 financing revenues and net earnings would have increased by 20.9% and 21.1%, respectively, over the prior year. PMCC's growth resulted primarily from the continued expansion of its financial service operations. In 1987, PMCC invested $349 million in leveraged leases, bring- ing the value of the equipment portfolio to almost $4 billion. We also continued to support Philip Morris' operating companies by providing financing to their customers. Mission Viejo Realty Group Inc.'s operating revenues exceeded. the prior year by 10%. Its 1987 net earnings of $21 million, including amortization of goodwill, were a record. Although the Colorado real estate market continued to be soft, the California residential housing, land, and business prop- erties markets remained strong. PMCC was in a good financial position at the end of 1987, with a capital base equaling $579 million. This base provides ample financ- ing capacity to accommodate our.• growth in 1988 and beyond. In summary, Philip Morris Companies Inc.'s 1987 results reflectedprior years' investments in new product development, in long-term marketing programs, and in modern plant and equip- ment. We will continue to invest now, for future profitable growth.

Quality starts with superior ingredients and no company more rigorousiyy seeks: out exceiience. We at Philip Morris purchase only tlie finest quality agricultural produetsR ft,takes a keen eye to separate the premium from the ~ merely satisfactory. , 4 When 14tr. Walker (left) rates leaf tobacco prior t.ei,° , . ,:.f auction, he draws on 38 years of experience. .a"`, Atr. Spc~ncer (right,y, ~raving }jecn raiseei on a. turkey ~r fa.rxn, uses extensive ~aersanz~l l:nawl.ecige whe'tt t~ J fas.spect.ia~q t~srlc~ys c~n belralf of Louis Na~.h. Mr. Itiei~op (below rigiit) brings faiar Aecades of practice to ensuring that the barley Miller ~ccepts is? M81k $p0111Af ' correctly nialted. R. C, "Dlxlr Wallter. : ` >.:.1Vlanager, U.S. Leaf Purehases'"" I'ia.ilip` 1Wiorria ~.•~.$.A:.- :' Louisviil.e;`Kentucky ', t,awrence Ri®sQp, Maltster Mil:ier,, BreaviiiK Compaaly , Waterleiox Wisciinsin ' Field Supervisor ', Louis Rich Company ,_, , Goshen, California © ® ® ® ® 19 0 0 ~ ~ 4~- I." r_f(

Suzanne Thompson , Sensory Specialist Miller Brewing Company M9lsvankee, Wisconsin ' and ease of use. iL, FWU I ® Industry-leading products can be made still better aO no company devotes ; more attention to research and`, development. We at Philip Morrls. are constantly refining our brands to :: Increase customer satisfaction Ms. Thompson (left) analvzes data fxorn,daily taste= test panels at Miller to monitor the:preferences,pf' beer d.rinkers. Emfrle>ying a dior3Wl~ser, I}r . Lephardt (bel®iw left)perftoriats e'agarettt, researel}. Messrs . Riayancl'I'edeaehi ~riglgt) helped tieai'gti a,' re`dosahle linpr that sig.n.it"xcatttly laroleengs, tfie fresh- ties9 of Post cereals: Dr. J®hI1 Q. l.eph8!'dt Philip Morrx9Y.3' S:A; Senior Scientist, Richmond, Virginia :. Research & Developnaent.:. 6eorg8;Bay (L),; JrW:: Paelcagiiig R;: ~ ;~ rc h Generel ROds Cr.1~yFFair~~, ! t Cf},}a ~ gP•.

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Jean Cldude Arnal Process Operator General Foods France St. Genest, France Leading technology enhances manufacturing competitiveness and no company is quicker to respond for greater efficiency. We at Philip Morris produce billions of units of mass- market consumer items each year. Speed and reliability are important to us-as ls employee safety. Mr. Arnal (left) prepan~s an on-line flavor sampling of Hollywood gum at or;e of Europe's most auto- mated food-processing ;acilities. Mr. Daniel (below left) operates a machine, capable of producing 10,000 cigarettes per m=nute. Using a scale model, Mr. Randle (right) reviews the inner workings of General Foods' new, state-of-the-art natural decaffeination plant. I Charles Randle Operator, Coffee Decaffeination General Foods Houston, Texas

Sharon F(izsimons Director; U.S. Export'r;ogistics ,, and Customer Service:: : ` P~ler 9Neng Manager, Regional Coordination, A,ia and Austraha j Sam Cermack.;_ . . - . AssistantMatnager~ : U S ExportLagistios .. Phili~ 14fiorris.Iriternational Inc,: New York: New York ;. '19 ~- . GenirfueDraff: Ge.vuiue Draft G Joan nogan- `J Area Mariager . Miller. Brewing Company Milwaultee, . Wis consin lee C9ndner Merch"andiser ' W.O.W. Distributor Waukesha, Wisconsin Bob ikckls. Vice President;.Microwave Business Oscar Mayer Foods Madison, Wisconsin,. 4 W 17 , marketplaces demand an innaUative sales force and effective , dmAbution network,.We at Philip MOMs work to meet the needs, of reRaolers both domestical9y and in our expanding international trade. Ms. FitzS'unons.andMessrs.Wang-and Cer'mack (left) map strategies'for exportiing-Philip Morris Superlights into, newly-ac.cessed Japanese tobacco. markets. Mr. Tuckis (right):is a member of the team test-marketingZappetites, a newhne ofmt.crowave snacks: Ms 'Rogan (below riglit) works'wxth local merchandisers~'to set up high-profile=and higlily , effective-displays of MilIer Genuine Draf,t.

J II W f time-honored names are invaiuabie piattorn~s for brawtho We at Philip morris constantly reevaluate Qur, products in search of line extensions- thaf not oniy improve our market share, but fuiiiU nsw consumer demands. Mr. Brocking P;te£t;6 discusses the latest Voint-caf stfle ,. material; that has helped make Marlbora the world`s: best-selEsng cigarette. Messrs. Trautseholcl and ' Lucke (right) inspect the new bun-lengtkOscar - Mayer hot dog. [3acl€eef by a aper.imil;~ designed .ara.nter diaptrzy, Mr. Jackson and Ms: Simons review.: the s'ueoessful launch of rirw Beaa~on:& Hedges hight$,: : tp(?a in el b®x. €: Steron Bracking •: : Saics Rc:~are~entatFVe' Philip Miirrie C3.&A: New Yorks NeFV 'k-6rk` Nlichae~ 1~auiadhold Gtnup I~rcc~uOt Miriager ~ C)scat' Mayer ~'ooels. Macdieo>;r; ~ i~egtaein IYlarriitJac(~aor~ I)iv{sioiA`l~~`~nagalr . Pkulzp Morris iJ>S.A.. C1ark,.lYeiv Jet'seX ` N r : aan ruaW~ rlc srgn N'I n i3 a a<<l t Ii Renee Simons Brand 1!'.Can Philigz<,14fo~ris t I,~..1. New Yasrkt New Y, r k 1-4 4:b N W

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Results 1987 Compared with 1986 Operating revenues for 1987 increased $2.3 billion (9.0%) and operating profit, as defined for segment reporting (income from operating companies excluding equity in net earnings of unconsolidated subsidiaries and affiliates), increased $471 million (13.1%). All business segments had increased revenues and all business segments, except food products, had increased operating profit. Net earnings increased by $364 million (24.7%), due principally to increased operating profit, as well as reduced interest and other debt expense, net and a lower effective income tax rate. The decrease in interest and other debt expense, net was due primarily to lower average amounts of outstanding debt. The 1987 results included a pre-tax charge of $117 million related to a restructuring at General Foods, partially offset by a pre-tax gain of $46 million from the sale of the Open Pit barbecue sauce retail business. These items reduced net earnings and earnings per share by $22 million and $0.09, respectively. The restructuring is expected to result in improved operating efficiencies and reduced overhead expenses. The company's effective tax rate in 1987 was 45.0%, compared with 47.5% in 1986. The decrease resulted pri- marily from provisions of the Tax Reform Act of 1986 which reduced corporate income tax rates. 1986 Compared with 1985 Operating revenues for 1986 increased $9.4 billion (59.2%) and operating profit increased $918 million (34.3%). The increases reflected 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 exclu- sion of Seven-Up and Philip Morris Industrial. - Net earnings increased by $223 million (17.7%) over 1985, due principally to increased operating profit, parti- ally offset by interest expense associated with the acquisi- tion of General Foods as well as a higher effective income tax rate. Earnings in 1986 reflected $111 million of goodwill amor- tization, substantially all of which related to the acquisition of General Foods. Goodwill amortization of $32 million in 1985 included $16 million amortization of General Foods' goodwill. Interest and other debt expense, net increased by $462 million in 1986 due principally to General Foods acquisition borrowings. The company's effective tax rate in 1986 was 47.5% com- pared with 46.1% in 1985. The increase resulted from the nondeductibility of certain intangibles and other items relating to the acquisition of General Foods and from the impact of certain provisions of the Tax Reform Act of 1986, which repealed investment tax credits retroactive to January 1, 1986. In 1986, the company changed its method of determining expense for domestic pension plans to conform to the requirements of Statement of Financial Accounting Stan- dards No. 87 ("SFAS 87"). The change increased earnings before income taxes, net earnings and earnings per share by $76 million, $39 million and $0.16, respectively. The decrease in pension costs reflected changes in certain actu- arial assumptions and the amortization of the unrecognized net gain of $429 million at the date of adoption, January 1, 1986. -~ Based on the current overfunded status of its pension plans, the company anticipates that no significant contribu- tions will be required for the next several years. Operating Results by Business Segment Operating revenues and operating profit increased 9.0% and 13.1%, respectively, over 1986. Tobacco Tobacco operations continued to show strong gains in operating revenues and operating profit, which in 1987 increased 15.4% and 15.8%, respectively. Philip Morris U.S.A. had a 7.4% increase in revenues in 1987 due pri- marily to price increases, as well as a 0.5% increase in unit volume. Philip Morris U.S.A.'s unit volume gain continued to outperform the domestic cigarette industry, which had a unit volume decline of 2.1%. Philip Morris U.S.A. increased its unit volume to 215.6 billion units for a market share of 37.8% in 1987 compared with 36.8% in 1986. Marlboro increased its unit volume by 0.3% to 134.6 billion units. Philip Morris International increased its revenues by 25.4% due primarily to increases in unit volume. and cur- rency translation. Total unit volume of Philip Morris Inter- national increased 7.8% over 1986, excluding volume added as a result of the merger of a Canadian subsidiary with a subsidiary of Rothmans International plc. Currency trans- lation increased operating revenues by $791 million in 1987. The increase in operating profit was due principally to higher revenues and currency translation, partially offset by higher marketing expenses.

In 1986, revenues and operating profit from tobacco operations increased 20.4% and 17.1%, respectively. Philip \'Iorris U.S.A. had a 6.7% increase in revenues due pri- marily to price increases, as well as a 0.5% increase in unit volume. The domestic cigarette industry unit volume declined by 2.1% in 1986. Philip Morris International increased its 1986 revenues by 41.2% due primarily to unit volume increases and currency translation and the consoli- dation of two majority-owned subsidiaries previously reported on the equity method. Tota11986 unit volume of Philip Morris International increased 6.3% over 1985 and currency translation increased operating revenues by $877 million. The increase in operating profit was due princi- pally to higher revenues and currency translation, partially offset by higher marketing expenses. Food Products Food products revenues increased 2.9% in 1987 due pri- marily to increased unit volume and currency translation, partially offset by coffee price decreases. GF USA had a 5.5% increase in revenues due primarily to a 2.3% growth in unit volume and to price increases. GF USA had unit vol- ume increases in its breakfast foods, bakery and desserts operations, while unit volume in beverages and meals remained flat. GF Worldwide Coffee & International had a slight decrease in revenues on a 3.6% increase in unit vol- ume. The decline in revenues was due primarily to price declines in domestic coffee, which was affected by lower green coffee bean prices throughout the year. However, during September 1987, the International Coffee Agreement was successfully implemented, resulting in a two-year agreement between producing and consuming nations. It is anticipated that this agreement will result in a stabilization of green coffee bean prices. GF Worldwide Coffee & Inter- national's foreign operations had growth in both unit vol- ume and revenues. Currency translation resulted in a $236 million increase in revenues. Oscar Mayer revenues increased 4.4% due primarily to 3.6% growth in unit vol- ume. Oscar Mayer had unit volume increases in both Louis Rich and Oscar Mayer brands. Food products operating profit decreased 3.1%froin 1986 due primarily to increased marketing expenses and certain nonrecurring items. Higher marketing expenses resulted principally from trade spending for coffee, associated with the competitive environment resulting from lower green coffee bean prices. Nonrecurring items in 1987 consisted of a$117 million restructuring charge, partially offset by a846 million gain on the sale of the Open Pit barbecue sauce retail business. Excluding these nonrecurring items, operating profit would have increased 8.3%. Revenues and operating profit for 1986 reflected the ,. inclusion of General Foods' operating results for the first full year. To facilitate a year-to-year analysis, this discus- sion addresses changes in General Foods' 1986 operations compared with operating results of calendar year 1985. In 1986, food products revenues increased 7.1% to $9.7 billion, 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 primar- ily to lower coffee volume largely influenced by coffee price volatility which disrupted consumer and trade buying pat- terns. Excluding coffee, domestic unit volume increased in 1986, principally in processed turkey products, baked goods and cereals. Internationally, growth was strong across most product lines and markets. Operating profit decreased 4.5% to $624 million. However, excluding good- will amortization, operating profit increased by approxi- mately 6.9%. The increase reflected higher revenues and currency translation, partially offset by higher green bean costs and marketing expenses. Beer Beer operating revenues in 1987 increased 1.7%, due pri- marily to a 1.4% increase in barrel volume. Market share rose to approximately 22.1% from 21.7% in 1986. Oper- ating profit increased 9.9% due primarily to higher reve- nues and lower variable cost of products sold, partially offset by higher fixed manufacturing costs and marketing expenses. In 1986, revenues increased 4.5% over 1985, primarily attributable to a 4.4% increase in barrel volume. Oper- ating 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.

General Net earnings for 1987 increased 24.7% to $1.8 billion. Earn- ings per share reached $7.75 in 1987, up 25.0% from 1986. Dividends declared in 1987 increased 27.3% to $3.15 per share ($749 million) from $2.475 per share ($590 million) in 1986. The quarterly dividend declared in November 1987 was at an annual rate of $3.60 per share, an increase of 20.0% over the annual rate established in November 1986. Return on average stockholders' equity was 29.5% in 1987 and 28.4% in 1986. The company's return on average assets was 12.3%, up from 10.6% in 1986, due principally to higher earnings. In 1987, the company repurchased 2 million shares of its common stock at an aggregate cost of $200 million (average cost of $99.91 per share). The purchases were made in accor- dance with the company's 1987 announcement of its intention to expend up to $1.0 billion to repurchase up to ten million shares of its outstanding common stock. In 1986, 1.9 million shares of common stock were repurchased at an aggregate cost of $140 million (average cost of $72.53 per share). Debt and Interest At December 31, 1987, the company's debt-to-equity ratio was .93, down from 1.22 at December 31,1986. The lower ratio reflects increased earnings reinvested in the business and the positive effect of currency translation on stock- holders' equity, as well as lower debt. Total debt was $6.4 billion at December 31, 1987, compared with $6.9 billion at December 31, 1986. {3 StaclQaolders' EQYItr (Year•End) -Het RAlam ®u ArAra90 St00NhWderS'Eltuttm(%) Billiansof Dollars °~ 7' 35 M khl ASiItt (Year•End) ~ NQl RH91w (Before Net Interest) w Arillai1A tolal Assats (%) Billions of Dollars- 19.6 % 14 At December 31,1987, approximately $721 million (11%) of the company's total debt was sensitive to interest rate fluctu- ations, compared with approximately 17% at December 31, 1986. The company's average interest rate on total debt was 9.3% during 1987 and 1986. At year-end 1987, the average interest rate on total debt was 9.2%. Credit facilities totaling $7.8 billion are maintained with various lenders to support commercial paper borrowings for seasonal and other needs of the company's operations. Sub- stantially all of these facilities have maturities beyond one year. Of these facilities $7.5 billion were unused at December 31, 1987. 1 Interest and other debt expense, net decreased $85 million in 1987 compared with 1986, due primarily to lower average amounts of outstanding debt. In 1986, interest and other debt expense, net more than doubled.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 expense) was 5.70 in 1987 compared with 4.61 in 1986 and 7.76 in 1985. The company maintains an "A UP-1" rating in the com- mercial paper market and an "A" credit rating for long-term obligations. During 1987, total debt decreased by $534 million, which represented $1.3 billion of debt repayments and a reduction of short-term borrowings, partially offset by $492 million of debt issuances and $298 million of foreign currency transla- tion. Long-term debt issued in 1987 consisted of $204 million W TBUI DAt (Year•End) . Ratlm of 1" Deit tr St d(I$dtts' F.qltlly (Year•End) Billions of Dollars 8.4 Ratio 3.5 i.- (p1RSKt EYMtSQ ~ (Af&eKt D1111IYd'I,f (Earnings Before Interestand Taxes Divided by Interest) Millions of Dollars 840 10.5 78 79.8o 81 82 83 84 85 86 87 2500011426 Coverage

in ttie United States, $100 million in the Eurodollar market t,nd the equivalent of $188 million of foreign currency denominated borrowings. During 1986, total debt decreased by $1.1 billion, which represented $3.4 billion of debt repayments, partially offset by $2.1 billion of debt issuances and an increase in short- term borrowings, and $214 million of foreign currency translation. 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 company has entered into currency swap agreements to hedge its exposure on substantially all of the foreign cur- rency denominated debt issued in 1987 and 1986. Foreign currency denominated debt for which the company has not entered into currency swap agreements is maintained pri- 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 $575 million (26.0%) to $2.8 billion in 1987, due primarily to increased earnings and to a higher deferred income tax provision in 1987. In 1986, funds from operations increased 24.7% over 1985 due primarily to increased earnings and noncash charges for depreciation and amortization, reflecting the inclusion of the first full year of operating results of General Foods. Total funds provided in 1986 included $487 million of working capital generated principally from the sale of sub- stantially 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. The company expects that funds from operations and available credit facilities will be sufficient to meet the needs of the business. New Financial Accouniing Standards In 1987, the Financial Accounting Standards Board issued two financial accounting standards which will affect the com- pany's financial reporting in future periods. Statement of Financial Accounting Standards No. 94 "Consolidation of All Majority-owned Subsidiaries" ("SFAS 94") requires the full consolidation of all majority-owned subsidiaries in financial statements for fiscal years ending after December 15, 1988. After giving effect to the provisions of SFAS 94, the company's total revenues, total assets and total liabilities as of December 31, 1987 would have approxi- marily to hedge currency exposure on its net investments in foreign operations. Foreign Currency Translation The company's consolidated international operations account for 28% of its operating revenues, 11% of its oper- ating profit and 22% of its identifiable assets. The principal consolidated foreign operations are in Europe and use local currency as the functional currency. Currency translation gains increased stockholders' equity by $249 million in 1987 as the dollar continued a weakening trend that began in 1985. Currency translation adjustments resulted in increases to stockholders' equity of $139 million and $54 million in 1986 and 1985, respectively. The company continually monitors its foreign currency exposure and acts to minimize such exposure, when deemed prudent, through various hedging transactions. Funds Used Capital expenditures increased $40 million to $718 million in 1987, approximately 56% of which related to General Foods, primarily for expansion and modernization of manufactur- ing and processing facilities. In 1986, capital expenditures increased $331 million due primarily to the inclusion of the first full year of General Foods. Capital expenditures are estimated to be $1.0 billion in 1988 and $3.1 billion for the years 1989-1992, of which approximately $544 million and $1.9 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 significant effect of the election was to increase the carrying value of domestic property, plant and equipment by $508 million. 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. mated $28.2 billion, $21.5 billion and $14.6 billion, respec- tively. Net earnings and stockholders' equity would not have changed. Statement of Finn ancial Accounting Standards No. 96 "Accounting for Income Taxes" ("SFAS 96") was issued in December 1987 and requires the use of the liability method of accounting for deferred income taxes for years beginning after 1988 and allows for restatement of prior years. The company has not determined the year in which it will adopt SFAS 96 or the effects of such adoption.

SELECTED f1NANCtAL DATA-F1fTEEN-YEAR REVIEW (in millions, except per share amounts and employees) i ngs e f ore i ncome t axes E arn b ,A ~- Summary of Operations: Operating revenues United States export sales Cost of sales: Cost of products sold Federal excise taxes Foreign excise taxes Income from operating companies Interest and other debt expense, net Pre-tax profit margin Provision for income taxes Net earnings Earnings per share Dividends declared per share Weighted average shares Capital expenditures Annual depreciation Property, plant and equipment (net) Inventories Working capital Total assets Long-term debt Totaldebt Deferred income taxes Stockholders' equity Funds from operations Net earnings reinvested Common dividends declared as % of net earnings Book value per common share Market price of common share high-low Closing price year-end--• - ' Price/earnings ratio year-end Number of common shares - outstanding at year-end Number of employees Income from operating companies is income before corporate expense and interest and other debt expense, net. Certain amounts appearing in the prior years' consolidated statements of earnings have been reclassified to conform with the current year's presentation. General Foods Corporation was acquired in November 1985. Accordingly, consolidated operating results shown above include the operating results of General Foods Corporation after October 1985. 1987 1986 1985 1984 1983 $27,695 25,409 15,964 13,814 12,976 1,592 1,193 923 925 970 11,264 11,039 6,318 5,517 5,343 2,085 2,075 2,049 2,041 1,983 3,331 2,653 1,766 1,635 1,527 4,193 3,707 2,760 2,296 1,944 685 770 308 273 230 3,34$ 2,811 2,329 1,607 1,585 12.1% 11.1% 14.6% 11.6% 12.2% $ 1,506 1,333 1,074 718 681 1,842 1,478 1,255 889 904 7.75 6.20 5.24 3.62 3.58 3.15 2.475 2.00 1.70 1.45 238 239 240 245 252 $ 718 678 347 298 566 564 514 367 341 294 6,582 6,237 5,684 4,014 4,381 4,154 3,836 3,827 2,653 2,599 1,396 1,432 1,926 1,289 1,117 19,145 17,642 17,429 9,339 9,667 5,222 5,945 7,331 2,059 2,515 6,378 6,912 8,009 2,588 3,075 1,288 994 872 784 737 6,823 5,655 4,737 4,093 4,034 2,769 2,214 1,775 1,547 1,349 1,093 888 776 472 538 40.6% 39.9% 38.1% 46.8% 40.5% $ 20.83 23.77 19.85 16.86 16.14 124t/x-72% 78-437A 47%-36 415/s-31 361/s-27 85h 717/s 4411s 40% 357/s 11 11 8 11 10 237 238 239 243 250 113,000 111,000 114,000 68,000 68,000 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.

Philip Mo rris Cuiupuiiics-foc. und Sub,idiurivs - 1982 : 1981 1980 1979 1978 1977 1976 1975 1974 1973 ~ ~ ~ 11,586 10,722 9,650 8,149 6,633 5,202 4,294 3,642 3,011 2,601 978 834 702 521 424 316 211 158 132 108 5,315 5,024 4,447 3,656 3,072 2,402 1,967 1,657 1,290 1,061 1,180 1,169 1,105 1,037 961 862 778 686 620 559 1,435 1,411 1,389 1,122 703 490 381 392 349 335 1,659 1,403 1,216 1,156 936 761 608 487 402 323 -~ ! 246 232 205 190 137 95 97 95 79 47 1,300 1,068 924 895 746 626 472 361 298 '25 6 11.2% 10.0% 9.6% 11.0% 11.2% 12.0% 11.0% 9.9% 9.9% 9.8% 518 408 375 387 337 291 206 149 122 107 782 660 549 508 409 335 266 212 176 149 3.11 2.64 2.20 2.04 1.69 1.40 1.12 0.91 0.79 0.68 1.20 1.00 .80 .625 .513 .391 .288 .231 .194 .169 251 250 249 249 241 239 238 234 223 219 918 1,019 751 629 566 280 220 245 216 175 250 211 178 133 106 79 65 50 38 .30 4,178 3,583 2,806 2,214 1,738 1,202 994 851 660 510 2,834 2,922 2,499 2,235 2,189 1,818 1,658 1,448 1,269 1,009 1,989 1,798 1,662 1,728 1,585 1,416 1,202 891 725 515 9,622 9,115 7,302 6,322 5,608 4,048 3,582 3,134 2,653 2,108 3,746 3,498 2,597 2,447 2,147 1,427 1,248 918 768 500 3,746 3,804 2,800 2,507 2,372 1,564 1,526 1,443 1,239 947 565 411 303 220 150 104 78 71 67 47 3,663 3,234 2,837 2,471 2,115 1,690 1,430 1,'?.28 975 815 1,160 976 784 703 577 444 348 261- 211 178 480 408 350 352 284 254 197 157 132 111 38.6% 37.9% 36.3% 30.6% 30.6% 27.9% 25.7% 25.7% 24.8% 25.0% 14.55 12.89 11.37 9.92 8.51 7.05 6.01 5.17 4.26 3.68 337A-22 27'.'a-21 24i/-14'h 19%-15-% 19'A-14 16i/r-12' 157.fi-121h 143/s-103'4 15%-81/4- 17'A-12~/. ~ 30 243/4" "" 21% 18 175/s 152 15a 13i/4 12 143A 9 9 9 8 10 11 13 14 15 21 252 251 250 249 249 240 238 237 229 222 72,000 72,000 72,000 65,000 60,000 53,000 51,000 48,000 38,000 37,000 ~ ~

CONS09.1DATED BALANCE SHEETS (in millioas of dollars) ® 9,398 8,486 Less accumulated depreciation 2,816 2,249 6,582 6,237 at December 31 Assets 1987 1986 Cash and cash equivalents $ 189 $ 73 Receivables,'net 2,083 1,878 Inventories: Leaf tobacco Other raw materials Finished product Other current assets Total current assets Property, plant and equipment, at cost: 2,008 1,899 840 755 1,306 1,182 4,154 3,836 146 127 6,572 5,914 Land and land improvements 494 474 Buildings and building equipment 2,800 2,629 Machinery and equipment 5,678 5,071 Construction in progress 426 312 Investments in unconsolidated subsidiaries and affiliates 1,244 1,067 Goodwill and other intangible assets (less accumulated amortization of $243 and $141, respectively) 4,052 3,988 Other assets 695 436 See notes to consolidated financial statements. $19,145 $17,642

Philip Morris Companies Inc. and Subsidiaries 1987 Liabillt9es Notes payable $ 691 Current portion of long-term debt 465 Accounts payable 803 Accrued liabilities: Taxes, except income taxes 537 Employment costs 453 Other 1,287 Income taxes payable 727 Dividends payable 213 Total current liabilities 5,176 Long-term debt 5,222 Deferred income taxes 1,288 Other liabilities 835 Stockhoiders' Equity Common stock, par value $1.00 per share 240 Additional paid-in capital 272 Earnings reinvested in the business 6,437 Currency translation adjustments 146 7,095 Less cost of treasury stock 272 Total stockholders' equity 6,823 $19,145 1986 ~ ~ $ 864 103 813 531 405 1,031 557 178 4,482 5,945 994 566 240 303 5,344 (103) 5,784 129 5,655 $17,642

9 0 M t,LP_~ Earnings Additioual Reinvested Common Paid-in in the Stock Capital Business a: 1,1985 galance, January Net earnings 1,255 Exercise of stock options and stock units Cash dividends declared 32.00 per share Currency translation adjustments 3tuck purchased Retirement of treasury stock (7) (32) (530) 569 - ;; Balance, December 31, 1985 119 404 4,456 (242) - 4,737 Net earnings Esercise of stock options and stoek units 1 19 11 31 Cash dividends declared $2.475 per share Two-for-one stock split-up 120 (120) Currency translation adjustments 139 139 Stock purchased (140) (140) Balance, December 31,19$6 240 303 5,344 (103) (129) 5,655 Net earnings Exercise of stock options and stock units (31) 57 20 Cash dividends declared $3.15 per share (748) (749) Currency translation adjustments 249 249 Stock purchased {2~51 (2401 ~ Balance, December 31,1987 $240 $272 $8,437 $ 9k6 $(272) $8,823:. See notes to consolidated 9nancial atatementa. $126 °,6427 $4,210 $(296) (479) 1,478 1,478 (590) (590) Currency Total Translation Cost of Stock- Asijust- Treasury holders' ments Stock Equity 54 54 1,842 1,842 $(374) $4,093 ' 21 30 (216) (216) 1,255 (479) G: , Cp~ISOLI®ATED STATEMENTS DF STDCKH©LDERS EQUITY {in millions of doIlara, except per share data)

;: ~C®N$®LiDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in millions of dollars, except per share data) 1 ~ Common Stock Additional Paid-in Capital Earnings Reinvested in the Business Currency Translation Adjust- ments Cost of Treasury Stock Balance, lanuary 1,1985 $~126 ° $4,210 1(296) 1(374) Net earni.ngs 1,255 Exercise of stock options and stock units 9 21 Cash dividends declared $2.00 per share (479) Currency translation adjustments 54 S ,ck purchased Retirement of treasury stock (7) (32) (530) 569 Balance, December 31, 1985 119 404 4,456 (242) - Net earnings 1,478 Exercise of stock options and stock units 1 19 11 $2.475 per share (590) Two-for-one stock split-up 120 (120) Currency translation adjustments 139 Stock purchased Balance, December 31, 1986 240 303 5,344 (103) (129) Total Stock- holders' Equity 54,093 1,255 30 (479) 54 - 4,737 1,478 31 139 5,655 $3.15 per share (749) (749) Currency translation adjustments 249 249 Stock purchased (200) (200) Balance, December 31,1987 $240 $272 $6,437 $146 $(272) $8,823 See notes to consolidated financial statements.

CONS®LIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION (in millions of dollars) for the years ended December 31 Funds Provided By Operations: Net earnings Depreciation and amortization Deferred income taxes Equity in undistributed net earnings of unconsolidated subsidiaries and'affiliates Funds from operations Increase in accrued liabilities and other payables Working capital from sales of operations Currency translation adjustments affecting working capital Other, net Total funds provided Funds Used For Increase (decrease) in: Cash and receivables Inventories Other current assets Capital expenditures Dividends declared Increase in property, plant and equipment from income tax election Investment in General Foods Corporation exclusive of $718 million working capital acquired Other, net Total funds used Net funds provided (used) Financing Activities Increase in current notes payable Long-term debt financing Reduction of long-term debt Purchase of treasury-stock Issuance of shares Funds (used for) provided from financing activities increase (Decrease) In Working Capital N 0 0 Working Capital at Year-End ~ ~ .,~ ~ ~ See notes to consolidated financial statements. 1987 1986 1985 $1,842 $ 1,478 $ 1,255 704 655 424 338 133 159 (95) (52) (63) 2,789 2,214 1,775 505 226 1,467 20 487 169 139 77 18 210 211 3,453 3,214 3,640 321 (2) 1,005 318 9 1,174 19 14 74 718 678 347 749 590 479 508 4,864 301 2,428 1,797 7,943 $1,027 $ 1,417 $(4,303) $ 189 $ 289 $ 149 492 1,788 4,666 (1,534) (3,385) (326) (200) (140) (216) 20 31 30 $(1,027) $(1,417) $ 4,303 $ (36) $ (494) $ 637 $1,396 $ 1,432 $ 1,926

NOTES T0 CONSOLlDATED FINANCIAL STATEMENTS Summary of Significant Accounting Policies: Consolidation: The consolidated financial statements include all signifi- cant subsidiaries except for the credit corporation and real estate operations. Investments in unconsolidated sub- sidiaries and affiliates are accounted for generally by the equity method. Pursuant to a recently issued financial accounting standard, the company will consolidate all majority-owned subsidiaries in 1988. Certain amounts appearing in the prior years' consoli- dated statements of earnings have been reclassified to conform with the current year's presentation. Inventories: Inventories are stated at the lower of cost or market. The last-in, first-out ("LIFO") method is used to cost substan- tially all domestic inventories. The cost of other invento- ries is determined 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 Acquisition: The company acquired for $5.6 billion all of the out- standing 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 General Foods have been included in the consolidated operating results of the company for periods after October 1985. At December 31, 1985 the purchase price exceeded the estimated fair value of 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. Divestitures: In 1986, the company-s-old substantially all of the opera- tions previously conducted by The Seven-Up Company ("Seven-Up operations") to various purchasers and divested the remaining operations in 1987. The total pro- ceeds from the sales, net of expenses, approximated the $542 million book value of the investment at January 1, 1986. In 1985 the company recorded a $50 million write- down in anticipation of the sale of the Seven-Up opera- InYentorieS: The cost of approximately 64% of inventories is deter- mined by the LIFO method. The stated LIFO value of inventory was approximately $650 million and $700 mil- of the aging process, ordinarily would not be utilized within one year. 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 undistrib- uted earnings expected to be remitted from subsidiaries. Property, plant and equipment: The capitalized cost of facilities includes interest and real estate taxes incurred during the construction period. Depreciation is recorded by the straight-line method. Goodwill and other intangible assets: Substantially all goodwill and other intangible assets are being amortized on a straight-line basis, principally over 40 years. 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. As a result, the carrying value of domestic property, plant and equipment was increased by $508 million and certain intangibles became deductible for tax purposes. Had the acquisition occurred at the beginning of 1985, pro forma consolidated operating revenues, net earnings and earnings per share would have been approximately $23,361 million, $1,260 million and $5.26, respectively, for the year ended December 31, 1985. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had then been in effect. tions. The write-down reduced net earnings and earnings per share by $35 million and $.15, respectively. In 1985, substantially all of the Philip Morris Industrial operations were sold for $250 million. The gain on these sales increased earnings before income taxes, net earnings and earnings per share by $77 million, $38 million and $.16, respectively. lion lower than the current cost of inventory at December 31, 1987 and 1986, respectively.

HOTES CONTIN®ED Subsidiaries and Affiliates Located Outside the United States: Principal financial data of subsidiaries and affiliates located outside the United States were as follows: Consolidated Unconsolidated (in millions) 1987 1986 1985 1987 . 1986 1985 Assets $4,418 $3,627 $3,105 -current $2,670 $2,330 $2,087 -noncurrent 1,047 1,338 1,280 Liabilities 2,276 1,778 1,395 -current 1,461 1,428 1,431 -noncurrent 695 1,022 895 Net assets 2,142 1,849 1,710 1,561 1,218 1,041 Company's equity 2,142 1,849 1,710 518 498 404 Operating revenues 7,875 6,648 3,545 6,675 6,364 5,555 Gross profit 1,580 1,400 1,165 Pre-tax earnings 507 209 166 Net earnings 279 184 92 • 325 126 68 Company's equity 279 184 92 54 36 45 At December 31, 1987, investments in unconsolidated affil- iates located outside the United States exceeded equity in net assets by approximately $119 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 consolidat- ing two majority-owned subsidiaries located outside the United States that had been reported on the equity method. For the year ended December 31, 1985, combined operating revenues of the two subsidiaries were approxi- mately $440 million. Consolidated earnings reinvested in the business at December 31, 1987 included the company's equity of approximately $200 million in undistributed earnings of unconsolidated affiliates. Federal income tax has not been provided on approxi- mately $600 million of accumulated earnings of subsidi- aries, 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, primarily 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, com- mercial and industrial 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 since November 1985 are reflected in the following condensed financial data based on historical carrying values of assets and liabilities. PMCC has accounted for MVRG by the equity method since July 1, 1986. Pursuant to a support agreement, the company has agreed to retain ownership of 100% of the voting stock of PMCC and make periodic payments to PMCC to the extent necessary to ensure that earnings available for fixed charges equal at least 1.25 times its fixed charges. N r-n 0 0 0 ~ N ~ W ~

Condensed financial data at December 31 and for the year then ended follow. (in millions) 1987 Assets F'mance assets $2,184 Investment in and loans to i4IVRG 419 Notes receivable from affiliates 23 Other assets 117 Total assets $2,743 Liabilities and stockholder's equity Notes payable $ 284 Long-term debt 1,094 Capital notes due parent 90 Deferred taxes and other liabilities 786 Stockholder's equity 489 1986 1987 1986 1985 Revenues $158 $175 $102 $1,637 Expenses 130 113 66 411 Pre-tax earnings before 23 MVRG and cumulative 53 adjustments related to $2,124 leveragedleases 28 62 36 Pre-tax earnings of MVRG 40 34 - Cumulative pre-tax adjustments $ 175 related to leveraged leases - (71) 965 Earnings before income taxes 68 25 36 - Provision for income taxes: 567 Current year (4) 35 11 417 Cumulative adjustments Total liabilities and stockholder's equity $2,743 $2,124 related to leveraged leases - (83) Cumulative adjustments to leveraged leases in 1986 resulted 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. Assets Operating revenues $330 $300 $204 Real estate held for sale' and investment $488 $476 Costs and expenses 289 262 178 Other assets 95 79 Earnings before income taxes 41 38 26 Total assets $581 $555 Provision for income taxes 19 19 14 Payable to affiliates $156 $118 Stockholder's equity 243 271 Total liabilities and stockholder's equity $581 $555

NOTES C®NTlNUED 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) 1987 1986 Amount Outstanding Average Interest Rate Amount Outstanding Average Interest Rate Bank loans $277 10.1 W. $ 997 8.1% Commercial paper obligations 414 7.9% 476 7.1% Amount reclassified to long-term debt . The company has credit facilities with a number of lend- ing institutions amounting to approximately $7.8 billion at December 31, 1987. Approximately $7.5 billion of these facilities remained unused at December 31, 1987. These facilities are maintained to support the company's commercial paper borrowings and for other corporate purposes. Commitment fees of ifio to'/4 of 1 percent are paid to the banks as compensation for most of the 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 bor- rowings on a long-term basis. Accordingly, short-term borrowings intended to be refinanced had been reclas- sified to long-term debt. 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, 61/s% to 151/a% (average effective rate 9.16%), payable through 1998 1987 1986 $ - $ 609 2,721 3,081 Debentures, 6% to 101iz% (average effective rate 11.12%), $1,200 million face amount, payable through 2017 851 775 Other currencies: Swiss franc obligations, interest from 47i6% to 6%%, payable 1989 to 1994 6% Deutsche mark obligation, payable 1996 r.,? 61h% Japanese yen bonds, payable 1991 rn O 9V4% Canadian dollar bonds, payable 1990 c> O ~ Other foreign currency debt 4-1. Purchase money obligations, 6% to 71iz%, payable through 2014 Other The company has entered into interest rate swaps and, in the case of certain foreign currency denominated debt, currency swaps to manage exposure to interest rate and currency movements. The effective interest rates may differ from the coupon rates as a result of these swap 682 664 137 294 157 123 77 220 183 71 184 194 ~ $5~?2't 144 ~ $5,945 arrangements. Foreign currency denominated debt for which the company has not entered into currency swap agreements is maintained primarily to hedge currency exposure of its net investments in foreign operations.

Aggregate maturities of long-term debt in each of the fol- 1990, $721 million; 1991, $628 million; 1992, $725 million; lowing periods are: 1988, $465 million; 1989, $874 million; 1993-1997, $1,098 million; and 1998-2002, $985 million. The company's revolving bank credit agreements restrict approximately $1.0 billion of consolidated earnings payment of cash dividends and the purchase, redemption reinvested in the business was free of such restrictions. or retirement of capital shares. At December 31, 1987, Currency Translation Adlustments: Currency translation adjustments included translation gains (losses) as follows: (in millions) 1987 1986 1985 Translation adjustments $155 S 54 $(25) Related income taxes 94 85 79 Capitai Stock: Shares of authorized common stock are 1 billion; issued and outstanding were as follows: $249 $139 $ 54 Issued Treasury Outstanding Balance, January 1, 1985 126,371,774 (4,976,484) 121,395,290 Exercise of stock options and stock units 214,491 285,256 499,747 Purchased (2,543,800) (2,543,800) Retirement of treasury stock (7,234,528) 7,234,528 Balance, December 31, 1985 119,351,737 (500) 119,351,237 Exercise of stock options and stock units prior to stock split-up 222,457 500 222,957 Two-for-one stock split-up 119,574,194 119,574,194 Exercise of stock options and stock units after stock split-up 470,560 168,741 639,301 Purchased (1,930,150) (1,930,150) Balance, December 31, 1986 239,618,948 (1,761,409) 237,857,539 Exercise of stock options-and atock units 78®,946 768,M Purchased (2,000,000) (2,000,000) Balance, December 31, 1987 239,618,948 (2,992,463) 236,626,485 At December 31, 1987, 10,661,862 shares of common stock Stock, $1 par value, were authorized, none of which have were reserved for stock options, stock units and other been issued. stock awards and 10,000,000 shares of Serial Preferred 49 ou N ut ~ 0 0 ~ ~ 4~- W. ~

NOIES CONT1NtlED Stock Plans: In 1987, stockholders approved the 1987 Philip Morris Long Term Incentive Plan, which permits the company to grant to eligible employees stock options, stock apprecia- tion rights, restricted stock, deferred stock, stock pur- chase rights and long-term performance awards. Such grants may be for cash and up to 8 million shares of com- mon stock. During 1987, the company granted stock options enabling eligible employees to purchase 1,124,589 shares of common stock at market prices on the dates of grant. At December 31, 1987, 6,885,566 shares remain available to be granted to employees. Under previous option plans, eligible employees were granted options to purchase common stock of the com- 1987: pany at market prices on dates of grant. Under one such plan, units were granted which permit the holder to pur- chase 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, 1987, options and units for 2,381,665 shares were exercisable. Other stock plan data for the years ending December 31, 1987, 1986 and 1985 follow: Per Share Under Option Per Share Price Range , End of Year Price Range Exercised Units 393,398 Options 428,599 1986: Units 595,221 Options 618,437 1985: Units 692,012 Options 449,648 Earnings per common share have been calculated on the weighted average number of shares of common stock outstanding for each year, which was 237,821,055, ~ $15.02-$25.91 403,681 $10.28-$25.91 $25.72-$73.75 3,372,615 $25.72-$89.50 $15.02-$25.91 798,283 $15.02-$25.91 $12.86-$42.63 2,703,350 $25.72-$73.75 $15.02-$25.91 1,409,804 $15.02-$25.91 $11.11-$34.69 2,478,142 $12.86-$42.63 238,510,748 and 239,698,288 for the years 1987, 1986 and 1985, respectively.

Pre-Tax Earnings and Provision for Income Taxes: (in millions) 1987 1986 1985 Pre-tax earnings: United States $2,880 $2,398 $2,179 Outside United States 462 413 150 Total pre-tax earnings $3,348 $2,811 $2,329 Provision for income taxes: United States federal: Current $ 840 $ 811 $ 762 Deferred RM 156 144 1,166 967 906 State and local 155 167 130 Total United States Outside United States: Current 173 222 23 Deferred 12 (23) 15 Total outside United States 185 199 38 Total provision for income taxes $1,506 ' $1,333 $1,074 Deferred tax expense is attributable primarily to the The effective income tax rate on consolidated pre-tax excess of tax over book depreciation and, in 1987, approx- earnings differed from the U.S. federal statutory rate imately $90 million from foreign currency deductions. for the following reasons: 1987 1986 1985 (in millions of dollars) Amount % Amount % Amount % Provision computed at U.S. federal statutory rate of reported pre-tax earnings $1,339 40.0% $1,293 46.0% $1,071 46.0% Increases (decreases) in the provision resulting from: State and local income taxes, net of federal tax benefit 93 2.8 90 3.2 70 3.0 Equity in net earnings of unconsolidated subsidiaries and affiliates (50) (1.5) (51) (1.8) (38) (1.6) Investment tax credit (1) (0.1) (17) (0.6) (34) (1.5) Other 125 3.8 18 0.7 5 0.2 Provision as reported $1,505 45.0% $1,333 47.5% $1,074 46.1% Statement of Financial Accounting Standards No. 96 "Accounting for Income Taxes" was issued in December 1987 and requires the use of the liability method of accounting for deferred income taxes. The standard allows restatement of prior years or prospective applica- tion, and requires adoption for years beginning after 1988, with early application permitted. The company has not determined the method or year in which it will adopt the standard or the effects of such adoption. h;.

Nons coN1aNOe® 2 Pension Plans: Effective January 1, 1986, the company adopted sures for non-U.S. plans in 1987 and 1986 and for all Statement of Financial Accounting Standards No. 87, plans in 1985 were determined under the provisions of the "Employers' Accounting for Pensions" ("SFAS 87"), for previous accounting principles. its U. S. pension plans. Pension cost and related disclo- U.S. Plans The company and its subsidiaries sponsor noncontribu- Retirement benefits for hourly employees generally are a tory defined benefit pension plans covering substantially flat dollar amount for each year of service. The company all employees. The plans generally provide retirement funds these plans in amounts consistent with the funding benefits for salaried employees based on years of service requirements of federal law and regulations. Net pension and compensation during the last years of employment. cost included the following components: Service cost-benefits earned during the year $ 93 $ 88 Interest cost on projected benefit obligation 190 172 (in millions) 1987 1986 Return on assets-actual . (148) (436) -deferred gain (loss) (94) 211 Amortization of net gain upon adoption of SFAS 87 (28) (28) Net pension cost The adoption of SFAS 87 decreased 1986 pension cost by The funded status of the plans at December 31 was approximately $76 million. Pension cost for 1985 was as follows: $74 million. (in millions) 1987 1986 Actuarial present value of accumulated benefit obligation- vested $1,758 $1,758 -nonvested 104 94 1,880 1,852 Benefits attributable to projected salaries 581 551 2,421 2,403 Plan assets at fair value 2,936 2,917 Excess of assets over projected benefit obligation 615 514 Unamortized net gain upon adoption of SFAS 87 (373) (401) Unrecognized net loss from experience differences and assumption changes 42 77 Prepaid pension cost $ 184 $ 190

The projected benefit obligation at December 31, 1987 and 1986 was determined using assumed discount rates of 8i/z% and 73/4% and assumed compensation increases of 7i/a% and 63/~%, respectively. The assumed long-term rate of return on plan assets was 9% atboth dates. Plan assets consist principally of common stocks and fixed income securities. The company sponsors a deferred profit-sharing plan Non-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 $30 million, $30 million and $15 million in 1987, 1986 and 1985, respectively. The actuarial present value of accumulated plan benefits was $427 million ($391 million vested) in 1987 and $366 mil- lion ($308 million vested) in 1986. Net assets available for covering certain salaried, nonunion and union employees. Contributions and cost are determined as a percentage of consolidated 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 $118 million, $99 mil- lion and $77 million in 1987, 1986 and 1985, respectively. benefits were $609 million and $477 million in 1987 and 1986, respectively. Net assets available for plan benefits include amounts funded with trustees or government organizations and book reserves of $115 million and $95 million in 1987 and 1986, respectively. The weighted: average assumed rate of return used in determining the actuarial present value of accumulated plan benefits was approximately 6% for both 1987 and 1986.

NOTES CONTINUED Tobacco, Food products Beer Other 1987 1986, 1985 $14,644 $12,691 $10,539 9,946 9,664 1,632 3,105 3,054 2,925 - - 868 $27,895 $25,409 $15,964 Equity in net earnings of unconsolidated subsidiaries and affiliates 126 111 82 Income from operating companies $ 4,193 $ 3,707 $2,760 Segment Reporting: Tobacco, food products and beer are the major segments of the company's operations. The company's consolidated operations outside the United States, which are princi- pally in tobacco and food products businesses, are orga- nized into geographic regions by segment, with Europe the most significant. Investments in unconsolidated affiliates located outside the United States represent principally tobacco operations in Europe, Canada and Latin America and food products operations in the Asia/Pacific region. Data by segment for the years ended December 31 (in millions) Operating revenues: Investments in unconsolidated subsidiaries and affiliates 1,244 1,067 Corporate assets 829 402 Total assets $19,145 $17,642 Capital additions: Tobacco $ 248 $ 191 Intersegment transactions are not reported separately since they are not material. For purposes of segment reporting, operating profit is income from operating companies less equity in net earn- ings of unconsolidated subsidiaries and affiliates. Identifiable assets by segment are those assets applic- able to the respective industry segments. Reportable seg- ment data reconciled to the consolidated financial statements are presented below. 1,099 312 $17,429

4 Data by geographic region for the years ended December 31 (in millions) 1987 1986 1985 Operating revenues: United States -Domestic $18,228 $17,568 $11,496 -Export 1,592 1,193 923 Europe 6,314 5,178 2,904 Other 1,561 1,470 641 $27,695 $25,409 $15,964 Reconciliation: Equity in net earnings of unconsolidated subsidiaries and affiliates 126 111 Income from operating companies $ 4,193 $ 3,707 Identifiable assets: United States Europe 3,033 2,482 Other 741 727 17,272 16,173 Investments in unconsolidated subsidiaries and affiliates 1,244 1,067 Corporate assets 629 402 Total assets $19,145 $17,642 Lltigati®®: There is litigation pending against the leading United States cigarette manufacturers seeking damages for cancer and other health effects alleged to have resulted from cigarette smoking. Philip Morris Incorporated, a wholly- owned subsidiary, is a defendant in some of these actions. Philip Morris Incorporated and the other cigarette manu- facturers have successfully defended all similar prior liti- gation and have not made any payments in settlement. An 82 -~~ $ 2,760 2,029 723 16,018 1,099 312 $17,429 adverse development in pending litigation might encourage the commencement of similar litigation. 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 com- pany. All such actions will be vigorously defended.

In N®TES CON4iNUED Additional iniomlati®n: (in millions) 1987 1986 Depreciation expense $564 $514 Rent expense $111 $105 Interest and other debt expense, net: Interest expense $712 $779 Other debt expense 15 23 Interest income (42) (32) $685 $770 Consolidated Quarterly Financial Results (®naudited): (in millions, except per share amounts) 1985 $367 $ 75 $345 4 (41) $308 Eor Quarter Ended: Mar. 31 Ju71® 30 Sept 30 080. 31 Year 1987 Operating revenues $6,554 $7,110 $8,967 $7,064 $27,695 Gross profit 2,464 2,828 2,824 2,899 11,015 Net earnings (A) 386 476 502 478 1,842 Per share: Earnings (A) 1.82 2.00 2.11 2.02 7.75 Dividends declared .75 .75 .75 .90 3.15 Market price high-low 91t/+-7230 92%-797/a 124tfi-89,/. 120ah-77tfe 124tfz-72% 1986 Operating revenues $5,924 $6,534 $6,398 $6,553 $25,409 Grossprofit 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 63i/4-437.fi 76-543/4 78-63 757/8-66% 78-437.5 (A) Third quarter 1987 results reflect a pre-tax charge of $117 million related to the restructuring at General Foods Cor- poration, partially offset by a pre-tax gain of $46 million from the sale of the Open Pit barbecue sauce retail business. These items reduced net earnings and earnings per share by $22 million and $0.09, respectively. The principal stock exchange on which the company's common stock (par value $1 per share) is listed is the New York Stock Exchange. At January 29, 1988 there were 43,623 holders of record of the company's common stock.

Report of Independent Certified Public Accountants: To the Board of Directors and Stockholders of Philip Morris Companies Inc.: We have examined the consolidated balance sheets of PI3ILIP MORRIS COMPANIES INC. and subsidiaries as of December 31, 1987 and 1986, and the related consoli- dated statements of earnings, stockholders' equity and changes in financial position for each of the three years in the period ended December 31, 1987. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, the financial statements mentioned above present fairly the consolidated financial position of Philip Morris Companies Inc. and subsidiaries at December 31, 1987 and 1986, 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, 1987, in conformity with generally accepted accounting principles applied on a consistent basis. COOPERS & LYBRAND New York, New York January 26, 1988 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 manage- ment's authorization and properly recorded, that assets are safeguarded, and that accountability for assets is maintained. The system of internal controls is character- ized by a control-oriented environment within the com- pany which includes written policies and procedures, careful selection and training of personnel, and exami- nations by a professional staff of internal auditors. Coopers & Lybrand, independent certified public accountants, have examined and reported on the com- pany's consolidated financial statements. Their exam- inations 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 Committee of the Board of Directors, com- posed of six non-management directors, meets periodi- cally with Coopers & Lybrand, the company's internal auditors and management representatives to review inter- nal accounting control, auditing and financial reporting matters. Both Coopers & Lybrand and the internal audi- tors have unrestricted access to the Audit Committee and may meet with it without management representatives being present.

BOARD OF DIRECTORS Thomas F. Ahrensfeld4 Senior Vice President and General Counsel Alfred Brittain III' Former Chairman of the Board of Bankers Trust New York Corporation and Bankers Trust Company, New York, NY Dr. Harold Brown2.5 Chairman of Foreign Policy Institute, The Johns Hopkins University School of Advanced International Studies, Washington, DC Howard L. Clark Former Chairman and Chief Executive Officer of American Express Company, New York, NY Dr. Jos6 Antonio Cordido- Freytesas Member of Betancourt, Cordido and Associates, Caracas, Venezuela, Attorneys, and President of C.A. Tabacalera Nacional Hugh Cullman2'4 Vice Chairman of the Board William H. Donaldson 1.z,a'5 Chairman and Chief Executive Officer of Donaldson Enterprises Incorporated, New York, NY Paul W. Douglasl Chairman and Chief Executive Officer of The Pittston Company'- Greenwich, CT Jane Evans5 John A. Murphy''z 1 Meraber of Executive Conunittee General Partner, President Hamish Maxwell, Chairman The Montgomery Consumer Group, William Murrayz'4 Z Member of Finance Committee San Francisco, CA Vice Chairman of the Board John A. Murphy, Chairman James L. Fergusonl'g John S. Reed"'3'S ' Member of Audit'Committee Chairman of Chairman of Robert E.R. Huntley, Chairman the Executive Committee, Citicorp and Citibank, N.A., General Foods Corporation New York, NY 4Member of Committee on Public Affairs and Social Responsibility Robert E.R. Huntley2'3'a Frank E. Resnik4 Hugh Culltnan, Chairman Chairman, President, and President and ~ Chief Executive Officer of Chief Executive Officer, Member of Nominating Best Products Co., Inc., Philip Morris U.S.A. Committee T. Justin Moore Jr. Chairman Richmond, VA Philip L. Smith2,4 , , Hamish Maxwell " Vice Chairman of the Board Chairman of the Board and and Chairman of Chief Executive Officer General Foods Corporation Dr. Elizabeth J. McCormack4's Hans G. Storr2 Associate of Rockefeller Senior Vice President and Family & Associates, Chief Financial Officer New York NY , William P. Tavoulareas''g T. Justin Moore, Jr.2•4s Former President of Counsel, Hunton & Williams, Mobil Corporation, Richmond, VA New York, NY . Margaret B. Young''4's Chairman of the Whitney M. Young, Jr. Memorial Foundation, New York, NY Joseph F. Cullman 3rd Chairman Emeritus George Weissmanl,z Director Emeritus

OFFICERS Philip Morris James T. Breedlove Philip Morris GeneralFoods A i t S Companies Inc. ss s ant ecretary Iniernalionai Inc. Corporation Patricia A. Malzacher Hamish Maxwell Assistant Secretary Geoffrey C. Bible Philip L. Smith Chairman of the Board and President and Chairman Chief Executive Officer Staff Vice Presidents: Chief Executive Officer James L. Ferguson John A. Murphy Bruce S. Brown Aleardo G. Buzzi Chairman of the President Gene A. Knorr Executive Vice President Executive Committee Hugh Cullman George L. Knox III Carlos E. Salguero Peter J De Luca Vice Chairman of the Board F. Robert Kurimsky Executive Vice President . Senior Vice President and William C. Smiy General Counsel William Murray William K. Transue Walter Thoma Vice Chairman of the Board David Zelkowitz Executive Vice President Andrew J. Schroder III Senior Vice President Philip L. Smith Philip Morris William H. Webb , Administration Vice Chairman of the Board Executive Vice President U.S.A. James C. Tappan Thomas F. Ahrensfeld Thomas M. Kearns Group Vice President Senior Vice President and Frank E. Resnik Senior Vice President General Counsel President and Andrew Whist Vice Presidents: Ehud Houminer Chief Executive Officer Senior Vice President Senior Vice President, William I. Campbell Philip J. Davis Planning Executive Vice President Richard D. Finucane, M.D. , Vice Presidents: Bennett Hersch Richard L. Snyder Marketing and Sales Paul J Tiller Senior Vice President Bernard Beaurpere . , Human Resources and Mark A. Serrano Martin D. Buss Executive Vice President, Elizabeth Butson GeneraiFoods Administration O ti pera ons Din ar Devitre y USA Hans G. Storr W. John Campbell Marc Goldberg Senior Vice President and Richard A Hutchinson Jr Senior Vice President, . , . Ervin R Shames* Chief Financial Officer Lee Pollak . Manufacturing President and R Nelson Beane Chief Executive Officer . John J. Gillis Vice President and Tobacco Technology Group Senior Vice President, Frank C DiRito Controller Trade Development Donal P. O'Brien . Senior Vice President, Eu ene J T Flana an Senior Vice President Human Resources g . g . Fred J. Laux Vice President, Secretary, and Senior Vice Pregident, Dr. Enrique J. Guardia Associate General Counsel Personnel Vice Presidents: Senior Vice President, Alexander Holtzman Quality, Science, and Technology Geor e Karandjoulis Vice President and - Vice Presidents: g Louis R. Turano Charles J. Bowen Associate General Counsel John van Harn Group Vice President Charles G. Bates George R. Lewis Vincent J. Buccellato Thomas J. Hoeppner Vice President and David E.R. Dangoor Group Vice President Treasurer O. Witcher Dudley Dr. Kenneth S Houghton William H Korab Stanley S. Scott . . Edwin J. McQuigg Group Vice President Vice President, Director of Fredric S. Newman tt7 Corporate Relations, and Brian G Lara h O Guy L. Smith IV . g O Assistant to the Chairman Harry G. Steele Vice President, O Murray H. Bring Lawrence W. Zinski Group Executive ss ~ Associate General Counsel ~ Edward A. Schefer Vice President ~ Donald Fried , Group Executive Associate General Counsel *Also an officer of General Foods Corporation.

David C. Collins David J. Driscoll James C. Gale Robert W. Ganger Gabrielle J. Hermann Sylvester T. Hinkes James R. Holzbach David F. Hurwitt Lois D. Juliber James R. Kinney John J. Mann III Gregory B. Murphy Douglas A. Smith Paula A. Sneed General Foods Worldwide Coffee & International Robert L. Seelert* President and Chief Executive Officer John M. Keenan* Executive Vice President Charles A. Adamo Vice President, Group Executive Brian A. McIver Vice President, Group Executive Vice Presidents: Bernard D. Balas Dr. Thomas L. Fazzina Dr. Nicolaas F. M. Kuijpers P. Michael Morton AlanR. Plasache Jack H. Scott Douglas A. Smith* __ David E. Soffe Raymond G. Viault Gerald D. Wollert* *Also an officer of General Foods Corporation. Jerry M. Hiegel Chairman James W. McVey* President and Chief Executive Officer Thomas E Duesler Executive Vice President Walter S. Brager Executive Vice President Alan G. Becker Senior Vice President, Operations Eugene E. Jarrel Senior Vice President, International Joel W. Johnson Senior Vice President, Marketing Ronald S. Kelly Senior Vice President, Oscar Mayer Operations Robert C. Lowes Senior Vice President, Chief Financial Officer and Treasurer Bjorn J. Thompson Senior Vice President, Technical Services Raymond G. Winburn Senior Vice President, Materials Management Vice Presidents: Michael J. Berg David W. Briggs Lowell E. Brower Francis L. Campanile Harry F. Clew, Jr. Allen C. Dieter Robert E. Drane Albert L. Frommeyer, Jr. C. David Harkness Gary Karp Roger D. Kinson John I. Lillie Phyllis A. Lovrien Patrick J. Luby Roman A. Maier Harold F. Mayer Nathan D. Ottens Enzio Pasini Robert L. Pech Philip F. Pellegrino Donald E. Peterson Pat Richter Paul G. Roehrig Thomas J. Ryan Harold G. Smith John E. Spohn Bryan G. Stockton Gene G. Suess Paul Szego Robert L. Tuckis Richard J. Waldrop Miller Brew9ng Company Vice Presidents: Billy R. Apple Dr. Vincent S. Bavisotto Rodney J. Blucher Alan G. Easton Leonard H. Jacob Raymond E. Jones, Jr. Thomas A. Koehler Joseph E. Martino Paul R. Mollomo George D. Riemer William A. Saupe Robert L. Smith Ronald R. Strain Georgy N. Tarala Robert A. Toledo Philip Morris Credit Corporation Hans G. Storr President and Chief Executive Officer Norman J. Treisman Senior Vice President Vice Presidents: James T. Breedlove Michael J. Kinney Mission Viejo Realty Group Inc. Leonard J. Goldstein President and Chief Executive Officer Warren H. Dunn Senior Vice President, Administration Allen A. Schumer Senior Vice President, Operations James G. Gilleran President and Chief Executive Officer Jack G. Raub Executive Vice President James L. Huesman Executive Vice President and Treasurer Craig McCallum Senior Vice President Harvey Stearn Senior Vice President J ~ 0 Vice Presidents: O ~ r-~ ~ Danette S. Fenstermacher ~ William K. Smith ~ Van Stevens Robert P. Swank

GENERAL CORPORATE INFORMATION Headquarters addresses: Philip Morris Companies Inc. 120 Park Avenue New York, New York 10017 (212) 880-5000 Philip Morris incorporated 120 Park Avenue New York, New York 10017 P_hilip Morri, I:.S,A._ 1'_'0 1'ark .a<<>nue New York, -New York 1001" Philip Morris International Inc. 120 Park Avenue New York, New York 10017 Regional Headquartere: Philip Morris EEC Brillancourt 4 Case Postale 1001 Lausanne Switzerland Philip Morris EFTA, Eastern Europe, the Middle East, & Africa Avenue de Cour 107 Case Postale 1001 Lausanne Switzerland Philip Morris Latin Amer Iberia 120 Park Avenue _ New York, New York 10017 Philip Morris Asia, Inc. 25th Floor, United Centre 95 Queensway, Central Hong Kong _ Philip Morris (Auxtralia) hieaited ' One Little Collins Strcet Melbourne, Victoria3001 Australia General Foods Corporation 250 North Street White Plains, New York 10625 Miller Brewing Company : 3939 West Highland Boulevard Milwaukee, Wisconsin 53201 , Philip Morris Credit Corporation 120 Park Avenue New York, New York 10017 Miti~ii n ~ icyRc.alt}_(;roitp Inc. 24800 Chrisanta Drive Mission Viejo, California 92691 Annual Meeting: The annual meeting of ' stockholdei$ of2?bilip hMtirrie Companies Itim-*illbe lteld n Apri128,19$8,:At the Oht1i0; Morria Manufaotui~ing C, ;n tr r, 3601 Coounett'e•Road.: Richmond, Virgiriia. Dividend Reinvestment The Conipan,r''s annual report on Form 10-K, which will be filed with the Securities and Exchange Commi9sion, will be availableto~tockholdereiu Apri7 upon written re,luestt,,: a E;. . -. : , ; Secretarp Philip .1Sot'rie Contprsniea Inc. 120 Park Averiuo- New York, New, York 10017 Stockholder Report: The Company received a ; shareholder proposal requesting it to issue a report on cigarette sales in the Third World. The Company agreed : to make suc h a report acailable and the shareholder proposal was withdrawn. A copy of this report,"The Activities of Philip Morrie in the Third Worl4"f'caribe obtained by writin'g to the Secretary of tbe Cofnpatiy at the addre.ls abtwe::., _ Transfer ABenti and Reqistrara: Stock Exchange Ust[nps: r~ New York Amsterdam '. Basel : Frankf~iri ; ,GeneY Laft~ Pet~ .To 7. uri'c.I]1 lvY StaCV Coopers & Lybrand 1251Avenue of the Amerioes ip New York, New York10020,; r: ~ari utnu~ aw„t: ; ~c; w r.e~nfi+~cv~«~ wF ~ usa4'p~'.~±!?E!t~!'~ ca/ s r blorgan ShureLi,lder `,rrices ` TruktCompany; 30 WestBroadwa} i New York, New York 10077-2192 Crestar Renk Bo< 2b6G5 ' ~ Iiikhmond,;`irtpnia 2320 M

PFiililr 4lcyrris C+>mhanies Enr. 120 f'ark .lveruie New York, IVe_wYcrrk 1(1{}1i t`It1V 1' MI~MED, NEW IIYIt"RSIk"El

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