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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