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PtiiliipMorris Cornpa~ni+es Inc. Annu~al Report 1988 :.. rs'.s:d~:aid...~:.~.:~>.c.:.z,-5~`.~.~.::Itau:n:~_.•+.8ra`.'r::e» ,.::a ::. a-.t.S~~ .x.sc~.L .;w~:.1O~ ..sx: .,'x .. :: s.~ .r..~sr..M.At"1~;~.' Y ~ii.._X.,..ee.ed~.: • z:;. . .

J, ., . .. s hilip 1'Wiorris is now the vw6rld~s fargestis nsumer packaged goods company~ co P manufacturing and marketing an array of; - qualifytobacco, fdod, and _beve ra.e brands. _The scope and vigor of our companies offer a wid+e - rang+e of choice for customers; economic::- oppor unity for employees; social andd culturak~_;, support for plant communities; and consistent ~' grovwt hin earnings and dMidends for ihvestors.. But in the increasingly competitive global marketplace, size aldne is, not enough. We also aspire to be the best, by continuing to identify and satisfy consumer needs quickly and completely-the key to expanding both.-: profitable voliume and market share through the-:-.~ 1990's and beyond'~ Financial Highlights Letter to Seockholdbrs - -. Philip Morris Product Profile Business Review and Strategies '' Tobacw

. ~ . ~. F i. naneial, Hrgl ['r~ .7 (in imillions of dollars; except per share data) 1988 1987 1986 1985 1984 Operating,revenues $31,742 $28,1'83 $25,883 $ 16;267 $14;102 Met'earnings 2,337 L,842 1,478 1,255 889 Net earnings per share 10.03 7:75' 6.20, 5.24 3.62 C)ividends.declared per share 4.05 3.15 2.475 2:00 1.70 Prrot.nt Irrfcn.as. Owr Prior ll.ar f)perating',tevenues 12.6% 8.9% 59:1% 15.4% 6,44 BJet'eamings 26.9% 24.7% 17.7% 41.3% -1.7% Wt,eamings per share 29.4% 25.0% 18:3%, 44.6% 1.0% Dividends declared per share 28.6%, 27.396 23:8%1 17.6% 17.2°c, Op.ratlng A.mantws Dorrtestie tobacco $ 8,501 171640 $ ~ 7,053' $ 6,611 a , 6,134. International!tobacco 8,085' T004 5,638' 3;991 3,741 Food 11,265' 9;946 9,6641 1,632 - Beer 3,262' 3;105 3,054 2,914 2,928' Financial services and real estate 629 488 474 303 288 Other - - - 816 1,011. Total operating,revenues $31,742 $28,183 $25,883 $16,2,67 ' $14;T02 Opisratingl /ncom. Domestic tobacco $ 3;087 5' 2,715 $ ' 2,366 $ 2,047' $ 1.,744 Intetslational tobacco 774 582' 492 413' 395 Food 849 773' 741 ' 1'20 Beer 190 170 154 132 114 Financial serviees and!real estate 1!63 68 32 66 57 Other - 20 (10) 42 30 Operating companies income 5,063 4,328 3;775 2,820 2.340 Amortization ofgoodwill' 125 105 112 33 16 Ptestructuring of GenerallFoods Corporation 348 71 Trenton brewery write-down - - - - 280 Unallocated corporate expenses 193 162 126 123 136 Total operating incorne"' i' 4,397 $ 3,990 S 3,537' $ 2;664 5 1.908 ~ompotund.d Avarag. Annual Growth Aate 1988-1983 1988-1978' 1988-1973 Operating revenues 19.1% 16.9% 1.8, 1% Net earnings 20;9% 19.0% 20! 1% lilet earnings per share 22:9% 19.5% 1'9!7% i 'tTperating income is income before interest and otherdebt expense, net. Kraft; lnc. became a wholly-owned subsidiary on ilecember7,1988; Accordingly, eronsolidated results of tMe comparry includeahe operating,results of Kraft; lne- since its acquisition. General Foods Corporation was acquired in November 1985:,Accordingly, consolidated Iresults shown above include the operating results of General Foods Corporation aften(ctober1985, The companyadbpted as of 7anuary 1,1988Ithe method ~of iaccounting for income taxes prescribed by Statement of Firwrtcial,Aecounting Standards No. 96, "Accounting for Income Taxes," The net effeet of the adoption of SFiAS 96 was an increase in annual 1988 net earrtingsand earnings per share of 5213'million and S0:9t, respectively In 1988, the companyprovidediorrestrncturing costs at General Fonds Corpora, tion which reduced 1988 eamings before income taxes, net eamings and earnings per share by3'3I48'million, i212!milliort and SU:91„respectively. In 1987, the company recorded a pre-tax charge of $'l17'million related to a resttucturing of Gbneral Foods into ttiree separate operating companies, partlalli, offset by a pre-tax gain of $46 million from the sale of Open Pit barbecue sauce retail business. These items reduced earnings before income 4axes. net earnings and earningspershare,byE71'millim f22lmillion and $0.09, respectively. In 1986 operating~irtconteJor'Firtancial Isernicesand real estatF was reduced b,r. $71 million resulting from the effects of the TawReform Act of 1966 and Icerta in relatedlleveraged lease,renegotiatfons. i005230585

Dear Stockholder: RIF-In-AL Your company continued to build on its strengths in 1988, most importantlyt'hrough the acquisition~of'Kraft, Inc.. Philip Morris, the most successfuCCand profitable cigarette com- pany in the world, is now alsothe largest and most diversified food and beverage ccnmpany in the United States, One chief reason for your company's success lies in the quality of our employees. We welcome to Philip Morri's the people of Kraft; as they join their experience to ours, we will together create a com- pany marked by even greater creativity and competitiveness: Toward that end, we formed Ithe Kraft General Foods Group, effective March 1',1989, to manage complementaryproduct lines and better utilize manufacturing, distribution, and marketing strengths. We believe the reorganization~willlreinforce ourexpan- sion into growing food sectors and enable us to compete in world markets more effectively than anyother U.S.-based food company. We are borrowing to finance our investment, as we did in acquir- ing General Foods. Yet, since that acquisition ini1985, sales growth, major marketing efficiencies< rapid debt redUction, and a strong cash flow have accelerated our growth in net earnings, earnings pershare; and'annualized dividends. We are confidentiof our abili- ties toservice this new acquisition-related debt and to pay it down over the next few years. The acquisition oflKraft in no way diminishes our determination to continue gaining volume and market share in all ourbasic businesses while providing predictable growthiin earningsand dividends: ln 1988, we increased our dividendiby 2596 to an, annualized rate of 5=1',50 per share, marking,the 21st consecutive year of increases. 1988 Results Consolidated operating revenues of'$3'1.7 billion were up 12.6% over 1987. Net earnings were up 26:9%ito $2.3 billion, and'net earnings.per share rose to $10.03; up 29.4%.. ICraft4lnc. became a wholly-owned subsidiary omDecember 74 1988. Accordingly. consolidated results of your company include the operating results of'Kraft; Inc. since the date ofacquisition, The transaction, after goodwill amortization and the cost ofi acquisition financing, diluted ouri 1988 consolidated neCearnings by$0.12 per share. To lay the groundwork for improved cost efficiencies, we pro- vided'forrestructuring costs at General Foods Corporation. The charges included a plant closing, consolidationof'manufacturing facilities, early retirementiprograms, and other overhead cost reductions. The restructuring's full-year effects were offset bythe favorable impact of our adoption of StatemenCof Financial Account- ing ;Standard sNo. 96, ' Accounting ,for Income Taxes ° With reference to our operating units, Philip Morris U.S.A. wass the only U.S: cigarette manufacturer to increase domestic unit wl- ume. Volume was up1.79fo; with market share growingto 39:3%. Philip Morris International Inc., whose wlume increased 4!49b, benefited from lowered trade barriers inAsia and the weaker dollar. General Foods Corporation volume rose 5.1% while operating revenues increased to $10.4 billion with both new and established products contributing,to the gain. The General Foods USA volume increase of 7.8% resulted in operating,revenues of $18 billion and operating income, excluding restructuring costs of $438 million. General Foods Woridwide Coffee and International's operating revenues increased slightly to ~$4:4 billion due to strong volume per- formance in Canada and overseas, fiaccluding,restructuring costs, operating income of $165 million was aduerselyaffected by price competition and higher marketing expenses in the U.S: coffee mar- ket. Oscar Mayer continued to capitalize on its market leadership with volume increasing 9.8% over 1987. Operating revenues increased to $2:3 billion and operating income rose to $'197 million. Since the date of acquisition, Kraft icontributed operating,reve- nues of $821 million and operating income ofi$78 million, exclud- ing goodwill'amortization: Although not included in Philip Morris' consolidated!results, Kraft's full-year revenues and volumes increased i12.996 and 10.196„respectiuely, over 1987. In 1988, Miller Btewing Company shipped more barrels and reported higher operating,revenues than everbefore. That volume growth, and consequent market share gain, were spurred by thee performance.of both its premium and popular-priced products:. Nfanagernent,and the Board ofDlrectors John M! Richman, Kraft's Chairman, has been named Chairman and Chief'Executive Of'ficer of the Kraft General Foods Group andd was electediVice Chairmanand a member of the Boardiof'Directors of Philip Morris Companies Inc.. Michael A. Miles, Kraft's President, has become Presidentand Chief Operating Officer of the Kraft General Foods Group. It iss intended that Mcc Miles become Chief'ExecutiveAfFicer of the Kraft General Foods Group in 1990; after the integration of ourtwo food units is completed. Mr. Richman will remain Vice Chairman of. Philip Morris Companies Inc. Murray H. Bring, SeniorVicePresidentandlGeneral Counsel of. Philip Morris, was elected to the Board of'Directors in 1988. In January of 1989J Dt Elizabeth E. Bailey, formerl y a member of ' the Kraft Board of IDirectors; was elected to the Board of'Directors of'Philip Morris. Hugh Cullman retiredlas Vice Chairman upon reaching the age of 65! Thomas F.' Ahrensfeld also retired as Senior Vice President and General Counsel. We again thank both Mr. Cirllmanand Mr. Ahrensfeld for their leadership and dedicated service to your company. In addition, Philip L. Smith resigned his position as Vice Chair, man to pursue other opportunities. Social and Legislative Issues Like manycompanies„we face challenges in the formulationof'n public policies which may affect ourvarious businesses, Your man- agement has articulated the corrtpany's positionion mostiof them. You may write to our Corporate Affairs department for more infor- mation in this regardi (See page 56'.). lnthe area of cigarette product liability, it should be noted that. Philip Morris was a defendant in a case that went to trial in 1988. A jury found in our favor on all claims brought againstius. At the end of'1988, the number of pending cases against the U.S. cigarette industry was 80, down 27'from year-end 11987. We are firmly committed to continuing,our programs in support 1095230586 ~~~

M o'the public interest„as well as to sustaining the activities of all oar operating companies in their communities. I i~ue OutWk The acquisition of Kraft. [hc. is in keepingwithiourefforts oflrecentf y:ars to help ensure future volume and earnings growth by concen- ttating,resources and attention on our: primary industries: tobacco. Mod, and be4-erages.ltie will continue to capitalize on such world- wide strengths as our'trademarks, markeetingj distribution systems, and'financial resources. We w ill employ our free cash flow to service and retire the debt taken on trn acquire Kraft. At.the sametime, we will maintain our capital iTavestmentprogram; expenditures of $1.2 billion are planned in 1989. Althouglrour debt is currently large, we retain the resources to consider additional', tactical acquisitions'to further enhance our product lines. The greater size and'variety of our fbod operations enables us to. strengthen our distribution systems and enhance our research and developrroenteffort:s to prepare ourselves for developments in regitnnalized marketing, new consumer trend4, and'.sttonger com petition in the U.S. and intErnationaliii. especially as we prepare for the contemplated consulidation of European marke ts in 1992.. These new red.il6es present great opportunities. The continuing gro%+sth of our established operating companies augrnented'.by luaftt equips us to take advantage of them. Bv investir•,g K ise:y and consolidating our strengths; we are positioning ourselves to nteet shifts in rnarket'conditions and sat- isfy consumer tastes more rapidly than ever before: all to assist us in reaching our goal of beir,g the best corlsumer products compar:~~~ ia the world. vkw Hamish 'Via.wwel l Chairman of'the Board and Chief Executive Officer Op.ratiny AMrsnuss . ®illibr s ot Dffiars M Domes?ic?oba c:;,o i ~intemati'y!a!. Tobacco .. Foo~ 9eer ~ iFinanciai'Seroices &F!ea!. Esiate si iC3t^er .1 Op.ralMS Cenrpsnias /woeer Biiiions ofDDiilar£M .r.!9!Pe8k Tobacco . ssi Intemationa: Tobacco r Food' Beer ts Fina-.ciai'Serv,ces & Reaa Es+.ate. s Otrse^ 3E Met Earnings e ! ;::!s : Do.;ars f Cash Flow Per Shore From op*rattny. AietiviNas  M.t E.rninps Par Share v,Aarfi [-1 Otbkdionds 8!.abr.d Par Shsr. iJci s.~ 2'i^.' 8d 85 86 87 ' 88 .

This is Plhilip Morris Tobacco Food 4 1.005230588

Beer 4 1005230589 >

IL ed by Marlboro, the ~vorld,s best-selling cigarette, Philip Morris U! S:A. increased unit ' volu ~~rne and' market share in 198i Our consistent ability to manufac- ture premium-quality products has helped ustosteadily gain voTurne andd market share in the U.S. while dramati- cally expanding our presence in the growing overseas markets. Operafing Revenues (Fe,cen:of Tcna,!GPeraa;r.gF.:r~ 7

Phiiip Morris lu.S.A. Nineteen eighty-eight was another record year: while the domestic industry's unit volume declined by 2:196, we were the only cig- arette manufacturer to : increase U.S. unit volume: Volume advanced to 2]9:3 billion units, up 1.79ib,.!nd market share increased 1.5 share points to 39.3%. Ass a result, operating reve- nues rose to $8.5'billibn, up 11.3%, andloperating income climbedlto $3.1 bil- lion, up 131746. Philip Morris U.S.A.'s cig- ariettes, which represent some of.the world?s most popular products,,are lead- ers in most demographic groups and also lead in several industry categories such~as full flavor, low'taq 85tnm;10pmm„and box packings. In addition, Philip:hQorris U.S.A, advanced its share in the growing ultra low tar and price-value categories. Marlboro gained market share for the 24th consecu- tive year to approach ~a 25% share,, up 1.3 share points over 11987 and reaching 138.8 billion units: Marl- boro Lights continued itsconsistent growth andl increased its leading,share. of the low tar category: Dur- ing 1988, we successfully introdluced Marlboro Men- tholiLights and!a reformu+ lated hiarlboro Menthol. We undertook new mar, keting initiatives to further support our other rnajor full-price entries. Virginia. Slims remains the best-sell- ing cigarette made espe- cialty for women;,the brand?s performance was strengthened byWirginia Slims Ultra Lights. Merit Ultra, Lights continued its growth with the intro- duction of a new box packing. Benson & Hedges remained the industry leader in the 100mm segment. Ourprice-value brands grew by 3.9 billi©n units in 1988, which was greater than the price-value cate- gory's total 3A billion unit growth last year. Our per.- forrnance was 1ed by Cam- bridge, which increased volurne by 53% in 1988. Philip Morris U.S:A:s share of't'he price-value segment grew by 5'.5lshare points,, reach'ing,21L1'9b. Early in 1989, Philip Morris U.S:A. repositioned Alpine as the first free-standing menthol in the price-value category and, as a result, strength+ ened our position in two important industry segments. To support continued volume growth, we have increased lthe availability of all'our brands in netailiout= lets by expanding our sales organization and conduct* ing,special promotionall activities. Strategic Focus We will continue to intro- duce new products and use brand extensions to main- tain our! strong overall pnes- ence, especially in growing segments of the indiastry, such as box packings and' the price-value category, Through additional invest- ments in~research and technology, we are seeking to strengthen our position, as a flexible, high-quality, low-cost producen ready to meet new challenges. And ouremphasi's on purchas- ing,domestically produced tobaccos has helped Amer- ican leaf tobacco growers both to increase their share of tobacco sold in the United'States, and to sup- ply quality leaf atcompeti- tive prices to the expanding glbbat marka In 1989, we will face yet another round of chal- lenges on excise taxes;, advertising, bans, and I restrictions on smoking. To face them, we have become more effective in, presenting,our point of view to smokers through Philip M?orrfs Mrrgazine, which now reaches more than 13'million households six times each year. We are confident that even with these challenges we will be able to continue to enhance our profitability. Mariboroi(nght) increased its market share for the 24th consecutive year; ourflagship cigarette,brand now accounts for one out of every four cig- arettes so/d in the U: S: In addition, Philip Morris W.'S;A: markets some of the strongest lull price brands: Benson &'Hedges (inset, right)„Merit, and'Uirginia Slims (below). 10015230592W

Philip Morris International dnc. achieved prowthiin marry markets where it competes, most notably in Asia and Europe. The expansion was paced'by Marlboro's unique world- wide appeal; as in Germany(below); but gains were also registered'by L&M'Milds in Japan (left); Superlights in Australia (inset,,l@lY); Parliament in Turkey, and Chesterlield'in Spain (below), Philip Morris Interna#imnal' InC. Philip Morris International Inc. again set new records in volume, operating reve- nues, and operating income. Unitvrslirrne increasedito . 334.7 billion units, 4.4% over 1987. ©perating reve- nues rose 15,4'% tb $8.1 bil- lion and operating income reached $774 million, up 33%. Our U.S. cigarette export volume increased by 13.2% to 68!8 billion, units. The company's exports of cigarettes and tobacco represented a gross contribution to the U.S: balance of payments of $1.9 billion. We improvedlour market share in 1'$'of'our 20 major markets. These increases were largely fueled by Marlboro's continued vol- ume and share gains in~ almost all of its rnarkets: The success of Marlboro Lights in countries ranging from France, Germany, and SwitQerland to Saudi Arabia, Mexico, and Japan has been a springtboard for expansion. Our, other majpr international brands, lead- ers in a growing numberof markets, also performed well in 1988. In Canada, where we have a 4096 investment in Rothmans, Benson and Hedges Inc., our income was again higher. In the European Eco- nomic Community, our, unit volume increased over 8%, and our aggregate market share now exceeds 20%. The gains were mostt noticeable in France, Ger- many,ltaly, and Spain. We also gained volume in Fin, land, where our market share now exceeds 60%, Sw=itzerlend„andlin Eastern Europe. ln, Latin America„our operating income was up over 1987; and inihe Asian, region our volume and' share growth continued, primarily due to the imme- diate acceptance of Ameri- can cigarettes in newly opened markets. We sold 8 billion more units in this reg ion tha n i n 1 1987, , an increase of 12.346. Stratpgic Focus We will use the momentum we have built in each region to achieve further volume and market share gains: These gains will come through the growthh of Marlboro, Marlboro l.ights, Merit, Parliament', and the Philip Morris brandl and continuedimar- keting support for Lark, Chesterfield, and' L&M. In addition; we wil I I introduce new brandsand extend current'brand'lines to maintain ourvolume: growth rtrends. We see great potential in Asia, where lowered trade barriers in several markets now, allow us to compete effectively with products marketed by the local gov- ernment monopolies. Since our share of most international cigarette mar- kets is still Ifar, below our U.S. leveli we have consid- erable room for future growth. During,the year, we increased marketing spending in several!key markets. In additionj our, ooverall position as a low- cost producer; coupled with our increasing market presence;,w.ill help to ensure continued income improvement. 11