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Table of Contents 2 Financial Highlights 3 Review of the Year 6 Philip Morris Incorporated 10 General Foods Corporation 20 Product Listing 22 Financial Review 23 Management's Discussion and Analysis of Financial Condition and Results of Operations 26 Selected Financial Data-Eleven Year Review 28 Consolidated Financial Statements 43 Report of Independent Certified Public Accountants 43 Company Report on Financial Statements 44 Board of Directors 46 Officers 48 General Corporate Information TIM1V 440921

Philip Morris Companies Inc. manufactures and markets tobacco, beer, and food products enjoyed by consumers around the world. Its two principal subsidiaries are Philip Morris Incorporated and General Foods Corporation, which became part of the Philip Morris family in November 1985. Philip Morris Incorporated is among the world's largest producers of cigarettes. Its Philip Morris U.S.A. unit leads the U.S. industry, while Philip Morris International markets cigarettes in more than 170 countries and territories. Other operating units are Miller Brewing Company, which has climbed to second place in the U.S. beer industry from seventh when full control of Miller was acquired in 1970; The Seven-Up Company, a producer of carbonated soft drinks; Mission Viejo Realty Group Inc., a community development company in Southern California and Colorado; and Philip Morris Credit Corporation, which provides financing for Philip Morris customers and engages in other financial services. : General Foods Corporation sells more kinds of foods and in greater volumes than any other U.S.-based company. Most of its products hold the first or second position in their markets. General Foods divides its operations into U.S. Grocery Products, Worldwide Coffee & International Products, and Processed Meats. ~A listing of Philip Morris Incorporated and General Foods Corporation products appears on pages 20 and 21. TIMN 440922

Review of the Year In 1985, Philip Morris again improved its competitive posi- tion in the cigarette industry. By acquiring General Foods Corporation, we also made an important move to enlarge and strengthen our participation in other attractive seg- ments of the consumer products marketplace. We increased our operating revenues, net earnings, and earnings per share by 15.6%, 41.3%, and 44.6%, respectively. The large gains in earnings compare with 1984 results that were depressed by a write-down of Miller's Trenton, Ohio, brewery. Although operating revenues and income of General Foods are included for the last two months of 1985, there was no net effect on Philip Morris' consolidated earnings because the General Foods' income contribution after goodwill amortization essentially offset the cost of acqui- sition financing. Worldwide cigarette sales, our principal business, increased by more than 18 billion units, and our market share improved both in the United States and internationally.. Philip Morris remains committed to sales and income growth in both the cigarette and beer industries. Actions taken in 1985 and early this year will also serve to focus more of our resources and ambitions on other consumer goods which offer us opportunities for enhanced performance in the future. In July, we divested the companies making up Philip Morris Industrial, realizing an after-tax gain of $38 mil- Operating Revenues &.ilrons of Dollars 17 5 lion. The sale resulted from a conclusion, reported to you last year, that these businesses no longer fit our strategic objectives. In April, our stockholders approved a restructuring into a new holding company, Philip Morris Companies Inc. The change took effect at mid-year and more accurately reflects the varied nature of our businesses. Most significantly, on November 1 we effected the acquisition of General Foods Corporation. The move dem- onstrates our belief that we should diversify in businesses that are compatible with our most successful experience and that bring competitive strength and excellent man- agement resources to the company. General Foods is one of the world's largest and best food companies. It has a wide range of well-known, high- quality grocery products with efficient and varied distribu- tion channels. Most of its products are in first or second competitive positions in their segments; many are in high- growth categories in the packaged food industry. The acquisition reinforces the strategy we have fol- lowed for 25 years to use some of our resources to expand our earnings base internationally and through diversification. Notwithstanding this history, our consistently superior cigarette earnings were still over 90% of our operating profit. Although your Board and management expect cigarettes to be a very large and profitable industry for many years to come, we became convinced that the value of your investment over the long term could be Operating Income 3iIhors of Doilars 28 24 20 2 8 3 TIMN 440924

Board of Directors As a result of the General Foods acquisition and in accord- ance with the merger agreement, James L. Ferguson, Chairman and Chief Executive Officer of General Foods, and Philip L. Smith, President and Chief Operating Officer, were elected to the Board of Directors of Philip Morris Companies Inc. in November 1985. In addition, the Board elected Mr. Ferguson a Vice Chairman of Philip Morris Companies Inc. Howard L. Clark, Dr. Elizabeth J. McCormack, and Wil- liam P. Tavoulareas, all former non-management members of the General Foods Board, were elected to the Philip Morris Board in January 1986. There were no other changes in our Board. Other Issues In 1985, we continued to pursue our responsibilities to society, particularly in the countries and communities in which we have plants and offices. With the acquisition of General Foods, the scope of these activities has expanded, and a separate report called "In the Public Interest" is being mailed to you. Several public policy issues are of important concern to Philip Morris. If you would like more information about these, you are invited to return the postcard which is included in this report. The Outlook Last year we expanded our range of brands with new product introductions in our tobacco, beer, and food products businesses. We will continue to develop, test Dividends Declared Per share 0 81 82 83 84 85 market, and introduce new products for which there is real consumer demand. We will also maintain our commitment to sound management and financial practices. Our businesses will continue to face challenges in the marketplaces of both products and ideas. We remain confident that we can meet these challenges and manage our responses successfully. With respect to the larger size of Philip Morris Compa- nies Inc., we believe it is a fallacy to think that being bigger will ensure our continued prosperity. Your man- agement views increased size as providing one thing- the resources to excel. Consequently, I will add another commitment to those we outlined last year: That is to use those resources to be the best at what we do. We intend to be the best at developing new products, the best at low-cost, high-quality production, the best at marketing to consumers, and the best at attracting and motivating capable people. By succeeding, we will con- tinue to prosper-. I welcome the people of General Foods to Philip Morris. We are 114,000 individuals, but one team. Our progress this year is a tribute to all our people's commitment to being the best and to sustaining the momentum that has characterized the success of your company. .P,_...~W,.,~ Hamish Maxwell Chairman of the Board and Chief Executive Officer 5 'yIMN 440926

improved by further diversification. We are confident that the merger with General Foods will add to Philip Morris' reputation and prospects as a worldwide consumer packaged-goods company. The acquisition of General Foods was made in light of our strong financial position with, at the time, the lowest debt/equity ratio in 23 years. The $5.6 billion price we paid was fair and comparable with prices of other recent mergers and acquisitions in the consumer products indus- try. This was an all-cash acquisition financed by debt bearing reasonable rates of interest. Our cash flow pro- jections indicate that it will be possible to reduce our debt burden significantly relatively soon, taking into account forecasted capital expenditures of $3.6 billion over the five years from 1986 to 1990 and other normal business needs. In addition, while no other major acquisitions are now contemplated, we expect that our financial resources will permit consideration of further acquisitions that fit or complement our existing businesses. _We do not .expect the General Foods acquisition to have any material dilutive effect ori Philip Morris' earn- ings. In future years, we expect it to add incremental earn- ings per share and to accelerate our income growth. In January 1986, we announced an agreement to sell the Seven-Up trademark and franchise business world- wide to PepsiCo, Inc. and also our intent to divest our remaining Seven-Up bottling and food operations as soon as practical. Although Philip Morris has made substantial Net Earnings Bdlions of Doilars 14 Hamish Maxweil (third from left), with (left to right) Hugh Culiman, John A. Murphy, and James L. Ferguson. investments in Seven-Up since its acquisition in 1978, we were unable to strengthen significantly its competitive position or to earn or forecast a satisfactory return on our overall investment. We expect that the Seven-Up divesti- tures will have an insignificant effect on Philip Morris' income in 1986. Earnings Per Share Do..ars TIMN 440925

levels. Seven-Up International unit volume sales declined somewhat overall, although good gains were made in several major markets. In January 1986, we announced an agreement to sell the Seven-Up trademark and franchise business world- wide to PepsiCo, Inc. and also our intent to divest our remaining Seven-Up bottling and food operations (Oregon Freeze Dry Foods Inc. and Ventura Coastal Corporation). Mission Viejo Realty Group Inc. Operating revenues for Mission Viejo Realty Group Inc. declined to $204 million in 1985, and operating income of $26 million also was lower than in the prior year. Mis- sion Viejo's performance suffered principally from a weak- ness in residential housing sales during the first half of 1985. The decline in housing sales lessened in the second half, however, as lower mortgage rates encouraged home buyers. Aggressive marketing programs led to strong land sales throughout the year. In"1985, major projects and programs were initiated in both the residential and commercial sectors of Mission Viejo's diversified real estate operations. On the residen- tial side, six housing projects were opened, three each in California and Colorado, including our first project for the Denver-area retirement market. Ten more neighborhoods are scheduled to open in California this year and three in Colorado. The year 1986 also marks the 20th anniversary of our first planned community, Mission Viejo, California, which has evolved from 10,000 acres of grasslands into a community of 60,000 residents. Mission Viejo's Business Properties Division launched a marketing awareness program in 1985 to establish our Highlands Ranch, Colorado, location as a prime site for business. We began to develop 450 new acres of business property, and more than 40 businesses have located in Highlands Ranch or entered negotiations for space. In Cali- fornia, construction began on a major shopping center at Mission Viejo, and we are participating in commercial and industrial joint ventures in several other areas. Philip Morris Credit Corporation Philip Morris Credit Corporation had sharply higher reve- nues of $93 million in 1985 and more than doubled its contribution to Philip Morris' net earnings to $23 million. The company provides financing for Philip Morris cus- tomers and engages in leveraged equipment leasing among other financing activities. We continued to provide customer financings for resi- dential, commercial, and industrial properties under development by Mission Viejo Realty Group Inc. We expanded our vending machine leasing program and arranged additional term loans for independent bottlers of The Seven-Up Company. In our leveraged leasing operations, we added new leases in 1985 for several jet aircraft and an electric utility support facility. These diversified our initial portfolio of leases, which primarily finance government cargo vessels and communication satellite transponders. We also broadened our range of financial services to include construction lending. Our initial project, in con- junction with a commercial bank, provided a construction loan for a specialty shopping center near Mission Viejo's Highlands Ranch property in Colorado. As we move through 1986, the operating units of Philip Morris Incorporated are well positioned in their primary business segments to grow and prosper this year and beyond. John A. Murphy President and Chief Operating Officer Philip Morris Incorporated TIMN 440930 9

Financial Highlights (in miilions of dollars, except per share amounts) 1985 1984 1983 1982 1981 Operating revenues $15,964 $13,814 $12,976 $11,586 $10,722 Net earnings 1,255 889 904 782 660 Earnings per common share 10.47 7.24 7.17 6.23 5.28 Dividends declared per common share 4.00 3.40 2.90 2.40 2.00 Funds fromm operations per common share 14.79 12.61 10.70 9.24 7.81 Percent Increase Over Prior Year Operating revenues 15.6% 6.5% 12.0% 8.1% 11.1% Net earnings 41.3% (1.7%) 15.6% 18.5% 20.1 % Earnings per common share 44.6% 1.0% 15.1 % 18.0% 19.7% Dividends declared per common share 17.6% 17.2% 20.8% 20.0% 25.0% Operating Revenues Philip Morris U.S.A. $ 6,611 $ 6,134 $ 5,520 $ 4,330 $ 3,762 Philip Morris International 3,991 3,741 3,647 3,564 3,400 Miller Brewing Company 2,914 2,928 2,922 2,929 2,837 The Seven-Up Company 678 734 650 530 432 Philip Morris Industrial 138 277 237 233 291 Philip Morris Incorporated 14,332 13,814 12,976 11,586 10,722 General Foods Corporation 1,632 Consolidated operating revenues $15,964 . $13,814 $12,976 $11,586 $10,722 Operating Income Philip Morris U.S.A. , $ 2,050 - $ 1,745 $ 1,338 $ 1,102 $ 906 Philip Morris International 434 421 366 446 397 Miller Brewing Company 136 116 227 159 115 The Seven-Up Company 10 6 (11) (1) (2) Philip Morris Industrial 15 30 13 7 19 Mission Viejo Realty Group Inc.* 12 17 20 2 11 Philip Morris Credit Corporation* 23 11 5 1 Philip Morris Incorporated 2,680 2,346 1,958 1,716 1,446 General Foods Corporation 116 Consolidated operating income S 2,796 $ 2,346 $ 1,958 $ 1,716 $ 1,446 Compounded Average Annual Growth Rate 1985-1980 1985-1975 1985-1970 Operating revenues 10.6% 15.9% 17.0% Net earnings 18.0% 19.5% 20.4% Primary earnings per share 18.9% 19.2% 18.3% Operating companies' income is income before corporate expense, interest, and other non-operating income and deductions. The amortization of previously capitalized interes*, is included in operating companies' income. On July 1, 1985, pursuant to a Plan of Exchange, Philip Morris Incorporated became a wholly-owned subsidiary of the company, the new publicly-held parent. The exchange has been accounted for similar to a pooling of interests and the consolidated results of the company for periods prior to July 1, 1985, reflect the consolidated results of Philip Morris Incorporated. General Foods Corporation was acquired in November 1985. Accordingly, consolidated operating results shown above include the operating results of General Foods Corporation after October 1985. Effective July 1, 1985, substantially all of the company's Industrial opera- tions were sold for $250 million. The gain on these sales increased pre-tax earnings, net earnings, and earnings per share by $77 million, $38 million, and $32, respectively, for the year 1985. In 1984, a write-down of the completed but inactive Miller Brewing Com- pany facility in Trenton, Ohio, reduced pre-tax earnings, net earnings, and earn- ings per share by $280 million, 5146 million, and $1.19, respectively. *Represents equity in net earnings of these unconsolidated subsidiaries. 2 TIMN 440923

modern and superior facilities anywhere in the industry. C)ur large investments of the last decade in facilities and technology are paying dividends in quality and productivity. Staff reorganization in 1985 allowed our sales force to call more frequently on key retai!ers. Additional point-of- sale fixtures (such as single pack and carton fixtures) improved our visibility and depth of inventory at the retail ±evel last year. High-quality, American-grown tobacco leaf is the cru- cial component of our brands. Philip Morris again was the largest purchaser of domestic flue-cured and burley tobaccos during 1985. Uncertainty clouds the future pricing of U.S. leaf. Tobacco growers' organizations and purchasers worked closely throughout 1985 to strengthen the U.S. tobacco program. Proposed federal legislation, which Philip Morris has endorsed, establishes a price support system that would make U.S. leaf more competitive in world markets and a method of setting production quotas that would better reflect leaf demand. All of this should benefit both the manufacturer and farmer in the long run. Out of a large universe of suspected factors in the cau- sation of chronic degenerative diseases-such as lung cancer and heart disease-cigarette smoking has been accused of being the principal cause. The basis for the accusation is primarily statistical evidence. Although researchers concede that knowledge of the fundamental processes by which these diseases arise is lacking, govern- ment and private financial support for the necessary research is waning. However, over the last 30 years Philip Morris and the industry have contributed nearly $130 million to fund independent research on smoking and health. We con- tinue to believe that the results of scientific investigations to date fail to demonstrate a cause-and-effect relationship between smoking and chronic diseases. We also believe that the preponderance of scientific evidence indicates that exposure to cigarette smoke causes no health impair- ment to a healthy non-smoker. Philip Morris International Philip Morris International performed well in 1985 with volume increasing 6.5% over the 1984 level to 274.9 billion units and worldwide market share (excluding the United States) rising to an estimated 6.6%. Our export volume advanced to 40.4 billion units, notwithstanding the strength of the U.S. dollar throughout most of 1985. Operating income rose 3.2% to $434 million on 6.7% higher revenues of just under $4.0 billion. Our income gain was held back by currency translation effects as well as by a reduced contribution from our investment in Rothman's International p.l.c. due principally to lower sales in major markets and restructuring charges. We achieved excellent sales and market share gains in the European Common Market, where unit volume was up 9%. In West Germany, the Marlboro family increased its market share nearly four percentage points. Merit led the way toward sales and share gains in Italy, and we con- tinued to make excellent progress in France with our prin- cipal brands, Marlboro and Philip Morris. In Switzerland, we widened our leading position to a 37% share of market based on the combined strength of Muratti Ambassador, Brunette, Philip Morris, and Marlboro. Greater exports to Gulf countries in the Middle East resulted in share gains in most major areas. Perfor- mance was very good in the newly opened Turkish mar- ket. There was also major volume improvement in Spain, where Marlboro posted a 38% gain over 1984.  '~VOnd Cigarette incus;ry Uric Sa'es (Eac..:ang u S A ) - Phno Vorris Share o` `Jdor dVarKe~ f,°•h) World Cigarette Industry Unit Sales Exclad.rg ,; S A 3~,:'~1on ~.,;r•its TIMN 440928 7

In Latin America, our Brazilian affiliate registered record volume in a market rebounding sharply after several years of decline. Depressed economic conditions led consumers in other important countries to continue to trade down to lower priced cigarette brands. Nevertheless, Philip Morris International achieved higher unit volumes and market shares for its premium brands. Sales volume was espe- cially good in Argentina, Mexico, and the Dominican Republic. Marlboro did well throughout the region, with volume up 24% versus 1984. The Peter Jackson family spearheaded success in Australia in 1985 with a market share advance to 15%. Partially offsetting this, our Lindemans wine business was hurt by industrywide surpluses and higher sales taxes, which led to severe price competition. Asia offers especially attractive growth potential for Philip Morris International. In Japan, Lark and Parliament continued to dominate the import segment, and we had strong volume gains last year; however, high tariff and tax barriers persist. In Hong Kong, our total market share exceeded 30% aided by an increase in Marlboro Lights' sales volume. Record sales volume in the Philippines was 19% ahead of 1984. Miller Brewing Company Operating income of $136 million in 1985 was 16.7% higher than the 1984 level despite a 0.5% decline in oper- ating revenues to $2.9 billion. Miller shipments for the year totaled 37.1 million bar- U S Beer IndutVy Barrel Shlprnents ~ Mdie, ihareoft,5 Industry(%) U.S. Beer Indasfry Barrel Shipments inc:.udirg imports 75 U2 83 aaa~ 28 rels, compared with 37.5 million barrels in 1984. While the Lite brand continued to grow, there was a decline in Miller High Life sales. The rate of decline had slowed appreciably by year-end, however, largely a result of mar- keting programs instituted early in 1985. These programs have already helped to reinforce the quality image of Miller High Life and its ranking as the nation's third-best- selling beer. They center on High Life's "Made the Ameri- can Way" concept and include advertisements, new labels and packaging, and special point-of-sale support materials. We introduced Miller High Life Genuine Draft in 22 states early in 1986 as the first step in a national rollout. Genuine Draft is brewed with a unique cold filtration process resulting in a smooth, fresh-tasting, draft beer in a bottle. Miller continues to explore a wide range of other products aimed at capturing additional market share. Lite beer from Miller, the second-best-selling brand in the United States, achieved higher volume in 1985 and maintained its dominance of the growing reduced-calorie category. In the super-premium segment, a new advertising cam- paign for Lowenbrau was launched in the fourth quarter. The campaign highlights Lowenbrau as a worldwide brand-brewed and enjoyed in major beer-drinking coun- tries. Meister Brau and Milwaukee's Best, Miller's popular- priced beers, together achieved higher market share last year. New advertising campaigns, improvements in existing campaigns, greater variety in promotional efforts, improved distribution, and other sales and marketing pro- grams are working in combination to create a stronger marketing position for 1986. The Seven-Up Company The Seven-Up Company was profitable in 1985, achieving operating income of $10 million on operating revenues of $678 million. Soft drink unit volume sales declined in the United States, partially due to lower Like cola volume. Sales of the Diet 7UP brand increased, however, to record ,VIMN 440929

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