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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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Product Listing Philip Morris Incorporated Philip Morris U.S.A. Miller Brewing Company Marlboro, Benson & Hedges 100's, Merit, Virginia Slims, Miller High Life, Miller High Life Genuine Draft, Lite, Parliament Lights, Players, Cambridge, Saratoga, Philip Lowenbrau, Meister Brau, Milwaukee's Best, and Plank Morris Commander, and English Ovals cigarettes. Road beers, Magnum malt liquor. Philip Morris International The Seven-Up Company Asia: Marlboro, Lark, Parliament, Philip Morris 100's, 7UP and Diet 7UP lemon-lime and Like cola carbonated Virginia Slims, Philip Morris Lights, Chesterfield, Four soft drinks, JuiceUp frozen juice concentrates, Nouvelle Square, Red & White, K-2, Cavanders, Select, Monterey, soups, Mountain House freeze-dried food products, other and Shelton cigarettes. food and beverage products. Australia: Peter Jackson, Alpine, Marlboro, Black & White, Chesterfield, and Viscount cigarettes, Lindemans, Rouge Homme, and Leo Buring wines. Canada: Benson & Hedges, Mark Ten, Belvedere, and Viscount cigarettes. European Economic Community Countries: Marlboro, Muratti Ambassador, L&M, Merit, Raffles, Philip Morris Light American, Philip Morris Super Lights, Diana, and Multifilter 100's cigarettes. EFTA, Eastern Europe, Middle East & Africa: Marlboro, Muratti Ambassador, Philip Morris Extra, Brunette, Bel- mont, Bond Street, Merit, L&M, and Link cigarettes. Latin America/Iberia: Marlboro, Galaxy, Lider, L&M, Rubios, Derby, Colorado, Nacional, Merit, Chesterfield, Fortuna, Baronet, and Delicados cigarettes, La Aurora cigars, Bohemia and Presidente beers, Castillo rums, Larios spirits. 20 TIMN 440941

MILLERBREWIN With its Lite and Miller High Life brands, Miller Brewing has the second- and third-largest-selling beers in the United States.

Philip Morris Incorporated Philip Morris Incorporated had another excellent year in 1985. Operating income rose 14.2% above the level of 1984 to $2.7 billion, on a 3.8% gain in operating revenues to $14.3 billion. The U.S. tobacco business was the largest contributor to our income advance, and results improved in most of our other businesses as well. Effective July 1, 1985, we sold substantiaiiy all of the Philip Morris Industrial operations (principally Plainwell Paper Co., Inc. and Wisconsin Tissue Mills Inc. to Chesa- peake Corporation, and Nicolet Paper Company to Ham- mermill Paper Company). The total sales price of $250 million produced an after-tax gain of $38 million. We divested these profitable operations because they were no longer significantly integrated with our major busi- nesses and were removed from the branded consumer products industries. Philip Morris U.S.A. Philip Morris U.S.A. increased its sales volume to 213.6 bil- lion cigarettes in 1985, up 1% from 211.6 billion units in 1984. Our gain contrasted with a decline for the U.S. industry from 600 billion units in 1984 to approximately 595 billion units last year. Market share for Philip Morris U.S.A. thus rose 0.6 share points in 1985 to approximately 35.9%, widening our leadership position in the industry. Operating income for 1985 climbed 17.5% to $2.1 billion. Operating revenues were up 7.8% to $6.6 billion. Philip Morris Incorporated Operating Revenues 6 Philip Morris Incorporated Operating Income Another strong performance by the Marlboro family paced our success in 1985. Marlboro-the nation's num- ber-one brand-posted a 3.3% volume gain to 133.3 billion units and approximately a 22.4% market share. Marlboro Lights again was the best-selling low-tar cigarette in the United States. Marlboro Red and Marlboro Lights in full-priced king size 25's packs were launched nationally in January 1985 and contributed to the overall volume gain for the brand. Virginia Slims, the leading cigarette marketed to women, was another of the industry's established brands that grew in 1985. Virginia Slims in a longer, 1 20mm ver- sion was nationally introduced in the fourth quarter and contributed to growth. In addition, Merit and Benson & Hedges 100's maintained their leading positions in their segments. Philip Morris U.S.A. will continue to concentrate on "full price" cigarettes. However, consumer acceptance of brands in the lower priced or "value" category has cre- ated additional opportunities for us to pursue. We launched Players Lights 25's nationwide in December to position ourselves in this segment. New products are central to our growth philosophy. As we identify opportunities in the marketplace, we develop and test products designed to meet them. Our objective is to continue to develop process improvements that result in better quality cigarettes as well as greater efficiencies. We are backed by the most  i: S CGgarette injusvy „ri.t Sa:es .Philip Uiorr,s Share of L S 1~.custry (%! U.S. Cig arette Industry Unit Sales °TININ 440927

Worldwide Coffee & International Products Last year was difficult for this business, which contributes about one-third of our operating income. We were able to hold earnings stable despite the strong U.S. dollar and a rundamental shift in the way we market coffee. To increase the importance of product quality and con- sumer marketing, Maxwell House cut the list prices of regular ground coffees and reduced trade promotion spending. Coffee volumes declined temporarily as the grocery trade reduced inventories that had been built to take advantage of prior price deals. The cost of green coffee jumped at year-end due to a severe drought in Brazil, and retail prices have followed upward. As a result, 1986 is likely to show unusual coffee consumption patterns. Maxwell House quality improvements have helped to keep us the number-one U.S. coffee company. A major improvement in 1985 was Fresh Lock, a small packet inserted to protect taste by removing oxygen and moisture. Our coffee business outside the United States had a good year. Kaffee HAG in Germany continued its leader- ship as Europe's best-selling brand of decaffeinated cof- fee. Our Saimaza brand in Spain lengthened its lead of the roast coffee market to a 23% share. In Canada, we began a major drive into premium coffee, including Heri- tage, the first instant to contain fresh ground coffee. Coffee continues to be a major growth business in the populous Asia/Pacific region. Our joint venture in Korea with Dong Suh Foods posted its fifth straight year of growth exceeding 30%. In Japan, our Ajinomoto-General Foods joint venture opened its fourth freeze-dried coffee plant. Construction began in India on a soluble coffee and powdered beverage plant, the first facility of our Kothari-General Foods joint venture. We also entered two joint ventures in the People's Republic of China in 1985 and introduced Maxwell House instant coffee there. Nearly all of our non-coffee businesses outside the United States are market leaders, and most held or increased share in 1985. Through our Hostess brand, we consolidated our posi- tion as Canada's number-one producer of potato chips James L. Ferguson Chairman and Chief Executive Officer General Foods Corporation 11 and other snack foods. Hostess now has a 34% share of market, more than twice that of our nearest competitor. Other important national franchises include Hollywood, which has more than 80% of the chewing gum market in France; Simmenthal, Italy's leading brand of canned meats; Kibon, the best-selling ice cream in Brazil; and Bird's, a leader in dessert products in Britain. Our growing food service business markets coffee and grocery products in the United States and internationally to restaurants, airlines, schools, and other institutions. Volumes, revenues, and earnings increased substantially in 1985. Crystal Light drink mix did particularly well in its first full year of national food service distribution. Processed Meats Contributing about 15% of General Foods' operating income, our processed meats business.benefited from good volume growth and improved margins in 1985, raising earnings significantly. Both the Oscar Mayer and Louis Rich brands maintained strong share leadership of every major-category in which they compete. Oscar Mayer strengthened its top position in sliced luncheon meat with the national introduction of Select Slices, a new premium line. The company increased its share of the overall bacon market and successfully test marketed Center Cut Bacon, a leaner premium brand. Louis Rich processed turkey products registered higher income on a 12% volume gain, the 15th straight year of double-digit growth. Louis Rich luncheon meats are now the number-two national brand behind only Oscar Mayer. Turkey's appeal as a low-fat source of protein continues to stimulate consumer demand. The year 1985 was one of accomplishment for General Foods-and even more confidence in our strategies and people. Our commitment to quality and convenience continues in 1986. We expect to have another good year. TIMN 440932

GENERAL FOOD General Foods sells its products under more than 60 major brand names, inc Maxwell House coffe% Post cereals, and Ent

General Foods Corporation U.S. Grocery Products Post cereals, Log Cabin syrups, Entenmann's baked goods, Oroweat specialty breads and rolls. Kool-Aid and Crystal Light soft drink mixes, Country Time lemonade flavor drink mix, Tang instant breakfast drink, Instant Postum cereal beverage. Jell-O brand dessert products and frozen novelties, D-Zerta brand desserts and topping mix, Cool Whip whipped toppings, Dream Whip whipped topping mix, Minute brand tapioca, Baker's chocolate and coconut products, Calumet baking powder, Certo and Sure-Jell brand fruit pectins. Birds Eye quick-frozen vegetables and fruits, Minute rice, Stove Top stuffing mix, Shake 'n Bake seasoned coating mix, Good Seasons salad dressing mix, Open Pit barbecue sauce, Ronzoni pasta. Worldwide Coffee & International Products Maxwell House, Maxwell House Master Blend, Yuban, Sanka, Brim, and General Foods International coffees. General Foods brand name coffees, cold beverages, des- serts, and other food products for the food service industry. Canada: Maxwell House, Sanka, and Chase and Sanborn coffees, Jell-O desserts, Baker's chocolate, Hostess potato chips and snacks, Kool-Aid drink mix, Tang flavor crystals, other food and beverage products. Europe: Maxwell House, Gevalia, HAG, ONKO, Bird's and Saimaza coffees, Bird's desserts, Tang beverage mix, Hollywood chewing gum, Krema candies, Simmenthal processed meat, Mareblu fish, other products. Latin America: Maxwell House and Cafe Oro coffees, Kool-Aid and Tang beverage mixes, Kibon ice cream, Jell-0 desserts, Rosa Blanca soups, other food products. Asia/Pacific: Maxwell House and Maxim instant coffees, non-dairy creamer, Tang and Kool-Aid beverage mixes, other food products. Processed Meats Oscar Mayer and Louis Rich luncheon meats, franks and wieners, Oscar Mayer bacon, sausage, and ham, Louis Rich fresh turkey cuts, Claussen refrigerated pickles. Oscar Mayer, Louis Rich, and Chef's Pantry meat and turkey products and Claussen pickles for food service and deli customers. TIMN 440942 21

General Foods Corporation General Foods Corporation made good progress in 1985. Though overall volume rose in line with the industry growth rate, we were able to win higher market share for many of our major brands. More than 75% of 1985 sales came from brands that hold the number-one market position. During the last two months of 1985, General Foods had operating revenues of $1.6 billion and operating income of $116 million. New product activity during the year was strong, with nearly all of our businesses introducing or expanding sig- nificant new entries in the faster growing segments of their markets. U.S. Grocery Products This business, which accounts for just over half of General Foods' operating income, improved its earnings, particu- larly in powdered beverages and bakery products. Though the powdered soft drink market was down modestly, we gained share for our Kool-Aid, Crystal Light, and Country Time brands. At nearly 75%, our share is at a 12-year high. The Crystal Light brand gained further consumer acceptance in its second year of national distribution and became the leading sugar-free powdered soft drink. Con- venient ready-to-drink Kool-Aid Koolers with 20% juice were expanded to 25% of the United States. The product has already reached the number-two position in the fast- growing aseptic juice drink market. ?'6 ' 984aatadre`or',9771985t'.scalyears, '976'984dataarefor~ ,977~ 98Sfisca'.years, _•._~aoorcwmatey'Viarch 31 ended appro.ximately March 37 General Foods Corporation Operating Revenues . > . _,,- a's General Foods Corporation Operating Income Miilipr5 of Do:-lafs Our bakery business posted significant increases in vol- ume, sales, and earnings. Entenmann's, the leading U.S. producer of fresh baked sweet goods, continued its successful expansion to the western United States and plans to expand further this year. Entenmann's improved its position in the Northeast by introducing premium chocolate chip cookies and several new Danish pastry products. Oroweat, which is the largest producer of specialty breads in the western United States, also had higher volumes, largely due to new products and quality improvement. General Foods' dessert business continued to build on the Jell-O trademark for new products. Jell-O Gelatin Pops, for example, scored outstanding results in a nation- wide rollout. This product and Jell-O Pudding Pops have strengthened our leadership of the fast-growing frozen novelty market. The Jell-O brand of refrigerated Ready-To- Eat Puddings entered test market in 1985 with encourag- ing early results. We have maintained our premier positions in the Jell-O brand's original markets-gelatin and pudding desserts. We recently introduced sugar-free products in both seg- ments. Our 1985 share rose to nearly 78% of the gelatin market and nearly 74% of puddings. Our Birds Eye trademark is helping us to enter another dynamic market segment-prepared convenience meals. At the end of 1985, we began shipping into test market Fresh Creations frozen dinners from Birds Eye. They fea- ture high-quality ingredients and a unique cooking system that preserves fresh taste. Post cereals achieved significantly higher earnings for the year. Our key brands gained market share, even though our total share of the highly competitive cereal market declined. Two new varieties were added to our successful Fruit & Fibre line. New advertising and improved quality have revi- talized the growth of Grape-Nuts and Natural Raisin Bran. And in late 1985, Post introduced nationally Horizon Trail Mix, a new cereal for active young adults. TI-M.N 440931

Consolidated Balance Sheets (in mi:!ions of dollars) at December 31 1985 1984 Assets Cash and cash equivalents $ 156 $ 94 Receivables, net 1,797 854 Inventories: Leaf tobacco 1,882 1,796 Other raw materials 761 359 Finished product 1,184 498 3,827 2,653 Other current assets 113 39 Total current assets 5,893 3,640 Property, plant, and equipment, at cost: Land and land improvements 399 267 Buildings and building equipment 2,391 1,773 Machinery and equipment 4,461 3,316 Construction in progress 267 225 7,518 5,581 Less, accumulated depreciation 1,834 1,567 5,684 4,014 Investments in unconsolidated subsidiaries and affiliates 1,099 1,054 Goodwill and other intangible assets 4,457 547 Other assets 296 84 $17,429 $9,339 See notes to consolidated financial statements. 28 TIMN 440949

TOBACCO•• Philip Morris t1. S.a. and Philip Morris International pr flue-cured and burley tobacco leaf into Martboro and quality cigarettes for U. S and world markets.

Consolidated Statements of Earnings { C (in mi;!ions of dollars, except per share data) ~ ! for the years ended December 31 1985 1984 983 Operating revenues $15,964 $13,814 $12,976 Cost of sales: Cost of products sold 6,318 5,517 5,343 Excise taxes on products sold 3,815 3,676 3,510 Gross profit 5,831 4,621 4,123 Marketing, administration, and research costs 3,117 2,329 2,248 Operating income of consolidated companies 2,714 2,292 1,875 Equity in net earnings of unconsolidated subsidiaries and affiliates 82 54 83 Operating income of operating companies 2,796 2,346 1,958 Corporate expense 123 138 129 Interest expense 345 299 234 Facility write-down 280 Other (income) deductions, net (1) 22 10 Earnings before income taxes 2,329 1,607 1,585 Provision for income taxes 1,074 718 681 Net earnings $ 1,255 $ 889 $ 904 Earnings per share $ 10.47 $ 7.24 $ 7.17 See notes to consolidated financial statements. I I 30 TIMN 440951

Philip Morris Comoanies',nc. ard Subsdlaries 1985 1984 Liabilities Notes payable $ 595 $ 172 Current portion of long-term debt Accounts payable Accrued liabllftles: Taxes, except income taxes Employment costs 83 946 484 426 357 472 410 189 Other 952 403 Income taxes payable 362 245 Dividends payable 119 103 Total current liabilities 3,967 2,351 Long-term debt 7,331 2,059 Deferred income taxes 872 784 Other liabilities 522 52 Total liabilities 12,692 5,246 Stockholders' Equity Common stock, par value $1 per share 119 126 Additional paid-in capital 404 427 Earnings reinvested in the business 4,456 4,210 Currency translation adjustments (242) (296) 4,737 4,467 Less, cost of treasury stock -- 374 Total stockholders' equity 4,737 4,093 $17,429 $9,339 TIAIN 440950 29

Management's Discussion conan..ed products. Tobacco products operating income increased $494 million (30%) due to volume and price increases, partially offset by $38 million negative effect of a stronger U.S. dollar on for- eign currency-denominated earnings. Philip Morris U.S.A. oper- ating income was up $408 million (30.5%) and Philip Morris International was up S86 million (28%). Domestic cigarette industry volume rose to 600 billion units, a 0.6% increase from 1983. Philip Morris U.S.A. increased its unit volume 3.4% and market share to 35.3%. Philip Morris International total unit vol- ume increased 5.5%. The income gains for Philip Morris Inter- national were based primarily on particularly strong unit performances in the developed markets of Western Europe and the Middle East. Beer operating income decreased $111 million (48.8%) from 1983 due primarily to lower profit margins on popular-priced brands and increased marketing expenditures. Seven-Up's 1984 operating income of $5.3 million was due pri- marily to volume and price increases. Tobacco products contrib- uted 94% and beer 5% of consolidated operating income for 1984. Equity in net earnings of unconsolidated subsidiaries and affiliates in 1984 decreased $29 million due primarily to the write-down of certain investments in developing countries. In 1984, interest expense was $299 million, an increase of $65 million (27.9%) over 1983 due principally to lower capital- ized interest during 1984 arising from the completion of facili- ties, partially offset by lower interest incurred due to reduced borrowings. Interest capitalized in 1984 was $14 million com- pared with $129 million for 1983. inflation-Adjusted lnformation The following current cost information is presented in accord- ance with the requirements of the Financial Accounting Stan- dards Board (FASB). Schedule I presents earnings and other data for 1985 as reported and as adjusted for current cost. Schedule II covers the five-year period to show the trends in key financial data restated in terms of average 1985 constant dollars measured by the U.S. Consumer Price Index. Schedule I (in millions of dollars, except per share data) Operating revenues Deductions from operating revenues: Cost of sales, excluding depreciation expense Depreciation expense Other, net Earnings before income taxes Provision for income taxes(A) Net earnings Earnings per share Gain from decline in purchasing power of net amounts owed Inventories and property, plant, and equipment: Increase in general price level Decrease in specific prices (current cost)(B) Excess of increase in general price level over the decrease in specific prices Translation adjustment Stockholders' equity (A) In accordance with FASB requirements, inflation-adjusted amounts do not reflect any adjustments in the provision for income taxes. Consequently, effective tax rates are. As reported in the primary statements 46.1 % As reported for current cost 48.7% As Reported in the Primary Statements (Historical Cost) Adjusted for Changes in Specific Prices (Current Cost) $ 1 5,964 $15,964 9,816 9,846 367 462 3,452 3,452 2,329 2,204 1,074 1,074 $ 1,255 $ 1,130 $ 10.47 $ 9.43 $ 180 $ 260 132 $ 392 $ 135 $ 4,737 $ 6,056 (B) At December 31, 1985, the current cost of inventories was $4,411 million, and the current cost of property, plant, and equipment, net of accumulated depreciation, was $6,516 million. 24 TIMN 440945

1 Pn;;p'J:crrs ~ ~~ares ; ~ : ~ucsdares ~ 78, 1980 1979 1978 1977 1976 1975 ~ ~~ 10,722 9,650 8,149 6,633 5,202 4,294 3,642 ~~ 834 702 521 424 316 211 158 ~ ~ 5,024 4 447 3 656 072 3 2,402 1,967 1,657 ~ , , , 1,169 1,105 1 037 961 862 778 686 ~ , 1,411 1,389 1,122 703 490 381 392 1,446 1,273 1,179 968 783 635 493 259 215 206 150 102 103 99 1,068 924 895 746 626 472 361 10.0% 9.6% 11.0% 11.2% 12.0% 11.0% 9.9% 408 375 387 337 291 206 149 V 660 549 508 409 335 266 212 5.28 4.41 4.08 3.38 2.80 2.24 1.81 2.00 1.60 1.25 1.025 .781 .575 .463 125 125 125 121 120 119 117 1,019 751 629 566 280 220 245 211 178 133 106 79 65 50 3,583 2,806 2,214 1,738 1,202 994 851 2,922 2,499 2,235 2,189 1,818 1,658 1,448 1,798 1,662 1,728 1,585 1,416 1,202 891 9,115 7,302 6,322 5,608 4,048 3,582 3,134 3,498 2,597 2,447 2,147 1,427 1,248 918 3,804 2,800 2,507 2,372 1,564 1,526 1,443 411 303 220 150 104 78 71 3,234 2,837 2,471 2,115 1,690 1,430 1,228 976 784 703 577 444 348 261 408 350 352 284 254 197 157 37.9% 36.3% 30.6% 30.6% 27.9% 25.7% 25.7% 25.79 22.74 19.84 17.00 14.08 12.00 10.32 551/s-42 481/2-291/8 3851s-31 1/a 3831s-28 32'1z-253/a 315/s-24-1/s 295/a-20'h 4831a 43i/a 36 351/4 31 307/8 261/2 9 9 8 10 11 13 14 125 125 125 124 120 119 119 _ 72,000 72,000 65,000 60,000 53,000 51,000 48,000 27 TIMN 440948

Management's Discussion and Analysis of Financial Condition and Results of Operations d g Genera9 Consoildated funds from operations were 51.8 billion for the year 1985, an increase of 14.6°io ever 1984. Excluding the effects of the acquisition of General Foods Corporation, funds from operations exceeded uses of funds by approximately $1.0 billion. The increases in the components of working capital rep- resent princi,pa!ly the acquired working capital of Generai Foods. Funds from operations of $1.5 billion and $1.3 billion for 1984 and 1983 exceeded total funds used by approximately $600 million and $300 million, respectively. Capital expenditures were $347 million in 1985 compared with $298 million in 1984 and $566 millionn in 1983. The 16% increase from 1984 is attributable to capital expenditures of General Foods since the date of acquisition. Capital expendi- tures are estimated at $775 million for 1986 and $3.6 billion for the years 1986 through 1990, of which approximately $460 million and $2.3 billion, respectively, relate to General Foods. Total debt at December 31, 1985 was $8.0 billion, a $5.4 bil- lion increase from a year earlier. This increase was due princi- pally to $5.0 billion of debt incurred in connection with the acquisition of General Foods and $1.0 billion of outstanding General Foods debt. The acquisition was financed initially with short-term borrowings. By year-end, the company had refi- nanced at an average annual rate of about 9.7% approximately $2.2 billion of this short-term debt by issuing fixed-rate obliga- tions with maturities from two to ten years and entering into agreements that had the effect of converting variable-rate debt to fixed-rate debt. The company expects to refinance in 1986 the majority of these short-term borrowings. Approximately $400 million of short-term debt was repaid from internally gen- erated funds. The company expects that funds from operations will be suf- ficient to meet the needs of the business in 1986. The company has available credit facilities to meet seasonal and other needs. In 1985, interest expense was $345 million, an increase of $46 million (15.3%) over 1984 due principally to the acquisition of General Foods. During 1985, the company purchased at an average cost of $84.80 per share approximately 2.5 million shares of its com- mon stock under the second of two announced common stock repurchase programs. All 7.2 million shares of treasury stock were retired prior to implementation of the plan of exchange on July 1, 1985 pursuant to which the company became a hold- ing company; under the plan, one share of the company's com- mon stock was exchanged for each share of common stock of Philip Morris Incorporated. Since the company is a holding company, one of its principal sources of funds is dividends from its subsidiaries. Certain debt agreements of Philip Morris Incorporated restrict its ability to pay cash dividends and to make other distributions to the com- pany. At December 31, 1985, approximately $2.8 billion of Philip Morris Incorporated's consolidated earnings reinvested in its business was free of such restrictions. General Foods' TIMN 440944 long-term debt agreements do not limit its ability to pay cash dividends and to make other distributions with respect to its common stock. In 1985, consolidated operating revenues of $16.0 bi!lion were $2.2 billion or 15.6% higher than in 1984, attributable principally to $1.6 billion of General Foods revenues since :he date of acquisition. Excluding General Foods, 1985 revenues were up $518 miilfon (3.8%). Tobacco operat'~.ng revenues increased $737 million (7.5%), while beer revenues declined slightly. The increase in revenues from tobacco operations was attributable to domestic price increases and international vol- ume gains, partially offset by $177 million due to currency translation. Revenues.for 1985 were reduced by approximately $139 million as a result of the sale on July 1 of substantially all of the company's Industrial operations. In 1985, consolidated operating profit, as defined for seg- ment reporting, increased $406 million (17.8%), of which S95 million was attributable to General Foods. Tobacco products operating profit increased $300 million (14%) due to price and volume increases in Philip Morris U.S.A. Domestic cigarette industry volume declined to an estimated 595 billion units, a 0.8% decline from 1984. Philip Morris U.S.A. increased its unit volume 1% and market share from 35.3% to 35.9%. Philip Morris !nternational total unit volume increased 6.5%. Tobacco products contributed 91 %, beer 5% and food products 4% of consolidated operating profit for 1985. Equity in net earnings of unconsolidated subsidlaries and affiliates in 1985 increased $28 million due primarily to the write-down of certain investments in developing countries in 1984. Net earnings were $1.3 billion, up 41.3% from net earnings in 1984 of $889 million. The 1984 net earnings were reduced by $146 million for the write-down of the Trenton, Ohio b rewe ry. Effective July 1, 1985, substantially all of the company's Industrial operations were sold for $250 million. The gain on these sales increased net earnings by $38 million. A write-down in connection with the proposed sale and restructuring of The Seven-Up Company reduced net earnings by $35 million for the year 1985. In 1984, consolidated operating revenues of $13.8 billion were $0.8 billion (6.5%) higher than in 1983, attributable prin- cipally to increased revenues of $0.7 billion from tobacco and $84.1 million from Seven-Up; beer revenues were up slightly. The increase in tobacco revenues was attributable to increases in unit volume and selling prices, reduced by $275 million due to currency translation. The slight increase in beer revenues was due to volume increases for popular-priced brands partially offset by volume reductions in premium-priced brands. In 1984, consolidated operating income was $417 million (22.2%) higher than in 1983 due mainly to domestic tobacco 23

Selected Financial Data-Eleven Year Review ons, except per share amour;*,s and employees) 1985 1984 1983 1Q82 r/10 Summary of Operations; Operating revenues $15,964 13,814 12,976 11,586 `~ ~ United States export sales 923 925 970 978 ~ Cost of sales: _ Cost of products so!d 6,318 5,517 5,343 5,315 Federal excise taxes _ Foreignexcisetaxes 2,049 1,766 2,041 - 1,635 1,983 1,527 1,180 i ~ 1,435 ! Operating income 2,796 2,346 1,958 1,716 ~ Interest expense 345 299 234 267 / Earnings before income taxes 2,329 1,607 1,585 1,300 / Pre-tax profit margin 14.6% 11.6% 12.2% 11.2% ~ Provision for income taxes $ 1,074 718 681 518 ~' Net earnings 1,255 889 904 782 = Earnings per common share 10.47 7.24 7.17 6.23 Dividends declared per common share 4.00 3.40 2.90 2.40 ~ Weighted average shares 120 123 126 126 ~ Capital expenditures $ 347 298 566 918 ~ Annual depreciation 367 341 294 250 Property, plant, and equipment (net) 5,684 . 4,014 4,381 4,178. ' lnventories . 3,827 .' - 2,653 2,599 2,834 ' Working capital 1,926 1,289 1,117 1,989 ' Total assets 17,429 9,339 9,667 9,622 ~ Long-term debt 7,331 2,059 2,515 3,746 ~ Total debt 8,009 2,588 3,075 3,746 l Deferred income taxes 872 784 737 565 Stockholders' equity 4,737 4,093 4,034 3,663 Funds from operations 1,772 1,547 1,349 1,160 Net earnings reinvested 776 472 538 480 Common dividends declared as % of net earnings 38.1% 46.8% 40.5% 38.6% Book value per common share $ 39.69 33.72 32.27 29.10 Market price of common share high-low 951/8-72 83'14-62t/8 72318-54 673/4-44V8 Closing price year-end 8&3/8 805/8 713I4 60 Pricelearnings ratio year-end 8 1 1 10 9 Number of common shares-outstanding year-end 119 121 125 126 Number of employees 114,000 68,000 68,000 72,000 Operating companies' income is income before corporate expense, Interest and other non-operating income and deductions. The amort:zation of previously capitalized interest is included in operating companies' income General Foods Corporation was acquired in November 1985 in a transaction accounted for as a purchase. Accordingly, consolidated operating results shown above include the operating results of General Foods G:;-Poration after October 1985. Effective July 1, 1985, substantially all of the company's Industrial operations 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 Company facility in Trenton, Ohio reduced pre-tax earnings, net earnings and earnings per share by $280 million, $146 million and $1.19, respectively. ' I 26 ryMN 440947

I Schedule !I (in miilions of doilars, except per s'-are ~i ~ Operating revenues Current cost nformation: Earn!^gs before income taxes tie*, earr.'-ngs Earn ngs per share Gain from decline in purchasing power of net amounts owed Excess of increase in general price level over the change in specific prices Translation adjustment Stockho!ders' equity at year-end Cash dividends declared per common share Market price per common share at year-end Average Consumer Price Index (A) Restated in average 1985 constant dollars. The current cost method reflects the effect of changes in the specific p"rices of the resources used in the company's opera- tions. This method measures the resources and their consump- tion based.on the'current cost of replacing them with-like resources, rather than in terms of the historical cost amounts actually expended to acquire them. These values do not con- sider technological improvements and efficiencies associated with the normal replacement of productive capacity. Adjust- ments for changes in specific prices of property, plant, and equipment are principally based on external price indexes spe- cifically or closely related to the resources being measured, or internally developed indexes and, in the case of inventories and cost of sales, on recent purchases and production costs. The U.S. Consumer Price Index is used to measure the effects of general inflation for the translated current cost information. The current cost method involves the use of assumptions, approximations, and estimates and, therefore, the resulting measurements should be viewed in that context and not as pre- cise indicators of the effects of inflation. The results do not nec- essarily represent amounts for which the assets could be sold or costs which will be incurred in future periods, or the manner in which actual replacement of assets will occur. In arriving at current cost net earnings for 1985, depreciation expense and the raw materials and supplies components of cost of sales are the only amounts reported in the primary statements 1985 $15,964 1984(A) $14,307 1983(A) $14,011 1982(A) $12,912 1981(A) $12,682 $ 2,204 5 1,498 5 1,568 $ 1,317 $ 1,127 1,130 754 832 739 644 9.43 6.14 6.61 5.88 5.15 180 176 188 201 401 392 121 (80) (55) 28 135 (93) (75) (82) (48) 6,056 6,020 6,291 6,092 5,519 $ 4.00 $ 3.52 $ 3.13 $ 2.67 $ 2.37 $ 87(A) $ 823/8 $ 76'ls $ 661/a $ 553/4 322.2 311.1 298.4 289.1 272.4 that have been adjusted into average 1985 dollars. Reve- nues, labor, and other costs and expenses are considered to reflect average price levels for the year, and accordingly have not been adjusted. The cost of sales adjustment for 1985 decreased earnings before income taxes by $30 million, reflecting the fact that inflation has exceeded the overall rate of increase in the histori- cal cost of the company's raw materials and supplies. The com- pany uses the last-in, first-out (LIFO) method to cost substantially all domestic inventories. This reduces the disparity in reported earnings with inflation-adjusted information since a more effec- tive matching of current costs with current revenues results. The depreciation adjustment decreased earnings before income taxes by $95 million. This adjustment reflects the increase in the valuation of the company's property, plant, and equipment measured under the current cost method over historical dollar cost amounts. The result of both inflation adjustments is a decrease in earnings before income taxes of 5.4%. The increase in stockholders' equity of $1.3 billion as com- pared with the amount reported in the primary statements is attributable mainly to the appreciation of inventories and prop- erty, plant, and equipment due to inflation. Additionally, stock- holders' equity is increased by gains resulting from the decline in the purchasing power of net amounts owed. TIMIN 4400746 25

Financial Review Net earnings for 1985 increased 41.3°o to $1.3 billion. Earnings per share reached 510.47, up 44.6°,'o from 1984. 1985 results include earnings of General Foods for periods after October 1985, a gain of $38 million on the sale of substantially all of the company's Industrial operations and a 535 million write-down in connection with the sale and restructuring of The Seven-Up Company. Net earnings for 1984 were reduced by $146 million for the write-down to net realizable value of the completed but inactive Trenton, Ohio brewery. In February 1985, the Board of Directors declared a cash divi- dend of $1.00 per share payable in April 1985. This 17.6°/o increase in the common stock dividend resulted in an annual rate of $4.00 per share. This was the 18th consecutive year of increase and our 58th consecutive year of dividend payments. Over the last decade, dividends per share increased 24.1% annually while net earnings per share increased 19.2%. Total assets of $17.4 billion at year-end 1985, including $8.4 billion relating to General Foods, are over five times greater than our total assets ten years earlier. Our return on average assets was 12.8%, up from 10.9% in 1984. Stockholders' equity reached $4.7 billion, an increase of nearly four times during the past decade. Our return on average stockholders' equity was 28.4% in 1985, up from 21.9% in 1984. Our debt to equity ratio at December 31, 1985 was 1.69 to 1 compared to an average of 1.04 to 1 over the last ten years. Total debt at year-end 1985 was $8.0 billion, a $5.4 billion increase from a year earlier, due principally to financing of the General Foods acquisition and $1.0 billion of outstanding Gen- eral-Foods debt. The $5.6 billion cost of the General Foods acquisition was initially funded using $3.6 billion obtained under a revolving credit facility with a number of lending insti- tutions that provides for domestic and Eurodollar loans and : TotalAssets("earErO; Stockholders'Equity(vear:^c ~ Net Return ,Berore Net rteresU . Net Return on Average on Average Total Assets Stockholders' Equity (°<,) 3, ~:,c~s o~ Do"~ars o 3, ons o"r po; '~ars 5 Zc 300 250 'S0 0G approximately $1.4 billion obtained from other short-term 'aor- rowings. The balance of such funds was generated internally. Subsequent to the acquisition and before year-end, the com- pany effectively converted $2.2 billion of its floating-rate bor- rowings into fixed-rate debt. Long-term financing completed by year-end included $865 million of domestic instruments, $500 million of Eurodollar borrowings and approximately $100 mill',on of Swiss franc notes. The company also entered into $500 mil- lion of interest rate swap agreements and $200 mii!ion of 'Inter- est rate protection agreements. The average annual interest rate is 9.7%. The company is planning to refinance in 1986 the majority of the remaining short-term borrowings. At year-end 1985, fixed-rate obligations were approximately 61% of total debt compared with 70% in 1980. The fixed-rate portion of our debt, which gives effect to interest rate swap and cap agreements, totalled $4.9 billion at year-end and had an average annual interest rate of approximately 9.9%. The company has $7.9 billion of short-term credit facilities with a number of lending institutions. Of this amount, $5.0 bil- lion consists of a revolving credit facility that was used to finance the acquisition of General Foods. These facilities also support the commercial paper borrowings. The company main- tains a high rating in the commercial paper market and a strong "A" credit rating for long-term obligations. Earnings coverage of interest expense for the company and its consolidated subsidiaries increased to 7.76 times interest expense for 1985 from 6.37 in 1984. The write-down of the Trenton brewery in 1984 was the primary reason for the lower earnings coverage for 1984. I Total Deli Ena) - Ratio of Total Debt to Stoekholders' Equity (vearErnd) 3, o^s of Oolars Ratio -a Interest Expense ~ Interest Coverage rtar-.ys 3efcre iterest ano'axes Di•,,aeC cy'^;resu VAhorsof0o~.lars 84 3 S 35C 5 0 %E 77 ?8 79 80 3? 82 83 84 85 0 7" 0 '6 717 ?8 ;9 30 3 82 3 22 TIMN 440943

NO POSTAGE NECESSARY IF MAILED IN THE UNITED STATES BUSINESS REPLY MAIL FIRST CLASS PERMIT NO. 5380 NEW YORK, NY POSTAGE WILL BE PAID BY ADDRESSEE Corporate Communications Department Philip Morris Companies Inc. 120 Park Avenue New York, New York 10164 TIMN 440971

~~ ~,_r ..~ ...... Goodwill and Other Intangible Assets: At December 31, 1985, this account inc uded approximately over 40 years. Accumulated amortization was $111 millio and nd $4.3 billion which is being amortized on a straight-line basis $79 million at December 31, 1985 and 1984, respectively. Short Term Borrowing Arrangements: At December 31, the company's short-term borrowings and related average interest rates consist of the following: (In millions of dollars) 1985 '984 Amount Average Amount outstanding Interest Rate Outstanding Interest Ra~= Bank loans $7,470 9.3% ~,197 Commercial paper obligations 2,457 8.0% 40 g c. Amount reclassified to long-term debt (3,332) (65) The company has credit facilities with a number of lending insti- tutions amounting to approximately $7.9 billion at December 31, 1985. Approximately $6.4 billion of these facilities remained unused at December 31, 1985. These facilities are primarily maintained to support the company's commercial paper bor- rowings. The company maintains bank balances of approxi- mately $20 million to support $300 million of the unused facilities and compensate the banks for services. Commitment fees of 1/4 of 1 percent are paid to.the banks as compensation for $5.3 billion of the unused facilities. The company has utilized interest rate swaps to establish long-term fixed interest rates on variable rate debt. At Decem- $ 595 5172 ber 31, 1985, interest rate swaps, which on a weighted avPrage basis have a maturity of 3.6 years and an interest rate of effectively established fixed rates on approximately $550 Ilion of debt. The company has also entered into agreements : pro- tect itself from significant increases in short-term borrow: ; rates for $200 million of debt. The company's credit facilities include four-year revoiving bank credit agreements totalling $6.0 billion which enab'.e the company to refinance short-term borrowings on a long-term basis. Accordingly, short-term borrowings intended to be refi- nanced have been reclassified to long-term debt. Lorn At C of ar (in m S 'nor Note C C , c 2 1. C Deb C Oth Pur Ot -Ac dec oc rr Re A ch G C (ir Tr, Re Averag? 36 TIMN 440957

W~ yonsolidated Statements of Stockhoiders' Equity m,i!lions of dolkars, except per snare data) ~ Earnings Currency Total Additional Reinvested Translation Cost of Stock- Common Paid-in in the Adjust- Treasury holders' theyears ended December 31 Stock Capital Business ments Stock Equity ;,ance, January 1, 1983 $126 $436 $3,200 $ (99) $3,663 ;, earnings 904 904 se of stock options and stock units 10 10 dividends declared on cornmon stock, $2.90 per share (366) (366) „ency translation adjustments (77) (77) ;rr:mon stock purchased $(100) (100) Balance, December 31, 1983 126 446 3,738 (176) (100) 4,034 earnings 889 889 ;prcise of stock options and stock units (19) 34 15 ;sh dividends declared on ~ommon stock, $3.40 per share (417) (417) ,-ency translation adjustments (120) (120) :Mmon stock purchased (308) (308) Balance, December 31, 1984 126 427 4,210 (296) (374) 4,093 _ earnings 1,255 1,255 _ cise of stock options and stock units 9 21 30 ;snn dividends declared on . :-, rement of treasury stock Balance, December 31, 1985 Jenotes deduction -_ otes to consolidated financial statements. :ommon stock, $4.00 per share (479) (479) .,,ency translation adjustments 54 54 .nmon stock purchased (216) (216) (7) (32) (530) 569 - $119 $404 $4,456 $(242) $ - $4,737 TIMN 440952 31

Philip Morris Companies Inc. 120 Park Avenue New York, New York 10017 TIMN 440972

Notes cortinued Inventories: At December 31, 1985 and 1984, the cost of approximately $600 million and $777 million iower than the current cost. of 73% and 70% of inventories was determined by the LIFO inventory at December 31, 1985 and 1984, respectlvely, method, respectively. The stated uF0 value of inventory was Subsidiaries and Affiliates Located Outside the United States: Principal financial data of subsidiaries and affiliates located out- side the United States are as follows: c.onsouaatea Unconsolidated-Equity ~rethcc (in millions) 1985 1984 1983 1985 1984 1983 Assets $3,105 $1,481 $1,360 -current $2,087 $1,814 52,121 -noncurrent 1,280 1,1 1 1 1,?96 Liabilities 1,395 667 722 -current 1,431 1,181 ',342 -noncurrent 895 7u ^y 4:; Net assets 1,710 814 638 1,041 1,0(-. 1,031 Company's equity 1,710 814 638 404 47 524 Operating revenues 3,545 2,855 2,703 5,555 6,474 ;,n14 Gross profit 1,165 1,235 ',323- Pre-tax earnings 166 176 234 Net earnings 92 87 30 68 96 156 Company's equity 92 87 30 45 26 ;8 At December 31, 1985, investments in unconsolidated affiliates located outside the United States exceeded equity in net assets by approximately $140 million, which is being amortized over 40 years. As of November 1, 1985, the company began consolidating two majority-owned subsidiaries located outside the United States which previously were reported on the equity method. At December 31, 1985 and for the year then ended, combined net assets and operating revenues of the two subsidiaries were approximately $240 million and $440 million, respectively. There was no material effect on the consolidated financial state- ments and accordingly data for periods prior to November 1, 1985 have not been restated. In 1984, net earnings included a charge of $41 million for the write-down of investments in cer- tain unconsolidated subsidiaries reported on the equity method. These operations are now being accounted for on the cost method of accounting. Consolidated earnings reinvested in the business at Decem- ber 31, 1985 include the company's equity of approximately $175 million in undistributed earnings of unconsolidated affiliates. Federal income tax has not been provided on approximatel.y $1.1 billion of accumulated earnings of subsidiaries, which are expected to be permanently invested abroad. 34 TIMIN 440955

Credit Corporations: of -~, ethod 1983 ,2,121 1,196 342 944 1,031 524 7,014 323 234 156 58 ,d a cer- i the ~m- iy it ly •are Philip Morris Credit Corporation (PMCC), a wholly-owned unconsolidated subsidiary of Philip Morris Incorporated (PMI), is engaged in financial service activities, including financing for customers of the company and its operating companies. General Foods Credit Corporation (GFCC), a wholly-owned unconsolidated subsidiary of General Foods Corporation (Gen- eral Foods), is engaged principally in the business of financing ieases for third parties. Pursuant to support agreements, both PMI and General Foods have agreed to retain ownership of 100% of the voting stock of their respective subsidiaries and to make periodic pay- ments to the extent necessary to insure that quarterly earnings of each subsidiary available for fixed charges equal at least 1.25 times fixed charges. No such payments have been required. Condensed combined financial statements of PMCC and GFCC at December 31 and for the year then ended follow. The statements include amounts related to GFCC since acquisition, based on historical carrying values of assets and liabilities. (in millions) 1985 1984 1985 1984 1983 Assets Revenues $102 $53 $24 Finance assets $1,232 $461 Expenses 66 35 15 Notes receivable from affiliates 231 150 Earnings before income taxes 36 18 9 Other assets 45 14 Provision for income taxes 11 7 4 Total assets $1,508 $625 Net earnings $ 25 $11 $ 5 Liabilities and stockholders' equity Notes payable $ 117 $233 Long-term debt 826 201 Capital notes due parent 90 90 Deferred taxes and other liabilities 325 34 Stockholders' equity 150 67 Total liabilities and stockholders' equity $1,508 $625 Real Estate Operations: Mission Viejo Realty Group Inc. (MVRG), a wholly-owned uncon- solidated subsidiary is engaged in community, commercial and industrial real estate development activities. The investment in MVRG at December 31, 1985 exceeded equity in net assets by approximately $42 million, of which $18 million is being amortized. Condensed financial statements of MVRG at December 31 and for the year then ended, follow: (in millions) 1985 1984 1985 1984 1983 Assets Operating revenues $204 $237 $258 Real estate held for sale and investment $290 $237 Costs and expenses 178 202 218 Land and offtract improvements 165 171 Earnings before income taxes 26 35 40 Other assets 56 56 Provision for income taxes 14 18 20 Total assets $511 $464 Net earnings $ 12 $ 17 $ 20 Liabilities and stockholder's equity Payable to affiliates $112 $ 87 Deferred income taxes 109 92 Other liabilities 38 45 Stockholder's equity 252 240 Total liabilities and stockholder's equity $511 $464 TIMN 440956 35

Consolidated Statements of Changes in Financial Position Not (:n millions of doiiars) for the years ended December 31 1985 1984 1983 Sumrr Funds Provided By Consc Operations: The cc Net earnings $ 1,255 $ 889 $ 904 subsidi operat Depreciation and amortization 424 375 327 affiliatE Divestitures and write-downs (3) 280 Deferred income taxes 159 37 174 Inventc Inveni Equity in undistributed net earnings of unconsolidated subsidiaries and affiliates (63) (34) (56) first-oL Funds from operations 1,772 1,547 1,349 inventc pally b Increases in accrued liabilities and other payables 1,467 46 166 indusi Working capital generated from sale of Industrial operations 169 invent( becau, Other, net 214 90 34 not be Total funds provided 3,622 1,683 1,749 Funds Used For Increases (decreases) in: _ 1 005 136 82 Cash and receivables , 1,174 54 235) Reor Inventories Other current assets 74 (3) 7 - At the of Phi Capital expenditures 347 298 566 PMl p, Dividends declared 479 417 366 and t Investment in General Foods Corporation exclusive of on JL opera $718 million working capital acquired 4,864 comg Currency translation adjustments affecting working capital (18) 52 48 holde Total funds used 7,925 954 834 Net funds (required) provided $(4,303) $ 729 $ 715 Acqu Financing Activity The c Increases (decreases) in current notes payable $ 149 $ (31) $ 560 mon ' Long term debt financing 4,666 35 91 whic of the Long-term debt retired (326) (440) (1,276) purch Purchase of treasury stock (216) (308) (100) have comp Issuance of shares 30 15 '0 the c Increases (decreases) in funds from financing activity $ 4,303 $ (729) $ (71 5~ acqui a Increases (Decreases) in Working Capital $ 637 $ 172 5;8 2: mor $71E Working Capital at Year-end $ 1,926 $1,289 $1,1'' % billior lion c ( ) Denotes deduction - - See notes to consolidated financial statements. - Divi In 1~ of $- Indu~ tion don, J ` 'I'IIVIlVq 440953

_ien- 'at it n-1- 1983 5294 S 64 777 S234 129 S36.3 Year i,964 i,831 1,255 10.47 4.00 /r -72 Report of Independent Certified Public Accountants: To the Board of Directors and Stockholders of Philip Morris Companies Inc.: We have examined the consolidated balance sheets of PHILIP MORRIS COMPANIES INC. and subsidiaries as of December 31, 1985 and 1984, and the related consolidated statements of earnings, stockholders' equity and changes in financial position for each of the three years in the period ended December 31, 1985. Our examinations were made in accordance with gener- ally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing proce- dures as we considered necessary in the circumstances. In our opinion, the financial statements mentioned above present fairly the consolidated financial position of Philip Morris Companies Inc. and subsidiaries at December 31, 1985 and 1984, and the consolidated results of their operations and the changes in their financial position for each of the three years in the period ended December 31, 1985, in conformity with generally accepted accounting principles applied on a consis- tent basis. Coopers & Lybrand NewYork, NewYork January 28, 1986 Company Report on Financial Statements: The consolidated financial statements and all related financial information herein are the responsibility of the company. The financial statements, which include amounts based on judg- ments, have been prepared in accordance with generally accepted accounting principles, applied on a consistent basis. Other financial information in the annual report is consistent with that in the financial statements. The company maintains a system of internal controls which it believes provides reasonable assurance that transactions are executed in accordance with management's authorization and properly recorded, that assets are safeguarded, and that accountability for assets is maintained. The system of internal controls is characterized by a control-oriented environment within the company which includes written policies and proce- dures, careful selection and training of personnel, and examina- tions by a professional staff of internal auditors. Coopers & Lybrand, independent certified public accoun- tants, have examined and reported on the company's consoli- dated financial statements. Their examinations were performed in accordance with generally accepted auditing standards and included studies and evaluations of internal accounting controls to the extent deemed necessary by them. The Audit Committee of the Board of Directors, composed of six non-management directors, meets periodically with Coopers & Lybrand, the company's internal auditors and man- agement representatives to review internal accounting control, auditing and financial reporting matters. Both Coopers & Lybrand and the interrial auditors have unrestricted access to the Audit Committee and may meet with it without manage- ment representatives being present. TIMN 440964 43

Dort- y in 3nd Dther ~t in e iata 1983 9,095 2,936 945 12,975 1,647 227 1,863 83 12 1,958 125 Data by Geographic Region for the years ended December 31 (in millions) 1985 1984 1983 Operating revenues: United States -Domestic $11,496 $10,034 $ 9,303 -Export 923 925 970 Europe 2,904 2,372 2,170 Other 641 483 533 $15,964 $13,814 $12,976 Operating profit: United States $ 2,540 $ 2,150 $ 1,804 Europe 149 134 67 Other (3) (4) (8) 2,686 2,280 1,863 Reconciliation: Equity in net earnings of unconsolidated subsidiaries and affiliates 82 54 83 Amortization of goodwill and other intangible assets 28 12 12 Operating income of operating companies S 2,796 $ 2,346 $ 1,958 Identifiable assets: United States $13,266 $ 6,616 $ 6,929 Europe 2,029 1,286 1,162 Other . 723 157 170 16,018 8,059 8,261 Investments in unconsolidated subsidiaries and affiliates 1,099 1,054 1,184 Corporate assets 312 226 222 Total assets $17,429 $ 9,339 $ 9,667 Pension Plans: 130 The company and certain of its subsidiaries have pension plans -- covering substantially all their employees. Total pension expense - for 1985, 1984, and 1983 was $100 million, $96 million, and $94 million, respectively, including amortization of prior service 5,115 (in millions) 2,139 1,007 8,_61 1,184 222 9,667 67 320 175 Actuarial present value of accumulated plan benefits: Vested Nonvested Net assets available for benefits The assumed rate of return used in determining the actuarial present value of accumulated plan benefits was principally 7.5% for both 1985 and 1984. costs over periods of up to 30 years. Generally, the plans are funded with independent trustees. A comparison of accumu- lated plan benefits with net assets as of the most recent valua- tion dates for defined benefit plans follows: 1985 1984 $1,562 $454 92 84 $1,654 $538 $2,361 $745 41 TIMN 440962

Earnings per Share: g Earnings per common share are cair_ulated on the weighted average number of shares of common stock outstanding for each year, which was 119,849,144, 122,675,079, and 126,044,770 for the years 1985, 1984, and 1983, respectively. 0 ) Pre Tax Earnings and Provision for IncomeTaxes: 5 (in millions) 1985 1984 1983 8 Pre-tax earnings: i United States - $2,179 $1,488 $1,472 4 Outside United States 150 119 113 5 Total $2,329 $1,607 $1,585 0) Provision for income taxes: 0 United States federal: 7 Current $ 762 $ 572 $ 416 0) Deferred 144 12 171 906 584 587 State and local 130 - 84 60 7 Total United States 1,036 668 647 Outside United States: Current 23 25 31 Deferred 15 25 3 Total outside.United States' 38 50 34 t Total provision for income taxes $1,074 $ 718 S 681 Deferred tax expense is primarily attributable to the excess of tax over book depreciation, reduced in 1984 by the tax benefit attributable to the facility write-down. The effective income tax rate on consolidated pre-tax earn- ings differs from the U.S. federal statutory rate for the following reasons: 1985 1984 1983 re (in millions) % of % of % of Amount Pre-tax Amount Pre-tax Amount Pre-tax 'e Provision computed at U.S. federal statutory rate ~ ~5 , '1 _ 38 31 '6 of reported pre-tax earnings $1,071 46.0% $739 46.0% $729 46.0% Increases (decreases) in the provision resulting from: Investment tax credit (34) (1.5) (20) (1.3) (40) (2.5) Inclusion in pre-tax earnings of equity in net earnings of unconsolidated subsidiaries and affiliates (38) (1.6) (25) (1.5) (38) (2.4) Income taxed at other than U.S. federal statutory rate and not expected to be subject to U.S. tax in the foreseeable future (21) (0.9) (20) (1.3) 2 0.1 State and local income taxes, net of federal tax benefit 70 3.0 45 2.8 33 2.1 Other 26 1.1 (1) - (5) (0.3) Provision as reported $1,074 46.1% $718 44.7% $681 43.0% TIMN 440960 39

^v.,-" ~.. . . ;ed Capital Stock: E Snares of common stock authorized, issued and outstanding were: E, Authorized Issued Treasury a~ Outstanding Balance, January 1, 1983 200,000,000 125,895,250 - 125,895,250 Adjustment of prior-year acquisition (4,340) (4,340) P Exercise ef stock options and stock units 423,786 11,890 435 576 (ir Issued for acquisition 52,738 52,738 P Purchased (1,396,600) (1,396,600) Balance, December 31, 1983 200,000,000 126,371,774 (1,389,050) 124,982,724 Exercise of stock options and stock units 472,166 472,166 Purchased (4,059,600) (4,059,600) P Balance, December 31, 1984 200,000,000 126,371,774 (4,976,484) 121,395,290 Exercise of stock options and stock units 214,491 285,256 499,747 Purchased (2,543,800) (2,543,800) Increase in authorized shares 150,000,000 Retirement of treasury stock (7,234,528) 7,234,528 Balance, December 31, 1985 350,000,000 119,351,737 (500) 119,351,237 At December 31, 1985, 2,514,933 shares of common stock were reserved for stock options and stock units, and 10,000,000 shares of Serial Preferred Stock, $1 par value, were authorized, none of which has been issued. . Stock Plans: Under stockholder-approved stock option and unit plans, 570,960 shares of common stock of the company remain available to be granted to employees. Under the option plans, common stock of the company has been made available for purchase by employees at market prices on dates of grant. Under the unit plan, a holder may elect to purchase shares of common stock at market prices on dates of grant or to receive the appreciation value (the excess of the market price at the date of exercise over the market price at the date of grant) in the form of stock or stock and cash. Appreciation value may be received with respect to the equivalent of 50% of the units granted. At December 31, 1985, options and units for 1,525,851 shares were exercisable. Per Share Under Option, Per Share Exercised Price Range End of Year Price Range 1985: Units 346,006 $30.03-$51.81 704,902 $30.03-$51.81 .Options 224,824 $22,22-$69.38 1,239,071 $25.72-$85.25 1984. Units 349,877 S30.03-$51.81 1,057,038 $30.03-551.81 Options 230,784 $22.22-g69.38 1,151,669 g22.22-569 38 1983. Units 324,801 $30.03-$51.81 1,429,989 $30.03-55181 Options 204,021 $22.22-$51.44 989,844 522.22-558 06 38 TIMN 440959

Public Policy Issues Listings: :,m,r,cas 10020 Public policy affects the operations of your company as well as the freedom and prosperity of our society. Philip Morris Companies Inc. is committed to defending the legitimate interests of our businesses and to harmonizing these interests with those of the public at large. We regularly contribute to the debate on public policies and would welcome the opportunity to share our positions with you. If you would like information on where Philip Morris stands on today's key issues, please fill in and return the attached postage-paid card. If the postage-paid card has already been used, please send your name and address to: Corporate Communications Department Philip Morris Companies Inc. 120 Park Avenue New York, New York 10017 Be sure to indicate on which of the following issues you would like to receive information: Business and the rights of free speech Fairness in taxation International trade policies The rights of smokers and non-smokers in an open society The federal tobacco price support program Food prices and U.S. government policies Standardization of food safety laws Promoting responsible decisions on the use of alcohol Please send me information on the following public policy issues: r Business and the rights of free speech E Fairness in taxation 0 International trade policies ~ The rights of smokers and non-smokers in an open society iJ The federal tobacco price support program E: Food prices and U.S. government policies E] Standardization of food safety laws El Promoting responsible decisions on the use of alcohol Name Ad d ress City State Zip Code TIMN 440970

Notes co"tlr'ued Segment Reporting: _ f h t e Tobacco, beer and food products are the major segments o company's operations. The company's consolidated operations outside the United States, which are principally in tobacco and food products businesses, are organized into geographic regions by segment, with Europe being the most significant. Investments in unconsolidated affiliates located outside the United States principally represent tobacco operati,ons located in Europe and Latin America and food products operations in the Asia/Pacific region. Intersegment transactions are not reported separately since they are not material. Data by Segment for the years ended December 31 (in millions) Operating profit calculated for purposes f g ~- c se ing is operating income of operating companles net earnings of unconsolidated subsidia-~es arc reduced by the amounts of amortization oF gco, . intangible assets included in other (income; the consolidated statements of earnings. Identifiable assets by segment are t'-.cse to the respective industry segments. R.epo,-ac z ,. .;. reconciled to the consolidated finandai s:a = sented below. " 1985 Operating revenues: Tobacco $10,539 5 9 Beer 2,925 „ Food products 1,632 Other 868 $15,964 Operating profit: Tobacco Beer Food products Othe.r Reconciliation: $ 2,441 136 95 14 a 2,686 Equity in net earnings of unconsolidated subsidiaries and affiliates 82 Amortization of goodwill and other intangible assets 28 Operating income of operating companies $ 2,796 Depreciation expense: Tobacco $ 166 5 Beer 134 Food products 29 Identifiable assets: , Tobacco Beer 1,779 7,974 Food products Other Investments inn unconsolidated subsidiaries and affiliates Corporate assets Total assets Cap.tal additions: Tobacco Beer 87 Focd oroducts 71 622 ~ , $ 5 c Per 643 16,018 1,099 312 $17,429 $ 151 S 40 TIMN 440961

Hugh Cullman Hamish Maxwell Hans G. Storr Dr Elizabeth J. McCormack William P Tavoulareas William H. Donaldson Ross R. Millhiser George Weissman iohn A. Murphy'•z•6 President and Chief Operating C icer, Phllip Morris Companies nc. and Philip Morris .n.corporated vVilliam Murray 2 'ice President, Philip Morris rcorporated, and President and Chief Executive Officer, lhilip Morris International .ohn S. Reed' 23 5 Chairman and Chief Executive Officer of Citicorp and Citibank, N.A., Uew York, NY Frank E. Resnik ° Jice President, Philip Morris '°corporated, and President and :hief Executive Officer, Philip 'forris U.S.A. Philip L. Smith President and Chief Operating Officer, General Foods Corporation Hans G. Storr 2 Vice President and Chief Financial Officer, Philip Morris Companies Inc. and Philip Morris Incorporated William P Tavoulareas 3 Former President of Mobil Corporation, New York, NY George Weissman'-z.o Chairman of the Executive Committee Margaret B. Young 3a,s Chairman of the Whitney M. Young, Jr. Memorial Foundation, New York, NY H. Robert Marschalk 3 Director Emeritus Paul W. Douglas T. Justin Moore, Jr. Margaret B. Young ' Member of Executive Committee George Weissman, Chairman Z Member of Finance Committee Hugh Cullman, Chairman 3 Member of Audit Committee Robert E. R. Huntley, Chairman ° Member of Committee on Public Affairs and Social Responsibility Hugh Cullman, Chairman 5 Member of Nominating Committee T. Justin Moore, Jr., Chairman 6 Member of Office of the Chairman Hamish Maxwell, Chairman TIMT,iii4 440966 45

Notes to Consolidated Financial Statements 3 4 7 4 6) 9 6 4 9 ~2 5) 7 ;6 16 Summary of Significant Accounting Policies: Consolidation: The consolidated financial statements include all significant subsidiaries except for the credit corporations and real estate operations. Investments in unconsolidated subsidiaries and affiliates are accounted for by the equity method. Income taxes: Investment tax credits are recognized currently as a reduction in the provision for income taxes. Provision is made for federal income taxes on the portion of undistributed earnings of sub- sidiaries expected to be remitted. Inventories: Inventories are stated at the lower of cost or market. The last-in, first-out (LIFO) method is used to cost substantially all domestic inventories. The cost of other inventories is determined princi- pally by the average cost method. It is a generally recognized industry practice to classify the total amount of leaf tobacco inventory as a current asset although part of such inventory, because of the duration of the aging process, ordinarily would not be utilized within one year. Property, plant, and equipment: The capitalized cost of facilities includes interest and real estate taxes incurred during the construction period. Depreciation is recorded by the straight-line method. Industrial development incentive grants are included in income as realized. Futures contracts: The company executes futures contracts primarily to hedge fluc- tuations in costs of commodities used in production and to hedge exposures in foreign currencies. Changes in the market value of hedging contracts are reported as an adjustment of the carrying amount of the hedged item. Reorganization: At the annual meeting held on April 25, 1985, the shareholders of Philip Morris Incorporated (PMI) approved a reorganization of PMI pursuant to a Plan of Exchange (the "Plan") between PMI and the company. Pursuant to the Plan, which became effective on July 1, 1985, the corporate framework through which the - operations of PMI were conducted was restructured, with the ~8 5 1 6) C, C 5) 72) 7 company becoming the publicly-held parent of PMI and the holders of PMI's common stock becoming the holders of the company's common stock. Under the Plan, one share of the company's common stock was exchanged for each share of PMI's common stock. The exchange has been accounted for in a manner similar to a pooling of interests and the consolidated results of the company for the periods prior to July 1, 1985 reflect the con- solidated results of PM . The reorganization had no effect on previously reported financial data. Acquisition: The company acquired for $5.6 billion all the outstanding com- mon stock of General Foods Corporation ("General Foods"), which on November 1, 1985 became a wholly-owned subsidiary of the company. The acquisition has been accounted for as a purchase, and accordingly, operating results of General Foods have been included in the consolidated operating results of the company for periods after October 1985, The purchase price of the common stock exceeded the fair value of the net assets acquired by approximately $3.9 billion and such excess is being amortized over forty years on a straight-line basis. Excluding $718 million of working capital acquired, the remaining $1.0 billion investment in General Foods represents primarily $1.8 bil- lion of property, plant and equipment less $900 million of long-term debt. The allocation of the purchase price is based on preliminary assumptions and is subject to revision once apprais- als, evaluations and other studies of the fair value of General Foods' assets and liabilities are completed. Had the acquisition occurred at the beginning of each year, pro forma consolidated operating revenues, net earnings and earnings per share would have been approximately $23,361 million, $1,260 million, and $10.51 for the year ended Decem- ber 31, 1985, and $22,836 million, $908 million, and $7.40 for the year ended December 31, 1984. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had then been in effect, nor are they necessar- ily indicative of future consolidated results. Divestitures and Write-Downs: In 1985, other (income) deductions, net includes a pre-tax gain of $77 million on the sale of substantially all of the company's Industrial operations and a $50 million write-down in connec- tion with the anticipated sale of The Seven-Up Company domestic and international franchise businesses and the restructuring of the remaining operations. In 1984, a write-down of the completed but inactive Miller Brewing Company facility in Trenton, Ohio reduced pre-tax earnings by $280 million. 33 TIMN 440954

Long Term Debt: J At December 31, the company's k., (j,~erm borrcwings, exclusive of amounts due within one year, co.n.sist of the following: (in millions) 1985 1984 S3,332 S 65 850 500 250 250 250 212 230 159 159 36 24 372 299 114 112 102 100 91 121 100 332 280 101 153 132 184 183 163 134 S7,331 $2,059 Short-:erm debt, rec'assif:ed Notes. payable 1988 to `,.995 9'-z% and 10°i:,, payable 1989 and 1995 - 14°/0 -15'h-°%, payable 1988 to 1991 9e '1e 9.55°io, retired in 1985 and 8718%, payable through '998 ?°% 13.8°!;, $150 million face value, payab'e 1988 to 1991, effective rate 9.8% 143/a%, $150 million face value, payabe 1989, effective rate 9.8% 5.15%-9.05°ro, payable through 1990 e Debentures: Slnking fund, interest from 65/a% to 117/a%, payable through 2010 6%, $250 million face value, payable 2001, effective rate 15.2% 6%, $200 million face value, payable 1999, effective rate 14.1% 6%, $150 million face value, payable 2001, effective rate 10.9% 7%, $200 million face value, payable 2011, effective rate 11.3% 101/2%, payable 1995 _ Other currencies: 700 million Swiss franc loans, interest from 51/4% to 6314%, payable 1989 to 1994 214 million Swiss franc notes, interest at 51/8%, payable 1992 380 million Deutsche mark loans, interest from 67/a% to 9112%, payable through 1990 Purchase money obligations: Interest principally from 6% to 71/2%, payable through 2014 Other Aggregate maturities of long-term debt, excluding short-term $1,704 million; and 1996-2000, $425 million. The revolving debt classified as long-term debt, in each of the following peri- credit facilities under which the short-term borrowings were ods are: 1986, $83 million; 1987, $179 million; 1988, $448 reclassified as long-term debt expire in 1989 and any amounts million; 1989, $600 mlllion; 1990, $191 million; 1991-1995, then outstanding mature. Restrictions: A debt agreement restricts payment of cash dividends and pur- 31, 1985, approximately $665 million of consolidated earnings chase, redemption or retirement of capital shares. At December reinvested in the business was free of such restrictions. Currency translation adjustments include translation gains (losses) as follows: (in millions) 1985 1984 1983 Translation adjustments S(25) $ (96) $(60) Related income taxes 79 (24) (17) Net change $ 54 $(120) $(77) 37 Currency Translation Adjustments: TIMN 440958

Notes continued Litigation: _ There is litigation pending aga nst the leading United States cigarette manufacturers seeking damages for cancer and other health effects alleged to have resulted from cigarette smoking. Philip Morris Incorporated is a defendant in some of these actions. Philip Morris Incorporated and the other cigarette manufacturers have successfully defended all similar prior litiga- tion and have not made any payments in settlement. An adverse development in pending litigation might encourage the commencement of similar litigation. In March, 1985, a verdict for $14 million was rendered in the U.S. District Court in Hammond, Indiana, against General Foods Additional Information: (in millions) Depreciation expense Rental expense Interest expensed interest capitalized Interest incurred Quarterly Financial Results (Unaudited): (in millions, except per share amounts) For Quarter ended: 1985 Operating revenues Gross profit Net earrings (A) Per share: Earnings (A) Dividends declared Market price high-low 1984 Operating revenues Gross profit Net earnings (B) Per share: Earnings (B) Dividends declared Market price high-low The principal stock exchange on which the company's common stock (par value $1 per share) is listed is the New York Stock Exchange. At January 31, 1986, there were 31,405 holders of record of the company's common stock. a) Effect ve 'uly 1, 1985, substantially all of the company's Industrial opera- t ons r:ere sold for S250 miliion. in the third quarter of 1985, the gain on t^ese sa•es ~ncreased net earrings and earnings per share by $38 million and S 32 .espec.,vely 42 Corporation on behalf of a former Burger Chef franchisee. Gen- eral Foods has appealed and has been advised by counsel that it has substantial arguments for a reversal of the verdict. A num- ber of similar actions by Burger Chef franchisees have been commenced against General Foods. It is not possible to predict the outcome of the above described litigation; however, management does not believe that the pending actions will have a material adverse effect upon the financial condition of the company. All such actions will be vigorously defended. 1985 1984 1983 $367 $341 $294 $ 75 $ 69 3 64 $345 $299 $234 3 14 129 $348 $313 S363 Mar. 31 June 30 Sept. 30 Dec. 31 Year $3,315 $3,719 $3,634 $5,296 $15,964 1,127 1,327 1,348 2,029 5,831 256 322 394 283 1,255 2.12 2.68 3.30 2.37 10.47 1.00 1.00 1.00 1.00 4.00 943/a-79 95118-811/2 87'/a-731/8 903/a-72 95'/8-72 $3,249 $3,609 $3,666 $3,290 $13,814 1,021 1,202 1,293 1,105 4,621 205 257 322 - 105 889 1.67 2.10 2.62 ,85 7 24 .85 .85 .85 .85 3 40 75'1n-62'l2 70-62'/s 79-671/a 83'/a-73'/8 83'l=,-62 ":~ During the fourth quarter of 1985, a write-down in ccnnecUon •.vith the anticipated sale of The Seven-Up Company domestic and internat~onai francrnse businesses and the restructuring of the remaining operations reduced net earnings and earnings per share by $35 million and 5.29, respectively (B) In 1984, a write-down during the fourth quarter of the completed but inactive Miller Brewing Company facility in Trenton, Oh!o reduced 1984 net earnings and earnings per share by $146 million and 51 19, respectively. TIMN 440963 E a c c

General Corporate Information Corporate Headquarters: Philip Morris Companies Inc. 120 Park Avenue New York, New York 10017 (212) 880-5000 Operating Company Headquarters: Philip Morris Incorporated 120 Park Avenue New York, New York 10017 Philip Morris U.S.A. 120 Park Avenue New York, New York 10017 Philip Morris International 120 Park Avenue New York, New York 10017 Regional Headquarters: Philip Morris EEC Brillancourt 4 Case Postale 1001 Lausanne Switzerland Philip Morris EFTA, Eastern Europe, the Middle East, & Africa Avenue de Cour 107 Case Postale 1001 Lausanne .Switzerland Philip Morris Latin America/Iberia 120 Park Avenue. New York, New York 10017 Philip Morris Asia, Inc. 25th Floor, United Centre 95 Queensway, Central Hong Kong Philip Morris (Australia) Limited One Little Collins Street Melbourne, Victoria 3000 Australia Benson & Hedges (Canada) Inc. 600 Rue de Lagauchetiere, West Sulte 2800 Montreal, Quebec H3B 4M1 Canada Seven-Up International 120 Park Avenue New York, New York 10017 Miller Brewing Company 3939 West Highland Boulevard Milwaukee, Wisconsin 53201 The Seven-Up Company 121 South Meramec St. Louis, Missouri 63105 Mission Viejo Realty Group Inc. 24800 Chrisanta Drive Mission Viejo, California 92691 Philip Morris Credit Corporation 120 Park Avenue New York, New York 10017 General Foods Corporation 250 North Street White Plains, New York 10625 Annual Meeting: The annual meeting of stockholders of Philip Morris Companies Inc. will be held on April 24, 1986, at the Philip Morris Manufacturing Center, 3601 Com- merce Road, Richmond, Virginia. Form 10-K: The company's annual report or: Form 10-K, which will be filed with the Securities and Exchange Commission, wi!I be available to stockholders in April upon written request to: Eugene J.T. Flanagan, Secretary Philip Morris Companies Inc. 120 Park Avenue New York, New York 10017 Transfer Agents and Registrars: Morgan Guaranty Trust Company of New York 30 West Broadway New York, New York 10015 United Virginia Bank Box 26665 Richmond, Virginia 23261 Dividend Reinvestment Agent: Morgan Guaranty Trust Company of New York Dividend Reinvestment Plan P.O. Box 3506 Church Street Station New York, New York 10008 Stock Exchange Listings: New York Amsterdam Basel Frankfurt Geneva Lausanne Paris Tokyo Zurich N'Y Stock Exchange Symbol: MO Auditors: Coopers & Lybrand 1251 Avenue of the Americas New York, New York 10020 Design - Corporate Annuai Reors nc Pnncpa, P'notography. S:rn . V!ttoro Sacco. Eaecutve Photograpry aeter Kare Pape. Scrtaire Gioss. P'amweli Paper Co., !nr Pr,ntea ~n J S A by Cas. :~Il~~ 440969

~ Miller Brewing Company al vVilliam K. Howe!I president and ,;nief Execu tive Off cer VVarren H. Durn Senior Vice President, Admiristration Thomas A. Fulrath Senlor Vice President, personnel Leonard J. Goldstein Senior Vice President, Sales Allen A. Schumer Senior Vice President, Operations Vice Presidents: Billy R. Apple Dr. Vincent S. Bavisotto Alan G. Easton Raymond E. Jones, Jr. Thomas A. Koehler Larry K. Neuman William A. Saupe Ronald R. Strain Georgy N. Tarala Robert A.. Toledo Charles A. Whipple The Seven-Up Company Edward W. Frantel President and Chief Executive Officer Charles W. Schmid Executive Vice President, Soft Drink Group Edward P. Callahan Senior Vice President, Administration Vice Presidents: J. Stewart Bakula Philip A. Unverzagt Leslie C. Zuke Mission Viejo Realty Group Inc. Phi:ip J. Reilly President and Chief Executive Officer James G. Gilleran Executive Vice President Jack G. Raub Executive Vice President James G. Toepfer Executive Vice President James L. Huesman Senior Vice President and Treasurer Vice Presidents: Danette S. Fenstermacher William K. Smith Paul Van Stevens Robert P. Swank Philip Morris Credit Corporation Hans G. Storr President Norman J. Treisman Senior Vice President Vice Presidents: James T Breedlove Michael J. Kinney General Foods Corporation James L. Ferguson Charman and Chief Executive Officer Philip L. Smith President and Chief Operating Officer Robert L. Seelert Senior Executive Vice President Ervin R. Shames Senior Executive Vice President Irwin Engelman Executive Vice President and Chief Financial Officer Jerry M. Hiegel Executive Vice President, and Chairman and Chief Executive Officer, Oscar Mayer Foods Corporation Adolph S. Clausi Senior Vice President and Chief Research Scientist Peter J. De Luca Senior Vice President and General Counsel Andrew J. Schroder III Senior Vice President- Administration William F. Dordelman Group Vice President John M. Keenan Group Vice President Robert Sansone Group Vice President James C. Tappan Group Vice President Vice Presidents: Lee A. Archer, Jr. C. Richard Blundell Charles J. Bowen Thomas F. Duesler Richard D. F.nucane, M.D. Harold A Goile Enrique J. Guardia Anthony Hass Gabrie!le J. Hermann Robert W. Hiller Sylvester T. Hinkes Thomas J. Hoeppner David E Hurwitt David W. Johnson Paul.'. Keating Robert A. Klath William H. Korab Philip A. Korn Brian G. Laragh James W. McVey F. Kent Mitchel Stephen B. Morris Lloyd A. Nelson Alan R. Plassche Raymond C. Schaub Edward A. Schefer Jack H. Scott Douglas A. Smith David E. Soffe Joseph B. Tharp Richard L. Tolleson Raymond G. Viault James H. Whitcomb Gerald D. Wollert TIMN 440968 47

Offiicers Philip Morris Philip Morris Incorporated Companies Inc. Philip Morris U.S.A. M Phili Hamish Maxwell John A. Murphy p Morris International Chairman of the Board and Pres;dent and Chief Frank E. Resnik N. William Murr Chief Executive Officer Operating Officer President and ay President and Pn John A. Murphy Chief Executive Officer Chief Executive Officer C' President and Vice Presidents: William I. Campbell Geoffrey C B oie Chief Operating Officer Executive Vice President, . Executive Vice President Hugh Cul!man R. Nelson Beane Marketing Ac Vice Cha!rman of the Board Geoffrey C. Bible Carlos E. Saiguero ' William I Campbell Mark A. Serrano Executive Vice Presidert T James L Ferguson . Executive Vice President, S, . Vice Chairman of the Board Eugene J.T. Flanagan Operations Richard L. Snyder Pe Edward W. Frantel Executive Vice President Thomas F Ahrensfeld W!liam K. Howell W. John Campbell Le Senior Vice President and George R Lewis Senior Vice President, S General Counsel . Jetson E. Lincoln Plant Operations Vice Presidents: A R. Nelson Beane William Murray Fred J. Laux c Martin D. Buss Vice President and William J. O'Connor Senior Vice President, Elizabeth Butson C Controller Philip J. Reilly Personnel Aleardo G. Buzzi Eugene J.T. Flanagan Frank E. Resnik Mary W. Covington V Vice President, Secretary and Carlos E. Salguero Vice Presidents: Dinyar Devitre Associate General Counsel Mark A. Serrano Marc Goldberg B Ehud Houminer Richard L. Snyder Albert J. Bissmeyer III Richard A. Hutchinson, C Vice President, Planning Hans G. Storr Vincent J. Buccellato Thomas M. Kearns A O. Witcher Dudley Lee Pollak F George R. Lewis John J. Gillis George D Riemer Vice President and Treasurer Staff Vice Presidents: Alexander Holtzman . Walter Thoma L ' Bruce S Brown Dr. Kenneth S. Houghton Jose de la Torriente ~ William J. O Connor Vice President . Gene A. Knorr Guy L. Smith iv William H. Webb , Administration and Human F. Robert Kurimsky Harry G. Steele Andrew Whist Resources " Frank A. Saunders George W. B. Taylor William C Smiy James L. Thompson, Jr. Gabriel F. N. Bechaalany Stanley S. Scott . William K Transue President, Vice President, Director of . Seven-Up International Corporate Affairs Tobacco Technology Group Hans G. Storr Donal P O'Brien Vice President and Chief . Senior Vice President Financiai Officer Vice Presidents: Alexander Hoitzman Associate General Counsel Dr. Robert B. Seligman James T. Breedlove Louis R. Turano Assistant Secretary John van Ham Bernadette T. Fee Assistant Secretary "° TIMN 440967

Board of Directors Thomas F. Ahrensfeld Jane Evans Alfred Brittain iu James L. Ferguson William K. Howell Howard L. Clark Robert E.R. Huntley Dr. Jose Antonio Cordido-Frey-es Jacques G. Maisonrouge John A. Murphy William Murray John S. Reed Frank E. Resnik Philip L. Smith Thomas F. Ahrensfeld ° Senior Vice President and General Counsel Alfred Brittain i Chairman of Bankers Trust Company, New York, NY Dr. Harold Brown ' 2.5 Chairman of Foreign Policy Institute, The Johns Hopkins University School of Advanced International Studies, Washington, DC Howard L. Clark Former Chairman and Chief Executive Officer of American Express Company, New York, NY Dr. Jose Antonio Cordido-Freytes Member of Betancourt, Cordido and Associates, Caracas, `-enezuela, Attorneys, and President of C. A. Tabacalera Nacional Hugh Cullman' Z.a,6 Vice Chairman of the Board Joseph F. Cullman 3rd' Chairman Emeritus William H. Donaldson',z.3 s Chairman and Chief Executive Officer of Donaldson Enterprises Incorporated, New York, NY Paul W. Douglas' Chairman and Chief Executive Officer of The Pittston Company, Greenwich, CT 4,5 Jane Evans' President and Chief Executive Officer of Monet Jewelers, Inc., New York, NY James L. Ferguson 16 Vice Chairman of the Board, Philip Morris Companies Inc., and Chairman and Chief Executive Officer, General Foods Corporation William K. Howell ° Vice President, Philip Morris Incorporated, and President and Chief Executive Officer, Miller Brewing Company Robert E. R. Huntley 2,3,4 President and Chief Operating Officer of Best Products Co., Inc., Richmond, VA Jacques G. Maisonrouge 3 a,s Vice Chairman of Liquid Air Corporation, New York, NY Hamish Maxwell'•z•6 Chairman of the Board and Chief Executive Officer Dr. Elizabeth J. McCormack Associate of Rockefeller Family & Associates, New York, NY Ross R. Millhiser 4 Former Vice Chairman of the Board T Justin Moore, Jr. z4.s Counsel, Hunton & Williams, Richmond, VA 44 TIMN 440965

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