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Primary Earnings Dividends Declared Capital Expenditures Per Share Per Share Dollars Dollars Miqions of Dollars TIMN 439720

Operating Revenues Operating Income Net Earnings by Operating Company by Operating Company 44ilhons of Dollars 7200 6800 Millions of Dollars 1080 1020 Millions of Dollars 450 425 6400 ~ 960 400 ~ 6000 5600 4800 4400 4000 3600 3200 2600 2400 2000 500 1200 800 0C 0 ~ Philip Morris U.S.A. Philip Morris International Miller Brewing Company ~The Seven-Up Company IIIIIIIIIIIIIIIIIIIIIIlPhilip Morris Industrial Mission Viejo Company 900 840 720 660 600 540 480 420 360 300 240 80 0 s . 375 350 300 275 250 225 200 75 150 125 100 75 50 25 C ! TIMN 439719

Philip Morris Incorporated 1978 Philip Morris Incorporated is now a leading company in three large industries-cigarettes, beer, and soft drinks-that provide simple pleasures to tens of millions of people every day. Over the past six years, Philip Morris has been the fastest growing U.S. company in both the cigarette and beer industries. In 1978, the company registered its 25th consecutive year of growth in operating revenues, net earnings, and earnings per share. Founded more than a century ago and incorporated in Virginia in 1919, the company has long been a major cigarette manufacturer. Today, it is the second-largest cigarette company in the U.S. market and the largest U.S.-based international cigarette company, selling its 160 brands in more than 170 countries and territories. 25 Consecutive Years of Growth 1953-1978 Operating Revenues Milhons of Dola!s 6800 6400 5600 J200 4800 4400 4000 3600 3200 2800 2400 2000 '600 1200 800 400 0 53 54 55 56 57 58 59 6C6' 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 Table of Contents 1 Flnancal Hlghhghts 4 Review of the Year 14 Phiup Morris U S.A. 18 Philip Morrls international 22 MlIler B'ewing Company 26 "1e Seven-Up Company 30 Phdlp Morris Industrial 32 M:sslor: Vleio Company 34 Financial Review 38 Frfteen-Year Financial Review 52 Directors anC Officers The corporation acquired full control of the Miller Brewing Company in 1970. At that time, Miller was the seventh-largest brewer in the U.S. Today, Miller is the second-largest. In 1978, the company expanded its operations with the purchase of The Seven-Up Company, the third-largest soft drink producer in the U.S. Philip Morris has also diversified into the manufacture of specialty papers, flexible packaging materials, and specialty chemicals as well as into community development and homebuilding. These businesses are conducted by six operating companies: Philip Morris U.S.A., Philip Morris International, Miller Brewing Company, The Seven-Up Company, Philip Morris Industrial, and Mission Viejo Company. Net Earnings Millions Of Dollars 425 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 TIMN 439717

Philip Morris Incorporated This year has been one of continued substantial prog- ress and significant activity to maintain our growth in the future. In 1978, we achieved new records in operating reve- nues, net earnings, and earnings per share for the 25th consecutive year, continued our enlarged facilities expansion program, raised the dividend on the com- mon stock, completed two significant acquisitions, and realigned our executive management. Operating revenues increased 27.5%, reaching $6.6 billion, net earnings grew 22.0% to S409 million, and earnings per share rose 20.9% to $6.77. Our major businesses in cigarettes and beer continued their growth in units, revenues, and income. Philip Morris U.S.A's unit sales increase of 5.3% again led the U.S. industry in 1978. Our U.S. cigarette sales totaled 168 billion units, about 28% of the industry. Our market share in the U.S. has more than doubled in the past ten years. Philip Morris International's cigarette sales reached 201 billion units, a gain of 7.8% over sales in 1977. Our share of the estimated 3.6 trillion unit market outside of the U.S. rose to about 5.5%, also more than double our share ten years ago. Miller Brewing Company barrel shipments were up 29.1 % over 1977 to a total of 31.3 million barrels. Miller's market share grew to about 19%, almost five times its 1972 level of 4.1 %. To meet demand and prepare for future growth in all of our businesses, we have invested more than $1.5 billion in capital expenditures over the five-year period from 1974 through 1978, of which $566 million was, spent in 1978. The anticipated continued growth of the company, our constant emphasis on the high quality of all our products, and our efforts to maximize our pro- duction efficiency will require an even larger capital investment program over the next five years. For the period from 1979 through 1983. we estimate total capital expenditures will be somewhat in excess of $3.0 billion. More than 90% of this amount will be used to increase capacity and productivity to meet expected demand. In 1979, in the U.S. we will begin construction of a new cigarette manufacturing plant in North Carolina and add new, more advanced equipment to our current facilities. Internationally, we will expand and modernize our cigarette production facilities in several markets, including the factories in West Berlin and Bergen op Zoom, the Netherlands. At the same time, almost all of Miller's breweries will be expanded and work will con- tinue toward the completion of two new ones in Califor- nia and Georgia. Expenditures on these and other capital expansion and modernization projects will total about $775 million in 1979. The dividend on our common stock was increased again in 1978. The Philip Morris dividend has been raised 13 times and has grown at an annual rate of 17% over the last 11 years. In 1978, dividend payments on the common stock were made for the 51 st consecutive year. In June, we acquired The Seven-Up Company, the third-largest soft drink producer in the U.S. We believe the soft drink industry could provide a significant growth area for Philip Morris in the future. We are confident about Seven-Up, but we realize that the soft drink industry is intensely competitive. Successful develop- ment of our position in this industry will require the care- ful planning of strategies for long-term growth. Also in June, we acquired the rights to existing Lig- gett Group cigarette trademarks outside the U.S. and related assets. These trademarks have considerable potential within Philip Morris International's large and growing worldwide tobacco operations. During the year, in a move dictated by the growth of the company since our last executive changes in 1973 and the retirement from line management of Joseph F Cullman 3rd, Chief Executive Officer for the past 21 years, Philip Morris underwent a broad executive realignment. George Weissman was elected Chairman of the Board and Chief Executive Offlcer; Ross R. Millhiser Vice Chairman of the Board; and Clifford H. Goldsmith, President. An Office of the Chief Executive consisting of these three top officers has been established and is responsible for overall corporate matters. Responsibility for all functions of the corporate staff lies with Mr. Millhiser. Philip Morris U.S.A., Philip Morris International, and Philip Morris Industrial are assigned to Mr. Goldsmith. Mr. Millhiser and Mr. Goldsmith report to Mr. Weissman. TIMN 439721

In addition, the Board of Directors elected two Group Executive Vice Presidents of Philip Morris Incorporated: Hugh Cullman. Chairman and Chief Executive Officer. Philip Morris U.S.A., reporting to Mr. Goldsmith; and John A. Murphy, Chairman and Chief Executive Officer, Miller Brewing Company, with responsibility for Miller, The Seven-Up Company, and Mission Viejo Company, reporting to Mr. Weissman. Joseph F Cullman 3rd remains active as Chairman of the Executive Committee of the Board of Directors, a post he has held for 11 years. Other major promotions were: Hamish Maxwell to Executive Vice President, Philip Morris Incorporated and President and Chief Executive Officer. Philip Morris International; John T Landry to Senior Vice President and Director of Marketing, Philip Morris Incorporated: Shepard P Pollack to President and Chief Operating Officer, Philip Morris U.S.A.; and William K. Howell to President and Chief Operating Officer, Miller Brewing Company. The new management team, which includes other management promotions at both corporate staff and operating company levels, has moved into place eff i- ciently and smoothly. Almost the entire senior manage- ment group has worked closely together for 20 years or more. Philip Morris U.S.A. Again in 1978, Philip Morris U.S.A. substantially out- performed its competitors in the U.S. cigarette industry and achieved new records. Operating revenues grew 12.8%, while operating income rose at an even faster rate, 19.8%. Cigarette industry sales in the U.S. reached about 605 billion units in 1978. Philip Morris U.S.A.'s volume grew to 168 billion units, up 5.3% or 8 billion units over last year. For the 12th consecutive year, we registered the industry's largest increase in unit sales, as Marlboro and Merit were the two largest unit volume gainers in the industry. Our share of the U.S. market increased to about 28% from 26.5% in 1977. A consistent marketing strategy and the highest qual- ity cigarettes in the industry have given Philip Morris U.S.A. well-positioned brands in important segments of the market. Marlboro's growth in both unit volume and market share led the industry in 1978, aided by the introduction of Marlboro Lights 100's early in the year. Marlboro, the largest selling cigarette in the U.S. and the world, widened its lead over the next largest selling brand and became the first filter cigarette brand ever to sell more than 100 billion units in the U.S. in one year. Benson & Hedges 100's Lights, introduced late in 1977, was an outstanding success in 1978 and strengthened the brand's position as the leading 100mm cigarette in the U.S. Merit continued its rapid growth. Introduced only three years ago.. Merit has become our largest selling low-tar brand and in 1978 was the fastest growing of the top ten brands in the U.S. Low-tar Virginia Slims also continued to grow as the leading cigarette designed for women. Although the pace of new brand introductions in the low-tar category slowed in 1978, as compared with 1976 and 1977, the category as a whole grew rapidly. Philip Morris U.S.A. is well-positioned to participate in the expected continued growth of this segment of the market with Merit, Marlboro Lights, Virginia Slims, Parliament, and Benson & Hedges 100's Lights. Within Philip Morris, the research and development function has grown increasingly sophisticated. Our advanced technological knowledge and expertise has made possible the creation of cigarette products that meet consumer demands for taste in low-tar products. Today our research and development facilities in Rich- mond employ a staff numbering more than 480 people, including more than 60 with PhDs. We believe that Philip Morris is in an excellent posture for further scien- tific breakthroughs. Our manufacturing center in Richmond, Virginia, which entered its sixth year of production during 1978, employs the latest technology in the making and pack- ing of cigarettes. We have been steadily increasing the productivity of our facilities primarily through the installa- tion of the latest available high-speed equipment. How- ever, it has become clear that the growing demand for our cigarettes in the U.S. and in export markets will sur- pass the production capacity of our facilities within the next few years. We are starting construction of a new cigarette manufacturing plant in Cabarrus County, North Carolina. This large investment demonstrates our confidence in the future vitality of the cigarette industry and in our ability to continue to grow and increase our market share. T'IMIN 439722

ioouar amounts excep' per-share amounts expressed :n thousands) Operating Revenues $6,632,463 S5,201.977 54,293.782 S3.642.414 53.010.961 Net Earnings 408,581 334.926 265,675 211,638 175.516 ~ Primary Earnings Per Common Share 6.77 5.60 4.47 3.62 3.15 Dividends Declared Per Common Share 2.05 1.563 1.150 .925 .775 Percent Increase Over Prior Year Operating Revenues 27.5% 21.2°% 17.9% 21.0% 15.7% Net Earnings 22.0% 26.1 °! 25.5% 20.6% 18.1 % Primary Earnings Per Common Share 20.9% 25.3% 23.5% 14.9% 16.2°% Dividends Declared Per Common Share 31.2% 35.9% 24.3% 19.4% 15.0% Operating Companies Revenues Philip Morris U.S.A. $2,437,465 S2,160,362 51,963,144 S1,721,549 51.502,267 ~ Philip Morris International 1,810,861 1.349,280 1.083,970 1,040,002 887,077 Miller Brewing Company 1,834,526 1,327.619 982.810 658.268 403.551 ~ The Seven-Up Company 186,494 Philip Morris Industrial 237,165 216..699 169,096 151,960 155,390 Mission Viejo Company 125,952 148,017 94,762 70,635 62.676 I Consolidated Operating Revenues $6,632,463 85,201,977 54,293.782 $3,642,414 53,010.961 Operating Companies Income Philip Morris U.S.A. $ 568,145 S 474.400 S 401.426 8 337.314 S 286.225 Philip Morris International 188,561 153.791 130,104 112.975 94,017 Miller Brewing Company 150,300 106,456 76.056 28,628 6,291 The Seven-Up Company 26,291 Philip Morris Industrial 15,024 14,860 10.620 8.052 12,280 Mission Viejo Company 19,761 33.225 16,333 5.875 4,772 Consolidated Operating Income $ 968,082 S 782,732 8 634,539 $ 492,844 8 403,585 _ Compounded Average Annual- Growth Rate - 1978-1973 1978-1968 1978-1963 1978-1953 _ Operating Revenues - 20.6% 20.6% 17.6% 13.0% Net Earnings 22.4% 23.7% 21.5% 15,4% Primary Earnings Per Share 20.1 % 20.0% 19.1 °l0 12.1 % Consoiidated operat,nc even.ues and operating income include the results of the company and all wholly-owned sub&diares (The Seven-Up Company and ts subsidiaries since June'. 1978). Operating revenues and operating ncome of The Seven-Up Company and its subsidiaries for ;he ent re year 1978 were $300.521.000 and $45.652.000. respect vely. Corporate expenses. interest expense. and items which are not directly attributable to the operat ng compan es are not allocated to them. In the op nion of management, any allocat on thereof would be arbitrary and would dimin sh the acciracy of measurement of their performances. TIMN 43971,3

I, I Philip Morris International Operating revenues and operating income of Philip Morris International advanced to record highs, increas- ing by 34.2% and 22.6%, respectively, in 1978. The world cigarette market outside of the U.S. increased 2.7% to an estimated 3.6 trillion units. Our cigarette unit volume reached 201 billion, up 7.8%, and our share of the international market excluding the U.S. rose to about 5.5%. Philip Morris International export sales from the U.S. were up 15.7%,and we continued to be the leading U.S. cigarette exporter. In 1978, we accomplished a significant expansion of our growing international operations through the pur- chase of the overseas cigarette business of the Liggett Group. This acquisition by Fabriques de Tabac Reunies S.A., our Swiss affiliate. included the rights to existing Liggett trademarks outside the U.S., as well as related rights, patents, and technical data. Liggett international brands covered by the purchase include Lark, L&M, Chesterfield, Eve, and Decade. In a related transaction, Philip Morris Incorporated bought from the Liggett Group international inventories, receivables, and other assets. Internationally, as in the U.S., Philip Morris is commit- ted to a multi-brand strategy. We sell over 160 brands in more than 170 countries and territories through 25 manufacturing and marketing affiliates, 38 licensees, and regional export sales organizations. Marlboro sales continued to grow, strengthening the brand's position as the world's best-selling cigarette. In 1978, Marlboro accounted for over one-third of Philip Morris International's volume. Merit, introduced in sev- eral international markets in 1977, posted a 70% sales increase in 1978. We also offer a broad range of regional and national brands, tailored to differing taste preferences around the world. The Europe/Middle East/Africa region achieved rec- ord unit sales and operating income. Marlboro regis- tered strong growth in many markets in this region, including Belgium, France, Italy, the Netherlands. Swit- zerland, the United Kingdom, Eastern Europe, and sev- eral Middle Eastern countries. In West Germany, Philip Morris G.m.b.H. continued to outperform the industry. Marlboro moved up to third position in the market and was the fastest growing brand in that country. To meet growing demand for its products. Philip Morris Europe is modernizing and expanding its manufacturing facilities in West Berlin and Bergen op Zoom, the Netherlands. In the Australia/New Zealand region, sales of Philip Morris (Australia) Limited were adversely affected by competitive price cutting and a significant increase in the Australian excise tax. New marketing strategies and the introduction of new brands and line extensions have been implemented to counteract price competition. Lindeman (Holdings) Limited, the wine-making sub- sidiary of Philip Morris (Australia) Limited, again increased sales volume, and strengthened its position as Australia's leading wine company. In the Latin America / Iberia region, unit sales and operating income continued to grow in 1978. Marlboro had strong unit gains in Argentina, the Dominican Republic, Mexico, Panama, and Spain. and the Lark brand continued its strong growth in Ecuador. Our affiliate in Brazil again incurred a significant loss due to substantial investments in marketing. Philip Morris Brasileira is improving its position in the higher price, higher margin segment of the market, with cur- rent strong growth trends for Galaxy, Shelton, Monterey, and Benson & Hedges 100's. We remain confident that profitability will be achieved over the long term in Brazil. the second-largest market in the world, after the U.S., excluding government monopolies and state enterprises. Benson & Hedges (Canada) Limited's sales were lower in 1978 due to increased competitive activities in the low-tar segment of the Canadian market. Two line extensions, Benson & Hedges Lights and Mark Ten Legere, have been introduced in the mild market seg- ment, which offers the greatest growth opportunity. In Asia, Philip Morris International posted record unit sales and operating income. Strong growth in U.S. export sales to Asian markets included substantial vol- ume increases by Marlboro in Hong Kong and Singa- pore, and by Lark and Parliament in Japan. Sales of our affiliates in India and Pakistan increased in 1978 on the growth of local brands, Cavander's and Red & White in India and K-2 and Red & White in Pakis- tan. Our licensee in the Philippines again posted record sales for Marlboro. With experienced management and geographically diversified operations. Philip Morris International is well- positioned to take further advantage of the significant potential for expansion of our business in international markets. TIMN 439723

Excellence is a human value and achievement. Our more than 60.000 employees are responsible for the superior quality, reliability, and integr ty of our products. The success of our company is a tribute to the knowl- edge. skill. and energy with which they use the most advanced facilities and techniques to produce and mar- ket these products in our various industries. Our own experience has unmistakably established that among consumers there is a broader demand for and growing responsiveness to high quality-quality in the products we make, in their packaging, and in their advertising and marketing. With each of our tens of millions of consumers, sev- eral times a day and day after day, our products must fulfill expectations of consistent quality. Taste, the cardinal satisfaction offered by our ciga- rettes, beer, and soft drinks, is the result of a myriad of ingredients, processes, and other factors. Because taste can be affected by a slight deviation from a recipe,a minor inconsistency in a process, or external influences, our quality-control tests and monitoring start with the purchase of premium ingredients and continue through the manufacturing and distribution process to the point of sale. In our cigarette operations, quality-control programs analyze tobacco, filters, papers, flavorings, and packag- ing materials before production. During production, blends, moisture, tobacco weights, and other factors are monitored by advanced new equipment. Many of the instruments interface with computers which permit greater uniformity of product than was possible with the manual methods of the past. After production, random samples of packaged cigarettes are "torn down" for further tests involving 30 factors in the cigarettes and their packages. In our breweries we adhere to the principle Frederic Miller enunciated a century and a quarter ago:"Qual- ity-uncompromising and unchanging:' From the time basic ingredients reach the brewery until the packaged beer is shipped to distributors, well over 150 individual tests are performed on product. packages, and pro- cesses by a highly qualified staff at each brewery using the finest analytical equipment. More than 500 people work in quality control throughout the Miller organiza- tion. In a pioneering practice for the brewing industry, every bottle, can, carton, case, and keg of Miller's beer is stamped with a product freshness 'pull date:' easily readable by the consumer. These efforts have made Miller's quality-control program the most stringent in the industry and result in the freshest, most consistent product in the industry. Quality has been a hallmark of The Seven-Up Com- pany, and it was a factor in our acquisition of the firm. In addition to quality controls in its own operations, it main- tains a highly professional field service organization that works closely with all 7UP developers. In all our operations quality-control departments report their findings directly to senior management at headquarters. While taste is the chief satisfaction provided by ciga- rettes. beer, and soft drinks, many other factors are involved in the total enjoyment of our products, and they, too, are subject to meticulous quality controls. They include, for example, the visual or tactile satisfac- tions derived from the perfect cylindrical configuration of a cigarette, the clarity of a beer, and the carbonation of a soft drink. The clean, pleasing design of the Marlboro package and the precise placement of the label on a Miller bottle bespeak the quality of the products. This same principle of total compatibility applies to advertising, promotions, and other marketing functions. For example, only advertising that is engaging, cre- ative, and respectful of the sensibilities of consumers is consonant with the superior character of our products. Such advertising encourages consumers to switch to our brands and reinforces the loyalty of our established customers. Our commitment to excellence in all aspects of our business-the quality of our people and the quality of our products-has been a major reason our company has been so successful for such a long period of time. TIMN 439726

I 1 I Innovative packaging continued to play a strategic role in soft drink sales growth in 1978 with the introduc- tion in April of 7UP and Sugar Free 7UP in new, all- plastic two-liter bottles. Seven-Up Enterprises, a canning and services orga- nization, increased its contribution to Seven-Up in 1978. Seven-Up Enterprises, through a network of approxi- mately three dozen production centers, produces foun- tain syrups and supplements production of canned and bottled 7UP products in a variety of packages for 7UP developers who are unable to manufacture them within their own production facilities. During the year, Seven-Up acquired bottling compa- nies in Houston, Texas, and Norfolk, Virginia. Seven-Up now operates three company-owned bottling opera- tions in the U.S. and one in Canada. In Canada, 7UP's market share reached its highest Philip Morris Industrial Philip Morris Industrial registered a 9.4% gain in operat- ing revenues while operating income was up 1.1 %. Philip Morris Industrial comprises four groups-Chemi- cal, Paper, Tissue, and Packaging. Again this year, each group increased its revenues over 1977 and operated profitably. The Chemical Group, which makes specialty chemi- cals for the packaging and textile industries, increased its income, despite softness in segments of the textile industry it supplies. New customers and the develop- ment of new products position the group well for 1979. The Paper Group produces glassine, printing, and technical specialty papers. This group increased its income despite a decline in demand for glassine paper products in general. while demand for the group's high- quality printing papers as well as for its technical papers increased in 1978. During the year, the Surtech Coating Division located in Nicholasville, Kentucky, was closed Mission Viejo Company In 1978, Mission Viejo Company results declined from 1977, but still reached the second highest annual level of performance in the company's h story. Following a year of extraordinary demand in 1977. California hous- ing market conditions returned closer to historic norms as tighter credit and higher mortgage rates tempered demand. Operating revenues and operating income decreased 14.9% and 40.5°/o, respectively, from the records achieved in 1977. In Orange County, California.. Mission Viejo s sales of 1,127 homes maintained the company s position as the largest single home builder in the county. Lake Miss on Vie o. a 124-acre recreational lake, was opened in June level ever, in an environment of heavy price competition. In 1978, Seven-Up International achieved the best year in its history. One major objective in 1978 was to broaden worldwide coverage for the 7UP brand, and introductions were made in several major new markets. In addition to expansion into new countries, Seven-Up International is continuing market penetration into pre- viously unfranchised areas of countries that presently have only partial distribution. We are confident about Seven-Up's prospects, but, as in the case of Miller and our other U.S. and interna- tional acquisitions, we are approaching the soft drink business with a long-term plan and commitment. Our objective is to build on the solid base of consumer awareness and 7UP's established quality image. after several years of unsatisfactory performance. This division had been engaged in the specialty coating business for the food packaging industry. The Tissue Group had another outstanding year in 1978, achieving new records in revenue and income. Profit margins were at record levels. Capital investment in prior years began to pay off in improved efficiencies. The Tissue Group increased its penetration of the rap- idly growing food service industry. It began expansion of its de-inking facility which will enable the company to continue to use recycled paper in lieu of virgin pulp as the principal raw material in its papermaking operation. The Packaging Group, which principally makes com- posite flexible packaging materials, experienced an increase in demand. However, continued severe pricing pressures and start-up costs at two new facilities resulted in lower income in 1978. and added a major new amenity for the residents and future home buyers in the community. The company's newest planned community, Aliso Viejo, also in Orange County, has submitted its master plan for the 6.600-acre area for governmental approval. In Colorado. new records were set in the Mission ViejoiAurora community, a suburb of Denver, with sales of 294 homes, up 40.7% over 1977. Mission Viejo entered into an option to purchase the 22.000-acre Highlands Ranch just south of Denver. Preliminary plans have been completed. The option has been extended for one year in order to refine the mas- ter plan. TIMN 439725

Joseph F. Cullman 3rd Board of Directors During 1978, John C. Sawhill, President of New York University, was elected a member of our Board of Directors. Dr. Sawhill has a distinguished background in business, education, and the federal government, We are pleased to report that Joseph F Cullman 3rd remains active in a key leadership role in Philip Morris Incorporated. Serving as Chief Executive Officer of the corporation from 1957 until November, 1978. Mr Cullman led Philip Morris through most of its past 25 years of continuous and accelerating growth. He provided the inspiration and leadership that has made Philip Morris successful. In every way, Philip Morris Incorporated today is stronger than it has ever been, and we can feel not only confident but positive and optimistic about the com- pany's future. Mc Cullman will continue to serve as Chairman of our Executive Committee and an active member of our Board of Directors. In the smooth and successful man- agement transition that took place this year, the execu- tives whom Mr Cullman developed, with whom he worked, and upon whom he and the company relied over the past two decades have been elected to serve in the corporation's top executive positions. We are for- tunate that his wise counsel and personal involvement will continue to be readily available to us. including service as the Administrator of the Federal Energy Administration. His election will further strengthen and diversify our Board. Looking Ahead Philip Morris operations in those businesses in which we are involved-cigarettes, beer, soft drinks, industrial products, and home building-are all successful and innovative. Our leading consumer product brands are well-positioned and growing. Our large capital expendi- ture program, designed to satisfy growing consumer demand and to improve productivity and efficiency, has helped to establish our company as a leader in its major businesses. Financially, Phiiip Morris has never been stronger. Our management is experienced, aggressive, and has exceptional depth, and our people at every level are dedicated to the company and to their work. As a result, we look forward to our 26th consecutive year of revenues and earnings growth in 1979. George Weissman Chairman of the Board and Ch ef Executive Officer ~:_'4 &1 ~_ Ross R. Millhiser Vice Chairman of the Board Clifford H. Goldsmith President TIMN 439730

Operating Revenues Operating Income Officers 1978 1978 Hamish Maxwell Mary W. Covington S 1.810. 861, 000 5188.561.000 Pres dent and Vice President, 1977 1977 Chief Executive Officer Corporate Affairs $1.349.280 000 S1 53, 791.000 1976 1976 R. Wilham Murray Staftan Gunnarsson S1 .083.970.000 S130.104,000 Executive Vice Pres dent Vice President ~ 1975 1975 Europe ' Middle East Africa S1.040 002.000 $112.975.000 Carios E. Salguero Hamilton Hurley Vice President ~ 1974 1974 Execut ve Vice President S 887.077.000 S 94.017 000 Latin America lberia Eric M. Janssen ~ Lee Pollak Vice President, Personnel \ Vice President and Ch ef Admin,strat ve Officer Albert E Beliol Thomas M. Kearns Vice Presfdent. Finance \ William H. Webb \ Vice President Geoffrey C. Bible Vice President George P Hibbard \ Vice President Treasurer \ 4leardo G Buzz Vrce Presdent Felix R. Sanchez Controller TIMN 439735 \

Operating Revenues Operating Income Officers 1978 1978 Hugh Cullman Albert J, Bissmeyer Edward M. Schaat. Jr. S2.437.465.000 5568.145.000 Chairman and Vice President, Vice President. Production 1977 1977 Chief Executive Officer Brand and Promotion S2.160.362000 5474.400.000 Dr Robert B. Sel gman 1976 1976 Shepard P Pollack Robert H. Cremin Vice President. S'.963 144,000 5401,426.000 President and Vice President Sales Research and Development 1975 1975 Chief Operating Off cer S1.72? .549.000 1974 502 267 000 S1 $337.314.000 1974 5286 225 000 W. Wallace McDowell Executive Vice Pres dent. Stanley S Scott Vi ce President. Public Affa rs au Jeb Lee J Richard L Snyder Vice President Finance and Administrat on . . . . Operatrons James J. Morgan Executive Vice President. Market ng Ben amin A Soyars Senior Vice President . Vice President. Markethno Services Fred J Laux Vice President. Personnel Will am G Lorigest Vice President Leaf James L Thompson. Jr Vice President Media Dr. Helmut R. R Wakeham Vice President Science and Technology Manufacturing R chard D. Robertson Vrce Pres dent. Ecology 1 R Nelson Beane Controlier ~ ~ TIMN 439731

7 At our new Engineering Center in York. Vrg n a, skdled techn!cal oerson- nel rebuild anc modernize cigarette mak,ng ard oack,ng equipment. This equroment, aiong with recently pur- chased high-speec mak:ng and pack- ing rnachines. wdf enable our factories 'o keep uo w th r s ng customer demand. 8 Philip Morris U.S.A. emphasizes con- t!nuous quality-control efforts to main- tain consistent high quality in its agarette brands. This picture shows a sample c garette from a production I ne be ng microscopically analyzed to insure that our carefully prescribed standards have been met. 9 Ph iip Morns U.S.A. scientists con- 10 An operator makes final adjustments stantly examine tobacco leaf and its to one of the new generation, high- components in order to develop better speed cigarette packing complexes quality product for use in our cigarette that have been installed at our facto- brands nes. The increased productivity of these machines has begun to contrib- ute to profits. 1 1 Philip Morris U.S.A.'s continuing growth requires an expansion of pro- duction capability. A new cigarette manufacturing center will be built on a portion of this 2,100-acre tract in Cabarrus County. North Carol na. near Charlotte. TIMN 439734

Perennial Problems While there have been no new adverse developments of importance, our industries continue to be confronted by perennial problems, among them: the smoking and health controversy, regressive excise taxes, and con- tainer restrictions. Fifteen years elapsed between the first Report by the U.S. Surgeon General in 1964 and the Surgeon General's report in January, 1979. During those years, hundreds of millions of dollars of government and pri- vate funds have been spent on health research. Although much of the research was concentrated on finding evidence that smoking causes diseases, no conclusive medical or clinical proof has been discovered. The latest report continues to rely primarily on statisti- cal data to attempt to establish a link between smoking and health. The statistical studies themselves, virtually all of them published previously, do not establish cause and effect according to epidemiologists and statisti- cians. Independent statisticians and biometricians have questioned the validity of the statistics in a number of these studies. The tobacco industry continues to maintain that the controversy can be resolved only by medical and sci- entific knowledge. Toward that end, the industry has contributed more than $70 million for independent research into the diseases blamed on smoking. Until recently, tobacco seemed to be the only prod- uct criticized on safety and health, but now there is a growing list of products similarly criticized. Occupa- tional and environmental health hazards also have received much greater attention. During 1978, the smoking and health issue took the form of legislative attempts at the state and municipal levels to restrict or prohibit public smoking. But a grow- ing assertiveness on the part of the tobacco industry to explain its side of the issue resulted in defeats for most of the anti-smoking proposals. The most important development occurred in Califor- nia, where the first referendum to restrict smoking in most public places was soundly rejected by the voters. Similar attempts to regulate smoking by legislation were rejected in a dozen other states and cities. As in so many other areas, when the public under- stands the issues, the consensus favors personal free- doms and common courtesy over government control. Internationally, there is a trend toward government- imposed restrictions on cigarette marketing in a number of countries. These measures are based on the assumption that cigarette advertising and promotion contribute to higher industry sales. There is sufficient evidence in countries where there has been no such marketing support of cigarettes to refute this assump- tion. Marketing restrictions serve only to restrain com- petition and reduce or eliminate information to consumers that would enable them to make informed brand choices. For example, in Finland the country's year-old ban on tobacco advertising and two-year-old ban on alcoholic beverage advertising have had no sig- nificant effect on sales in either market. Excise taxes continue to place an unfair burden on smokers. In 1978, federal, state, and local taxes on cig- arettes amounted to $6.2 billion. In contrast, the cost of federal price guarantees for tobacco growers has averaged less than $1.25 million annually. Clearly. smokers are paying a disproportionate share of the cost of government. At the same time, it is gratifying to note that proposals to increase the federal tax have been repeatedly defeated and the number of increases in state taxes has declined in this decade. During the year, 16 out of 17 states rejected legislative proposals to increase ciga- rette taxes, and one state, Colorado, reduced the ciga- rette tax. In the states and communities with the highest tax rates, cigarette "bootlegging" has become a major operation of organized crime. This will continue to be a problem until the high tax states realize that they are losing revenue because of illicit bootlegging operations and lower their taxes accordingly. Restrictive container legislation now enacted or pro- posed in a number of states increases costs to brewers, soft drink bottlers, distributors, retailers, and consumers. Such legislation requires more energy con- sumption, adds to water pollution, and does little to reduce litter. Ultimately, it forces consumer price increases and accelerates inflation. Beverage containers play a minor part in the solid waste problem-making up only 6% of municipal solid waste in the U.S. Returnable packaging legislation thus ignores what is by far the largest part of the problem and takes a narrow approach while exacting a broad economic toll. For those reasons, although our brewing and soft drink operations are prepared to deal with any eventual- ity, with little effect on our growth, we oppose such leg- islation. We do support comprehensive solutions to the problems of resource and energy conservation, such as solid waste disposal and resource recovery systems within communities. In April,1977, the Food and Drug Administration moved to ban the use of saccharin in consumer prod- ucts. An act of Congress postponed the ban until May 23, 1979. pending further analysis of studies said to link the sweetener with disease. In the eventuality of a ban, the "diet" segment, accounting for about 12°r'o of the soft drink market, would be affected negatively. Two cases involving the two leading soft drink com- TIMN 439727

The Miller Brewing Company had another outstanding year in 1978. Operating revenues gained 38.2°ro, and operating income grew 41.2%. The U.S. brewing industry, including imported brands, sold about 166 million barrels of beer in 1978, an increase of 4% over 1977, Miller's barrel shipments rose 29.1%. reaching 31.3 million barrels, up 7.1 million bar- rels over shipments in 1977. In 1972, Miller sold 5.4 million barrels. Since then Miller's volume has risen 25.9 million barrels. or 482%. In 1978. Miller's share of the U.S. beer market increased to about 19% from 15.2% in 1977, and Miller strengthened its position as the second-largest U.S. brewer. Again in 1978, Miller pursued its marketing strategy, which positions its brands in the fast-growing, higher priced segments of the industry. Miller High Life, Miller's largest selling brand, continued to be the fastest grow- ing premium brand in the U.S., and strengthened its position as the second-largest selling brand. Lite is well established as the leading brand in the rapidly growing lowered calorie segment of the U.S. beer industry. Lite has continued to grow and to main- tain a dominant share of this segment. In the relatively small but rapidly growing super- premium segment, domestically brewed Lowenbrau was introduced nationally by Miller in late 1977. In 1978, Lowenbrau's sales exceeded original expectations and gave Miller a solid position in this developing portion of the business. Again in 1978, Miller was unable to meet fully the strong consumer demand for its three brands. Plant The Seven-Up Company The newest member of the Philip Morris family, The Seven-Up Company, increased its operating revenues and operating income in 1978. For the full year, operating revenues grew 19.5%, and operating income was up 0.3%. Seven-Up experienced unit growth with all its soft drink products-7UP Sugar Free 7UP, Fountain 7UP and Sugar Free Fountain 7UP-and 7UP maintained its position as the third-largest selling soft drink in the world and the largest selling lemon-lime flavored soft drink in the U.S. and Canada. 7UP is also sold in 87 other coun- tries around the world. Philip Morris acquired Seven-Up last June following extensive study of the soft drink industry as well as Seven-Up's position and potential. 7UP is a high-quality product with excellent consumer acceptance and an internationally known trademark. expansion in Milwaukee. Fort Worth, and Fulton, New York, and new brewery construction continued at an accelerated pace. The new brewery in Eden, North Carolina, with an annual capacity of 8.8 million barrels commenced production during 1978. Construction pro- ceeded on two additional new breweries, one, a 5 mil- lion barrel capacity brewery in Irwindale, California, and the other, a 10 million barrel brewery in Albany, Georgia. Both are scheduled to start production by 1980. Miller continued its program to ensure that its quality- control efforts match its rapidly growing production. Skilled personnel and sophisticated equipment test Miller's products at all stages of the brewing process to ensure that Miller's brands maintain their quality leadership. Miller increased the capacity of its facilities to self- manufacture containers. The glass bottle plant in upstate New York began production during the latter part of the year. Construction progressed on a new can manufacturing plant in North Carolina to be completed in 1979, which will be capable of producing aluminum or steel cans. In 1978, Miller operated three can plants located near its breweries in Milwaukee, Fort Worth, and Fulton. During 1978, Miller invested $357 million in the con- struction and modernization of its breweries and con- tainer facilities, bringing the total of such expenditures to nearly $1 billion since 1972. These ultramodern facili- ties outfitted with the latest technology available have enabled us to increase production of the highest quality beer while improving profits. Many of the characteristics of the soft drink industry are similar to those of our other businesses. Essentially, soft drinks-like cigarettes and beer-are reasonably priced, relatively low-cost, consumer items that give pleasure to users, who repeat their purchases often when the quality of the product satisfies their expectations. Our major priority in soft drinks will be the 7UP brand in the U.S. The first move to improve the position of the brand was the appointment by Seven-Up management of a new advertising agency and the creation of a new advertising campaign and marketing program for the 7UP brand. The campaign, introduced early in 1979, is designed to capitalize on the national trend to more active outdoor lifestyles. The theme, 'America's Turning 7U1?'is intended to develop a large and growing base of consumers whose primary soft drink is 7UP TIMN 439724

To build a strong, modern management, it is neces- sary and productive to draw upon all elements of talent in our population. Women and minorities today repre- sent over 65% of the population of the U.S. It is our pol- icy and goal to have these groups represented adequately in the Philip Morris management structure. We are making progress toward achievement of this goal. Minorities now fill 11% of positions classified as ' officials and managers' (five years ago they held 6%). Minorities now account for 17.1 °io of our combined sales forces (up from 10.8°io five years ago). In total, one out of four of our U.S. employees today is a member of a m nority group. Women today account for 10% of our officials and managers (five years ago they represented 6.7%). Women today hold 22.5% of our professional jobs (compared with 14.3% five years ago). In 1978, we expanded significantly our support of minority-owned banks by establishing a multi-million- dollar credit agreement with a consortium of 28 minority banks across the country. In 1978, three governors welcomed new Philip Morris facilities to their states as boosts to the future econo- mies of their states. They were Governor James B. Hunt. Jr, of North Carolina. where Philip Morris U.S.A. is building a new cigarette manufacturing facility, and where the Miller Brewing Company has a new brewery and can manufacturing plant, and Governors George D. Busbee and Edmund G. Brown, Jr. of Georgia and California., where Miller is constructing new breweries. Our cigarette manufacturing plants and breweries are welcome because they create jobs while meeting all applicable pollution control and other environmental standards. Business activities at Philip Morris make social sense. One example is our Mission Viejo development in Orange County. California, one of the most successful planned communities in the nation, both financially and socially. Mission Viejo is planning another Orange County community, Aliso Viejo. to be developed on 6,600 acres just west of the original Mission Viejo development. For years, major developers shied away from this property because it involved more environmental con- stra nts than any other piece of land in Orange County. Aliso Viejo's plans call for reserving 50% of the acreage for open space and also specify that, of the 20,000 homes expected to be built, 20% will be priced to be accessible to families with moderate incomes. Our coroorate charitable contributions once again increased sharply-in fact, they have more than dou- bled in the past three years, and about tripled in the past five. Philip Morris grants assist a wide range of nonprofit organizations, with the largest category con- tinuing to be higher education. As a matter of policy, we support programs in our plant cities whenever possible. The largest single grant made by the company-$1 million payable over five years-was pledged to Yale University's new Graduate School of Organization and Management for the establishment of a Philip Morris Chair in Marketing in honor of Joseph F Cullman 3rd. Since 1962, it has been our policy to match employee contributions to educational institutions (up to $10..000 per employee per year). We have enlarged this plan to cover gifts to cultural organizations (museums, libraries, orchestras, and the like), and we have now extended it again to cover contributions to hospitals with the upper limit for hospitals and cultural groups set at $500 per employee annually. During 1978, we strengthened our Vocational and Technical Scholarship Program, under which children of employees may now receive awards of up to $2,500 a year to attend accredited vocational or technical schools. Philip Morris corporate support of cultural and artistic activities continued to grow in 1978. An exhibition enti- tled "Mirrors and Windows," focusing on American photography since 1960, opened at The Museum of Modern Art in New York, drawing record-breaking crowds. A traveling exhibition on pop and minimal art from the 1960s and 1970s will open next October in Mil- waukee, headquarters of the Miller Brewing Company. Philip Morris and Mission Viejo will be major sponsors of the "First Western States Biennial Exhibition", sched- uled to open in Denver in March, 1979, showcasing the works of contemporary Western artists. Starting in April, 1979, in New York, Philip Morris will sponsor an exhibi- tion of Michelangelo drawings never shown in this coun- try. A Philip Morris grant to the Conference of Mayors is designed to promote art and culture in U.S. cities. Our commitment to social programs extends to our international operations. We are supporting a commu- nity development project in a village in the state of Maharashtra, India, and our affiliate in the Dominican Republic is financing the construction of a student center at the Instituto Superior de Agricultura. Last year, the highly acclaimed Jasper Johns exhibition, spon- sored by Philip Morris and the National Endowment for the Arts, traveled to Cologne, Paris. London, and Tokyo. As we enter the last year of this decade.. Philip Morris can look back on a period in which our corporate activ- ities in the public interest area grew as significantly as our business activities. The two go hand in hand, and this partnership helps to explain the vitality of our company. `TIMN 439729

Philip Morris U.S.A. Operating Revenues Over the last ten years. Philip Morris U S A s operating revenues have ncreasea at an averaoe annual compcunoed rate of t2.9°b. Philip Morris U.S.A. Cigarette Unit Sales Total unit sales of Philo Morris U.S.AA have grown at an average annual compounded rate of 8-8vo during the past ten years Mn;rons or poflars Bnlion Lo-ts 2450 t75 2'00 150 ' 750 !25 SGC t00 G50 75 50 'CG 25 35G Philip Morris U.S.A. U.S. Cigarette Industry Operating Income Unit Sales Phiho Morris U S.A: s operating income has Over the last ten years. total U SS risen at an average annual compoundeC cigarette industry unit sales have grown rate of 20.5% for the last ten years. at an average annual rate of t 4%, while our market share has more than doubled reach ng about 28% m?978. ~ u S Cigarette hdustry'Unn Sales -~hdip Morns Sha,e of U S Indusiry ;'a ) Mlllions of Dollars 3,11,01 Unas . 700 700 35 600 600 30 SOC 500 25 400 400 2C 300 300 15 200 200 'C t00 ?00 5 0 0 69 70 71 72 73 74 75 76 77 78 69 70 71 72 73 74 75 76 77 78 69 T0 71 72 73 74 75 76 77 78 TIMN 439732

panies and questioning territorial restrictions on fran- chised soft drink bottlers are now in the United States Court of Appeals for the District of Columbia Circuit. They are the outgrowth of suits brought by the Federal Trade Commission against the major soft drink franchis- ing companies, including Seven-Up, in 1971. The case The Public Interest The low regard in which business seems to be held in some quarters today is based largely on a perception that companies are selfish actors on the world stage. Philip Morris strives for a performance that makes eco- nomic and social sense. Good corporate citizenship is not an afterthought but an active concern in everything we do. We believe that the company's achievements in every area are founded on a corporate philosophy which highly values individual excellence and imagina- tion, quality of people and products, the efficient utiliza- tion of resources, and a sense of social responsibility. This corporate philosophy has attracted outstanding people to our ranks and is, in fact, the key to our suc- cess. Our social activities are not pursued solely for the sake of profits. They are mounted simply because that is the kind of company Philip Morris is. We recognize that a company in the tobacco busi- ness confronts a special challenge. We make a product that carries a health warning, that cannot be advertised on television and radio in the U.S. and many other countries, and that some people would like to legislate out of existence by reviving a form of prohibition. As a corporation and as individuals. we share a serious con- cern about major public health problems, and we com- mit resources to help find the causes of diseases that have been statistically associated with cigarette smok- ing. We have no trouble accepting a world in which there are different points of view, but we do have trouble with zealots who tolerate no opinions except their own. We believe the Administration should be commended for its anti-inflation program and we will conscientiously make every effort to stay within the wage and price guidelines. Philip Morris will vigilantly continue to seek new ways to hold down costs through greater efficiency and productivity. We also agree with the President that tighter reins on government expenditures are equally essential if inflation is to be arrested. Because the United States buys more products abroad than it exports, the U.S. balance-of-payments deficit currently runs to about $2 billion a month. As a result, the cry of protectionism-"Keep imports out"-is being heard once again. As Nobel-laureate Paul Samuelson has said, protectionism does not provide protection but succeeds only in "making the world less productive." Philip Morris is convinced that we are well into an era of irrevocable interdependence among involving Seven-Up has been deferred pending the out- come of the appeals. We believe the current franchise system is the most efficient means of distributing our products and serves the public interest by fostering vigorous brand competition, nations and that our national task is to make interna- tional trade and investment free-flowing, productive, and healthy for all sides. Philip Morris is the largest U.S. exporter of cigarettes. Our cigarettes are also manufactured and marketed abroad by 63 affiliates and licensees. Philip Morris Inter- national and its affiliates employ 27,000 people abroad. These are not jobs taken from the American labor mar- ket. We import no cigarettes for sale in the U.S. If we did not operate internationally, our U.S. employment would be reduced. The number of Philip Morris employees in the U.S. working directly in support of our international business exceeds 2,000. In 1978, Philip Morris alone made a net positive contribution of more than S200 mil- lion to the U.S. balance of trade through the export of cigarettes, tobacco, and other manufacturing compo- nents. Total U.S. eXport of tobacco and tobacco prod- ucts contributed a net positive amount of $1.7 billion to the U.S. trade balance, up 31 % over 1977. Philip Morris also contributes positively to the econo- mies of the countries in which we operate. Last year, we published the results of a survey cover- ing our operations in 13 developing countries. The publi- cation documents the activities of our affiliates in relation to the economic and social objectives of host countries and shows how private international invest- ment can further the interests of all concerned. Philip Morris in 1978 announced plans to build a new corporate headquarters building in New York City. An important feature of the building will be a block-long, enclosed pedestrian mall housing a sculpture garden administered by the Whitney Museum of American Art. Our decision to keep our headquarters in New York represents an expression of confidence in the city as a dynamic environment for business. Philip Morris head- quarters have been in New York since 1919. Philip Morris played an active political role in 1978. Our efforts in California and other states were crucial to the defeat of restrictive anti-smoking legislation. The Philip Morris Political Action Committee (PHIL- PAC) was launched in 1978. Authorized by the Federal Election Campaign Act, PACs enable corporations to solicit voluntary political contributions from administra- tive and executive personnel as well as directors and shareholders and to distribute these monies to candi- dates for federal office. More than 800 corporate PACs are now functioning. TIMN 439728

Aw"i6IIii © INenfhol~s le t0 MadbOrO GDIl1ItTj'. ~ ® © TV ® ~ ® ® ,EF._.._ .. M RIT wrg5 &M~ Merit Taste Acclaimed. 0 National Smoker Study: Merit Taste Impresses Toughest Cntics. 1 Merit our largest selling low-tar brand, was the fastest grow ng of the top ten U S brands in 1978. 2 Marlboro widened its lead as the larg- est seli ng cigarette in the U S and the worid 3 Benson & Hedges 100's strengthened its posit on as the lead ng 100mm cigarette in the U.S with the highly successful introduction of Benson & Hedges 100's Lights late in 1977. 4 Virginia Slims continued to grow as the leading cigarette designed for women. 5 Point-of-sale displays at retail counters and an expanded, well-trained, and highly motivated sales force helped broaden market penetration and rein- force the already substantial sales success of Philip Morris U.S.A. 6 W dely publ cized anC n ghly success- ful events like the Marlboro Cup race at Belmont Park in New York, spon- sored by Philip Morris U.S.A., enhance the companys other efforts Seattle Slew captured the 1978 Marlboro Cup TIMN 439733 dll' I(m I ~ll<'1r1L1~1', ~~CM~tA~ ~~11

Operating Revenues Operating Income Off cers 1978 1978 John A. Murphy Edward W. Frantel S1,834,526 , 000 $150,300.000 Chairman and Vice President, Sales 1977 1977 Chie1 Executive Officer S1.327.619.000 S106,456,000 Thomas A. Fulrath 1976 1976 William K Howell Vice President Personnel S 982810 000 056 000 S 76 President and . 1975 . . 1975 Ch,ef Operating Otficer James R Haland S 658.268.000 S 28.628.000 Lauren S Wifliams Vice President Corporate Affairs 1974 1974 Larry K Neuman S 403.551.000 S 6291.000 Executive Vice Pres,dent Vi ce Pres,dent, Mater,al Fiow Thomas B. Shropshire Sen,or Vice President and Treasurer Dr Vincent S Bawsotto Vice Pres,dent. Brewing and Pesearcn Warren H. Dunn V,ce Pres,dent and General Counsel Allen A. Schumer Vice Pres,de nt Pant Operations Georgy L Tarala Vrce President Engineering Trav s G Adler Controller Raymond E Jones. Jr Secretary TIMN A39739

The Seven-Up Company The Seven-Up Company Operating Revenues Operating Income The Seven-Up Company's operating revenues have grown at an average annual compounded rate of t3.',°io over the past ten years. During the last ten years. operating income of The Sever-UO Company has ncreased at an average annual compounded rate of 11 8% Milhons of Dollars vtlhons of Dollars 350 70 ® TIMN 4397441

7 To meet the growing demand for their 9 Record exports of Marlboro and other 1 1 Locally manufactured Marlboro and products, affiliate companies in Ger- company brands from the U.S. helped U.S.-sourced Parliament are two of many and the Benelux are increasing Phdip Morris continue as the leading our leading brands sold in the capacity and modernizing manufac- U S. exporter of c garettes. important Japanese market. turing facilities. 8 Philip Morris (Australia) Limited is an active patron of local arts and conservation. 10 Philip Morris' modern manufacturing facility in the Canary Islands produces popular national brands for sale on the Spanish mainland, where record unit volume was achieved last year. International brands such as Marlboro are exported from the U.S. to Spain. TIMN 439738

1 Mariboro showed strong sales growth in Egypt and several other M ddle East markets. It was the best selling brand in Kuwait and Lebanon ~ 2 U S.-sourced exports of Marlboro posted record increases in Hong Kong and other Asian markets 3 In Brazil, Galaxy, the countrys first low-tar low-rncotine brand. posted unit sales increases of over 80% in this mportant market where total industry sales grew at more than 8°/a compounded annually over the last five years 4 Benson & Heoges (Canada; L m ted s introduct on of ?wo new I ne exten- sions-Benson & Hedges L,ghts and Mark Ten Legere-and the continued s,jppo" of V,scount. the comoany s eadng low-tar brand. position our afflliate wel'1 in the rapidly growing low- tar segmenr o' the market 5 Our wine affiliate. Lindeman (Hold- ings) Limited. increased sales volume and market share to remain the lead- ing wine company in Australia. 6 Participat on in sporting events. such as the internat onal Formuia 1 Grand Prix racing circu,t. is an important Dart ofour worldwide progran of commL,- nty rela' ons cultura', and pror o- t onal activit es TIMN 439737

Miller Brewing Company Miller Brewing Company Miller Brewing Company U.S. Beer Industry Operating Revenues Barrel Shipments Operating Income Barrel Shipments Inc:~ding Imports Dur ng the iast ten years. Miller s operating MiIlers barrel volume has grown at an Operating income of Miller has grown Total U.S 'oeer :ndustry barrel sales have risen at an ,evecues rave ncreased at ar aveage average compounded rate of 20 9% at an average annual compounded rate average annual rate of 4.0% over the last ten years. arnua'. coripoundec rate of 26.0"4 annual!y for the past ten years. Cf 23.64~ over the last ten yeafs. During the same period Miller's 8hare of the market =ti? more than quadrupled. reaching about t 9'i i.n 1978. Imported, Super-Premwm. Nationally Distributed ?remium, anc Lowered Calcne Beer Regional, Non-?remium Beer Ale. Malt Liquor - Mtller Share of U S Industry (°o) n,ors of :Da,a,s _ OC M .~I~.ons o' Barrels 35 Wlhons of Dollars 140 Miuhons of Ba«els 175 '80G 3C ?2C 150 .8 SC0 25 too 125 / .5 '200 2C 80 'OC / '2 90G 5 60 75 ~ 9 500 ' C 40 50 f- 5 300 5 20 25 3 G 0 0 69 70 71 72 73 74 75 76 77 78 69 70 71 72 73 74 75 76 77 78 69 70 71 72 73 74 75 76 77 78 69 70 71 72 73 74 75 76 77 ;8 TIMN 439740

Operat ng Revenues Operating Income Officers Subsidiary Presidents ~ 1978 1978 William E. Winter John R. Kidwell S300.521, 000 S45.652.000 President President. Seven-Up U.S.A., Inc. 1977 1977 $251.408 000 $45.514,000 Paul H. Young, Jr. Charles B Thies , 1976 1976 Executive Vice President President. Seven-Up International, Inc. $233.283.000 $44.634, 000 J Stewart Bakula Colin B. Scarfe 1975 1975 Vice President and General Counsel President, Seven-Up Canada Limited S2? 3.623.000 $39.938,000 1974 1974 Dr. Jonn E Bujake Arnold F. Larson S? 90.880,000 $29.620.000 Vice PresidenL Director of Corporate President, Seven-Up Enterprises Research and Development Wiliiam A Fagot Vrce President, Treasurer Clark W Russell. Jr. Vi ce Pres dent. Director of Corporate Plannrng Robert W. Simpson Vice President and Secretary 0. W. Hickel. Jr. Pres,dent. Warner-Jenkrnson Company Ellis Byer President. Oregon Freeze Dry Foods. Inc Frank J, Leforgeas Pres dent Ventura Coastal Corporation TIMN 64139743

'~~'7 ~.~ MURATTI AMBASSADOR bYI IGI IC I ASTOR u.o un..iiim.nn i`, I l~iZl'.1 Aft v I- Alk Wk s" •MW L. . ^. Ten im 0 © net %r=i ,.`~ ona; 1 -,n~ ~r~~ C//tJ~fiTft "' k" 0 Philip Morris International Philip Morris International Philip Morris International World Cigarette Industry Operating Revenues Cigarette Unit Sales Operating Income Unit Sales Exc!uding U s a Total unit sales of Philip Morris nternationa~ 's affdiates, licensees, and exports have risen at an average compounded rate Of 14.4°0 over the last ter years. - peraung revenues o the e consoii ateo anc u^consolidated affiliates of Phdip Morris :itemational have increased at an averege annual compounced rate of 22 -, °ro over the past ten years UN ions 3'S0 2700 225C i.8GC '35C 900 450 0 .m' 0 During the last ten years. Phdip Morris Internatlonal's operating income has grown at an average annuaicompounded rate of 19.6% TIMN 439736 Over the past ten years, worldwide cigarette industry unit saies have ncreased at an average annual rate of 3.4°io while our market share has more than doubled. reaching 5.59/o in 1978 ~ W'ond Cigarette Industry Unit Sales (Excluding U S A_) - Phillo Morrs Share of Worid Market (°%) o` Dodars Btlhon Units Millions of DOllars Bdllon Units "b 210 210 3850 t4 180 180 3300 12 150 150 2750 10 120 t20 2200 8 90 90 165G 6 60 60 1100 4 ~~ 30 0 30 0 550 0 ~~ 2 0

7 For decades. 7UP has beer a favcrite 9"Do a Double Take was the national soft drink in dense!y populated Hong 7UP promotion theme in retail food Kong. Cargo fer,ies "acili~ate distribu- stores during the 1978 holiday sea- tion to retail outlets ;n tr•e surounding son. Special in store displays, helped harbor area between the siarc and generate multiple package sales. the Kcwioon ma nland 8 Outdoorsmen. campers bacKpack ng entrusiasts and the U.S.government are amorg the prime users of the freeze-dned conven erce foods pro- ducec and distr:butec under the Mountain House and Easy Meai 'abeis by Oregon Freeze Dry Foods. Inc. 10 In one of its many appearances throughout the U S the 7UP hot air balloon. one of Seven-Up's new spe- cial event promotions. participated in the 1978 Kentucky Derby Festivai Great Balloon Race in Louisville, which attracted 30 000 spectators. 11 In 1978, nital distribution of 7UP began in major supermarket chains in the important Brussels market. 'rIMN 439746

The following analysis pertains to the latest two years of the five-year summary of operating results on the preceding page. Operating Revenues In 1978, consolidated operating revenues were $1,430 million (27.5%) higher than in 1977. Reve- nues from worldwide sales of tobacco were up $738 million (21.1 %), of which $322 million is attributable to increased cigarette unit sales, $252 million to increases in selling prices (including increases in certain foreign excise tax rates), and $164 million to translation of foreign currencies at average exchange rates in effect during 1978. Operating revenues from beer sales were up $506 million (38.2%), with $385 million due to greater volume and $121 million to price increases. The Seven-Up Company was acquired in June, 1978, in a transaction accounted for as a purchase, and its revenues from June 1 of $186 Cost and Expenses Cost of sales, which includes cost of products sold and federal and foreign excise taxes on products sold, increased $981 million (26.1%) in 1978 over 1977 and $628 million (20.1 %) in 1977 over 1976. Cost of sales of tobacco products accounted for $467 million of the 1978 increase, of which $241 million is attributable to volume, $77 million to cost increases (including increases in certain foreign excise tax rates) and $149 mil- lion to translation of foreign currencies. The cost of beer products sold increased $403 million in 1978, of which $325 million is due to greater vol- ume and $78 million to cost increases. Cost of sales of The Seven-Up Company consolidated f,om June 1, 1978 was $102 million. The total cost of sales increase in 1977 over Other Items Equity in net earnings of unconsolidated subsid- iaries and affiliates decreased $8.4 million (71.5%) in 1978 compared to 1977 and $2.5 million (17.7%) in 1977 compared to 1976. The 1978 decrease is principally attributable to lower sales as a result of competitive price cutting and a significant excise tax increase in Australia and additional losses from Brazilian operations due principally to higher marketing expense. Interest expense in 1978 increased $48 million (47.5%) over 1977 following a decrease of million are included in 1978 revenues from other products. Consolidated operating revenues in 1977 were $908 million (21.2%) higher than in 1976. Reve- nues from worldwide sales of tobacco products were up $506 million (16.9%), of which $230 mil- lion is attributable to increased cigarette unit sales, $237 million to increases in selling prices (including increases in certain foreign excise tax rates), and $39 million to translation of foreign currencies at average rates in effect during 1977. Operating revenues from beer sales were up $345 million (35.1 %), with $309 million of the increase coming from greater volume and $36 million from price increases. 1976 includes cost increases of $291 million for tobacco products and $287 million for beer. Tobacco product increases included $161 million attributable to volume, $102 million to cost increases (including increases in certain foreign excise tax rates), and $28 million to translation of foreign currencies. The $287 million higher cost of beer included $262 million from higher volume and $25 million of cost increases. Marketing, administrative and research costs in 1978 were $255 million (37.7%) higher than in 1977 and $129 million (23.7%) higher in 1977 than in 1976, reflecting increases from growth in operations, inflation, the effect of currency trans- lations, and in 1978 the inclusion of The Seven-Up Company from June 1. $1 million in 1977 compared to 1976. The 1978 increase reflects substantial additional borrowings during the year, principally to finance the acqui- sition of The Seven-Up Company, and a sharp increase in short-term interest rates. The $46 million and $85 million increases in income taxes in 1978 and 1977, respectively, reflect the applicable taxes on the increased income for those years. Reference is made to the Notes to Consolidated Financial Statements for additional information. TIMN 439754

Philip Morris's 25th consecutive year of sales and earnings growth was marked by volume gains in our major businesses, price increases necessary to offset higher costs, and continued production efficiencies. Our pre-tax profit margin of 11.2% was down slightly from 1977, largely due to higher marketing costs and interest expense, but it was considerably above the average of the last decade (Chart 1). In February, 1978, the common stock dividend was increased to an annual rate of $2.05 per share. This was the 11th consecutive year of increase. The $2.05 per share dividend declared in 1978 represented a 31 % increase over 1977. Our payout of earnings rose moderately to just over 30%, the highest level since 1971 (Chart 2). We continued our conservative dividend policy in the face of our rapidly growing business with the attendant large capital expenditures. Funds from operations increased 30% last year. The strong growth in our internal cash generation, particularly in recent years, has provided support for increasing capital expenditures, which totaled S566 million in 1978 (Chart 3). We estimate our capital outlays will total about $775 million in 1979 and will be somewhat in excess of $3.0 billion from 1979 through 1983. About 90% of the expenditures forecast for the next five years will go toward increasing capacity and productivity. We will continue to closely monitor these expenditures for acceptable returns and optimal utilization of capacity. Over one-half of our planned capital investment through 1983 will be in the Miller Brewing Com- pany. We expect that each year Miller will con- tinue to generate a greater percentage of the funds required for its growth than in the prior year. Total assets increased dramatically last year to $5.6 billion. This was due largely to our business growth requiring additions to both working capital and facilities and to the acquisition of The Seven- Up Company. Our net return on average total assets remained above 8% (Chart 4). Stockholders' equity reached $2.1 billion in 1978, a sevenfold increase over the last decade. Nevertheless, net return on average stockholders' equity has remained consistently high, at 21.5% in 1978 (Chart 5). Capital expenditures and the acquisition of The Seven-Up Company were the primary factors behind last year's financing program, which was clearly the most ambitious in our history. An equity Operating Revenues Primary Earnings Per Share Funds from Operations Pre-Tax Margins Dividends Declared Per Share Capita~ Expenditures ChaC 1 Char12 .,nart 3 s Operatiny Revenues ~ Pre-Tax Margins (Pro) W Primary Earnings Per Snare - Dwdends Deciared °er Share M °dnds fro, Operatuons - CaqrtaiExpendnures Blliions of Dollars 11 . Do:iars M~i:ors o' Dci,a,s 7 C ' 4 700 60 600 52C 40 6 4 00 30 6 300 20 4 200 2 '•OC C 69 70 71 72 73 74 75 76 77 76 69 70 7 72 73 74 76 77 78 40C 30" 2CQ '~oC

7u, 1 7UP and Sugar Free 7UP come in a w de vanety of package sizes and tyoes Product ava lability in the pack- aaes most desired bv consumers is fundamental to successful marketing. 2 Expanded facilit es for product on of frozen concentrate for lemonade cur- rentiy enabies Ventura Coastal Cor- oorat on to process over 600 tons of fresh lemons daily 3 7UP's presence is outstanding in Montreai, Canada. one of the top soft dr nk markets in North America. In ad- dition to sales through major indepen- dents and supermarket chains. a high percentage of 7UP is marketed through thousands of small food shops and neighborhood grocery stores tnat dot the citys res dentiai areas 4 Sophist cated testing and a ski!led eye insure tnat unsurpassed quality o` product continues to be a halimark of The Seven-Up Company 5 Golden Crown brand reconstituted lemon and lime juices are gaining widespread usage in family food reci- pes and in restaurant and :nst tutional food service outlets. 6 This single flavor being prepared at a Warner-Jenk nson Company plant is but one of 5.000 d fferent flavors wh ch the company is capable of manufactunng for customer use :n t7ousands of fooo oeverage. and other consumer o,oduc+.s TIMN 439745

offering to cover part of the cost of Seven-Up was appropriate in view of the long-term nature of this investment. Consequently, we issued 2 million shares of common stock. The rernaining cost of Seven-Up was covered by $150 million of 25-year debentures with an annual interest rate of 9'/e% and $200 million in 5'/z-year notes with an annual interest rate of 8.65%, both issued in the public marketplace. Prior to the Seven-Up acquisition, we nego- tiated two privately placed fixed-rate loans-a $160 million bank term loan with an annual inter- est rate of 81/2% and $150 million of 20-year notes with an annual interest rate of 87/e%. These fixed-rate financings extended the aver- age maturities within our debt structure and re- duced our exposure to rising interest rates. At year- end 1978, fixed-rate obligations composed 68% of total debt compared with 60% one year earlier. Despite an $800 million net increase in our total debt last year, our debt-to-equity ratio of 1.12:1.00 was below the ratios from 1973 through 1975 (Chart 6). We anticipate this ratio will hold near its present level for the next year, because of contin- uing high rates of capital spending, before resum- ing its downward trend. Our excellent credit rating Average Total Assets Net Return on Average Total Assets Chart 4 -m Average Total Assets - Net Return on Average Tota~ Assets ('o) reflects consistently strong growth in earnings and stockholders' equity. Inventories made up largely of tobacco leaf, which is continually increasing in value, provide additional support for our debt. In 1978, our income tax rate of 45.2% declined slightly from 46.5% in 1977. This primarily reflected a 75% increase in our investment tax credit over the prior year. The dollar declined significantly against major world currencies for the most part of last year. Toward year end the determined intervention efforts of the U.S. Government and steps taken together with foreign governments to stabilize the U.S. dollar have brought relative tranquillity at this time to the world's major currency markets. Our carefully structured, multi-faceted hedging program, however, was again successful in minimizing the after-tax effect of foreign currency transactions and translations. The pressures we face are those associated with rapid growth in an inflationary environment. We expect that our financial condition will con- tinue to strengthen in the years ahead. We intend to continue our conservative financial policy together with a carefully monitored capacity ex- pansion program to take advantage of opportun- ities in the marketplace and the latest available technology. Average Stockholders' Equity Total Debt Net Return on Average Debt to Equity Ratio Stockholders' Equity ~hart 5 Chart 6 ~ Average Stockhoiders Equity - Net Return or Average Stockholders Equ:ty (?~c) >• Tctai Debt - Tctai Debt to Stockr~.olders Equrty ("ear-End) Ratio (%) TIMN 439752 _ ^ Biiiiors of Dollars 4,9 . 'a 6iiiions of Doiiars 2.1 0= 21 Biu,ons o) Dollars 28 '75 Ja iU ~..o iI c.u 2.8 8 2 12 1 6 00 2. 7 g 9 9 1 2 75 _ 14 a 6 6 8 50 ~ 7 0 2 0 3 0 3 0 a 0 25 0 69 70 71 72 73 74 75 76 77 78 69 70 71 72 73 74 75 76 77 78

3 Miller operates three can manufactur- rg plants. in Mi!waukee. Fulton and Fort Worth. Another plant s nearing corroetion n Reidsville. North Caro- ir.a. These piants supply Miller with a sicnrf,cant portion of Its can needs. Tne plants turn out m llions of cars and severa'~ bibon can lids eacn vear. 6 Modern, automated equipment such as this high-speed filling machine plays an ,mportant part in moving the Miller products to the consumer with maximum efficiency. Miller uses the finest state-of-the-art equipment for brewing, manufactunng, and research. 7 Teiev sion continues to be one of the ma' ior vehicles for Millers advertising campaigns, AII three principal Miller brands receive strong television expo- sure, particularly on sports programs and crime-time network shows. Miller's super-premium Lowenbrau brand is supported by the warm friendliness of the "Tonight. let it be Lowenbrau" theme. 8 The most sophisticated, finest quality- control systems available are key parts of the Miller Brewing Company story. Quality checks monitor each phase of the brewing process and insure that only the highest quality products reach the consuming public. 9 The popular Lite beer campaign is as entertaining as ever, after nearly five years. The Lite campaign continued to use former athletes and employ a sense of humor, which has become ts trademark. Here former profes- sionai bowler Don Carter demon- strates Lites ''easy-opening' cans. °TIl~~ 439742

4 P!ainwell Pacer Company :s develop- ing fdter wrapp ng paper `or many brands of Ph,up Morns cgarettes it also oroduces several graces of fine pr nting papers wh ch are usec in many annual repor.s ncwd ng tnis one. 5 This pict reactor at Polymer Irdus- tres Adhes:ves & 'uqu,o Coat ngs D vis on is used 'o deve!oc new types of polymers and cl gcmers for use in coat ngs and adhes ves wh cn can be cured by electron-curtain. o whlprint's new sheet extruoer in its Mil- waukee plant prodaces materials for tnermo'ormed packages for pro- cessed meats. Th s ooeration is one of several examples of Milprrnt s pro- gram to produce many of its own raw matenals. 7 Milprint's giant new metallizer. installed this year. is the newest in the U.S. and the first a r-to-air metallizer dedicated to the production of flexible packag ng materias. !t produces metailized paper and film for use in food and c garette packaging and labels. 8 Koc'n Label Companys carton plant in ~or, Atkinson, Wisconsin, began operations this year. It produces six- pack and eight-pack bottle carriers for the brewing ,ndustry. 9 The use of polyester powder to coat guardra:ls on U.S. h ghways is an interesting potential new market for Armstrong Produc's Company. cpoxy pcwders `or the coating of re nforcing bars on br dge decks are also pro- duced by Armstrong. Philip Morris Industrial Operating Revenues Over ;he iast ten years. Philip Morris Industrial's operating revenues have ncreasea at an average annuai compounded rate cf 11 0%. Philip Morris Industrial Operating Income Operating income of Philip Mcrris industriai has grown at ar average annuai CompountleC rate Cf 8.2o/o during the past ten years. Mdlions of poilars Miuions of Doflars 245 21 TIMN 439748

i "A liii i iiiirli ii iliiib (dollar amounts except per-share amounts expressed in thousands) 1978 1977 1976 1975 1974 Summary of Operations: Operating Revenues $ 6,632,463 5,201,977 4.293,782 3,642,414 3,010,961 Cost of Sales: Cost of Products Sold 3,072,134 2,401,680 1,966,871 1,656,839 1,290,319 Federal Excise Taxes 960,791 862,115 778,161 686,276 619,504 Foreign Excise Taxes 702,809 490,372 381,125 392,127 349,363 Operating Income 968,082 782,732 634.539 492,844 403,585 Interest Expense 149,794 101,584 102,834 99,045 82,741 Earnings Before Income Taxes 745,497 625,516 471,928 360,810 297,502 Pre-Tax Profit Margins 11.2% 12.0% 11.0o/a 9.9% 9.9% Provision for Income Taxes 336,916 290,590 206,253 149,172 121,98E Net Earnings 408,581 334,926 265,675 211,638 175,516 Primary Earnings Per Common Share 6.77 5.60 4.47 3.62 3.15 Fully Diluted Earnings Per Common Share 6.77 5.60 4.47 3.62 3.07 Dividends Declared Per Common Share 2.050 1.563 1.150 .925 .775 Weighted Average Shares-Primary 60,367,725 59,822,487 59,408,484 58,442,362 55,649,417 Weighted Average Shares-Fully Diluted 60,367,725 59,822,487 59,408,484 58,442,362 57,339,255 Capital Expenditures $ 566,228 279,818 220,173 244,477 215,770 Annual Depreciation 105,496 78,466 64,856 49,853 38,006 Property, Plant & Equipment (Gross) 2,217,331 1,594,910 1,323,923 1,129,838 899,810 Property, Plant & Equipment (Net) 1,737,605 1,202,432 993,879 851,103 659,520 Inventories 2,188,553 1.817,561 1,657,504 1,448,428 1.269,212 CurrentAssets 2,756,757 2,221,020 2.005.745 1,788,085 1,557.908 Working Capital 1,585,090 1,415,867 1,202,224 890,797 725,000 Total Assets 5,608,165 4,048,039 3,582,209 3,134,326 2,653,263 Total Debt 2,372,179 1,563,498 1,525,638 1.443,270 1,239,312 Stockholders' Equity 2,114,660 1,690,066 1,429,982 1,227,781 974,673 Net Earnings Reinvested 283,805 253,661 197,195 157,102 131,890 ~_ - Common Dividends Declared as % of Net Earnings 30.6% 27.9% 25.7% 25.7% 24.8°6 Book Value Per Common Share $ 34.00 28.16 23.99 20.63 16.97 Market Price of Common Share High-Low 763/4-557/s 647/8 -511/z 63'/a-493/4 59'/4-401ia 613i8-341ie Closing Price Year-End 701/2 61 '/s 613i4 53 48 Price%Earnings Ratio 10 11 13 14 15 No. of Common Shares-Actual Year-End 62,134,169 59..919.917 59,487,393 59,357.236 57.264.586 TIMN 439755

24 ® I .- /i71~l~ . ~t~r11a~:IM1%Il _ r/1 _ "",Irurlirlll ~~iwata~9i • ~~u ;. r; .rl ~ --- ur' 0 11rY~i ir~i4 nl/if ~~1 i111+1rlMr ~~,,,--46 -''! ~.--.. -'°~ © m Construct on of Mdler s s xth orewery. ocated in Irwndale. Californ a began n November. 1977 By 1980 when it s compieted. the brewery will nave a capacty of 5 miil on barrels a year 2 M'iers new headquarters ouiid~ng. compieted in late 1977 now houses severa "undred of M Iwaukee s cor- co,ate persorne~ The faci+fy has become anotmer of Miller s Milwaukee landmarks IM I H ® ® 3 Albany. Georgia, is the !ocation for the seventh brewery in the Miller Brewing Company family which will have a capacity of 10 mill on. barrels. Ground was broken for the Albany facility in April. 1978. and production is sched- uled to start by 1980. 4 Miller s Eden. North Carol na. facdr.y has been Droducing Wler p,oducts since March 1978 The brewery s annua: capacity is 8 8 million barre,s .v TIMN 439741

Philip Morris Incorporated and Consolidated Subsidiaries 1978 1977 - Liabilities - Notes payable $ 211, 345, 000 $ 121,139, 000 - Current portion of long-term debt 13, 866, 000 15, 740,000 - Accounts payable and accrued liabilities 785,201,000 503, 767,000 - Federal and other income taxes 129, 388, 000 139, 766, 000 - Dividends payable 31, 867, 000 24, 741, 000 Total current liabilities 1,171,667,000 805,153,000 Long-term debt 2.146, 968, 000 1,426, 619,000 Deferred income taxes 149, 952, 000 104, 429, 000 Other liabilities 24, 918, 000 21, 772, 000 Total liabilities 3,493,505,000 2,357,973,000 Stockholders' Equity Cumulative preferred stock, par value $100 per share 7,693,000 8,262,000 Common stock, par value $1 per share 62,136,000 59,922,000 Additional paid-in capital 439,443,000 300,538,000 Earnings reinvested in the business 1,608,954,000 1,325,149,000 2,118,226,000 1,693,871,000 Less, Cost of treasury stock 3,566,000 3,805,000 2,114,660,000 1,690,066,000 $5,608,165,000 $4,048,039,000 TIMN 439758

Philip Morris Incorporated and Consolidated Subsidiaries 39 1973 1972 1971 1970 1969 1968 1967 1966 1965 1964 2,602,498 2,131,224 1,852.495 1,509.540 1,142,373 1,019.846 904,841 771,975 704,544 641,439 1,060,777 832.890 700.021 577,106 454,718 409.912 363,115 311,784 292,588 277,522 558,947 494,778 441,143 372,092 319,086 295,903 271,073 234,975 214,128 194,312 334,512 228,151 201.386 147,124 54,247 41,841 39,658 30,057 27.780 22,462 329,483 287,461 241,137 203,180 153,237 126,159 101,838 81,867 65,128 55,568 50,993 37,870 35,472 35,425 28,640 15,949 10,205 8,094 6,098 5,919 255,609 229,634 189,800 150,008 115,613 100,107 81,317 65,144 52,423 44,466 9.8% 10.8% 10.2% 9.9% 10.1 % 9.8% 9.0% 8.4% 7.4% 6.9% 106,977 105,168 88,302 72,510 57,273 51,241 37,716 30,961 25,914 21,852 148,632 124,466 101,498 77,498 58,340 48,866 43,601 34,183 26,509 22.614 2.71 2.34 2.01 1.68 1.29 1.09 .98 .77 .59 .50 2.61 2.18 1.82 1.43 1.20 1.07 .97 .77 .59 .50 .674 . 631 . 605 . .525 .488 .425 .35 .35 .30 .30 54,804,174 52,999,338 50,126,614 45,613,196 44,538,922 43,857,780 43,349,768 57.315,784 57,265,432 56,556,948 56.596,566 49,558,612 45,069,770 43,982,508 174,665 120,034 68,001 39,595 23,636 26,373 25,688 17,089 12,078 19,366 30,245 26,576 21,500 17,658 13,512 12,139 10,903 9,532 8,857 8.316 728,726 571,148 447,075 394,088 236,962 219,346 193,656 172,593 159,759 153,224 510,286 373,372 274,070 236,697 147,354 138,704 123,555 110,157 104,044 102,417 1,009,414 801,145 670,244 568,428 447,319 451,922 386,576 297,761 271,823 257,256 1,245,934 989,708 826,453 728,837 574,988 561,685 485,908 372,895 339,082 318,978 515,347 524,791 417,591 347,682 315,871 312,406 306,172 253,257 213,826 202,810 2,108,403 1,701,494 1,392,035 1,239,424 976,489 786,578 648,994 512,549 466,277 443,438 947,364 681,000 553,900 557,700 490,400 354,800 256,400 161,000 158,100 159,000 815,028 695,549 579.114 452,849 355,808 314,496 280,186 249,821 230,677 217,783 111,376 89,894 69,666 52,176 35,659 29,189 27,453 18,159 12,670 8,794 25.0% 27.2% 30.6% 31.6% 37.4% 38.4% 34.9% 44.2% 48.6% 56.9% 14.66 12.55 10.72 8.93 7.39 6.56 5.88 5.24 4.81 4.51 683/s-483/a 59'/a-33'/s 35'/2-233/8 25'/8-14 18'/8-12'/2 17'/8-11 143/a-7'/a 9-6'/8 8'/s-6'/e 7'/s-5 5/s 573/s 591/8 35'/s 243/a 17'/s 16 1 1'/s 8'h 73/s 6 Ys 21 25 17 14 13 14 11 11 12 12 55,378,434 54,444,090 52,338,908 48,317,680 45,130,668 44,400,616 43,661,748 43,226,688 43,043,460 4 2,916,956 TIMN 439756

~ 16666 " i i" I December 31, 1978 and 1977 1978 1977 Assets ~ Cash and cash equivalents $ 72,930,000 $ 72,231,000 Receivables 473,586,000 316,723,000 inventories E Leaf tobacco 1,459,048,000 1,271,235,000 [ Other raw materials 198,541,000 142,231,000 Work in process and finished goods 419,551,000 314,519,000 Housing programs under construction 111,413,000 89,576,000 L 2,188,553,000 1,817,561,000 Prepaid expenses 21,688,000 14,505,000 C Total current assets 2,756,757,000 2,221,020,000 C Land and offtract improvements 72,836,000 69,576,000 Property, plant and equipment, at cost Land and land improvements 101,256,000 55,246,000 Buildings and building equipment 476,152,000 398,479,000 Machinery and equipment 1,231,438,000 931,042,000 ~ Construction in progress 408,485,000 210,143,000 C 2,217,331,000 1,594,910,000 C Less, Accumulated depreciation 479,726,000 392,478,000 p 1,737,605,000 1,202,432,000 E Brands, trademarks, patents and goodwill 652,368,000 222,492,000 Long-term receivables 66,258,000 64,762,000 Other assets 79, 070, 000 38, 249, 000 $5,608,165,000 $4,048,039,000 See notes to consolidated financial statements. Investments in and advances to unconsolidated foreign subsidiaries and affiliates 243,271,000 229,508,000 TIMN 439757

42 Consolidated Statements of Earnings for the years ended December 31. 1978 and 1977 Philip Morris Incorporated and Consolidated Subsidiaries to 1978 1977 Operating revenues $6, 632,463, 000 $5,201,977,000 B r Cost of sales P, Cost of products sold 3,072,134,000 2,401,680,000 Federal and foreign excise taxes on products sold 1,663,600,000 1,352,487,000 Gross profit 1,896,729,000 1,447,810,000 C Marketing, administration and research costs 931,978,000 676,772,000 964,751,000 771,038,000 P Equity in net earnings of unconsolidated foreign subsidiaries and affiliates 3,331,000 11,694,000 F Operating income of operating companies 968,082,000 782,732,000 C Corporate expense 54,106,000 38,523,000 Interest expense (excluding capitalized interest of $13,425,000 in 1978 and $7,163,000 in 1977) 149,794,000 101,584,000 Other deductions, net 18,685,000 17.109,000 Earnings before income taxes 745,497,000 625,516,000 ~ F Provision for income taxes 336,916,000 290,590,000 Net earnings $ 408,581,000 $ 334,926,000 Earnings per common share $ 6.77 $ 5.60 C See notes to consol dated financial statements. F F F C TIMN 439759

Operating Revenues Operating Income Officers 1978 1978 William D. McCoy Robert G. Etter $237,165.000 $15.024,000 President Vice President, 1977 1977 New Business Deve opment S21 6.699,000 $14.860,000 James B. Kurtzweil 1976 1976 Executive Vice Pres dent. George R. Lewis S169.096,000 510.620,000 Operations Vice Presrdent Financia' 1975 1975 and Planning, Treasurer $151.960 000 S 8,052.000 James E. Asmuth Vrce President and Alan G. Wern ck 1974 1974 President Tissue Group Vice Presiden,t, Admrnrstratron 5155.390.000 S 12.280.000 Raiph J. Becker Vice Pres denL Purchasing Rcharcl W Detnck Vi ce President and President. Paper Group James R Kieckhefer Secretary Dr Herbert Aschkenasy President, Chem cal Group TIMN 439747 Wiscons n Tissue Mills produces a!most all of the paper used in its qual ty I ne of napkins It offers 'he widest assortment of colors anc sizes of any company in its industry. 2 These pulp storage tanks are part of the increased de-inking capab,lity at Wisconsin Tissue Milis which wfll erable the company to cont nue to use waste paper as the ma or raw materai r ts aapermak ng operat cn 3 Th s saeaai emboss ng ror at Wiscor- sir Tssue Mdis is produc ng napk ns for Birger King The ab!I ty to emboss arc to pr nt in up to four colors pro- v~ces Wsconsin Tissue with the caPa- ;,nir, to produce a wice variety of c'.:sto'T ,zed napkins for tne food se'- oce ndustry.

i wliliii 'ri'ri"Ifilluill"ii "amiki iJWii (co',ar amounts expressed in miufions) 1978 1977 1976 1975 1974 Operating Revenues Tobacco S4.231 64°/ S3.493 67% S2.987 70% S2.704 744/o 52.326 77% Beer 1,834 28 1.328 26 983 23 658 18 404 14 Other Products 567 8 381 7 324 7 280 8 281 9 $6,632 100% $5,202 100% $4,294 100% $3,642 100% $3,011 100% Cost of Sales: Cost of Products Sold 3,072 2.402 1,967 11,657 1,290 Federal and Foreign ExciseTaxes 1,663 1.352 1.159 1.078 969 Gross Profit $1,897 $1,448 $1,168 $ 907 $ 752 Operating Profit: Tobacco S 751 78% S 615 80% S 516 83% S 426 91% S 355 93% Beer 150 16 106 14 76 12 28 6 6 2 Other Products 56 6 49 6 28 5 15 3 18 5 $ 957 100% $ 770 100% $ 620 100% $ 469 100% $ 379 100% Reconciling Items 1 1 13 15 24 25 Operating Income of Operating Companies $ 968 $ 783 $ 635 $ 493 $ 404 Interest Expense 150 102 103 99 83 Corporate and Other Expenses 72 55 60 33 23 Earnings Before Income Taxes $ 746 $ 626 $ 472 $ 361 $ 298 Provision for Income Taxes 337 291 206 149 122 Net Earnings $ 409 $ 335 $ 266 $ 212 $ 176 Primary Earnings Per Common Share $ 6.77 $ 5.60 $ 4.47 $ 3.62 $ 3.15 Identifiable Assets Tobacco 53.066 S2.510 52.242 S2.047 S1,796 Beer 1,245 819 646 497 338 Other Products 979 407 336 285 271 $5,290 $3,736 $3,224 $2,829 $2,405 Depreciation Expense. Tobacco S 52 S 42 S 39 S 32 S 25 Beer 41 27 18 10 6 Capitai Additions: Tobacco S 174 S 78 S 61 S 86 S 127 Beer 358 Worldw de tobacco (Philip Morris U.S.A. and Philip Morris International) and domestic beer (MiIler Brewing Company) represent the companys primary industry segments 'Other Products" include soff drinks, and food flavors and colors (The Seven-Up Company). ndustr al products (Philip Morris Industrial), land development operations (M ssion V ejo Company) and non-tobacco operations (publ shing and greet ng cards) of Ph l p Morr s International. 183 147 146 For segment reporting purposes, operating profit is defined as operating income of operat,ng companies less equity in net earnings of uncon- sobdated foreign subsd aries and a'fi!iates and reduced by the amounts of amortizat on of good- wil! and trademarks included in other deductions, net in the statements of earn ngs. Addtiona' industry segment nformat on is included in the notes to consolidated f nanc al statements. 77 TIMN 439753

Mission Viejo Company Mission Viejo Company _ Operating Revenues Operating Income ' Over 3.000 acres of scer iC hiils and Durng tne ast ter years, Miss on Vle o Operating income of Mission Vle o nas valle s wdl be devoted ,o C er space Comoanys operat~,ng revenues have increased at an average annual Y P grown at an average annual compounded compounded rate of 29.9% over the past and recreationai uses :r t'le r:ew com- •a'•e of 19 7°~~ ;er years. munity of Aliso Vie)o. 'IcCa'eC two `~scai year ended Seotember 30 Fiscal year endec September 30 miles wes*, of 'Vt ssion V,e o 8 M ssion Viejo Company ~,troduced ts proposed plan for the new commun ty of Aliso V e;o ~o the publ c in i-ebriary ' 978. Pubiic nearings before trte Orange Cojnty Planr.ing Commission began r December. The innovat!ve pian responds to a brcad range of env ronmental. social, and economic goals. The plan pro- poses a permanent open space area, cover ng more than one-nalf of the property res dential areas consisting of 20 000 hornes, some 470 acres devotea to business. park and indus- tnal uses and a Town Center com- mercial area. ~Ndl~ors of DOIlarS Miss on Viejo Company Share of Orange County Market Sales of Mission Viejo Company accounted for 7 9% of the new homes soio n Orange County. Caufornia. ir 1978 . TIMN 439750 Mtll.ions of --ouars , 73 3 'O.s SC 3C 50 25 25 2r` 3 0 697C 71 72 73 74 75 76 77 78 6S 73 71 72 73 74 75 76 77 78 90 75 6 C' as 1 5 69 7C 71 '2 73 74 75 76 7. '9

for the years ended December 31, 1978 and 1977 Phtlip Morris Incorporated and Consolidated Subsidiaries Preferred Stock Common Stock Additional Paid-In Capital Earnings Reinvested in the Business Cost of Treasury Stock Total Stockholders' Equity Balance, Jan. 1, 1977 $8,812,000 $59,490,000 $294,225,000 $1,071,488,000 ($4,033,000) $1,429,982,000 Net earnings for the year 1977 334,926,000 334,926,000 Proceeds from common stock issued upon exercise of stock options 117,000 6,138,000 6,255,000 Common stock issued for acquisition 315,000 12,368,000 12,683,000 Preferred stock purchased for treasury (147,000) (147,000) Preferred stock retired (550,000) 175,000 375,000 Cash dividends declared: Preferred stock (104, 000) (104, 000) Common stock, $1.56 per share (93,529,000) (93,529,000) Increase (decrease) 1977 (550,000) 432,000 6,313,000 253,661,000 228,000 260,084,000 Balance, Dec. 31, 1977 8,262,000 59,922,000 300,538,000 1,325,149,000 (3,805,000) 1,690,066,000 Net earnings for the year 1978 408,581,000 408,581,000 Proceeds from common stock issued upon exercise of stock options and stock units 180,000 9,967,000 10,147,000 Common stock issued for acquisition 34,000 94,000 481,000 609,000 Proceeds from sale of common stock 2,000,000 128,675,000 130.675,000 Preferred stock purchased for treasury (161,000) (161,000) Preferred stock retired (569,000) 169,000 400.000 Cash dividends declared: Preferred stock (97,000) (97,000) Common stock, $2.05 per share (125,160,000) (125,160,000) Increase (decrease) 1978 (569,000) 2,214,000 138,905,000 283,805,000 239,000 424,594,000 Balance, Dec. 31, 1978 $7,693,000 $62,136,000 $439,443,000 $1,608,954,000 ($3,566,000) $2,114,660,000 ( ) Denotes deduction. See notes to consolidated financial statements. T'IMIv 439760

Operatmg Revenues Operating Income Officers 1978 1978 Philip J. Reilly, President 51 25.952.000 $19,761.000 James G Gilleran 1977 1977 Execut ve Vice President S11 48 017 000 225 $33 000 , , 1976 , , 1976 James G Toepter S 94.762 000 $16.333, 000 Executive Vice President 1975 1975 Marvin E. Lawrence S 70.635 000 S 5.875.000 Senior Vi ce President 1974 1974 Geurt Henr Lodder S 62.676 000 S 4.772.oD0 Senior Vi ce President John F Biggs. Vice Pres dent James L Huesman Vice President and Treasurer Gerry D. Ogn bene. Vice President Donald B. Schulz. Vice President Wiliiam K. Smith Vice President and Secretary Harvey Stearn. Vice Pres,dent Van Stevens. Vice President Robert P. Swank. Vice President 1 Finisterra condom niums the first waterfront development on Lake Mis- s on V efo. opened in 1978. T emen- dously popuiar. each phase was soid-out on the day it was offered F nisterra was one of six distinctive product I nes offered in Mission Vie}o dunn^1976 2 A variety of organized youth sports in Miss on V efo compiements the com- munitys unexcelied recreatonal amenities. Missior Veio coasts one of tne hjghest rates per cap ta c` pa^,ici- aatior n~ecreat,on n tne country 3 The recreauon center is a %o of com- munity activity in M,ss,on Veio. Aurora. Colorado. Here. young res,- cents celebrate the amval of w nter anc the naturai outdoor recreato^ enioyed in Colorado 4' The Water Babies' was Mission Viejo community's entry into the 1979 Pasadena Tournament of Roses Parade. The float was viewed by an estimated 125 mdlion qeople around the world 5 The Mis&on V~eio Nadadores Swirr Team contrnued its extraordinary performance in 1978 winning two nat onal AAU team cnamc,onsn ps ana sett,ng two worid recores 6 Missio- Veio Company cui,os quaity nving environments for peopie Attrac- tve neghoorhoods. quet streetss convenientiy iocated shopp ng. sc7ooas employment. and recreation are tne fruits of detaileo. thoughtfu' piarring-a tradition ir the M;ssion V e;o lifestyle TIMIN 439749

iii •••i li i ii ii iii 66 ii I' iiiiiINI I ii '1" 11111 '• • for the years ended December 31, 1978 and 1977 Philip Morris Incorporated and Consolidated Subsidiaries Sources of Working Capital 1978 1977 Net earnings $ 408,581,000 $334,926,000 Add (deduct) items not requiring current use of working capital: Depreciation and amortization 116,226,000 81,604,000 Deferred income taxes 42,508,000 28,015,000 Equity in net earnings of unconsolidated foreign subsidiaries and affiliates (3,331,000) (11,694,000) Dividends from unconsolidated foreign subsidiaries and affiliates 12,605,000 10,985,000 From operations 576,589,000 443,836,000 Long-term debt issued 776,554,000 258,550,000 Sale of common stock 130,675,000 Common stock issued under stock options and stock units 10,147,000 6,255,000 Land and offtract improvements transferred to housing programs under construction 3,989,000 3,822,000 Disposal of property, plant and equipment 8,936,000 9,563,000 Reduction in long-term receivables 4,455,000 4,611,000 Additions to working capital 1,511,345,000 726,637,000 Uses of Working Capital Dividends 125,257,000 93,633,000 Capital expenditures 566,228,000 279,818,000 Funds in escrow for construction 27,809,000 12,596,000 Capitalized lease obligations 10,869,000 6,260,000 Land and offtract improvements 7,249,000 14,632,000 Investments in and advances to unconsolidated foreign subsidiaries and affiliates 23,037,000 8,652,000 Investment in consolidated subsidiaries 456,333,000" . 11.884,000 Repayment of long-term debt 78,439,000 92,647,000 Purchase of trademarks and related business 45,000,000 Other, net 1,901,000 (7,128,000) Working capital used 1,342,122,000 512,994,000 Increase in working capital $ 169,223,000 $213,643,000 Changes in Components of Working Capital Cash and receivables $ 157,562,000 $ 56,658,000 Inventories 370,992,000 160,057,000 Notes payable and long-term debt currently payable (88,332,000) 140.981,000 Accrued liabilities and other payables (271,056,000) (137,231,000) Other, net 57,000 (6,822.000) $ 169,223,000 $213,643,000 ' Funds invested in The Seven-Up Company, exclusive of working capital: Net non-current assets acquired, principally property, plant and equipment $ 66,667,000 Cost in excess of net assets ac uired q 389, 666, 000 $ 456,333,000 TIMN 439761 See notes to consolidated financial statements

Summary of Significant Accounting Policies Consolidation The consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries. Investments in and advances to Inventories Inventories are valued at the lower of cost or mar- ket. The cost of leaf tobacco is determined on an average cost basis, and the cost of other invento- ries is determined generally on a first-in, first-out basis. It is a generally recognized industry prac- tice to classify the total amount of leaf tobacco inventory as a current asset although part of such Real estate operations The cost of land, including offtract improvements, interest and property taxes, is reported as a non- current asset until a designated area is placed into development. Interest is capitalized in accord- ance with the general industry practice. The amount of interest capitalized is determined by the average borrowing rates applicable to loans incurred for use in these operations. Offtract improvements are access roads, utili- Brands, trademarks, patents and goodwill These intangibles, including goodwill acquired after November 1, 1970, are being amortized over periods of not more than forty years. Other good- Income taxes _ The provision for income taxes is calculated on reported pre-tax earnings. Certain items of - income and expense included in the financial - statements, such as depreciation, are reported in _ different years in the tax returns in accordance with applicable income tax laws. The resulting dif- - ference between the financial statement income - tax provision and income taxes currently payable Property, plant and equipment Maintenance and repairs are charged against income, and expenditures for renewals and improvements are capitalized. In order to present more realistically the economic cost of a con- structed facility, whenever the construction period of a facility exceeds one year, the capitalized cost of the facility includes interest and real estate taxes incurred during the construction period. The interest capitalized on construction of facili- unconsolidated subsidiaries and affiliates are stated at cost adjusted for equity in undistributed earnings or losses since the dates of acquisition. inventory, because of the duration of the aging process, ordinarily would not be utilized within one year. The cost of housing programs under construction represents the cost of land, including offtract improvements, interest and property taxes, and housing construction costs on sites currently under development. ties, etc., which are essential to the development of a community, but which are not directly attribut- able to the development of a particular tract or area. The cost of these improvements is allocated to the salable acreage remaining in each project and is charged to cost of sales when such acreage is sold. Revenue and profit from real estate sales are recognized only as cash is received. will is not being amortized unless there has been a diminution in its value. is reported in the financial statements as deferred income taxes. Investment tax credits are recog- nized currently as a reduction in the provision for income taxes. Provision is also made for federal income taxes on the portion of undistributed earn- ings of foreign subsidiaries and affiliates that is expected to be remitted to the United States. ties is determined by applying the Company's average short-term borrowing rates to the related construction balance. Provision for depreciation of assets is recorded by a charge against income at rates considered adequate to amortize the cost of such assets over their useful lives computed on the straight-line method. rv1M~4 439162

m £LL6£t, JKWII

46 I • " Summary of Significant Accounting Policies, Continued Pension plans The Company and certain of its subsidiaries have pension plans covering substantially all their employees. Prior service costs, which are being amortized over periods of up to thirty years, and accrued pension costs are funded with indepen- dent trustees. Acquisitions In June. 1978, the Company acquired for 5520,000,000 the common stock of The Seven-Up Company. The acquisition has been accounted for as a purchase, and accordingly. operating results of Seven-Up have been included in the consolidated operating results of the Com- pany for periods after May 31, 1978. The pur- chase price of the common stock exceeded the net assets acquired by $390,000.000 and such excess is being amortized over a period of forty years on a straight-line basis. Had the acquisition occurred on January 1, 1977, pro-forma operating revenues, income before taxes, net earnings and earnings per share of the Company and its con- solidated subsidiaries would have been Foreign Exchange Various hedging activities are engaged in to mini- mize the effect of currency fluctuations on net earnings. Gains and losses resulting from balance sheet translation and transactions, including for- Foreign Subsidiaries Principal financial data of foreign subsidiaries and affiliates are as follows: 1978 Assets Liabilities Net assets Company's equity and advances Operating revenues Net earnings Company's equity 1977 Assets Liabilities Net assets Company's equity and advances Operating revenues Net earnings Company's equity At December 31. 1978, investments in unconsoli- dated foreign subsidiaries and affiliates exceeded equity in net assets by approximately 516.000.000, including S11.000.000 which arose subsequent to November 1, 1970.. and is being amortized. $6,746,490,000, $743,285,000, $405,762,000, and $6.54 for the year ended December 31, 1978, and $5,453,385,000, $625,572,000, $332,835,000, and $5.38 for the year ended December 31, 1977. On June 26, 1978, a wholly-owned subsidiary of the Company purchased for S45.000.000 the international cigarette business of Liggett Group Inc., consisting of the right to sell cigarettes out- side the United States under the trademarks L & M, Lark, Chesterfield, Eve and Decade. The Company also purchased for approximately $63,000,000 inventories of leaf tobacco and fin- ished goods and receivables associated with such business. ward exchange contracts, net of related income taxes, decreased net earnings by $400,000 and $1,100,000 in 1978 and 1977, respectively. Consolidated (Wholly-Owned) Unconsolidated (Partially-Owned) $ 944,956,000 $ 667,850,000 552.052.000 346, 099, 000 392,904,000 321,751,000 392,904,000 226,871,000 1,401,928,000 1,099,767,000 58, 398, 000 13, 561, 000 58,398,000 3,331,000 741,761,000 602.603.000 430,976,000 298,100,000 310,785,000 304,503,000 310, 785.000 213.227, 000 1,017,780,000 965.391.000 37, 723, 000 25.280.000 37, 723,000 1 1, 694.000 Federal income tax has not been prov ded on approximately 5400,000.000 of undistributed earnings of foreign subsidiaries and affiliates, accumulated since inception of such investme OsS which are expected to be permanently invested abroad. TIMN 439763

49 Provision for Income Taxes The 1978 provision includes: Currently payable Deferred The 1977 provision includes: Currently payable Deferred Deferred tax expense results from timing dlffer- ences in the recognition of certain items of reve- nue and expense for tax and financial statement purposes. The source of such differences and the tax effect of each are as follows: -xcess of tax over book depreciation ~Irovisions charged to expense, deductible in other years for tax purposes, net ~dditional taxes provided on unremitted earnings of foreign subsidiaries and affiliates .:arrying costs of real estate operations deferred which are deductible currently for tax purposes Other The effective income tax rate on consolidated pre-tax earnings differs from the U.S. federal income tax rate of 48% for the following reasons: Provision computed at 48% of reported pre-tax earnings Increases (decreases) in the provision resulting from: Inclusion of equity in net earnings of unconsolidated subsidiaries and affiliates in pre-tax earnings Investment tax credit Foreign income taxed at other than 48% and not expected to be subject to U.S. tax in the foreseeable future State and local income taxes, net of federal tax benefit Other Provision as reported Incentive Compensation Plan In accordance with the stockholder-approved Incentive Compensation Plan, a provision of 57.800,000 was made against 1978 earnings for awards that may be made to officers and other key employees. A provision of $5,612,000 was made against 1977 earnings. Federal Foreign State and Local Total $231,948,000 $24,966,000 $37,494,000 $294,408,000 35,254,000 7,254,000 42,508,000 $267,202,000 $32,220,000 $37,494,000 $336,916,000 $211.620,000 $16,591,000 $34,364,000 $262,575,000 18,513,000 9,502,000 28,015.000 $230133 000 $26,093,000 $34,364,000 $290,590,000 1978 1977 $ 35,891,000 $ 24,597,000 2,412,000 1,187,000 1,800,000 1,600,000 2,205,000 855,000 200,000 (224,000) $ 42,508,000 $ 28,015,000 Amount Per Cent to Pre-tax Amount Per Cent to Pre-tax $357,839,000 48.0% $300,248,000 48.0% (1.599,000) (.2) (5,613,000) (.9) (29,293,000) (3.9) (16,768,000) (2.7) (10,884,000) (1.5) (5,257,000) (.8) 19,497,000 2.6 17,872,000 2.9 1,356,000 .2 108,000 $336,916,000 45.2% $290,590,000 46.5% TIMN 439766

! so Notes, Continued Segment Reporting Worldwide tobacco and domestic beer represent the primary segments of the Company's opera- tions. Other products include soft drinks, indus- trial products and land development operations. The Company's foreign operations, which are predominantly in the tobacco business, are orga- nized into geographical regions for management responsibility with Europe being the most signifi- cant. Intersegment transactions are not reported separately since they are not material. Operating profit calculated for purposes of seg- ment reporting is operating income of operating companies less equity in net earnings of uncon- solidated foreign subsidiaries and affiliates and reduced by the amounts of amortization of good- will and trademarks included in other deductions. net in the statements of earnings. Identifiable assets by segment are those assets that are used in the Company's operations in each segment. Corporate assets consist primarily of long-term receivables and fixed assets. Reportable industry segment data for 1978 and 1977 is included in the summary presented on page 36 of this report. Data by geographical region with a reconciliation to the consolidated statements is presented below. Data by Geographical Region Consolidated for years ended December 31, 1978 and 1977 1978 1977 Operating Revenues: United States $5,230.535,000 $4.184,197,000 Europe 1,268,127,000 893, 600, 000 Other Foreign 133,801.000 124,180,000 $6,632,463,000 $5,201,977,000 Operating Profit: United States $ 877,947,000 $ 710,651,000 Eu rope 67, 991, 000 49, 571, 000 Other Foreign 11,129,000 9,808,000 957,067,000 770,030,000 Reconciliation: Equity in net earnings of unconsolidated foreign subsidiaries and affiliates 3,331,000 11,694,000 Amortization of goodwill and trademarks 7,684,000 1.008.000 Operating income of operating companies $ 968,082,000 $ 782,732,000 Identifiable Assets: Un ited States $4, 394, 028, 000 $3, 061, 761, 000 Europe 765,760.000 579,674,000 Other Foreign 129,671,000 94,693,000 5,289,459,000 3,736,128,000 Investments in and advances to unconsolidated foreign subsidiaries and affiliates 243.271,000 229,508,000 Corporate Assets 75.435,000 82,403,000 Total Assets $5,608,165,000 $4,048,039,000 Litigation As previously reported, the Company was named a defendant in three purported class actions brought by tobacco growers alleging violation of the antitrust laws. In two of the cases (one of which has been terminated), determinations have been made by the courts that the actions are not proper class actions. The third action is of a similar nature and the Company has been advised by counsel that it is also not a proper class actior,. Counsel also advises that the Company has sub- stantial factual and legal defenses to the alleged charges in the actions. Accordingly, no provisions have been made on account of the litigation. Addi Wor~ Dept Rer PenE Qua (millr 197' 1S7' Tne s the Rep The pro'. (ar dep rar Rep WOL reP Rep To - of F We she Cor 197 stat che enc anc anc acc cec circ TIMN 439767

48 Notes, Continued Restrictions Certain of the agreements covering long-term debt contain restrictions with respect to the payment of cash dividends on common stock and to the pur- chase, redemption or retirement of capital shares. At December 31, 1978, approximately $600,000,000 of consolidated earnings reinvested in the business was free of such restrictions. Other debt agreements specify minimum amounts of working capital and limit the amount of senior debt which may be issued. At December 31, 1978, the Company was in compliance with these agreements. Stock Plans Under the stockholder-approved 1977 Stock Unit Plan, units with respect to 707,625 shares of common stock of the Company remain available to be granted to employees of the Company or its affiliates. A stock unit entitles the holder to pur- chase one share of common stock at the market price at the date of grant, or to receive the appre- ciation 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 no more than 50% of the units granted. Appropriate appreciation value is recognized cur- rently as compensation expense. Pursuant to pre- viously approved stock option plans, common stock of the Company has been made available for option to officers and other key employees at market prices on the dates granted. Stock Units Stock Options 1978 1977 1978 1977 Under option, beginning of year 298,700 - 672,775 825,376 Granted - 298,700 - 4,000 Exercised (387) (A) - (179,642) (C) (117,540) Canceled (6,325) - (19,048) ( 39,061) Under option, end of year 291,988 (B) 298,700 474,085 (D) 672,775 (A) At $60.06 per share; resulting in issuance of 363 shares and cash. (B) At $60.06 per share. (C) At prices ranging from $50.50 to $59.72. (D) At prices ranging from $44.44 to $61.94. Capital Shares Authorized Issued Treasury Outstanding Preferred: At December 31, 1977 82.616 82,616 (56,675) 25,941 Purchased (2,201) (2,201) Retired (5,688) (5,688) 5,688 At December 31, 1978 76,928 76,928 (53,188) 23,740 Common: At December 31, 1977 100,000,000 59,922,141 (2,224) 59,919,917 Shares issued for acquisition 34,247 34,247 Sale of shares 2,000,000 2,000,000 Exercise of stock options and stock units 180,005 180,005 At December 31, 1978 100,000,000 62,136,393 (2,224) 62,134,169 As of December 31, 1978,1,473,698 shares are reserved for the exercise of stock options and stock units. Earnings Per Share Earnings per common share for 1978 and 1977 are calculated on the weighted average number of shares of common stock outstanding for each year, which was 60.367,725 and 59,822,487, respectively. ,ygMN 439765 F T T Df er ni~ PL tr _Ex Ac C Tr, pr, inc Pr Inc Pr Inc In Inc $7 aw kema

V ~ - k*1 1!!i I George Weissman Ross R. Millhiser Clifford H. Goldsmith VX H. Robert Marschalk Hamish Maxwell Joseph F Cullman .lames C. Bowlina Dr. Jose Antonio Cordido-Freytes / ~ T Justin Moore, Jr. John S. Reed TIMN 439771 0

47 Brands, Trademarks, Patents and Goodwill At December 31, 1978, this account included approximately $465,000,000 which is being amortized. Cost in excess of net assets of compa- nies acquired prior to November 1, 1970, is not Short-Term Borrowing Arrangements In addition to the domestic and foreign bank loans and commercial paper obligations included in current liabilities, the information presented below also includes short-term notes payable classified as long-term debt in accordance with Financial Accounting Standards Board Statement No. 6. At December 31, 1978, $550,000,000 of short-term notes were included in long-term debt. Average bank loans and commercial paper obligations outstanding during 1978 were S266,311,000 and $366,690,000, respectively, on which the weighted average interest rates were 9.6%. and 7.8%., respectively. At December 31, 1978, short-term notes payable consisted of bank Long-Term Debt Outstanding at December 31, exclusive of amounts due within one year: Short-term notes (see below) Notes, interest principally from 8'/4% to 8.85%, payable from 1982 to 1998 Bank term loan agreements, interest from 7'/e% to 81/2% through April, 1985, and at a fluctuating rate thereafter, payable from 1980 through 1988 Sinking Fund debentures, interest from 65/a% to 9'/e%, payable from 1979 to 2004 Purchase money obligations, interest principally from 6% to 7%, payable through 2008 Other The Company has entered into a $300,000,000 revolving credit and term loan agreement, matur- ing in 1981, and a $250,000,000 Eurodollar revolving credit agreement maturing in 1982, both of which can be used to refinance short-term notes payable. Management intends to exercise its rights under these agreements in the event that it becomes advisable. Accordingly, at December 31,1978, 5550,000,000 of short-term notes pay- able have been classified as long-term debt in accordance with Financial Accounting Standards Board Statement No. 6. Capitalized Interest The effect of the policy to capitalize interest relat- ing to major facilities was an increase in pre-tax income of S4.517,000 in 1978 and $513,000 in 1977; the effect relating to real estate operations being amortized because, in the opinion of man- agement, the related investments have not experi- enced any diminution in value. loans of $236,372,000 and commercial paper obligations of $524,973,000 on which the aver- age rates of interest were 10.7%, and 10.2%, respectively. At that date, lines of credit amounted to approximately $1,500,000,000, of which $700,000,000 remained unused. During 1978, the Company and its consolidated subsidiaries maintained average demand deposit bank bal- ances of approximately $70,000,000 with a number of banks, principally in the United States, to compensate the banks for account handling and other important services and to support lines of credit. 1978 1977 $ 550,000,000 $ 500,000,000 689,400,000 342, 000, 000 360, 000, 000 200, 000, 000 369,121, 000 227,100, 000 114,461,000 62, 306, 000 63, 986, 000 95, 213, 000 $2,146,968,000 $1,426,619,000 Generally, long-term debt is callable, at annually decreasing premiums. Expenses incurred in securing long-term loans are included in other assets and are being amor- tized on the straight-line method over the respec- tive lives of the issues giving rise thereto. Aggregate maturities of long-term debt in each of the following years are: 1979, S13,866,000, 1980, S158,610.000; 1981, $343,846,000: 1982, $326,067,000; 1983. $14,698,000; 1984-1988, S715.753,000 and 1989-1993, S222.449,000. was an increase in pre-tax income of $4.961,000 in 1978 and S2.037.000 in 1977. The combined effect on net income was an increase of S4.590.000 in 1978 and $1,228,000 in 1977. TIll4N 439764

I Additional Information 1978 1977 Working capital at year-end $1,585,090,000 $1,415,867,000 Depreciation expense $ 105,496,000 $ 78,466,000 Rental expense $ 33,777,000 $ 24,678,000 Pension expense S 41,757,000 $ 34,015,000 Quarterly Financial Data (Unaudited) (m llions except per share amounts) Per Share of Common Stock Quarters Operating Revenues Gross Profit Net Earnings Earnings" Dividends Paid Market Price (High-Low) 1978 Year $6,632.5 $1,896.7 $408.6 56.77 S1.95 5763/0-55'/s IV 1,751.9 518.7 101.6 1.68 .5125 747/8 -651% III 1,817.6 524.7 115.2 1.91 .5125 76%a-643/a II 1,672,3 473.3 104.3 1.74 .5125 72'/4-57 Ys 1 1,390.7 380.0 87.5 1.46 .4125 613/4-55'./8 1977 Year $5,202.0 31,447.8 $334.9 $5.60 $1.475 $64?'a-51'/z 1 V 1,354.0 375.1 84.2 1.41 .4125 64?ia-591/s 111 1,376.1 388.3 94.2 1.57 .4125 64 -543/4 II 1,329.3 365.0 85.1 1.42 .325 57%-51 !%z 1 1,142.6 319.4 71.4 1.19 .325 61 ?/a-523'a The sum of quarterly amounts may not equal the yearly amount due to rounding. Replacement Cost (Unaudited) The current replacement cost of the Company's property, plant and equipment, and inventories (and the consequent cost of sales including depreciation expense) is higher than the compa- rable historical cost values for those assets. Replacement of property, plant and equipment would permit manufacturing efficiencies. Higher replacement cost values for inventories reflect economic trends of higher prices for materials which the Company has traditionally offset through increased selling prices. Further informa- tion regarding the effects of current replacement cost will be presented in the Company's Form 10-K for the year 1978 which will be filed with the Securities and Exchange Commission. Report of Independent Certified Public Accountants To the Board of Directors and Stockholders of Philip Morris Incorporated: We have examined the consolidated balance sheets of PHILIP MORRIS INCORPORATED and Consolidated Subsidiaries as of December 31, 1978 and 1977, and the related consolidated statements of earnings, stockholders' equity and changes in financial position for the years then ended. Our examinations were made in accord- ance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing pro- cedures as we considered necessary in the circumstances. In our opinion, the financial statements men- tioned above present fairly the financial position of Philip Morris Incorporated and consolidated sub- sidiaries at December 31, 1978 and 1977, and the results of their operations and the changes in their financial position for the years then ended, in con- formity with generally accepted accounting prin- ciples applied on a consistent basis. Coopers & Lybrand New York, January 30, 1979. TIMN 439768

52 Directors and Officers Directors Thomas F. Ahrensfeld Clifford H. Goldsmith John A Murphy Senior Vice President and President Group Executive Vice President and General Counsel Chairman and Chief Executive Robert E. R. Huntley Officer, Miller Brewing Company James C. Bowling President of Washington and Lee Senior Vice President, Assistant University. Lexington, VA John S. Reed to the Chairman of the Board, Executive Vice President of and Director of Corporate Affairs John T. Landry Citicorp and Citibank. N.A., Senior Vice President and New York, NY Alfred Brittain III Director of Marketing Cha rman of Bankers Trust Dr John C. Sawhill Company, New York. NY Edward Lasker President of New York University, CounselMcKenna & Fitting, New York, NY George V Comfort Los Angeles, CA, Attorneys Chairman of George Comfort George Weissman & Sons. Inc.. New York, NYY Jacques G. Maisonrouge Chairman of the Board and reai estate management Chairman of IBM World Trade Chief Executive Officer Europe, Middle East1A frica Dr. Jose Antonio Cordido-Freyles Corporation. White Plains, NY Margaret B. Young Member of Betancourt, Cordido Chairman of the Whitney M, and Associates, Caracas. Venezuela, H. Robert Marschalk Young, Jc Memorial Foundation, Attorneys, and President of Vice Chairman of Richardson- New York, NYY and Consultant C A. Tabacalera Nacional Merrell Incorporated, Wilton. CT, to the Company pharmaceuticals manufacturer Hugh Cullman John E. Cookman Group Executive Vice President and Hamish Maxwell Director Emeritus Chairman and Chief Executive Executive Vice President and Officer. Philip Moms U.S.A. President and Chief Executive T. Newman Lawler Officer, Philip Morris International Director Emeritus Joseph F Cullman 3rd Chairman of the Executive Committee Ross R. Millhiser J. Harvie Wilkinson. Jr. Vice Chairman of the Board Director Emeritus Richard W. Dammann Member of Dammann Edelman & T. Justin Moore, Jr. Andrew C. Britton , Engel. New York, NY, Attorneys Chairman and Chief Executive Member, Advisory Board Officer of Virginia Electric and PowerCompany. Richmond, VA Chandler H. Kibbee Member, Advisory Board Committees Audit Committee Executive Committee Finance Committee Office of the Chairman H R. Marschalk. Chairman J. F Cullman 3rd. Chairman J. E Cookman, Chairman G. Weissman, Chairman R W Dammann J E. Cookman H. Cullman H. Cullman R E R. Huntley H. Cullman R. W. Dammann C. H. Goldsmith E Lasker R. W. Dammann C H. Goldsmith R. R Millhiser J. S Reed C. H. Goldsmith C H. Kibbee J. A. Murphy J H. Wilkinson, Jr. E Lasker E Lasker T N. Lawler H. R. Marschalk Office of the Ch,ef Executive Comm ttee on Publ c Affa rs H R. Marschalk R. R. Millhiser G. Weissman and Social Responsibil ty R R Miilhiser T J Moore, Jr. R. R Millhiser J C Bowling. Chairman T J. Moore, Jr. J A Murphy C. H. Goldsmith R W. Dammann J. S Reed J. S Reed C H Goldsmith G We ssman G. Weissman R E R Huntley J H Wilkinson. Jr. J T. Landrv H Maxwell T J Moore, Jr J A Murphy M B. Young TIMN 439769

Officers George Weissman Eugene J. T Flanagan Philip J. Reilly Alexander Holtzman Chairman of the Board and Vice President. Secretary and Vice President and President. Associate General Counsel Chief Executive Officer Associate General Counsel Mission Viejo Company George P. Hibbard Ross R. Millhiser William K. Howell Frank E. Resnik Assistant Treasurer and Vice Chairman of the Board Vice President and President Vice President, Tobacco Operations Treasurer, and Chief Operating Officer Philip Morris International Clifford H. Goldsmith , Miller Brewing Company Carlos E. Salguero President Vice President and Edward G. Silcock Jetson E. Lincoln Executive Vice President, Assistant Treasurer Hugh Cullman Vice President Plannin Philip Morris lnternational Group Executive Vice President and , g Norman J. Treisman Chairman and Chief Executive William D. McCoy Edward M. Schaaf, Jr. Assistant Treasurer A Philip Morris U S Officer Vice President and President Vice President and Vice President, . . . , , Philip Morris Industrial Philip Moms U.S.A. Production John C. Lino John A. Murphy , Assistant Controller Group Executive Vice President and W Wallace McDowell Thomas B. Shropshire Chairman and Chief Executive . Vice President and Executive Vice President and Horace W. Pierpoint Officer, Miller Brewing Company Vice President, Operations, Senior Vice President, Assistant Controller Philip Morris U.S.A. Miller Brewing Compan y Robert H. Souther Hamish Maxwell Executive Vice President and James J. Morgan Benjamin A. Soyars Assistant Controller President and Chief Executive Vice President and Executive Vice President and Senior Robert A. White Officer, Philip Morris International Vice President, Marketing, Vice President, Manufacturing, Assistant Controller Philip Morris U.S.A. Philip Morris U.S.A. Thomas F. Ahrensfeld Mary E. Russell Senior Vice President and R. William Murray Walter F. Sperber Assistant Secretary General Counsel Vice President and Vice President and Controller Executive Vice President, Anthony W. Giraldi James C Bowling Hans G. Storr Assistant Secretary . Senior Vice President, Assistant Philip Morris lntemational Vice President, Finance to the Chairman of the Board O'Connor William J Wallace G. Lloyd , . Dr. Heimut R. R. Wakeham Staff Vice President and Director of Corporate Affairs Personnel Vice President , , Vice President and Vice President, Operations Services, Tobacco John T. Landry Shepard P. Pollack Science and Technology, Senior Vice President and Vice President and President Philip Morris U.S.A. Frank A. Saunders Director of Marketing and Chief Operating Officer, Staff Vice President, Lauren S. Williams Corporate Relations and Albert E. Bellot Philip Morris U.S.A. Vice President and Communications Vice President and Vice President, F Harrison Poole Executive Vice President, Philip Morris International Vice President and Treasurer Miller Brewing Company Graham U. White Staff Vice President, Taxes Robert H. Cremin William E. Winter Vice President and Vice President, Vice President and President, Sales, Philip Morris U.S.A. The Seven-Up Company General Corporate Information Corporate Headquarters: Transfer Agents and Registrars Dividend Reinvestment Agent: Annual Report Paper: Philip Morris Incorporated Common Stock: Citibank, N.A. Paper stocks used in this 100 Park Avenue Morgan Guaranty Trust Company WCGSM Securities 872 report are made by Plainwell New York 10017 New York of New York Dividend Reinvestment Paper Company, a division of , (212) 679-1800 30 West Broadway Box 3192 Philip Morris Industrial. New York, New York 10015 New York, New York 10043 Cover: Kashmir Glossy 80= Annual Meeting: Text: Kashmir Dull 100 = The annual meeting of stockholders of United Virginia Bank Stock Exchange Listings: Philip Morris Incorporated will be held Box 6E New York on April 26, 1979, at the Philip Morris Richmond, Virginia 23214 Amsterdam Operations Center, 3601 Commerce Basel Richmond, Virginia. Road Transfer Agent Frankfurt , Preferred Stock: Geneva Form 10-K: Morgan Guaranty Trust Company Lausanne The company's annual report on Form of New York Paris which will be filed with the Securi- 10-K Zurich , ties and Exchange Commission, will be Registrar Preferred Stock: available to stockholders in April upon Chemical Bank Stock Exchange Symbol: written request to: 20 Pine Street Common Stock: MO New York, New York 10015 Eugene J.T. Flanagan, Secretary Auditors: Philip Morris Incorporated Coopers & Lybrand Credrts. Design Chermayeff & Geismar Assoc 100 Park Avenue New York, New York Photography Stephen Anderson. New York, New York 10017 Gianiranco Gorgorn PrinteC m u S A TIMN 439770

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