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11 our activities at Philip Morris share a single goal: to satisfy the needs of our consumers around the world. Our large scale and varied product mix help us generate growing returns for investors, and bring the benefits of diversity and quality to customers and consumers, as well as opportunity to our employees, in all our markets and communities. Many of our 3,000 products are everyday staples for millions of people. This year's Annual Report introduces some of our executives, and shows how we all work together to process agricultural goods into high-quality tobacco, food, and beer brands welcomed worldwide. Contents Financial Highlights Financial Information 24 Board of Directors 52 On the cover: Some of the crops, from tobacco and coffee to wheat and soy- beans, which we process and market around the world. C.:J

Financial naneial Highlights (in millions of dollars, except per share data) 1989 1988 1987 1986 1985 Operating revenues $44,759 $31,742 $28,183 $25,883 $16,267 Net earnings 2,946 2,337 1,842 1,478 1,255 Net earnings per share 3.18 2.51 1.94 1,55 1.31 Dividends declared per share 1.25 1,01 .79 .62 .50 Percent Increase Over Prior Year Operating revenues 41.0% 12.6% 8.9°l0 59.1 % 15.4% Net earnings 26.1% 26.9% 24.7% 17.7% 41.3% Net earnings per share 26.7°l0 29.4% 25.0°fo 18.3% 44.6% Dividends declared per share 23.8% 28,6% 27.3% 23.8% 17.6% Operating Revenues Domestic tobacco $ 9,489 $ 8,501 $ 7,640 $ 7,053 $ 6,611 International tobacco 8,375 8,085 7,004 5,638 3,991 Food 22,933 11,265 9,946 9,664 1,632 Beer 3,435 3,262 3,105 3,054 2,914 Financial services and real estate 527 629 488 474 303 Other 816 Total operating revenues $44,759 $31,742 $28,183 $25,883 $16,267 Operating Companies Income Domestic tobacco $ 3,606 $ 3,087 $ 2,715 $ 2,366 $ 2,047 Intemational tobacco 1,007 774 582 492 413 Food _ 2,138 849 773 741 120 Beer 226 190 170 154 132 Financial services and real estate 173 163 68 32 66 Other 20 (10) 42 Operating companies income 7,150 5,063 4,328 3,775 2,820 Gain on sale of Rothmans International p.l.c. 455 Restructurings of food operations (179) (348) (71) Amortization of goodwill (385) (125) _ (105) __ (112) (33) Unallocated corporate expenses (252) (193) (162) (126) (123) Interest and other debt expense, net (1,731) (670) (646) (772) (311) Earnings before income taxes $ 5,058 $ 3,727 $ 3,344 $ 2,765 $ 2,353 Compounded Average Annual Growth Rate 1989-1984 1989-1979 1989-1974 Operating revenues 26.0°io 18.3% - 19.7% Net earnings 27.1 qo 19.29'h 20.7% Net earnings per share 28.4°io 20,1 % 20.3% ~ Q Per share data have been adjusted to reflect the 1989 four-for-one stock split. Kraft. Inc. became a whollv-owned subsidiary on December 7, 1988. General Foods Corporation was acquired in November 1985. Accordinglti: consolidated results of the company include the operating results of these companies since the dates of their acquisition. See Note 3 of the notes to consolidated financial statements regarding 1989, 1988 and 1987 restructuring charges of food operations and the 1989 sale of the company's investment in Rothmans International p.Lc. See Note 10 of the notes to consolidated financial statements regarding the ~ company's 1988 adoption of the method of accounting for income taxes prescribed ~ by Statement of Financial Accounting Standards No, 96, ~--~ ln 1986. operating companies income for financial sen•ices and real estate was ~ reduced by $71 million resulting from the effects of the Tax Reform Act of 1986 and certain related leveraged lease renegotiations. " ` Percent increases for 1985 compared with 19'i4 include a 1964 write-down of the ° j~ completed but inactive Miller Brewing Company facilit.• in Trenton. Ohio. which ~ C~ reduced net earnings and earnings per share by S14o million and 5.15, respectiveh•. l

Dear Stockholder: Through its strategic repositioning during the 1980's, your com- pany achieved the business mix and critical mass it will need for continued growth in the decade and century to come. Over the past year, we have worked to ensure that the acquisi- tion of Kraft, Inc. not only made us the largest consumer packaged goods company in the world, but also brought us closer to being the best. The acquisition has strengthened the entire companv giving all our product lines new opportunities for increased efficiency and growth. Our greater size and scope are helping us do everything better. Our operating companies coordinate purchasing, processing, and marketing activities. These common business elements increase our opportunity for more effective and profitable operations. We have already begun to exploit some of the technology, research, distribution, and packaging skills we now have. These synergies make our operations more effective in many ways, whether through joint purchases of raw materials and advertising media, shared data and technologies, or cross-promotions fea- - turing the extended family of Philip Morris food brands. Synergies lead not only to savings, but also to new products, packagings, and distribution channels that create sustainable competitive advantages. These business-building benefits are even more important than our cost savings. In 1989, as we brought the Kraft and General Foods organiza- tions together to form Kraft General Foods, Inc., our tobacco, food, and beer businesses reached new market share heights in a number of categories, announced several tactical acquisitions and divestitures, introduced a record number of new products and repositioned advertising campaigns, and posted better finan- cial results than ever. We are ahead of schedule in achieving the targets established when we acquired Kraft. Our growing operating strength enabled us to increase our dividend by 22.2%, to an annualized rate of $1.375 per share, marking the 22nd consecutive year of increases. Our four-for-one common stock split broadened our shareholder base, and our plan to expend up to $1.5 billion to buy back our own stock from time to time should further enhance the value of our stock. Officers not pictured elsewhere in this report: (seated, I to r) Hans G. Storr, Hamish Maxwell, Murray H. Bring, George R. Lewis, William 1. Campbell; (standing, l to r) Donald Fried, Guy L. Smith IV, John A. Murphy, B. Jack Miller, John J. Tucker. -- Our new size gives us a larger presence in the world's capital markets, while our consistent earnings growth continues to attract investors. By building the long-term strength of our businesses, we are focusing on the best way to increase the fundamental value of vour investment. 1989 Results Consolidated operating revenues of $44.8 billion were 41.0% higher than in 1988, which included operating results from Kraft since December 7, 1988, the date of acquisition. Our operating companies income increased b_v41.2% to $7.2 billion, and net earnings of $2.9 billion were up 26.1%. Net earn- ings per share were $3.18, rising 26.7% on a split-adjusted basis. To realign our investments more strategically, we sold our 29% equity interest in Rothmans International p.l.c. in December 1989, resulting in a pretax gain of $455 million. Primarily reflecting costs arising from the combination of Kraft, Inc. with General Foods Corporation, the company charged $179 million against pretax income. The positive net impact of these actions added $276 million to earnings before income taxes, $152 million to net earn- ings, and $.16 to earnings per share. Our tobacco operations continued to turn in an outstanding performance. For the 34th year in a row, our volume grew in the United States. Our volume outside the U.S. grew by 7.7%, as Philip Morris International Inc. sold 26 billion more units in 1989 than in the previous year- reflecting record growth. Kraft General Foods, Inc. achieved ambitious financial targets for 1989, with operating revenues and operating companies income reaching $22.9 billion and $2.1 billion, respectively. On a pro forma basis, including all of Kraft's 1988 results, operating revenues rose by 1.9%, and operating companies income increased by 26.2%. Our reorganization of Kraft General Foods, Inc. into seven operating units is already yielding positive results. Our five-year strategic plan calls for the company to join the top performers in the food industry, in profit margins as well as in revenue and earnings growth. At Miller Brewing Company, the past three years have shown continued growth in revenues, income, and barrels shipped as repositionings and continued new product successes helped Miller increase its share of the U.S. beer market. Management and Board ofDirectors John M. Richman retired from his positions as Chairman and Chief Executive Officer of Kraft General Foods and Vice Chairman of Philip Morris Companies Inc. He remains a member of the Philip Morris Board of Directors. We thank Mr. Richman for his leadership in overseeing the successful integration of our C ~ Kraft and General Foods businesses. Michael A. Miles was elected Vice Chairman and a member ~ of your Board of Directors, and was named Chairman and ~ Chief Executive Officer of Kraft General Foods, Inc., succeeding Mr. Richman. In August 1989, Rupert Murdoch, Chief Executive of The News Corporation Limited, was elected to the Board of Directors of Philip Morris. -- C.~ v James L. Ferguson retired as an employee and member of your 2

Board of Directors. We thank him for his many contributions at General Foods Corporation and to Philip Morris. In addition, Frank E. Resnik resigned his position as a member of the Board of Directors. He remains Chairman of Philip Morris U.S.A. Social and Legislative Issues From product liability to environmental and packaging issues, we face the normal range of public policy challenges for a company of our size and scope. For years, cigarette product liability has been the most widely discussed of our public policy challenges. At the end of 1989, the number of cases pending against the U.S. cigarette industry dropped to 59, continuing a decline from 1986's peak of 151. We regard a recent decision by the 3rd Circuit Court of Appeals, reversing a lower court's verdict against a tobacco company, as a significant positive development for the industry Our roles in public interest initiatives have grown out of our pride in our products and their place in the lives of our con- sumers. A more detailed account of our corporate responsibility program appears on page 56 of this Report. The Outlook We are accumulating greater resources than ever to prepare for the major changes coming to North American, European, and Pacific Rim markets. We are constantly examining options to build further on our international strengths for effective competition in the emerging global marketplace. Wherever possible, we are using our free cash flow to maximize production consistency and efficiency in our core businesses. We are investing in new plants and equipment, and acquiring advanced manufacturing technologies. In 1989 alone, our capital expenditures reached a new record of $1.2 billion, and we are forecasting that capital expenditures will amount to another $6.4 billion over the five-year period beginning with 1990. These investments help us maintain our positions as both low cost and high quality producers. Our low cost manufactur- ing position is the cornerstone of our marketing flexibility Consistent quality at every step, from purchasing to packaging to distribution, is the key to product quality and consumer loyalty to our brands. Implicit in our new size, and our greater number and range of decision points, are certain challenges for our employees. We invest heavily in our people because our continued expansion depends on them-as much as on our products. _ Our employees, and their determination to help us grow, have brought us to our present level of success. As long as we remain tenacious, fast-moving, and dedicated to quality products for our customers and consumers, we will continue to advance in profitability and toward our goal of being the best consumer_ products company in the world. ~(~....r. ; 'ti. D, ~ Hamish Maxwell Chairman of the Board and Chief Executive Officer Operating Revenues Billions of Dollars ri Domestic Tobacco = International Tobacco = Food Beer = Financial Services & Real Estate = Other Net Earnings Billions of Dollars 85 86 87 88 Dividends Declared Per Share Dollars iid 85 86 87 88 89 1.25 00 75 50 25 89 0 Operating Companies income Billions of Dollars . Domestic Tobacco = International Tobacco = Food Beer t• Financial Services & Real Estate = Other 7.5 ! Cash Flow Per Share From Operating Activities  Net Earnings Per Share Dollars 6 2

This is Philip Morris Philip Morris U.S.A. Philip Morris International Inc. MER1T, Pnau~rr f ~~ Pete"~~ ~ fltl~ si ~~ S IIhoS~ Kraft USA Kraft General Foods International Led bv Marlboro and other strong brands, Philip Morris U.S.A. manufactures and markets more than 40% of the cigarettes sold in the United States, and also manufactures cigarettes for export. Millions 1989 - 1988 ` Operating Revenues $9,489 $8,501 Operating Companies Income $3,606 $3,087 Philip Morris Intemational Inc. manufactures and sells Marlboro and other leading brands around the world including Peter Jackson in Australia, Lark in Japan, Parliament in Turkey, and Philip Morris, Merit, and Muratti in Europe. Millions 1989 1988 Operating Revenues $8,375 $8,085 Operating Companies Income $1,007 $ , 774 General Foods USA has 30 leading brands, including Maxwell House coffees, Entenmann's bakery products, Kool-Aid and Crvstal Light powdered beverages, Jell-O desserts, and Minute rice and Stove Top brands. Millions 1989 1988 Operating Revenues $5,048 8 54,907 Operating Companies Income $ 434 $ 324 Kraft USA, with Kraft products from cheeses to mayonnaise and barbecue sauces, also markets such leading brands as Philadelphia Brand, Miracle Whip, Velveeta, and Cheez Whiz. Miltions 1989 1988 Operating Revenues $4,462 $4,116 Operating Companies Income $ 793 S 552 KGF International markets strong U.S. brands, such as Kraft cheeses and Maxwell House coffees, as well as products with regional appeal, in Europe, Asia Pacific, and Latin America. Millions 1989 1988 Operating R_evenues $3_,933 $4,124 Operating Companies Income $ 373 S 327 Comparisons for Kraft General Foods, Inc. operating units are on a pro forma basis, including a full year of Kraft, Inc. results for 1988. 2048163928 4

Kraft General Foods Canada Kraft General Foods Frozen Products Kraft General Foods Commercial Products Miller Brewing Company Canada's largest packaged food company, KGF Canada, brings together a host of popular Kraft and General Foods products. Millions 1989_ 1988 Operating Revenues $1,310 $1,420 Operating Companies Income $ 188 $ 173 With a strong base in luncheon meats, hot dogs, and bacon, Oscar Mayer Foods also markets Louis Rich turkey meats, as well as seafood products, pickles, new Lunchables lunch combinations, and Zappetites microwaveable snacks. Millions 1989 1988 Operating Revenues $2,285 $2,185 Operating Companies Income $ 174 $ 169 KGF Frozen Products markets both dairyand frozen products, including ice creams, frozen novelties, toppings, cottage cheeses, yogurts, frozen dinners, side dishes, pizzas, and bagels. Millions 1989 1988 Operating Revenues $2,121 $2,030 Operating Companies Income $ 172 S 133 KGF Commercial Products distributes a full array of foods and supplies to restaurant operators, and has food ingredients and edible-oil refining operations. Millions 1989 1988 Operating Revenues $3,773 $3,628 Operating Companies Income $ 156 S 106 The second-largest brewer in the world.l4iller has major brands in such cateaories as low-calorie, premium. pnced. and below-premium, and has entered the non-alcoholic segment. 19illions _ 1989 1988 Operating Revenues $3,435 53.262 Operating Companies Income S 226 S 190 Operating revenues and operating companies income excludes Kraft General Foods.lnc.'s Headquarters items. 204bM,1J`LJ s

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Vur worldwide tobacco volume, sales, and share gains in 1989 have further strengthened our competitive position in the United States and in most of our foreign markets. Even in flat or declining markets, our sales and share gains are generating strong income growth. As we look to the fu- ture, there is every rea- son to believe that we can continue to grow our global tobacco busi- -.0.,._ ness, We have vitality William Murray, Vice Charrman_ and momentum. We Philip Morris Companies tnc, have a unique portfolio of trademarks. Our mod- ern, state-of-the-art fac- tories manufacture low cost, high quality prod- ucts in ever increasing quantities. And we are investing in research and development in or- der to have a constant stream of new products available to meet chang- ing consumer needs. Together, these fac- tors bring us cash flows matched by few compa- nies in any industry any- where in the world, and give us confidence in the future of our tobacco business." Operating Revenues ~ a---e-.: v rotai Ooe•a -c t•e.e-_ a. A anooro ctaarettes (aoove) the oest-se?!rng consurfer ~cac a~e~ r,rvouct,n inesr:ortd Ker etemenis,n6ut 3uc.,_ Lp~ orest ouai;ty toaaccorteitt, process:n;z -en; . a,~J.~Fa~ at =ons,s(enity Tobacco We are the largest interna- tional cigarette company in the world todav. Our tobacco operations account for almost 11% of the 5.3 trillion unit global cigarette market, and have a greater share in profitable industri- alized regions. In 1989, our worldwide unit volume grew by 4.7% to 580 billion cigarettes. The Marlboro brand has steadily increased its sales to become the world's best-selling consumer packaged product. In the United States, our leadership position contin- ued to strengthen. Unit vol- ume increased slightly to 219.5 billion units. The domestic cigarette indus- trv's unit volume decreased approximately 6%, reflect- ing lower consumer demand as well as a deci- sion by Philip Morris U.S.A.'s largest competitor to reduce trade inventories below year-end 1988 levels by limit- ing shipments. Our share of the U.S. market, based on shipments, reached a new record of 41.9"o, up from 39.3°n in 1988. Our performance in the United States is the result of the broadbased appeal of t>u- brands. We continue to lead in almost everv major sepment. and we are well positioned in all growth cateQories. Marlbaro's momentum continued in 1yb9. Withh its high qualit.v and consis- tent marketind f<,cus, the -~ `larlbor<, brand qrew to represent tn•er.,6",- of the U.S. market, gaining 1.4 share points and outselling the next four cigarette brands combined. This marks the 15th consecutive year that Marlboro has ranked first in the domestic cigarette industry. Marlboro Lights widened its lead in the low tar category, reach- ing more than 10% of the total market. Our other full-priced brands contributed signifi- cantly to our strength in the United States. Merit Ultra Lights continued its rapid growth. and Virginia Slims registered market share gains. Benson & Hedges held its position as the larg- est free-standing brand in the 100mm segment. Our share of the growing discount category contin- ued to climb, with unit vol- ume up by 38.5%, paced by gains from Cambridge and Alpine. Outside the United States, where total industry volume U.S. Cigarette industry Unit Sales (Based on Shipments)  U.S. Cigarette Industry Unit Sales • Philip Morris Share of the U.S.lndustry t °o 2 0 `f S 1 U J CI Jt 7

Philip Morris U.S.A. Share of Tbtal Retail Cigarette Inventory (°a) 32 85 86 87 88 89 increased by nearly 4%, our unit sales grew by 7.7%, to 361 billion cigarettes. These sales included 78 billion cigarettes exported from our factories in the United States, a 13.4% increase over 1988. We maintained our positions as the leading U.S. cigarette exporter, and one of the largest U.S. exporters of low cost consumer goods. Our gross contribution to the U.S. balance of pay- ments was $2.4 billion. Our overseas growth was especially strong in our large and profitable markets. In West Germany, our market share surpassed 30% and we widened our lead as the market's largest supplier. In Italy, our market share grew to 36%, setting a new record. In France, volume increased by more than 8%, with our market share reach- ing nearly 23%. And in Japan, our volume grew by more than 26%. Over the three years since the Japa- 8 20481Eiq~j` y32 nese market opened, our share has risen to 9% - - more than all other foreign competitors combined. In Turkey, our volume increased by nearly 20%, and we achieved a market share of almost 14%. Marlboro's volume out- side the United States increased by over 9%, one of its best gains ever. Marlboro Lights grew 29%, led by advances in West Germany, France, Mexico, Switzerland, and Saudi Ara- bia. Volumes of our other international trademarks - Lark, Parliament, Virginia Slims, Merit, L&M, Chesterfield, and the Philip Morris brand - grew collec- tively by 11%, a record performance. We are well positioned for the changes scheduled for 1992 in the European Com- munity and do not antici- pate any disruption in our business with the advent of the single European market. In Eastern Europe we have been trading profitably for over 20 years, and we are vigorously exploring possi- bilities of expanding there in the wake of recent politi- cal developments. In Asia, we are taking full advantage of opportunities in a number of newly opened markets, where we see great potential for future growth. To satisfy changing con- sumer tastes, we continued an ambitious program of new product introductions throughout the year. In the United States, we launched Superslims from Virginia Slims, a new cigarette with less smoke from the lit end; Aggressive research and develop- ment efforts (far right) at our Rich- mond, Virginia, facilities helped make the launch of new Superslims (above) from Virginia Slims successful. In the United States, Cambridge (also above) continues to gain volume and market share. Lark (right) is Japan `s best-selling imported cigarette brand. Ehud I-louminer, President and Chief Executive Officer. Philip Morris U.S.A.

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